China Longyuan Earnings: Results Trail Expectation Due to Impairments; Shares Remain Attractive

China Longyuan’s 2023 net profit rose 26% year on year to CNY 6.2 billion. However, this was below our expectation as it incurred CNY 2.1 billion of asset impairment losses, with CNY 1.5 billion related to projects to replace smaller-capacity wind turbines with larger ones for its old wind farms (capacity of 1.2 GW). While this doesn’t affect Longyuan’s cash flow, we think guidance from management would be welcomed by investors as a similar impairment (capacity of 356 MW) of CNY 590 million was made in 2022. We cut our fair value estimate to HKD 10.60 per share from HKD 12.00 after factoring in lower average tariffs. We reduced our 2024-26 earnings forecasts by 3%-8%. Trading at 5 times 2024 price/earnings, we believe Longyuan is undervalued. However, we think near-term concerns on more impairments and slow subsidy collections will continue to cap its share price performance.