Event:

The Company unveiled the Decisions on the Plan (Supplementary) of Zhejiang Zheneng Electric Power (ZZEP) Merging Zhejiang Southeast Electric Power (ZSEP) through Share Swap and the Report (Draft) on ZZEP’s Merger of ZSEP by Absorption. According to the announcement, the A-share offering price is set at Rmb5.53 per share, pro forma 2013E earnings are forecasted to be Rmb4.46bn, and Zhejiang Zheneng Group (ZZG) promised to interest its interest by up to Rmb1.5bn A-shares.

Comment:

Share swap price is below the previous lower limit, and the major shareholder’s plan to boost its interest helps stabilize share price. The offering price announced by the Company is Rmb5.53 per share, below the lower limit of the expected offering price range (Rmb5.71-6.63 per share, 14.0-16.0x 2012 PE) and implying 2012 PE of 13.4x after excluding non-recurring gains and losses. In our view, the offering price is fair, and more in favor of B shares holders than the expected price range. In addition, the Company announced that in order to avoid irrational volatility of ZZEP’s A-share price after listing, ZZG will spend up to Rmb1.5bn in expanding its interests, which will help maintain the stability of ZZEP’s A-share price.

Projects are continuously put into operation, and earnings grow steadily. As for the approved projects, the Company has thermal power, gas-fired power and nuclear power plants under construction. Its Liuheng Power Plant (2 x 1000 MW), Taizhou No.2 Power Plant (2x1000MW), Fengtai Phase-II project (2x660MW), and Sanmen nuclear power project (2x1250MW) are high quality assets with strong profitability, and in addition, the three gas projects (total installed capacity of 2250MW) and the stake in Fangjiashan nuclear power project (2x1080MW) to be obtained also deserve close attention. Additionally, decline in the coal price and capital cost in 2013 and decline in thermal power utilization hours during 2013-15E are important factors that affect the Company’s profit.

Fair price and small free float. ZZEP achieves its listing on the A-share market by absorbing ZSEP through share swap. The A-share offering price of Rmb5.53 per share implies 2012 PE of 13.4x after excluding non-recurring gains and losses, lower than the median of 15x PE for comparables. Therefore, the A-share offering price is relatively fair.