Analysis of China Resources Power Holdings (CR Power)

The author published the analysis report here is for his own reference only. It is not an indication of the author's business interests for companies being analyzed. It is definitely not an investment advice, please see the full disclaimer located at the bottom of the blog post.

As outcome of analysis of top 4 china power producers (Part 1 and 2), the China Resources Power Holdings Co. Ltd. (hereafter called "CR Power") is shortlisted to perform further detail analysis.

Competitive Advantages
CR Power have following competitive advantages over it peers:-

1. The company is better position in improvement of fuel cost control from the acquired coal mines that operating toward full production mode. Even this may increase finance cost of the company, the acquisition of coal mines still making a good business sense as fuel cost carry more weight in the influence of profit.
   
2. Even the key business of the company was coal-fired power generation, it is aggressively expands into wind power generation in recent years and aimed to be the leading wind power producer in China. It was a strategic move as the cost of wind energy is declining steadily according to this report (but the construction cost of wind energy plant is sensitive to steel price as 80% of it's raw material comprised of steel).
   

Financial Summary

The Compounded Annual Growth Rate (hereafter called "CAGR") of the Revenue of CR Power is great, 49%. However, Total Liabilities is chasing the tail of Revenue, it's CAGR is 45%, grow moderately slower than Revenue. The good news is Total Liabilities grow at 5 years lowest rate, 25.73%. I expect the grow of liabilities will be stabilized over time with the aid of improvement of fuel (coal mines ownership) and finance cost control (issuance of corporate bonds with better rate compared to bank borrowing), as growing liabilities at 45% annually is unsustainable.

The CAGR of Net Generation Volume (Mwh), Capacity (MW) and Net Profit achieving more than 20%. Even CAGR of Weighted Average Shares of the company recorded 4.71%, it still managed to achieve CAGR of Earning per share (hereafter called "EPS") and Dividend per share (hereafter called "DPS") about 15%.

By looking into Net Profit or Earning per share data of CR Power, it was clear that the nature of power generation industry is cyclical, as it has up and down year within 5 years period.

Rate of Returns and Financial Leverages

 

CR Power achieved satisfactory of Return On Average Equity (hereafter called "ROAE"), more than 12% for the 5 years period except 2008. But Return On Average Asset (hereafter called "ROAA") is far from satisfactory especially in year 2010, merely 4.4%. The aspect which worth paying more attention is the financial leverages adopted by the company, which measured by Debt to Equity Ratio growing year on year except 2009, it reach 184.54% in 2010.

Cash Flow Analysis

The Cash Flow statement is simplified version of the consolidated cash flow statement of the company to ease the work of analysis. From 2006 to 2010, the Total Cash Generated by the company is HK$1,607 millions only where Total Cash Inflow is HK$41,957 millions and Total Cash Outflow is HK$40,368 millions in the same period. The ratio of Total Cash Generated to Total Cash Inflow is 3.83%, it is clear sign that power generation is cash sucking industry.

In 2009 and 2010, the cash inflows generated by the company barely enough to cover cash outflows, but in 2006 and 2008, it almost lost all the cash generated in 2007.

The dividend paid for the 5 years period amounted HK$7,100 millions and it is look like funded by the new issuance of shares in the same period, amounted HK$7,756 millions.

How Much It Worth?
Let's say the growth of power demand of China will be slow down and the company CAGR of both EPS and DPS is 10% in the next 10 years (approximately 15% in the past 5 years), the EPS of the company will be HK$2.69 in 2020 and the forecast dividends received over the 10 years period totaling HK$5.79.

If the stock price of CR Power sell at 10 times earning in 2020, it is HK$26.90 and included total dividends received, it is HK$32.69 per share. Given annual 6% inflation rate in next 10 years, the discounted rate is 0.591898. So, HK$32.69 discounted to today price, it is HK$19.35 per share.

The discounted price is 26% higher comparing to today (1 August 2011) closing price HK$15.32. Do you think it is worth to place a bet?