Datang Renewable’s 1H23 net profit of RMB1,780m (+1% YoY) was in line with our estimates but missing high-end market expectations, resulting in a 16.7% plunge of share price yesterday. We see the sell- off as a mixed result of expectation misalignment and possible misunderstanding of dividend policy. Given undemanding valuations, we maintain BUY rating and HK$3.20 TP.
　　Key Factors for Rating
　　1H23 results review. DTR’s revenue grew by 12% YoY in 1H23, thanks to 19% power generation increase during the period but dragged by 6% decline in average tariff. Finance expenses dropped by 16% YoY thanks to active refinancing activities, or 11% after considering interests on perpetual bonds.However, as DTR booked several one-off incomes such as reversals of impairment and warranty claims in 1H22, its net profit made limited progress on the high base.
　　Dividend discussion. It may appear weird to talk about dividend payment for a growing renewable company, but the discussion was brought up during the post-result conference calls nevertheless. We opine that there might be some misunderstanding regarding the company’s dividend policy which contributed to the sell-off yesterday, as management clarifies it has no intention to raise payout ratio (averaging 18% during the last five years). Subsidiaries with debt-to-asset ratio below 80% would distribute profits to parentco DTR after booking surplus reserve, and the pooled distributions will become the base for dividend payment (instead of net profit in consolidated P&L statement). DTR did not announce interim dividend for 1H23 as always.
　　Capacity growth and tariff. DTR added 136MW new capacity in 1H23, +1% compared to end-2022 base, which is not abnormal for renewable companies that typically commissions majority of new projects in 2H. Management reveals projects under construction amounted to 2.6GW as of end-Jun 2023, and the company won approval for another 2.58GW projects during 1H23. We believe DTR is still on track to deliver decent capacity growth in the next few years.
　　DTR’s realized tariff was RMB470/MWh in 1H23, down 6% YoY. Of which, impacts from 1) new projects with lower tariff; 2) increase in market-based power trading volume and 3) increase in auxiliary service fee represents roughly 20%/40%/40% of the reduction in tariff.
　　Key Risks for Rating
　　Slower-than-expected capacity growth; higher-than-expected expenses.
　　Valuation
　　Maintain BUY rating. DTR is trading at 0.6x adjusted 2024 P/E, which we deem as undemanding.