CGN Power’s 3Q net profit dropped by 11% YoY, largely in line with its 7.1% YoY decline in total on-grid power output. Other factors impacting the results include FX losses, higher income tax rates, sluggish VAT rebate collection, etc. We cut 2022 - 24 earnings forecasts by 3-14% to reflect higher income tax rate and lower VAT refund assumptions.
　　Key Factors for Rating
　　3Q results largely in line. The profit decline was mainly driven by several factors: (i) more maintenance outage in 3Q22, including Ling’ao unit’s 10-year outage resulted in 7.1% YoY decline in total power generation in the quarter; (ii) mild increase in finance expenses despite declining borrowing cost, partly due to FX losses and possibly lower capitalised interest too; (iii) 4.0ppts increase in income tax rate as Yangjiang unit 3 and 6’s tax holiday entered the next phase.
　　Rising global interest rates dim CGN’s yield attractiveness. Like most other utilities with yield offering, CGN Power suffers from the interest rate hike environment. It is almost impossible to have a DPS growth rate that is fast enough to maintain the yield gap with interest rates rising so fast. The narrowing yield gap will naturally make yield stocks less attractive. Before a rate cut coming on the horizon, we expect CGN Power’s valuations unlikely to rebound meaningfully.
　　Key Risks for Rating
　　Higher-than-expected market-based tariff in 2023;
　　Lower-than-expected interest expenses.
　　Valuation
　　Downgrade to HOLD as we cut 2022-24 earnings forecasts by 3-14%. TP cut to HK$2.00 on both lower earnings and RMB exchange rate assumptions.
　　CGN Power is trading at 6.3% 2023E dividend yield, which is not uncommon in this market, in our view. Surprise rate cuts and better-than-expected EPS growth may make us reconsider the recommendation.