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On Tuesday, JPMorgan upgraded China Resources Power Holdings Co Ltd (836:HK) (OTC: CRPJY) stock from Neutral to Overweight, adjusting the price target to HK$21.00, a modest increase from the previous HK$20.00.
The firm's analysis suggests that the market has overly penalized the company's shares, which have significantly underperformed the Hang Seng China Enterprises Index (HSCEI) since early July.
China Resources Power's stock has seen a decline of over 35% compared to the HSCEI's 11% gain during the same period. JPMorgan attributes this underperformance to market concerns about potential tariff reductions next year, possible capital issuance, and disappointing results from sector peers, such as Huaneng Power.
Despite these concerns, JPMorgan views the current valuation of China Resources Power, trading at less than six times one-year forward Price-to-Earnings (P/E), as an attractive entry point. The analyst points out that the stock now offers a projected yield of approximately 7% on a pro-forma basis, even when assuming significant tariff cuts over the next two years.
JPMorgan's outlook for China Resources Power is based on the expectation that tariffs will decrease at a moderate rate, in the mid-single-digits percentage annually. This is due to the robust growth in power consumption in China.
The potential negative impact of tariff reductions is expected to be partially mitigated by a decrease in coal prices, estimated at 3-5% year-over-year in 2025, and an increase in capacity charges anticipated in 2026.
The firm also notes macroeconomic uncertainties projected into the first half of 2025 and a lower yield environment in China as factors contributing to the perceived value in China Resources Power's shares.
With these considerations, JPMorgan has decided to upgrade the stock to Overweight, signaling confidence in its investment potential despite the challenges ahead.
InvestingPro Insights
Recent data from InvestingPro adds depth to JPMorgan's analysis of China Resources Power Holdings Co Ltd (OTC: CRPJY). The company's P/E ratio of 6.45 aligns with JPMorgan's observation of the stock trading at less than six times one-year forward P/E, supporting the view that the stock may be undervalued. This is further reinforced by an InvestingPro Tip indicating that CRPJY is "Trading at a low earnings multiple."
The company's dividend yield of 4.49% is substantial, though lower than JPMorgan's projected 7% yield. However, an InvestingPro Tip highlights that CRPJY "Pays a significant dividend to shareholders" and has "maintained dividend payments for 21 consecutive years," which may appeal to income-focused investors in the current economic climate.
Despite recent underperformance, CRPJY has shown a strong 33.17% YTD price total return, suggesting resilience in the face of market challenges. For investors seeking more comprehensive analysis, InvestingPro offers 11 additional tips for CRPJY, providing a broader perspective on the company's financial health and market position.
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