China Longyuan Earnings: Disappointing, Due to Lower Tariffs, but Shares Remain Undervalued

We cut Longyuan’s fair value estimate to HKD 9.90 per share from HKD 10.60, after disappointing first-quarter 2024 results that reveal lower average tariffs and utilization hours. We think weak tariffs will persist and our 2024-26 earnings forecasts are reduced by 3%-7%. While power output rose 8% year on year, first-quarter revenue was flat due to lower tariffs, with the average wind tariff falling 6%, mainly attributable to increasing grid parity projects and rising power trading volume. Although wind power capacity was 6% higher, wind power generation only increased by 1% on the back of poorer wind resources. This was offset by strong output growth from other renewable energy (mainly solar) and coal power. Trading at 0.5 times 2024 price/book, we think the firm remains undervalued, but ongoing concerns about declining tariffs and slow subsidy collections will continue to weigh on its share price performance.