China Longyuan’s 2022 Results In Line

We keep our China Longyuan 00916 fair value estimate at HKD 14, and we think the shares are attractive currently given the firm’s strong renewable energy capacity growth, with 2023 price/earnings of around 9.6 times. While Longyuan’s 32% year-on-year fall in 2022 net profit to CNY 4.9 billion was disappointing, this was in line with its preliminary earnings guidance. The weak earnings were mainly attributable to CNY 2.0 billion of impairment losses, but they don’t affect Longyuan’s cash flow. In fact, Longyuan’s 2022 operating cash flow rose to CNY 29.6 billion from CNY 18.1 billion in 2021, due to the collection of CNY 20.8 billion of subsidies owed by the government. With the kitchen-sinking exercises done in 2022, we think impact from the ongoing subsidy audit should be limited.

Longyuan’s overall output in 2022 is broadly within our expectation. However, renewable capacity addition of 4.4 gigawatts was below our forecast of 5.0 GW, likely due to COVID-19 disruptions and higher solar module costs. This is similar to its peers, which generally saw below-expectation expansion in 2022. In 2023, management targets to add 5.5-6.5 GW of renewable capacity, which we think is achievable given falling costs of wind turbines and solar modules.

Management also shared several key updates during the briefing. First, the proposed assets injection from its parent is ongoing, and the parent is now focusing on verification of the assets’ value. The firm will look at various financing options when more information is available. Second, the exit of its coal power business is unlikely in the near term, but it will remain on the firm’s agenda. Third, the plan to replace smaller-capacity wind turbines (focusing on 1.0 megawatts or below) with larger ones for its old wind farms is progressing, with more construction activities expected in 2024. While this has resulted in a CNY 590 million impairment loss in 2022, management believes it will improve its overall efficiency.