Cgn Power Co.Ltd(003816) feasibility analysis report on foreign exchange derivatives trading by its subsidiary Guangdong nuclear power joint venture Co., Ltd
1、 Background of foreign exchange derivatives trading
The power sales revenue of Guangdong nuclear power joint venture Co., Ltd. (hereinafter referred to as the “joint venture”), a subsidiary of Cgn Power Co.Ltd(003816) (hereinafter referred to as the “company”), is mainly priced and received in US dollars, and the operating expenses are mainly in RMB. There is a certain demand for exchange of US dollars against RMB every year. Under the financial market environment of two-way fluctuation of RMB exchange rate, in order to effectively manage the exchange rate risk faced by the currency difference between revenue and expenditure, combined with the requirements of fund management and daily business needs, the joint venture company plans to carry out foreign exchange derivatives transactions for the purpose of hedging.
2、 Necessity and feasibility of foreign exchange derivatives trading
The joint venture company sells about 80% of its power generation to Hong Kong Nuclear Power Investment Co., Ltd. the power sales revenue is priced and collected in US dollars. However, the operating costs, nuclear fuel fees and other operating expenses of the joint venture company are mainly in RMB. The time and currency of income and expenditure do not match. The fluctuation of the exchange rate between US dollars and RMB will have an impact on the profits and cash flow of the joint venture company. The exchange loss of the joint venture in 2018 was RMB 119 million, the exchange loss in 2019 was RMB 31 million, and the exchange gain in 2020 was RMB 197 million.
In order to strengthen exchange rate risk management and prevent the adverse impact of exchange rate fluctuations on the operation of the joint venture company, it is necessary to appropriately carry out foreign exchange derivatives transactions. The derivatives trading business carried out by the joint venture company is closely related to the daily business needs. The transaction type is the forward foreign exchange settlement transaction between us dollar and RMB. The transaction currency is the main currency of the market, and the product liquidity is good. The joint venture company entrusts China Guangdong Nuclear Power Finance Co., Ltd. (hereinafter referred to as the “finance company”) to carry out foreign exchange derivatives transactions in accordance with the regulations. The finance company has equipped professionals to engage in foreign exchange derivatives transactions and formulated a standardized internal control system, which can effectively regulate the trading behavior of foreign exchange derivatives and control the trading risk. Therefore, it is feasible to carry out foreign exchange derivatives trading.
3、 Overview of proposed foreign exchange derivatives transactions
After comparing different hedging instruments such as forward transaction, option transaction and currency swap, and comprehensively considering the transaction cost, transaction difficulty, liquidity and other factors, the foreign exchange derivatives transaction to be carried out by the joint venture company is the forward foreign exchange settlement hedging business of US dollar against RMB, with the purpose of locking the cost and preventing exchange rate risk. The forward foreign exchange settlement hedging business carried out by the joint venture company is a simple foreign exchange derivative product closely related to the basic business, and these foreign exchange derivatives match with the basic business in terms of variety, scale, direction and term, which is in line with the company’s compliance, prudent and steady foreign exchange risk management principles. The main terms of the transaction scheme are as follows: 1. Transaction type: forward foreign exchange settlement hedging business.
2. Contract term: matching the demand for RMB, no more than one year.
3. Counterparty: banking financial institutions.
4. Hedging scale and maximum net position scale at the time point: no more than RMB 1.4 billion. 5. Capital occupation scale: ordinary forward transactions do not involve capital occupation scale.
6. Liquidity arrangement: foreign exchange derivatives transactions are based on normal basic business and match the actual capital needs of the joint venture company, which will not affect the liquidity of the company and the joint venture company.
7. Other terms: foreign exchange derivatives transactions mainly use the comprehensive bank credit line of the joint venture company, and the principal delivery is adopted at maturity. No handling charges will be incurred whether the joint venture company conducts derivative transactions with banks or not.
4、 Risk analysis of foreign exchange derivatives trading
1. Market risk
Exchange rate fluctuations are two-way. After carrying out foreign exchange forward hedging transactions, the exchange rate locking price of forward foreign exchange transactions may be lower than the bookkeeping exchange rate of the joint venture on the delivery date, resulting in exchange losses of the joint venture.
2. Liquidity risk
When the foreign exchange derivatives contract expires, the joint venture company shall pay US dollars as agreed in the contract. If the joint venture company does not have enough US dollar funds for delivery at that time, there will be liquidity risk. 3. Performance risk
When the foreign exchange derivatives contract expires, the counterparty needs to pay RMB to the joint venture company as agreed in the contract. If the counterparty fails to pay as agreed, the joint venture company will face performance risk. 4. Other risks
During the transaction, if the terms of the transaction contract are not clear, it may face legal risks. 5、 Risk control measures for foreign exchange derivatives trading
1. Market risk control measures. The foreign exchange derivatives transactions carried out by the joint venture company are aimed at reducing the impact of exchange rate fluctuations, and there is no risk speculation. The trading quota of foreign exchange derivatives of the joint venture company shall not exceed the upper limit of the authorized quota approved by the board of directors, and the market risk is controllable. 2. Liquidity risk control measures. The proposed foreign exchange derivatives transaction is based on the US dollar income of the joint venture company. Its income is stable and controllable, which can ensure that there are sufficient funds for clearing at the time of delivery, and the liquidity risk is low.
3. Performance risk control measures. The counterparties of foreign exchange derivatives transactions of the joint venture company are financial institutions with good credit and have established long-term business relations with the joint venture company, and the performance risk is low.
4. Other risk control measures. The joint venture company will carefully review the terms of the contract signed with the counterparty and strictly implement the risk management system to prevent legal risks.
The company and the joint venture company will continue to track the changes in the open market price or fair value of foreign exchange derivatives, timely assess the changes in the risk exposure of foreign exchange derivatives transactions, regularly report to the company’s management, timely report any abnormalities, prompt risks and implement emergency measures.
6、 Derivatives transactions of the joint venture in 2021
On January 13, 2021, the foreign exchange derivatives trading plan of the joint venture company was adopted by the fourth meeting of the third board of directors of the company. The content of the plan is basically consistent with the application plan and is effective from January 14, 2021 to January 13, 2022. However, compared with the target exchange rate, the real exchange rate of US dollar against RMB in 2021 is relatively low, and the joint venture company has not actually carried out this derivative transaction.
7、 Conclusion of feasibility analysis of proposed foreign exchange derivatives transactions
The foreign exchange derivatives transaction of the joint venture company is a transaction based on its actual foreign exchange revenue and expenditure business. This transaction is based on the normal business background and aims to reduce the risk of foreign exchange rate fluctuation. There is no risk speculation. The transaction is feasible. The company has formulated the regulations on the management of derivatives transactions of joint stock companies, and the targeted risk control measures planned to be taken are also feasible. Cgn Power Co.Ltd(003816)
January 17, 2022
