CR Power threatened by underperformance on utilization hours

In the next 2-3 years.

It has been noted that the investment case for CR Power is at a stage where it faces increased scrutiny from investors due to the geographical spread of its installed capacity and growth.

According to a research note from Barclays, the key concern is the potential risk to utilization hours in the medium to long term, due to its c50% exposure to Jiangsu, Guangdong and other provinces that are potentially affected by the import of power using UHV lines and the nuclear build-out.

The concentration of near-term growth within exposed provinces further puts its resilience to the test in 2015, in Barclays' view.

Barclays revises its earnings estimates down 3-5% for 2015 and 2016, lowers its price target to HK$24 and downgrade its rating to Equal Weight, mainly on reduced utilization hour assumptions.

Here's more from Barclays:

UHV lines and China's nuclear build-out to muddle the investment case; downgrade to Equal Weight: Even with a track record as one of the best operators in China, CR Power could underperform on utilization hours in the next 2-3 years, in our view. It has c50% capacity in Jiangsu and Guangdong, which are the two biggest recipient provinces of power to be transported by UHV lines. In addition, the nuclear build-out is likely to be strongest in Guangdong, further pressuring long-term utilization rates.

Strong capacity growth profile but mostly in coal IPPs: CR Power has one of the strongest pipelines of power projects in our coverage group, with capacity growth of about 35% from end-2013 to 2016, on our estimates. However, the geographical spread of this growth concerns us as the bulk of capacity additions are in coal IPPs, which are most at risk to utilization hours in the medium to long term. While it is growing renewable power capacity at a faster rate, the smaller base means that renewable IPPs would only be 15% of total capacity by 2016, from 12% at end-2013.

Valuations hold us back from being more cautious: CR Power's 2015E P/E valuation has de-rated 25% since its peak in September 2014, while consensus earnings estimates have moved up by 5%. The stock is currently trading below -1SD from its long-term average, implying a c10% discount vs the sector average. While we are cautious on the investment case due to potential challenges to its utilization hours, we are Equal Weight due to reasonably inexpensive valuations.