31 October 2018 Utilities Yangtze Power Provided for the exclusive use of Research Research at Provisional Access on 2018-11-01T01:47+00:00. DO NOT REDISTRIBUTE Deutsche Bank Research Rating Company Date Buy Yangtze Power 31 October 2018 Forecast Change Asia China Reuters Bloomberg Exchange Ticker Price at 30 Oct 2018 (CNY) 15.62 Utilities 600900.SS 600900 CH SHH 600900 Price target - 12mth (CNY) 19.80 Utilities 52-week range (CNY) 17.67 - 15.37 Shanghai Composite 2,568 In line 3Q18, stable outlook, Buy Valuation & Risks Michael Tong, CFA Yangzte Power reported in-line 3Q18 results with net profit of Rmb9.4bn, down Research Analyst slightly by 3% yoy with 10% power output growth offsetting the lower investment +852-2203 6167 income and the absence of a VAT rebate. We reiterate Buy on Yangtze Power as the company provides stable earnings outlook thanks to high-quality hydro Hanyu Zhang power assets, and DPS commitment with an implied yield of 4%. The potential Research Analyst asset injection of the parentco's two hydro plants under the construction will likely +852-2203 6207 provide further earnings growth potential for Yangtze starting from 2020-21. We slightly raise our earnings forecast by 4-6% over 2018-20E and lift TP to Rmb19.8. Key changes Buy. TP 19.20 to 19.80 ↑ 3.1% Sales (FYE) 49,752 to ↑ 4.3% In line 3Q18 results with robust output growth (See details in Figure 1) 51,894 In 3Q18, Yangzte's net generation reached 82.8bn kWh, up 10% yoy thanks to Op prof margin 56.4 to 57.1 ↑ 1.2% improving waterflows in Three Gorges (+22% yoy) and Xiluodu (+5% yoy), which (FYE) Net profit (FYE) 20,980.3 to ↑ 4.4% more than offset the weaker output of Gezhouba (-11%) and Xiangjiaba (-3%). 21,895.0 Average realized tariff rose slightly by 1%. Although with strong output growth, Source: Deutsche Bank 3Q18 net profit dropped slightly by 3% yoy to Rmb9.4bn, mainly dragged by lower Price/price relative investment income (-69% yoy) and the absence of VAT rebate which ended at the end of 2017. Finance costs dropped by 5% yoy to Rmb1.5bn and net gearing was 20 lowered to 94% from 99% at end-2017. 15 Key takeaways from result briefing 10 Management expects the waterflow in Yangtze river to improve by more than Jan '17 Jul '17 Jan '18 Jul '18 5% yoy, the power output to exceed its previous target of 201.3bn kwh, and Yangtze Power Shanghai Composite (Rebased) net profit to rise yoy in 2018. The construction of Wudongde/Baihetan is well on track and management expects the first unit to become operational in 2020/2021. Performance (%) 1m 3m 12m Absolute -4.6 -7.3 -2.9 The company has effectively reduced its average borrowing cost to 3.9% at end Shanghai Composite -9.0 -10.5 -24.3 3Q18 from 4.2% in 9M18. Management expects the synchronized dispatching to Source: Deutsche Bank play a more important role to boost output, and reiterate that they will use the investment income to smooth out earnings volatilities. Key indicators (FY1) ROE (%) 15.9 Earnings revision, valuation and risks Net debt/equity (%) 54.6 We raise our earnings by 4%/6%/4% in 2018/19/20E to reflect higher power output Book value/share (CNY) 6.41 assumptions and slightly higher investment income forecasts. Our TP is raised Price/book (x) 2.4 to HKD19.8 (from HKD19.2) which is based on DCF with WACC of 7.1% and Net interest cover (x) 5.2 zero terminal growth rate. Key risks include: 1) reductions in generation volume Operating profit margin (%) 57.1 Source: Deutsche Bank Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its reseDistributedarch repo ron:ts. T31/10/2018hus, inves t10:30:10ors shou lGMTd be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018. THE CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE ’ S REPUBLIC OF CHINA (“THE PRC”) (EXCEPT IN COMPLIANCE WITH THE APPLICABLE LAWS AND REGULATIONS OF PRC), EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAU. 7T2se3r0Ot6kwoPa Provided for the exclusive use of Research Research at Provisional Access on 2018-11-01T01:47+00:00. DO NOT REDISTRIBUTE 31 October 2018 Utilities Yangtze Power caused by irregular