CGN Power’s 1H23 net profit of RMB6,959m is 18% higher YoY and 23% ahead of our estimates, thanks to sound cost control and savings in finance expenses. It appears that the prolonged maintenance of Taishan-1 did not drag results as severely as we feared. With domestic interest environment continues to favour large utilities companies like CGN Power, we raise our earnings forecasts for 2023-25 by 4-12% respectively. Maintain BUY rating for CGN Power with a higher TP of HK$2.50, as it offers rare earnings and valuation certainty amid a challenging market.
　　Key Factors for Rating
　　All-around robust 1H23 results. CGN Power showcased solid operations by converting 14% YoY growth in power generation into 14% higher gross profit.
　　Furthermore, it managed to control SG&A to edge down 2% YoY while finance expenses dropped by 9% YoY, thanks to a 46bps decline in average borrowing cost compared to full-year 2022 (3.43% in 1H23). Elsewhere, a 35% more VAT refund collected YoY and higher invest in
　　Tariff outlook. CGN secures most of its market-based power sales (MBPS) in annual contracts, with a small exposure to monthly and spot contracts. In recent months, short-term MBPS tariff in Guangdong market has softened from the peak tariff in the past two years, prompting questions on CGN’s tariff outlook.
　　We opine that CGN has never benefited much from the hike in thermal tariff as its realized tariffs have been essentially tied to nuclear benchmark tariff.Therefore, a potential pull-back of annual MBPS thermal tariff in 2024 is unlikely to negatively affect its ASP unless thermal tariffs fall below benchmark - an unlikely scenario under current coal prices.
　　Accelerated new plant construction. The last few years have been relatively quiet in CGN’s history with limited additions of new plants - a pattern may extend to at least 2025. From 2026 onwards, however, CGN may start to add dual plants consecutively, raising its growth profile. With learning curve on cost reduction for Hualong - 1 model, coupled with a low-interest-rate environment domestically, the new reactors could boast better-than-expected return profiles, in our view.
　　Key Risks for Rating
　　Lower-than-expected realized tariff; higher-than-expected operation costs; unexpected operational disruption
　　Valuation
　　Maintain BUY rating. We raise CGN’s 2023-25 earnings forecasts by 4-12% respectively to factor in lower interest expenses and SG&A costs. TP lifted to HK$2.50, implying 1.0x 2024 P/B.