ANUNREMITTINGLYGLOOMYOUTLOOK1018

1、analyst analyst company report underweight nat resources (ii) a pending decision over the price it pays czech coal for 8mt per year of lignite, or 40% of cezs annual lignite consumption, and (iii) ec pressure for cez to sell thermal domestic capacity in order to foster competition. anticipation of n

2、ew nuclear spend depresses nearer-term outlook. the czech government wants to build a new reactor at the temelin power plant, in order to maintain the countrys self-sufficiency when older lignite plants close at the end of this decade. anticipating the possibility of heavy nuclear investment, and gi

3、ven that the state is its majority shareholder, cezs strategy seems to be focused on strengthening its balance sheet although it is already the strongest amongst its peer group: even if it makes disposals, we see no efforts to grow other than in renewables. we are highly sceptical that the economics

4、 of new nuclear add up in a medium-sized, interconnected market such as the czech republic. maintain uw, reduce target to czk700: we remain uw. our target price of czk700 (cut from czk710) is based on the rounded average of dcf (czk778, 7.0% wacc, 1% terminal growth), sotp (czk773 after 10% discount

5、), ddm (czk635), peer group 2013e comparison (czk651), and finally the newly-added criterion of fair value at the czech market 2013e pe at 9.6x (czk688), given that cez is seen as a defensive bellwether. catalysts: q3 results on 8 november are likely to show a slight year-on-year decline on albanian

6、 losses and non-recurrence of the romanian payments that boosted q2. we expect continuing weakness in power and carbon pricing to trigger downgrades in consensus forecasts, and we see increasing debate over the economic logic in cez focusing on the building of nuclear reactors, costs of which have s

7、piralled in recent years. the analyst certifications in the disclosure appendix, and with the disclaimer, which forms part of it index index level ric bloomberg source: hsbc prague se-50 986 cezp.pr cez cp enterprise value (czkm) free float (%) market cap (usdm) market cap (czkm) source: hsbc 555,78

8、3 29 20,057 387,104 cez a.s. (cez cp) electric utilities 16 october 2012 financials we remain uw and cut our tp to czk700 from czk710 abc untenable nuclear policy affects cez outlook in our view, the czech governments plan to build a new nuclear reactor at temelin is untenable. watching developments

9、 in the uk we believe that the czech government is monitoring the progress (or lack of it) of the uks efforts to put into place a remuneration system adequate to incentivise new nuclear, and will learn from the problems that might arise. as we have written in our report of 20 september uk new nuclea

10、r: sliding onto the back-burner, we see no final decision on hinkley point before next year at the earliest, for various reasons including: low demand; extension of existing reactors; the impact of us shale and chinese slowdown on coal and gas supply; rising costs of nuclear post- fukushima and fall

11、ing costs of wind and solar; complexity of the feed-in-plus-contract-for- difference (fit + cfd) remuneration system being proposed with risk that it may be considered as being akin to a subsidy by the ec. the uk is to implement a carbon floor price of gbp5/t above the eu ets price from april 2013 r

12、ising to gbp10/t above from april 2014, which is already reflected in a jump in wholesale forward prices, in order to encourage nuclear and renewables build with a view to meeting its self-imposed and unilateral legal obligation to cut carbon emissions by 80% by 2050. as an island with limited inter

13、connection, with old existing reactors and thus the need to look beyond wind, solar and biomass to meet its co2 targets, the uk should find itself in a better position than most to put forward its own market framework that will differ from its neighbours. however, difficulties abound, in our view. t

14、enuous argument for necessity of new-nuclear in the czech republic the czech government is looking to extend nuclear in order to reduce carbon emissions and keep the country self-sufficient after the scheduled closure of 1.4gw of lignite-fired capacity around the end of this decade. in reality, the

15、czech republic is a major exporter (16twh annual average in 2009-11, the equivalent of half of czech annual nuclear output or 2.3gw of lignite) to germany, austria and the slovak republic, we forecast sluggish power demand growth (our economists forecast a 0.9% decline in gdp in 2012 with a 1.0% rec

16、overy in 2013; the czech market is mature enough, in our view, to expect power demand to struggle to match gdfs growth), such that it is arguable whether the new nuclear is required. in addition, the czech market is a non-regulated market where prices are similar 3 nationalgrid redelctricadeespaa en

17、ergiasdeportugal iberdrola snamretegas gdfsuez fortumoyj gasnaturalfenosa ceza.s. centrica rwe edf terna verbund enelsse enagas e.on draxgroupplc cez a.s. (cez cp) electric utilities 16 october 2012 cez balance sheet: strong enough 6.0 5.0 4.0 3.0 2.0 1.0 0.0 source: hsbc estimates (within 3%) of it

18、s neighbours germany, austria, slovakia and austria, none of which are proposing to build new nuclear and in the cases of austria and germany are strongly anti-nuclear. we believe that the cost of new nuclear and the huge time-scale of the investment will require a form of re-regulation of the czech

19、 market that could bring significant price rises and put it at a competitive disadvantage to its neighbours. our view is that, for new nuclear to have an obvious attraction, it would need the following combination: (i) big in terms of population, (ii) growing fast in terms of per-capita consumption,

