It would've locked up a bulk of capital in the long-term.
Last October, China signed a deal with the UK to participate in three UK nuclear power projects, with CGNPC, the parent of CGN Power, owning a 20.0%-66.5% stake in each of the projects.
Under a non-competition deed granted by CGNPC, CGN Power has the option of investing in any UK nuclear project that is either being planned or constructed by the parent group. Thus far, the independent non-executive directors of CGN Power have elected not to pursue the UK projects.
According to CCB International's Cathy Chan and Felix Lam, the decision by CGN Power’s independent non-executive directors not to get involved in the construction of the UK nuclear projects did not come as a surprise given the company’s strategy of refraining from involving itself in nuclear power projects that do not have at least one unit already in commercial operation.
The UK project does not yet meet this criterion as it is still at the initial stage of development and has several major hurdles to negotiate, not least of which is insufficient funding from other stakeholders, in particular Électricité de France (EDF FP, NR), a French power company.
Here's more from CCB International:
CGN Power’s decision to forgo involvement in the UK projects at this time is sensible in our view, as it will avoid a situation that would lock up a large chunk of capital over a long period and expose the company’s portfolio to a great deal of uncertainty. Under the terms of the non-competition deed, refraining from involvement at this time does not preclude CGN Power from investing in the UK projects at a later date. We have not factored in the UK projects into our model.
Asset injection a potential positive near-term catalyst. By not getting involved in the construction of the UK nuclear projects, management at CGN Power can focus on negotiations over the Fangchenggang Nuclear Project, a potential asset injection from the parent company likely in 2016-2017F. In our view, the Fangchenggang deal has the potential to become a major share price catalyst. Phase 1 of the deal adds 2GW of capacity in 2016F. Assuming the injection takes place at the beginning of next year, we forecast CGN Power’s 2017F net profit will be 10% higher than it would otherwise have been had the asset injection not been made.
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