EPC Business Contributed to 50% Drop in Total Revenues

In the first half of 2016, the revenues of Concord New Energy dropped by 51.5% year-on-year to RMB1.052 billion, whereas the profit attributable to shareholders increased by 10.1% to HK$279 million. During the period, the company adjusted its business models, significantly reduced the size of EPC business and increased the proportion of BT business. As a result, revenue from EPC business plummeted by 68.7% year-on-year to RMB584 million, representing 55.5% of the total revenue from last year's 85.8%. Although the plunge in revenue and profit of the EPC segment contributed to poor overall performance, the performance of wind power segment was impressive and the significant increase in profitability drove up the overall profit. Meanwhile, the company also took a wide range of measures to control costs, that is, lowering equipment costs while improving the efficiency of equipment operation. Therefore, net profit margin saw a substantial increase of nearly 15 percentage points to 26.5%.

Expansion of Power Generation Business to South China, Substantial Increase in Profit Contribution

Installed capacity and power generation of the company grew steadily, resulting to significant increase in proceeds from power generation. The revenue derived from power generation business soared by 71.1% over the previous year to RMB428 million, and the net profit surged by 80.8% over last year to RMB207 million, so power generation business was the core profit source of the company. During the period, new grid-connected attributable installed capacity amounted to 122MW, representing a year-on-year increase of 106.8%. The newly installed power capacity throughout the year is expected to be 300-400MW. The attributable installed capacity of continued projects and new construction projects stood at 788MW, up by 40% year-on-year. Besides, attributable power generation reached 1,096.85GWh, a year-on-year increase of 38.4%. By the end of the period, the company owned 52 grid-connected power plants with attributable installed capacity of 1,401MW, around 2/3 of which was situated in areas without curtailment. The attributable installed capacity is projected to reach 2,500MW by 2018. Presently, the company primarily wholly owns or controls new power generation projects in the central and south areas without curtailment, and gradually reduces the assets in areas with curtailment by sales and replacement. With the improvements in overall asset quality, the operating income from the power generation segment will witness a continued surge.

Enhanced Financing Capacity and Independent Power Generation Capacity

Through exploring a vast variety of financing channels, the company's financing capacity was significantly enhanced. To be specific, in the first half of the year, it issued the first domestic green bond worth RMB500 million and short-term commercial paper worth RMB600 million, and signed long-term loans worth RMB1.8 billion. The financing fund will be used to independently develop new power plants. We expect that the company will have sufficient capital guarantee. Also, with rich reserves of resources, its power plant development business will experience a rapid development and the attributable installed capacity of independent power generation will see a substantial increase.

Valuation and Rating

As a number of ultra-high voltage (UHV) transmission lines will be put into operation in 2017, the grid curtailment in the industry will be gradually improved, and the power generation utilization hours are projected to gradually increase due to the implementation of government-subsidized purchase policies. Under the continuous optimization and adjustment of asset structure, the company's revenue from and profit contribution of power generation business are constantly increasing, leading to further growth in overall profits. Furthermore, since the end of last year the company has repurchased a total of 212 million shares and the continuous share repurchase also helps to boost investor confidence. But the policy of cutting on-grid price imposes pressure on the company's valuation. Given the PV projects held by the company are basically located in the areas without curtailment, we believe that the company's net profit in 2016 and 2017 will be basically unaffected. Therefore, we give the company the target price of HK$0.60 and the "Buying" rating. (Closing price as at 19 October 2016)

Risk Warnings

The implementation of policy falls short of expectations;

Operating of power plants under construction fails to meet expectations;

Changes in curtailment policy;

Financials

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