Datang Renewable’s 2022 Generation Volume Beats Estimate;

We raise our fair value estimate for Datang Renewable 01798 to HKD 2.98 from HKD 2.74 to account for the better-than-expected generation volume in 2022 and the appreciation of the yuan. We think the shares are fairly valued now and positive development on subsidy settlement will be a catalyst for the firm.

DR’s power output grew 10% year on year in 2022 to 28,787 gigawatt-hours, about 4% higher than our full-year forecast. We think this is attributable to better utilization hours and increased capacity. However, we think the firm may incur impairment losses in the fourth quarter of 2022, as seen in peer China Longyuan Power’s preliminary earnings guidance. We will issue an update pending more detailed information from the firm’s final results in late March, but we believe any impairment losses will have limited impact on our valuation as they do not affect cash flow.

We think DR’s high net gearing ratio (more than 1.5 times at the end of June 2022) remains a concern for investors, given its aggressive expansion plan. However, we take comfort that the firm has been able to manage its borrowing costs well. We note that DR has issued CNY 3.9 billion in corporate bonds in early 2023 at interest rates between 3.52% and 3.62%, lower than the firm’s consolidated average financing cost of 3.76% in the first half of 2022.