20、 and (iii) prices high enough to support new nuclear. turkey (74m population, 3.8% gdp growth 2013 estimated by hsbc economists, per- capita power consumption at 40% of the oecd average) is looking to build a nuclear reactor on the black sea coast and appears to fit these criteria; the czech republi

21、c appears not to. in terms of the uk, at least it is looking to replace nuclear with nuclear. cez has entered a clause limiting its outlay to eur400m (czk9.4bn) in the preparatory phase of the temelin project in 2013-16, providing a ceiling as well as flexibility should it decide in 2016 to exit the

22、 project. until a final decision is made, however, the companys ability to grow is restricted; we believe that, even if it divests assets (see below) it will not look beyond renewables projects for growth and it will thus remain over- dependent on czech wholesale power prices. this is despite the fa

23、ct that it has amongst the strongest balance sheets in the sector. lower profits for lignite generation declining achieved prices cez benefits from a highly profitable power generation mix, dominated by nuclear and lignite (84% of 2011 output) with a very small portion in coal and gas. this protects

24、 it, to a large degree, against deterioration of load factors at times of waves of imports of german wind/solar power and of domestic solar/wind production. but it also implies a highly stable cost structure (only edf (edf fp, eur16.5, ow, tp eur21), which sells its power onto a regulated market, ve

25、rbund (ver av, eur17.16, n, tp eur18) and fortum (fum1v fh, eur14, uw, eur15) are more stable) meaning that it is amongst the most sensitive to wholesale power prices, which show no sign of any improvement and have continued to weaken since our previous cez report on 22 abc may. cez hedged 9% of 201

26、3 output and 10% of 4 cez a.s. (cez cp) electric utilities 16 october 2012 2014 output in the three-month period ending 31 july 2012, but remains only 65% hedged for 2013 and 32% for 2014. typically, it is significantly more hedged than this and our impression is that it is hoping for a quicker reco

27、very than its better- hedged counterparts especially e.on (eoan gr, eur18.15, n, tp eur21). we remain bearish given our outlook for flattish demand, continued over-supply (except in moments of freezing, windless and cloudy weather), lack of appetite for a political arrangement leading to a bounce in

28、 carbon prices, and our forecast of thermal coal prices staying in the usd90s/t range to 2014 (metals quarterly, 12 october 2012). we have reduced cezs average achieved power price (eur52.5/mwh in 2012) from eur52.5/mwh to eur52.0/mwh in 2013e and from eur53.2/mwh to eur50.5/mwh for 2014e. higher ca

29、rbon volumes and lignite supply costs the earnings contribution of lignite-powered generation will also be eroded by two further which is scheduled to close in 2019) expires at the end of this year as well as a new contract to last until 2055. negotiations are ongoing. if no agreement is reached, th

30、en pocerady will receive no lignite from czech coal as of january 2013 and cez will be obliged to make up as much of the shortfall as possible from its own mines which are located slightly further away, which will mean both lower lignite volumes and higher transport costs for lignite. the choice app

31、ears to be as follows: either cezs lignite costs will rise by a significant amount (on any agreement with czech coal), or costs will go up by less but lignite-fired electricity output will be down (on lack of an agreement); or cez will sell the pocerady power plant (one- eighth of its domestic power

32、 output) to czech coal (as suggested by the czech coal owner on 21 june 2012 in the czech press, who stated that relations had improved between his company and cez since the change of cez ceo in late 2011). abc factors: out of the three eventualities, the direct sale of on an annual basis from 2013,

33、 cez is obliged to purchase a rising proportion of its carbon emission allocation, from zero in 2012 to 45% (or 23mt) in 2013 rising to the full 100% (or 42t) by 2020e. western eu member power generators (such as rwe, rwe gr, eur34.56, ow, tp eur41) will pay the full 100% from 2013. the polish gener

34、ators have been allocated a similar portion of free carbon permits to cez. cez is in dispute with czech coal, from which it purchases 8mt of lignite annually, or 37% of its lignite consumption (the rest being produced in-house). rwe produces 100% of its lignite from its own mines. czech coal has dem

35、anded substantial price increases once the present supply agreement (which concerns cezs pocerady lignite-fired power plant, pocerady appears to us the most possible, since it would allow cez to fulfil ec demands to sell at least 800mw of thermal plant in order to facilitate competition and put an e

36、nd to a lengthy dispute. however, such a move would be highly dilutive: we estimate that pocerady generates at least 5% of cezs ebitda and 7% of ebit but with just seven years of operating life and steady erosion of its (high) profitability through rising carbon purchasing from 2013, we doubt that c

37、ez would achieve more than czk11bn for the plant (according to our dcf valuation of the unit). we estimate that full disposal of pocerady could dilute cezs 2013e eps by almost 10%. we have not assumed this in our numbers; rather, we have assumed that cez reaches an agreement with czech coal. the oth

