SEP Actively Invests in Offshore Wind Power, Quickens Clean Energy Transition

In 2017, SEP acquired 100 percent stake of SPIC Jiangsu Company from SPIC successfully, which increased the company's clean energy installed capacity substantially. By the end of 2017, SEP's controlling installed capacity reached 12.9 GW, among which wind power and PV power amounted to 1.09 GW and 1.26 GW respectively and accounted for 18.19 percent altogether. In 2017, the company's wind power business reported profit of RMB 406 million, with a year-on-year growth of 50.09 percent; its PV power business realized profit of RMB 163 million, increasing 62.72 percent on a year-on-year basis; both wind power and PV power businesses accounted for 30 percent of total profit. As of the end of 2017, the company's renewable energy projects approved amounted to 1.18 GW, and its renewable energy projects which had commenced reached 740 MW, both of which are likely to contribute to the company's clean energy installed capacity in the future. Jiangsu province has rich wind energy resources, especially offshore wind power resources. So far, SPIC Jiangsu Company has put Binhai H1 and H2 offshore wind power projects into operation, with combined installed capacity of 500 MW, and Jiangsu Dafeng Offshore Wind Power Project under construction has an installed capacity of 300 MW. Considering that the 300 MW Binhai H3 project has been approved, along with the H4 and H7 projects in Rudong county, Jiangsu province which have won approval recently, the company's future offshore wind power installed capacity that requires follow-up development work will arrive at 1.1 GW. In accordance with the 13th Five-Year Plan of Wind Power Development in China, the total grid-connected offshore wind power capacity in Jiangsu province will reach 3 GW by 2020, with 4.5 GW under construction, and both the scale of grid connection and construction rank top in the country, well above the other provinces. With abundant project reserves in hand and broad development space for offshore wind power in Jiangsu in the coming years, SEP is expected to fully leverage its first-mover advantage, continue to expand offshore wind power installed capacity, and accelerate its transformation to clean energy.


With the 2x1000 MW ultra-supercritical coal-fired power generation project constructed by SPIC Jiangsu Company put into operation in Q4 2017 and the 320 MW Xinjiang Hami Gas-fired Power Generation Project connected to the grid smoothly in June 2018, the company's thermal power installed capacity has been increasing continuously. At present, the company's coal-fired power installed capacity stands at 8.48 GW, with all the units above 300 MW class; its gas-fired power installed capacity comes up to 2.39 GW, with relatively good unit structure. In July 2017, SEP announced that Minhang Gas-fired Power Generation Project won approval from Shanghai Municipal Development and Reform Commission (DRC), and planned to construct a 1200 MW gas-fired power generation project, which would further improve the company's thermal power installed capacity after commercial operation. Since July 1, 2017, the on-grid power tariff for coal-fired power generation in Shanghai has been increased by RMB 0.0107/kWh (including tax), and the tariff for coal-fired power plants in Anhui province participating in "Transmission of electricity from Anhui province to East China" has been increased by RMB 0.0151/kWh, which will enhance the company's profit to some extent. The company's coal-fired power generation units are mainly located in Shanghai, Jiangsu and Anhui. In 2017, the annual average thermal coal price index in the above three regions increased by more than 30 percent, while coal prices have still been running at high levels year to date. Therefore, the company's coal-fired power generation business growth will depend on the coal price decline.


The company has accelerated the implementation of "going global" strategy, and actively boosted investment in overseas assets through greenfield investment and capital operation. Currently, the company several overseas projects in operation, including a thermal power project in Malta and PV power projects in Japan. Recently, the site excavation project for Hunutlu Coal-fired Power Plant, invested and controlled by SEP, has kicked off officially in Turkey, indicating that the project has entered a substantial stage of construction, with estimated construction period of 48 months. According to the company's planning, its controlling installed capacity will reach 16.8 GW in 2020, increasing 30 percent compared with that in the end of 2017; the overseas controlling installed capacity will reach 5.8 GW, and clean energy will account for not less than 50 percent of total installed capacity while renewable energy will take up not less than 25 percent. In addition, the company's stake purchase of Pakistan-based KE is still under negotiation, and there are some uncertainties in the following acquisition process due to the power tariff coordination issue.


Earnings forecast and rating: Considering that KE project is not included in the consolidated financial statement, we will lower the company's earnings forecast for 2018-2019 and increase the earnings forecast in 2020, with estimated net profit attributed to the parent company to be RMB 1.13 billion, 1.32 billion and 1.49 billion in 2018, 2019 and 2020 respectively (Assume that KE project is included in the consolidated financial statement, and the net profit is expected to be RMB 2.409 billion and 2.892 billion in 2018 and 2019 respectively, while KE project is estimated to contribute RMB 1.028 billion and 1.216 billion), with corresponding EPS of RMB 0.47, 0.55 and 0.62, and P/E ratio of 17, 14 and 13 times respectively. In general, the company has good structure in thermal power generation units, along with broad development space for offshore wind power projects and accelerating expansion in overseas assets, and we hereby maintain an "overweight" rating.

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