WENSHAN ELECTRIC POWER(600995)：DEVELOPING INTO A RARE PLAYER OF PUMPED STORAGE

　　China Southern Power Grid （CSG） planned to transfer its pumped storage, peak shaving hydropower, and electrochemical energy storage power stations into Wenshan Electric Power, which will drive the Company to develop into a rare player with premium energy storage operation capabilities in the market if CSG’s asset replacement goes well. Under the large-scale development of new energy, we expect pumped storage projects to be more profitable as the pumped storage industry grow by leaps and bounds, alongside the impending full coverage of the two-part tariff scheme and the gradual build-up of electricity spot market. Coupled with CSG’s proactive plan in pumped storage developing and abundant project reserves, we expect Wenshan Electric Power’s pumped storage business to grow rapidly upon the completion of CSG’s asset replacement. We forecast the Company’s 2022E/23E/24E attributable net profit （ANP） to be Rmb130mn/170mn/200mn, corresponding to a dynamic PE of 61x/47x/40x at the current trading price. We initiate coverage with a “BUY” rating and a target price of Rmb19.80.
　　 Planning to purchase energy storage assets of CSG for transformation.
　　Wenshan Electric Power is positioned as an integrated enterprise of power purchase, generation, design and distribution in Wenshan, Yunnan, with Yunnan Power Grid as the controlling shareholder （holding 30.66% shares） and CSG as the actual controller. The Company has been promoting asset replacement and reorganization at this point. According to its announcement, CSG planned to transfer 100% shares of CSG Peak and Frequency Modulation Power Generation Company to Wenshan Electric Power, which means that all the pumped storage, peak shaving hydropower and electrochemical energy storage power stations under CSG will belong to Wenshan Electric Power upon the completion of the asset replacement, driving the Company to develop into a listed platform with premium energy storage development, investment, construction and operation capabilities under CSG.
Vast growth headroom for the pumped storage industry.
　　The scale of China’s flexible power supply is relatively modest compared with overseas development, and the large-scale development of new energy has imposed heightened requirements for flexible power supply and power grid modulation. Pumped storage boasts fast start-up/shutdown, flexible output, low unit cost and large energy storage capacity, and is deemed as an important source for domestic flexible power supply based on China’s current conditions. The National Energy Administration （NEA） proposed to ramp up pumped storage installations to 62/120GW by the end of 2025/2030, implying a CAGR of 15.4%/14.1% during the “14th/15th Five-Year Plan” period （2021- 25/2026-30）， which will drive the pumped storage industry to develop rapidly.
　　We expect higher profitability of pumped storage projects with the impending full coverage of the two-part tariff scheme and the gradual build-up of electricity spot market and supporting service market, and investors have been building large-scale exposure to the industry.
　　High growth visibility on strengthened project reserves.
　　CSG planned to transfer multiple projects to Wenshan Electric Power, including pumped storage projects that are currently under operation, under construction and still in the fund raising state, with installations of 11.48GW, the on-going peak shaving hydropower projects with installations of 1.92GW, and the electrochemical energy storage projects that are under operation as well as in the state of fund raising with installations of 500MW/1,002MWh. In addition, 11 pumped storage power stations that are in the early stage of development with total installations of 12.60GW are also included in this round of asset replacement. The abundant project reserves will warrant medium and long-term growth for the Company. Considering the historically high profitability of the assets up for replacement, we expect Wenshan Electric Power’s diluted return on equity （ROE） to be 8.92% in 2021 upon the completion of the transaction, significantly higher than 0.74% prior to the deal.
　　According to CSG’s plan, project reserves and construction pace for pumped storage projects, we forecast the installations of CSG Peak and Frequency Modulation Power Generation Company to grow rapidly to reach 13.88/29.48GW by the end of 2025/2030.
Potential risks: Disappointing demand in electricity distribution areas; the price gap between electricity purchase and distribution missing expectations; the progress of asset replacement failing expectations; the construction progress of electricity spot market falling short of expectations; disappointing demand for supporting services in project areas; the progress of new projects missing expectations.
Investment recommendation: Considering the asset replacement is still in progress, we arrive at our financial estimates based on the existing electricity distribution business at this point. We forecast Wenshan Electric Power’s 2022E/23E/24E operating revenue to be Rmb241mn/252mn/263mn, with ANP at Rmb130mn/170mn/200mn, respectively, equivalent to EPS forecasts of Rmb0.27/0.35/0.41, which corresponds to a dynamic PE of 61x/47x/40x at the current trading price. We expect the Company to develop into a rare platform-based player in energy storage operation upon the completion of the asset replacement with a focus on pumped storage, which will drive up its ROE as well as growth. Therefore, we believe Wenshan Electric Power will enjoy certain valuation premiums compared with hydropower and wind power suppliers, and with the average 2022E PB of comps valuation as a reference, we assign 100% valuation premiums to the Company to arrive at a target price of Rmb19.80 on 4.2x 2022E PB. We initiate coverage with a “BUY” rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。