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Xinjiang Tianfu Thermoelectric (600509) In-depth Research Report:Price at low ebb to boost electricity and gas business to grow rapidly,resource advantage and policy support to facilitate development

发布时间:2014-04-22    研究机构:中信证券国际

A regional energy supplier relying on the Xinjiang Production and Construction Corps (XPCC). Asa power supplier integrating electricity supply and sales business under the Eighth Agricultural Division of the XPCC in Shihezi, the Company boasts an independent regional power grid. Its core business covers power/heat/natural gas supply, and has operated 1,665MW of installed capacity built independently or based on state-owned assets, and has 2,080MW of installed capacity under construction. In 2013, power supply and natural gas revenues represented 79.5% and 3.9% of its total turnover, and gross margin accounted for 85.6% and 6.4%. Its controlling shareholder is Tianfu Power Group, and actual controller is the State-owned Assets Supervision and Administration Commission of the Eighth Agricultural Division of the XPCC which indirectly holds a 41.6% stake in the Company.

Uniquely low electricity tariff underpins businesses from energy-intensivesectors, and organic/inorganic means drive power business to keep growing.The Company has an independent Shihezi power grid with autonomous pricing power. It offers preferential price to major industrial users to attract energy-intensive sectors, and itsaverage selling price for electricity in 2013 was ~Rmb0.15/kWh, lower than that for major industrial users in other areas in Xinjiang. The energy-intensive sectors have become a major booster to its electricity sales volume growth, and improvement in local industrial production capacity in Shihezi boosted its electricity sales volume to increase rapidly; advancement in installed capacity and power grid construction, and breakthroughs in supply bottlenecks will warrant rapid growth in its electricity sales volume. In addition, as the XCCP’s integrated energy platform, the Company has a clear positioning, and it may take advantage of M&As to facilitate grid integration in northern Xinjiang, which should boost its development in the medium to long term. Its electricity supply volume is projected to be 11.0/13.0/15.6tWh in 2014/15/16E (8.5tWh in 2013).

Gas filling stations are forecast to expand rapidly, and gas profit contribution is expected to keep improving. The Company relies on main traffic trunks in Xinjiang to build urban natural gas pipeline network and filling stations, and it is rapidly boosting its cross-region presence; its construction and acquisition of gas filling stations will propel the number of its gas filling stations to increase at an accelerated pace. 16/32/50 gas filling stations are projected to be operated in 2014/15/16E, and gas for vehicles will drive its natural gas earnings to register a rapid growth.

Making presence in shale gas will underpin gas source, and silicon carbide business may become an X factor.Shale gas and other unconventional natural gas development is greatly encouraged by policies. China bounds in shale gas resources, and Xinjiang is home to such resources. The Company partners with Hubei Shale Gas to accelerate exploration of shale gas in Xinjiang, which will provide natural gas business development with multiple gas sources. In recent years, it has been endeavouring to spin off auxiliary businesses with unpleasant economic benefits, and the retained silicon carbide business remains in R&D and market development period, which should accrue insignificant earnings in the short term. Yet, if breakthroughs can be made in technology or market development, silicon carbide business will become another shinyspot to boost the Company’s growth.

Potential risks: (i) the Company’s earnings is highly susceptible to economic environment and environmental protection policies as electricity it generates is mainly used by customers from heavy industry, (ii) coal price rise arising from resource tax and huge demand due to relatively low coal price in Xinjiang, and (iii) expiry of lockup on 183mn shares on 19 Mar out of all shares under private placement (at an offering price of Rmb7.55 per share) in 2013.

Earnings forecast, valuation and investment rating. In 2013, forecast-beating labor cost due to wage adjustment and average annual wage increase and special bad debt impairment totally reduced EPS by Rmb0.11, which was a major contributor to lower-than-expected earnings; thanks to the advantage of low electricity tariff and regional expansion, the Company’s electricity and gas businesses are projected to propel its earnings in future to grow rapidly (CAGR of ~14-16% in 2014-16E). We forecast its 2014/15/16E EPS to be Rmb0.52/0.67/0.82 (including Rmb0.48/0.61/0.73 accrued by electricity business, and Rmb0.03/0.06/0.09 by gas business), implying 2014/15/16E PE of 14.9/11.6/9.5x. Factoring in Xinjiang’s outstanding advantage in shale gas resources and regional development to be further facilitated by national policy support, we initiate coverage of it with a “BUY” rating with its target price at Rmb10.4 per share (implying 2014E PE of 20x).

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