长江电力(600900)

Yangzte Power reported in-line 3Q18 results with net profit of Rmb9.4bn, downslightly by 3% yoy with 10% power output growth offsetting the lower investmentincome and the absence of a VAT rebate. We reiterate Buy on Yangtze Poweras the company provides stable earnings outlook thanks to high-quality hydropower assets, and DPS commitment with an implied yield of 4%. The potentialasset injection of the parentco's two hydro plants under the construction will likelyprovide further earnings growth potential for Yangtze starting from 2020-21. Weslightly raise our earnings forecast by 4-6% over 2018-20E and lift TP to Rmb19.8.Buy.

In line 3Q18 results with robust output growth (See details in Figure 1)

In 3Q18, Yangzte's net generation reached 82.8bn kWh, up 10% yoy thanks toimproving waterflows in Three Gorges (+22% yoy) and Xiluodu (+5% yoy), whichmore than offset the weaker output of Gezhouba (-11%) and Xiangjiaba (-3%).Average realized tariff rose slightly by 1%. Although with strong output growth,3Q18 net profit dropped slightly by 3% yoy to Rmb9.4bn, mainly dragged by lowerinvestment income (-69% yoy) and the absence of VAT rebate which ended at theend of 2017. Finance costs dropped by 5% yoy to Rmb1.5bn and net gearing waslowered to 94% from 99% at end-2017.

Key takeaways from result briefing

Management expects the waterflow in Yangtze river to improve by more than5% yoy, the power output to exceed its previous target of 201.3bn kwh, andnet profit to rise yoy in 2018. The construction of Wudongde/Baihetan is well ontrack and management expects the first unit to become operational in 2020/2021.The company has effectively reduced its average borrowing cost to 3.9% at end3Q18 from 4.2% in 9M18. Management expects the synchronized dispatching toplay a more important role to boost output, and reiterate that they will use theinvestment income to smooth out earnings volatilities.

Earnings revision, valuation and risks

We raise our earnings by 4%/6%/4% in 2018/19/20E to reflect higher power outputassumptions and slightly higher investment income forecasts. Our TP is raisedto HKD19.8 (from HKD19.2) which is based on DCF with WACC of 7.1% andzero terminal growth rate. Key risks include: 1) reductions in generation volumecaused by irregular water levels; 2) volatility in associates' earnings; and 3) a lowervaluation/dividend contribution of Yangtze's investment portfolio.