water levels; 2) volatility in associates' earnings; and 3) a lower valuation/dividend contribution of Yangtze's investment portfolio. Forecasts and ratios Year End Dec 31 2016A 2017A 2018E 2019E 2020E Sales (CNYm) 48,939 50,147 51,894 51,136 51,139 EBITDA (CNYm) 40,114 41,076 42,098 41,506 41,498 Reported NPAT (CNYm) 20,781 22,261 21,895 21,589 21,620 Reported EPS FD(CNY) 0.945 1.012 0.995 0.981 0.983 DB EPS FD (CNY) 0.945 1.012 0.995 0.981 0.983 DB EPS growth (%) 35.3 7.1 -1.6 -1.4 0.1 PER (x) 13.5 14.5 15.7 15.9 15.9 Price/BV (x) 2.2 2.5 2.4 2.3 2.2 EV/EBITDA (x) 9.0 10.9 8.9 8.7 6.5 DPS (net) (CNY) 0.713 0.680 0.650 0.650 0.650 Yield (net) (%) 5.6 4.6 4.2 4.2 4.2 ROE (%) 18.9 16.9 15.9 14.9 14.3 Source: Deutsche Bank estimates, company data Page 2 Deutsche Bank AG/Hong Kong Provided for the exclusive use of Research Research at Provisional Access on 2018-11-01T01:47+00:00. DO NOT REDISTRIBUTE 31 October 2018 Utilities Yangtze Power Figure 1: Yangzte quarterly result summary (Rmb mn) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 3Q18 yoy 9M17 9M18 9M18 yoy Revenue 7,855 11,435 17,942 12,914 8,149 11,060 19,856 37,233 39,066 Operational cost (4,223) (4,419) (5,741) (5,070) (4,239) (4,070) (6,285) 9% (14,383) (14,595) 1% Business tax and surcharges (185) (224) (289) (358) (221) (279) (467) 62% (698) (967) 39% Selling expenses (2) (3) (5) (10) (3) (4) (6) 20% (10) (13) 40% Administrative expenses (129) (157) (209) (346) (134) (159) (203) -3% (495) (497) 0% Financial expenses (1,453) (1,372) (1,573) (1,499) (1,360) (1,467) (1,500) -5% (4,398) (4,327) -2% Asset impairment loss (4) (10) (10) (181) 2 (16) 0 NM (24) (13) -44% Investment income 835 747 438 292 1,189 1,105 137 -69% 2,020 2,431 20% Operating profit 2,694 5,998 10,554 5,742 3,383 6,169 11,532 19,246 21,084 Non-operating income 525 508 1,016 205 1 664 0 -100% 2,049 665 -68% Non-operating expense (0) (4) (51) (368) (0) (1) (213) NM (55) (214) NM Pre-tax profit 3,219 6,502 11,519 5,579 3,384 6,832 11,319 21,240 21,535 Income tax (510) (1,106) (1,866) (897) (551) (1,139) (1,917) 3% (3,482) (3,607) 4% Net profit 2,709 5,396 9,653 4,517 2,833 5,693 9,403 17,758 17,929 Minority interest (1) 1 (2) (12) (1) (3) (3) 36% (2) (6) NM Net profit to shareholders 2,708 5,397 9,651 4,505 2,832 5,690 9,400 17,756 17,922 Net output (bn kWh) 32.9 48.8 75.4 53.9 34.5 46.8 82.8 157.0 164.1 Three gorges 13.9 24.9 32.8 26.0 15.3 23.6 40.1 22% 71.6 79.0 10% Gezhouba 3.2 5.3 6.1 4.5 3.4 5.1 5.5 -11% 14.6 13.9 -4% Xiluodu 10.2 11.6 24.0 15.6 10.2 11.2 25.1 5% 45.8 46.5 2% Xiangjiaba 5.5 7.0 12.5 7.8 5.6 6.9 12.1 -3% 25.0 24.6 -2% Implied tariff (Rmb/mwh) Source: Company Data Deutsche Bank AG/Hong Kong Page 3 Provided for the exclusive use of Research Research at Provisional Access on 2018-11-01T01:47+00:00. DO NOT REDISTRIBUTE 31 October 2018 Utilities Yangtze Power Model updated: 31 October 2018 Fiscal year end 31-Dec 2015 2016 2017 2018E 2019E 2020E Running the numbers Financial Summary Asia DB EPS (CNY) 0.70 0.94 1.01 1.00 0.98 0.98 Reported EPS (CNY) 0.70 0.94 1.01 1.00 0.98 0.98 China DPS (CNY) 0.48 0.71 0.68 0.65 0.65 0.65 Utilities BVPS (CNY) 5.5 5.8 6.1 6.4 6.7 7.1 Weighted average shares (m) 16,500 22,000 22,000 22,000 22,000 22,000 Average market cap (CNYm) 206,201 281,579 323,306 257,730 257,730 257,730 Yangtze Power Enterprise value (CNYm) 234,173 359,899 448,090 375,578 362,592 269,925 Reuters: 600900.SS Bloomberg: 600900 CH Valuation Metrics P/E (DB) (x) 17.9 13.5 14.5 15.7 15.9 15.9 Buy P/E (Reported) (x) 17.9 13.5 14.5 15.7 15.9 15.9 P/BV (x) 2.45 2.18 2.54 2.44 2.32 2.21 Price (30 Oct 18) CNY 15.62 FCF Yield (%) 7.0 10.7 9.7 8.3 8.5 8.9 Target Price CNY 19.80 Dividend Yield (%) 3.8 5.6 4.6 4.2 4.2 4.2 EV/Sales (x) 9.7 7.4 8.9 7.2 7.1 5.3 52 Week range CNY 15.37 - 17.67 EV/EBITDA (x) 12.0 9.0 10.9 8.9 8.7 6.5 EV/EBIT (x) 17.5 12.9 15.6 12.7 12.5 9.3 Market cap (m) CNYm 257,730 USDm 37,017 Income Statement (CNYm) Sales revenue 24,239 48,939 50,147 51,894 51,136 51,139 Company Profile Gross profit 20,621 42,021 42,991 44,293 43,673 43,673 China Yangtze Power Co., Ltd.