China General Nuclear Power Corp:New issue thoughts

Relative Value.

    Existing guaranteed 2025s are at G+105bp, and typical 5/10 year spread curveis at 20-25bp for power names, though recent new issues have been steeper.

    We see eventual fair value for CGN’s 2022s & 2027s (A3/A-/A+) at 85-90bp &115-120bp respectively (without new issue concession). Note that CGN alsohas a 2025 with a keepwell structure that trades around G+105bp. The IPG at130bp area and 165bp area clearly looks quite generous to compensate for theheavy supply from China, even if we assume the usual tightening before finalguidance. Separately, CGN is issuing 7yr EUR bonds where IPG is MS+140bp.

    Key downside risks are weak market technicals and highly leveraged creditprofile, while upside risks include high strategic importance, etc.

    Compared to other power generators under our coverage, China Three Gorges(A1/A/A+) has similar scale, but with stronger EBITDA margins (67% vs 54% in1H17), lower leverage (4.1x vs 9.6x at Jun’17) and higher ratings (1-2 notches).

    SPIC (A2/A-/A) on the other hand has similar leverage and ratings, though islarger in scale (2.3x revenues in 1H17). The 2021s and 2026s for Three Gorgesare around 75bp and 100bp, while SPIC’s are at about 85bp and 105bprespectively. We think CGN should trade 10-20bp wider. Compared to otherlower single A/high BBB rated Chinese names, we believe CGN should tradeclose to China Railway Group (A3/BBB+/A-) given central governmentownership and dominating position in their respective markets. China RailwayGroup 2022s & 2026s trade at G+90bp and G+110bp currently.

    Technicals.

    We are mindful of the fact that supply in the China IG space has been heavyrecently. A flurry of China companies tapped the USD bond market, withUSD21 billion priced across 34 deals in Nov. Like more than 90% of the Chinadeals this year, CGN is also a RegS only issue, which won’t help. Plus, overallmarkets feel a bit weak into year end. Hence, we will look for decent new issueconcession (may be 20-25bp, on top of our fair value estimate above).

    Fundamentals.

    CGN is 90% owned by central SASAC and 10% owned by GuangdongGovernment. CoC is defined when central government ceases to own over 50%of the company. CGN’s credit profile is weak as reflected in their standaloneratings being high yield (Ba3/BB+ by Moody’s/S&P). Leverage is high at 9.6x atend of Jun 2017 with negative FCF due to relatively aggressive capex plans asit strives to meet China’s clean energy policy goals. Revenue and EBITDA in 1Hstood at RMB40.4 billion and RMB21.7 billion. At the same time, being one ofthe only three authorized enterprises with controlling interest in nuclearprojects, CGN benefits from high industry entry barriers, positive regulatoryenvironment for nuclear power, strong government support and sound marketposition in the nuclear power industry.