China clean energy players cheap despite potential tariff cut, KimEng says

Hong Kong currency notesHong Kong currency notes

KimEng is keeping a positive view on China’s wind power sector on cheap valuations and improving utilization hours, saying potentially tariff cuts aren’t likely to hurt earnings much.

“We believe the market is overly concerned about the impact of potentially lower tariffs on new wind capacity in 2019,” it said in a note last week. “We expect the negative earnings impact will be small under the worst case and more than offset by improving utilization hours and lower curtailment rates.”

It noted that the National Energy Adminstration has said new wind projects, excluding those already approved, will adopt competitive bidding to set tariffs, which shouldn’t be higher than benchmark rates starting next year.

But the brokerage estimated that overall 2019 earnings would decline by only 1.7 percent on average for every 10 percent tariff fall at new wind farms, with only 6 percent capacity growth estimated.

“Overall, we believe wind companies’ earnings are more sensitive to utilization hours than tariff rates as lower tariffs will only affect new capacities. We expect higher utilization hours can more than offset lower tariffs for new wind farms in 2019,” it said.

It tipped Huaneng Renewables, or HNR, as its top Buy, with a target price of HK$3.80, saying it has the best asset quality. It also has a Buy on China General Nuclear Power, or CGN Power, with a target price of HK$2.70 on expectation free cash flow yield will double as it commissioned its new unit.

It also rated wind operator China Longyuan Power and China Datang Corp. Renewable Power both at Buy, with target prices of HK$7.80 and HK$1.80 respectively.

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