Datang Renewable’s 2022 Results Beat Expectations on Lower Costs and One-Off Compensation

We raise our fair value estimate for Datang Renewable 01798, or DR, to HKD 3.38 from HKD 2.98 to account for better-than-expected 2022 results. 2022 net profit rose 93.8% year on year to CNY 2.9 billion, mainly attributable to lower impairment losses, better operating efficiency, a CNY 322.7 million compensation from wind turbine suppliers, and a drop in income tax expenses. Trading at 2023 price/earnings of around 6 times and price/book ratio of 0.6 times, we think the shares are currently undervalued, but we think a higher margin of safety is warranted, given DR’s high gearing. We expect recovery in profitability and positive development on subsidy settlement to support share price performance.

DR’s 2022 key generation numbers were in line with our expectations, but the renewable capacity addition of 1.1 GW was below guidance of 2.0 GW, likely due to COVID-19 disruptions and higher solar module costs. Management targets to add 1.5 GW of renewable capacity in 2023, which we think is low given the firm’s goal to grow renewable capacity to 40 GW by 2025 (14.2 GW as of end-2022). In our view, DR may plan to achieve its target by acquisitions, besides building its own renewable capacity.

Given DR’s aggressive expansion plan, we think a key positive is the improvement in the firm’s balance sheet, with the net gearing ratio falling to 1.7 times as at end-2022 from 2.0 times a year ago. We believe this is mainly due to the collection of CNY 8.3 billion in subsidies owed and a lower capital expenditure in 2022 on the back of a delay in the expansion plan. DR has subsidy receivables of CNY 13.3 billion as at end-2022, versus CNY 15.4 billion a year ago. We expect this to be settled by the government in stages and has assumed a gradual fall in DR’s accounts receivable days in our model. In addition, DR’s borrowing costs were well managed, with the average financing cost declining to 3.38% in 2022 from 3.94% in 2021. The firm aims to reduce the cost by 10-20 basis points in 2023.