CGN New Energy reported 23.5% YoY fall in FY16 net profit toUS$79m, below our and consensus forecasts by 29.0% and 26.4%respectively, mainly due to lower-than-expected operating marginof gas-fired power as well as coal-fired, cogen and steam power.We correspondingly cut our FY17 and FY18 earnings forecasts by15.3% and 19.2% respectively. Downgrade from Accumulate toHold with target price lowered by 14.4% to HK$1.25.
FY16 net profit down 23.5% YoY. CGN New Energy reported23.5% YoY reduction in FY16 net profit to US$79m, below our andconsensus forecasts of US$112m and US$108m by 29.0% and26.4% respectively. Revenue from (1) gas-fired power; and (2)coal-fired, cogen and steam power fell 20.1% and 8.1% toUS$660m and US$173m, but still above our estimate of US$624mand US$164m by 5.8% and 5.5% respectively.
Lower-than-expected operating margin. The major reason formissing the forecast is due to the lower-than-expected operatingmargin of the company’s (1) gas-fired power as well as (2)coal-fired, cogen and steam power amid decline in natural gas priceand increase in market power supply in Korea. Operating margin ofthese two segments dropped from 9.4% and 26.6% for FY15 to8.0% and 21.0% for FY16, lower than our forecast of 9.0% and27.2% by 1.0 and 6.2 percentage points respectively.
Short-term uncertainty in parent’s asset injection. Duringtoday’s investor presentation, the management reiterated itslong-term plan on further acquisition of its parent’s assets after thefirst batch of asset acquisition of 1.4GW installed capacitycompleted in 2015. But no timeline for short-term progress wasprovided.
Downgrade to Hold with target price of HK$1.25. Given thelower operating margin and utilization hours, we cut our FY17 andFY18 earnings forecasts by 15.3% and 19.2% respectively. Wecorrespondingly lower our DCF-derived target price by 14.4% fromHK$1.46 to HK$1.25, which offers 4.2% upside potential.Downgrade from Accumulate to Hold.