CGN Power projected to generate 21% net profit CAGR between 2013 and 2016

Overseas expansion could also boost CAGR.

It has been predicted that China-based CGN Power could generate 21% net profit CAGR between 2013 and 2016, based on China’s nuclear build-up plan.

According to a research note from Maybank Kim Eng, this is before factoring in possible overseas expansion, which could then boost CAGR to 28%.

The report also said that, considering the significance of the nuclear sector, CGN is very likely to be included in the MSCI China index.

Further, Maybank Kim Eng estimates the possible inflow by Asia Pac (ex-Japan) ETFs could reach USD690m, vs free float of USD3.2b.

Here's more from Maybank Kim Eng:

We believe nuclear power is one of the most effective solutions to the energy and environmental challenges faced by China.

To encourage investment in this capital-intensive sector, the government provides attractive policies and subsidies to boost returns.

We estimate the equity IRR of a nuclear power project is around 16%, the highest among alternatives, except for solar.

Based on the government’s blueprint, we expect nuclear installed capacity in China to grow at 21% CAGR between 2014 and 2020, with potential for 7GW of additional capacity to be approved between 2015 & 2016 alone.

As the pioneer of Gen-III reactors and the most aggressive nuclear power developer globally, we expect CGN to receive overseas orders given its rapidly rising reputation.

Besides sound fundamentals, we believe CGN’s scarcity nature will prompt the counter to trade at a premium to its utility peers. Initiate at BUY with a DCF-based TP of HKD4, implying 23x and 18x FY15E and FY16E PER. The stock offers 44% upside.

Based on our estimates, the stock is priced at 16x FY15E PER, which we believe is a bargain, considering its 21% earnings CAGR and scarcity value. We expect the stock to approach the valuations of gas distributors.