NDRC approves CGN Power's Hongyanhe Phase III project

It could add 2.3GW of capacity soon.

CGN Power has announced the NDRC's approval of its Hongyanhe Phase III project, which could add 2.3GW of capacity in the next five years.

According to a research note from Barclays, this is in line with its expectations for CGN to have the first-mover advantage to receive approvals for 9GW of projects for China to reach its targeted nuclear capacity of 58GW by 2020.

Moreover, the latest approval illustrates CGN's potential to maintain double-digit earnings growth beyond 2020. Under its current project pipeline, Barclays expect CGN to grow its earnings at a CAGR of 12% until 2020 with lower earnings volatility than those of the IPPs.

Its full-year 2014 earnings release is scheduled for 18 March while the completion of the Taishan asset injection transaction and the commissioning of Yangjiang Units 2 and 3 in 2015 should be major catalyst in the next 6-12 months.

Here's more from Barclays:

Project approval illustrates potential to maintain double-digit earnings growth: CGN currently has 13.4GW of projects under construction that are to come on stream by 2020, implying an average addition to 2.2GW per year. The approval of the Hongyanhe Units 5 and 6 should add 2.3GW in capacity and strengthen its growth path beyond 2020.

Evolutionary reactor technology dynamics improve economics: The Hongyanhe Units 5 and 6 in Liaoning province are likely to have capacities similar to Units 1-4 while the technology will have features of G-III. We note that the Hongyanhe Phase III is based on ACPR-1000 technology, which basically is the G-II technology but with the safety features of the G-III-based reactors. Thus, the expansion capex is likely to be RMB 12-15mn per MW, lower than G-III reactor capex of RMB20-25mn per MW.

Potential approvals in China's 13 Five Year Plan look even bigger: China's government is to indicate various economic targets under its 13th Five Year Plan at the ongoing National People's Congress meeting, including power capacity targets. We note that any positive news on nuclear capacity addition targets will likely be a positive catalyst given the soft target of 200GW of nuclear capacity by 2030 from the planned 58GW by 2020.

Valuations are now in line with those of renewable peers: CGN is trading at 17.4x our 2015 earnings estimate, which is in line with the valuations of the wind companies in our coverage. Although the EV/EBITDA at 20.8x on our 2015 estimates is at the upper end of the range, the multiple should normalize with project commissioning in next 2-3 years.