Datang Renewable Earnings: Power Output Within Expectation; Shares Undervalued

We keep our fair value estimate for no-moat Datang Renewable 01798, or DR, at HKD 2.94. Trading at a 2024 price/book ratio of 0.3 times and 2024 price/earnings of around 4 times, we believe DR is undervalued. We expect net income to grow at a CAGR of 10.7% during 2022-27, mainly attributable to rising installed capacity. Nonetheless, our top pick for the renewable energy players is China Longyuan, given the firm’s leadership position and strong execution track record. Subsidy settlement has been slow, and we believe positive development on this front could help to rerate the sector. We lower DR’s Morningstar Uncertainty Rating to High from Very High as we think the firm will benefit from the government’s commitment to support the renewable energy industry.

DR’s cumulative net profit for the first nine months of 2023 declined by 3.4% year on year to CNY 2.25 billion. However, excluding one-off items, we estimate recurring earnings were up 15.8% year on year. Revenue rose 8.3% to CNY 9.47 billion, underpinned by a 13.2% growth in power output, which is in line with our expectation. Nonetheless, third-quarter wind power output was down 4.8% year on year, likely due to weaker wind resources. This is similar to peers’ operating performance. Meanwhile, with revenue growth lagging generation growth, this implies a drop in average tariff, likely due to a rising share of power trading volume.

As of end-September 2023, DR’s accounts receivable were CNY 17.18 billion, about 19.4% higher than end-2022′s CNY 14.39 billion. We believe this is due to slower subsidy settlement, a trend witnessed by other renewable energy players. On a positive note, DR was able to benefit from the lower borrowing rates in China, with cumulative nine months’ interest expenses falling 14.1% year on year.