Datang Renewable Earnings: Results Largely in Line but Slow Subsidy Collection Is a Risk

We cut our fair value estimate for no-moat Datang Renewable 01798, or DR, to HKD 2.94 from HKD 3.38 to factor in the depreciation of the Chinese yuan and higher tax rates. We also increase our midcycle accounts receivable days to 210 from 180, given the slow subsidy collection. We think the shares are undervalued, with 2023 price/earnings of around 5 times and a price/book ratio of 0.5 times based on the Aug. 29 closing price. We expect net income to grow at a five-year compound annual rate of 10.7% during 2022-27, mainly attributable to rising installed capacity.

DR’s first-half 2023 operating results were broadly in line with our expectations. However, we think the slow collection of subsidies is a negative and this may continue to weigh on its near-term share price performance. DR collected CNY 230 million during the period, versus CNY 7.4 billion a year ago. As a result, operating cash flow declined to CNY 3.3 billion from CNY 10.0 billion during the first half of 2022. This may pressure the firm’s financial position, given DR’s aggressive expansion plan. On a positive note, we think DR is managing its borrowing costs well, with average financing cost falling to 3.21% from 3.76% during first-half 2022. Meanwhile, the firm’s net gearing ratio was 1.6 times as of end-June 2023, largely stable from a year ago.

Net profit was flat year on year at CNY 1.8 billion in the first half. However, excluding the reversal of impaired receivables and a one-off compensation from a supplier, we estimate that core profit was 22% higher. Revenue grew only 12% despite a 19% jump in power output, largely due to a 6% drop in average on-grid tariff. We believe investors are worried about the declining power tariff, but management thinks the falling prices of solar modules and wind turbines should continue to support returns of renewable energy projects.

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