Power capacity portfolio will be boosted by 5.6GW.
Barclays said that CPI has announced the acquisition of a 100% stake in Henan Power from its parent company, which could add 5.6GW of power capacity to its existing portfolio, or a potential capacity increase of 34% from end-2015. However, the acquisition price has not been disclosed, which is likely the key determinant for potential earnings accretion.
The acquisition is in line with CPI’s guidance for asset injection-driven inorganic growth in 2016.
Here's more from Barclays:
CPI has been gradually strengthening its balance sheet, following the partial disposal of a stake in Shanghai Power last year, while we believe the potential disposal of the remaining 17% stake could handily fund the transaction. Its gearing as at end-2015E at 139% is one of the strongest in our coverage universe.
The proposed asset injection adds 34% to capacity from this transaction alone and we expect a further increase of 20% in the next two years from its end-2015 capacity. This increases the likelihood of CPI doubling its installed capacity by 2018, in our view. The mix of capacity in the proposed asset injection is consistent with its existing portfolio of 80:20 between thermal and clean power.
Preliminary numbers disclosed by CPI in the announcement implies a PBT of RMB196 million per GW of capacity for Henan Power’s portfolio. This is significantly lower than our estimated blended PBT of RMB329 million per GW (excluding gains on disposal) for CPI’s existing portfolio in 2015.
For illustrative purposes, assuming an EV/GW of RMB3.5-4.0 million (consistent with latest average capex spend for China coal-fired plants), we value the 100% stake at approx RMB20-23 billion.
This implies an incremental interest cost of around RMB1.1 billion at CPI’s average funding cost, broadly in line with Henan Power’s PBT in 2015. Given the risk of
a y/y earnings decline in 2016 due to tariff cuts, an attractive eventual acquisition price is required to make the transaction accretive
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