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Datang International Power -A:The plan to spin off coal-chemical business comes out

发布时间:2016-07-04    研究机构:瑞银证券

The company plans to sell loss-making coal-chemical business to parent.

On 30 June, the company announced its plan to sell its loss-making coal-chemicalbusiness to Zhongxin Nenghua Technology Co. Ltd, a fully-owned subsidiary of itsparent, China Datang Corporation, for Rmb1. The business' audited asset/liability/equityvalues are Rmb78.2bn/69.7bn/8.5bn, respectively, and Rmb6.5bn of equity value isattributed to the company (or Rmb0.5/share).

Profitability & ROE to improve notably; moderate impact to asset-liability rate.

We expect the asset spin-off to cause an asset impairment loss of cRmb14bn(Rmb1/share), including Rmb6.5bn of equity value impairment and Rmb7.5bn ofliability that the company should still assume after this transaction. We believe this spinoffwill help increase the company's 2016/17E recurring net profit by 22%/44%,respectively. After the transaction, we estimate the company's 2016/17E ROE at12%/16% and 2016E net liability/total equity ratio will drop to 294% from ourprevious estimate of 319%. Meanwhile, the Rmb78.2bn asset and Rmb69.7bn liabilitywill be excluded from the company's balance sheet. The company also expects 2016dividend to be affected.

We expect stock price to react positively as it hasn't reflected the spin-off.

With regard to the balance sheet, we believe this transaction could bring about anequity value increase of up to Rmb2.9/share, or Rmb38.3bn increase in total equityvalue. This is based on the assumption that its stock price will factor in the Rmb52.3bnof liability to be spun-off and Rmb14bn asset impairment loss brought by the spin-off.

However, we believe the company's high asset-liability ratio after the spin-off could stilldepress the upside potential of its stock price. As the company's current PE is slightlyabove that of A-share coal-fired power companies' average (the company's 2017E PEof 13.6x vs. industry average of 10.4x), we believe that in theory the company's stockprice gain after the transaction may be slightly below that of its 2017E earnings gain of44%.

Valuation: derive our price target of Rmb3.6 based on the DCF methodology.

Our current price target of Rmb3.6 is derived based on the DCF methodology (WACC5.5%). This price target hasn't considered the spin-off of coal-chemical business. Weplan to revisit our forecasts.

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