Asia Nuclear Sector - Initiation: the next powerhouse

 China’s nuclear industry is poised to enter a rapid development phase, with capacity exceeding Japan and Korea’s in a few years

 Its leading operators should benefit from expanded installed capacity and better profitability, driven by government policies

 Fuxin (Buy) is our top China pick; we initiate on CGN with an Outperform (2); in Korea we like KEPCO and DHI (Outperform)

Investment case
Asia’s 3 major nuclear players — China, Japan and Korea — have sharply divergent growth prospects over the next 5 years, with China’s nuclear power capacity seen rising at a CAGR of 18.5% for 2014-20E, far outpacing Japan and Korea’s 0.5%/6.4%, respectively. The disparities flow from the 3 countries’ different government policies and project pipelines.

In this report, we focus on China and Korea as, post Fukushima, Japan has:
1) a seemingly unclear nuclear power policy, 

2) some public opposition to restarting nuclear plants, and 

3) a limited project pipeline (planned or under construction).

China leads in growth potential, given:
1) its ample project pipeline, ie, 28.3GW nuclear capacity under construction; with 6 nuclear units (7.4GW) being approved in 2015, on our estimates, we expect China’s nuclear capacity to total 56.1GW by end-2020,

2) supportive government policies, and

3) its aggressive expansion into overseas markets, which provides extra revenue streams for nuclear power companies in China.

Korea targets to increase its nuclear capacity from 21GW in 2014 to c.43GW by 2035. The 7th electricity plan, which will be finalised by endJune, will add 2 nuclear power plants to the existing pipeline, taking the number to 13. The present government’s strong stance on nuclear energy gives us confidence in the country’s future nuclear market.

We highlight the following as the sector’s major share-price catalysts:

1) new government policies, including China’s new project approvals,

2) interest-rate cuts, which would reduce plant financing costs, and

3) nuclear power technology breakthroughs.

In China, Huadian Fuxin (Fuxin) (816 HK, HKD3.93, Buy [1]) is our top pick in the nuclear space, backed by its appealing 2016E PER of 8.1x. But we trim our 12-month target price to HKD4.6 (from HKD5.0), given our more conservative coalfired power utilisation projections. We initiate on CGN Power (CGN) (1816 HK, HKD4.70) with an Outperform (2) rating and 12-month target price of HKD5.0. We forecast a capacity CAGR of 16% for CGN over 2014-20E due to its strong project pipeline, and longer term we expect it to expand via parent asset injections and overseas expansion. We note CGN’s average net-profit margin was 12.9pp higher than China National Nuclear Power’s over 2011-14.

KEPCO (015760 KS, KRW43,700, Outperform [2]) is our top pick in the Korea Utilities Sector. We view the stock as a beneficiary of the government’s commitment to nuclear in its 7th electricity plan. And we reiterate Outperform (2) on Doosan Heavy (DHI) (034020 KS, KRW25,500) but cut our 12-month target price to KRW29,000 (from KRW31,000), as we foresee a slowerthan-expected earnings turnaround at its subsidiaries.

In our view, the main risks for the sector are:

1) major nuclear accidents affecting power capacity growth,

2) uranium price hikes, and

3) technological uncertainties. (Read Report)

Source : Daiwa Capital Markets

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