38、er plants put up for sale by cez are chvaletice (lignite, 800mw), 5 czkbn cez a.s. (cez cp) electric utilities 16 october 2012 cez: new forecasts _ 2012e_ _2013e _ _ 2014e _ abc newpreviousnewpreviousnewprevious ebitda - hsbc88.086.085.585.583.186.9 ebitda - consensus88.887.387.1 net profit hsbc41.2

39、40.538.538.537.140.0 net profit consensus43.242.341.7 eps (czk)77.275.972.072.169.675.0 eps consensus80.578.678.2 dividend (czk)45.045.042.043.040.044.0 dividend consensus45.945.946.8 source: hsbc estimates, thomson reuters datastream detmarovice (800mw coal-fired thus less profitable than pocerady

40、or chvaletice but younger and with no obstacles to fuel supplies) and melnik 3 with tisova (lignite, 852mw). according to reuters (3 september 2012), detmarovice has attracted the most interest with 12 bidders. selling detmarovice would be less dilutive for cez, but would not solve the problem of li

41、gnite costs for pocerady. changes in forecasts: up in 2012, down in 2014 we have raised our 2012 ebitda forecasts slightly on the better-than-anticipated q2 performance in czech power generation. however, our estimates are only just in line with cez guidance, and we see risk that continuing disputes

42、 between the albanian distribution subsidiary and the albanian government (most recently involving a rise in vat during q3 which will trigger provisions) could lead to guidance being slightly missed. we have left 2013 unchanged and cut our 2014 estimates to reflect a higher contribution from romania

43、n renewables than previously (full year of output in 2013 from the fontanele-cogealac 600mw wind farm) our lower achieved power price assumptions, and higher lignite costs (we already took into account rising carbon costs). there is downside to our estimates if cez elects to sell the pocerady power

44、plant. we would highlight that our estimates are significantly below consensus, which we believe has yet to mark down forecasts for achieved power prices. we remain at underweight, target czk700 from czk710 we have reduced our target price from czk710 to czk700, reflecting the following factors: our

45、 rounded target price of czk700 is based on the average of: dcf unchanged at czk778, wacc 7.0%, specific equity risk premium at 1.0%, terminal growth 1.0%. impact of higher 2012 estimates offset by the combination of lower 2014 and rolling forward our valuation date to end-2013 sop czk773 from czk78

46、8, after 10% discount, due to rolling forward our valuation date to end-2013. ddm czk635 from czk662 due to decline in dps forecasts. peer group 2013e comparison czk651 from czk625 due to a rise in sector peer multiples since our previous publication on cez on 22 may. we adjust our 2013 cez earnings

47、 to assume zero free carbon allocations, to put them in line with sector peers, which implies a 5% discount rating for cez. 6 czk 709 592 651 czkm (186,310) 647,943 18,357 778 533 773 651 778 788 625 778 28 cez a.s. (cez cp) electric utilities 16 october 2012 czech market 2013e per (a criterion we a

48、dded in our may publication to compare cez with central european stocks since cez is perceived as a bell-weather of central european markets), currently at 9.6x cez peer group value: czk651 per 2013e: 5% discount to sector at 9.9x ev/ebitda 2013e: 5% discount to sector at 6.2x average peer group val

49、ue per share source: hsbc estimates abc (czk688) unchanged from may. cez dcf valuation: czk778 under our research model, for stocks without a volatility indicator, the neutral band is 5ppts above and below the hurdle rate for czech stocks of 10%. our target price of czk700 implies a potential negati

50、ve return of 3.6%, which is below the neutral band; therefore, we reiterate our underweight rating on the stock. potential return equals the percentage difference between the current share price and the target price, including dcf value (core operations) associates, st marketable assets, others ev (

51、asset side) less: financial net debt less: provisions, minorities and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investm

52、ent rating. hsbc has assigned ratings for its long-term investment opportunities as described below. this report addresses only the long-term investment opportunities of the companies referred to in the report. as and when hsbc publishes a short-term trading idea the stocks to which these relate are

53、 identified on the website at details of these short-term investment opportunities can be found under the reports section of this website. hsbc believes an investors decision to buy or sell a stock should depend on individual circumstances such as the investors existing holdings and other considerat

54、ions. different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. investors should carefully read the definitions of the ratings used in each research report. in addition, because research reports contain more complete information

55、concerning the analysts views, investors should carefully read the entire research report and should not infer its contents from the rating. in any case, ratings should not be used or relied on in isolation as investment advice. rating definitions for long-term investment opportunities stock ratings

56、 hsbc assigns ratings to its stocks in this sector on the following basis: for each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate, regional market established by our strategy team. the price target for a stock represents the val

57、ue the analyst expects the stock to reach over our performance horizon. the performance horizon is 12 months. for a stock to be classified as overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend

58、 yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as volatile*). for a stock to be classified as underweight, the stock must be expected to underperform its required return by at least 5 perc

59、entage points over the next 12 months (or 10 percentage points for a stock classified as volatile*). stocks between these bands are classified as neutral. our ratings are re-calibrated against these bands at the time of any material change (initiation of coverage, change of volatility status or chan

60、ge in price target). notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change. 8 oct-07oct-08oct-09oct-10oct-11oct-12