Datang Renewable (01798 HK) | Strong 1Q23 Results; Promising Improvement in Earnings Profile Driven by Ongoing Operational Optimisation

During 1Q23, Datang Renewable (DTR, or the "Company") recorded total power generation of 8,736 GWh (+24.7% yoy), among which wind generation was 8,209 GWh (+22.7% yoy) and solar generation was 527 GWh (+68.6% yoy). The higher generation in 1Q23 was primarily due to better wind resources. However, during the quarter, DTR's revenue was only up by 13.9% yoy, lower than the 22.7% yoy growth in power generation, likely reflecting a drop in tariffs. In 1Q23, DTR reported shareholders' profit of RMB1,135 mn (based on PRC accounting standards), up 28.2% yoy, mainly attributable to higher generation and lower net financing costs.

In 2022, while peers suffered from lower wind utilisation hours due to prevailing poorer wind conditions across China, DTR recorded flat wind utilisation hours of 2,262 thanks to ongoing technical transformation, digitalisation and improved generation management. Given the room for operational improvement, especially considering the potential related to wind repowering, we believe DTR's ongoing effort in operational optimisation is as powerful as capacity expansion in driving earnings growth.

We believe DTR's capacity growth prior to 2022 was largely constrained by higher-than-peers IRR requirements as well as limited power delegated by China Datang Corporation when it comes to project development – these limiting factors are largely dismissed under the parent group's new strategy of "Secondary Entrepreneurship" in line with China's dual carbon goals. In this lens, we believe DTR's 2023 capacity installation target of 1.5-2.0GW is rather conservative and its capacity growth could accelerate from 2023 onwards, especially considering the Company's improved cash flows and lowered gearings. We also see large upside associated with wind repowering, which is gaining momentum in China with an acceleration of policymaking in this regard since late 2021. DTR currently has around 2GW of wind power eligible and suitable for repowering, and this number is likely to reach nearly 4GW by the end of 2025, according to our estimate. Wind repowering, on average, can more than double the generation capacity and triple the power output of a repowered site, according to case studies conducted both in China and overseas.

We raise our 2023 EPS forecast to RMB0.35 (+2.3%) primarily reflecting better YTD wind resources, while maintaining 2024 and 2025 forecasts unchanged at RMB0.47 and RMB0.61, respectively. Our new TP is HK$3.40, based on 8.5x 2023 PE.

Lower-than-expected power demand; higher-than-expected raw material costs; unfavourable changes of regulations and policies for IPPs; and extreme weather conditions.