Cgn Power Co.Ltd(003816) feasibility analysis report on foreign exchange derivatives trading by its subsidiary Taishan nuclear power joint venture Co., Ltd
1、 Background of foreign exchange derivatives trading
Taishan nuclear power joint venture Co., Ltd. (hereinafter referred to as “Taishan company”), a subsidiary of Cgn Power Co.Ltd(003816) (hereinafter referred to as “the company”), signed an export credit refinancing agreement (with a term of 17 years) with the syndicate in November 2009, with an amount of 1.753 billion euros. By the end of 2021, the total balance of euro debt under the agreement was 482 million euros. From 2022 to 2026, Taishan company shall repay euro debt at a fixed time in accordance with the export credit refinancing agreement. It is difficult to prepay the debts under the agreement because of the high interruption fee. Since the power sales revenue of Taishan company is only RMB, there is a certain demand for foreign exchange purchase and repayment of RMB against euro every year. In the financial market environment of two-way fluctuation of RMB against euro exchange rate, in order to effectively manage the exchange rate fluctuation risk of foreign currency debt, in combination with fund management requirements, Taishan company plans to carry out foreign exchange derivatives transactions for hedging purposes.
2、 Necessity and feasibility of foreign exchange derivatives trading
The daily operating expenses of Taishan company have euro debts with fixed repayment date, and the time of currency revenue and expenditure does not match the currency. The fluctuation of RMB against euro exchange rate will have an impact on the profits and cash flow of Taishan company. The exchange loss of Taishan company in 2018 was 15 million yuan, the exchange gain in 2019 was 42 million yuan and the exchange loss in 2020 was 158 million yuan. In 2021, Taishan company did not conduct derivatives trading.
In order to strengthen exchange rate risk management and prevent the adverse impact of exchange rate fluctuations on the operation of Taishan company, it is necessary to appropriately carry out foreign exchange derivatives trading. The derivatives trading business carried out by Taishan company is closely related to the daily business needs. The transaction type is the forward purchase of foreign exchange between RMB and euro. The transaction currency is the main currency of the market, and the product liquidity is good. Taishan entrusted China Guangdong Nuclear Power Finance Co., Ltd. (hereinafter referred to as “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 standardize 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 Taishan company is the forward foreign exchange purchase hedging business of RMB against euro, with the purpose of locking the cost and preventing exchange rate risk. The forward foreign exchange purchase hedging business carried out by Taishan 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 compliant, prudent and stable foreign exchange risk management principles. The main terms of the transaction plan are as follows: 1. Transaction type: forward foreign exchange purchase hedging business.
2. Contract term: matching the maturity of euro debt, 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 240 million euros (principal and interest of Euro export credit due from 2022 to 2023).
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 repayment demand of Taishan company, which will not affect the liquidity of the company and Taishan company.
7. Other terms: the trading of foreign exchange derivatives mainly uses the bank comprehensive credit line of Taishan company, and the principal delivery is adopted at maturity. No matter whether tsnpc and the bank carry out derivatives transactions, no relevant handling charges will be incurred.
4、 Risk analysis of foreign exchange derivatives trading
1. Market risk. Exchange rate fluctuations are bidirectional. After foreign exchange forward hedging transactions are carried out, the exchange rate locking price of forward foreign exchange transactions may be higher than the bookkeeping exchange rate of Taishan company on the delivery date, resulting in exchange losses of Taishan company.
2. Liquidity risk. When the foreign exchange derivatives contract expires, Taishan company needs to pay RMB according to the contract. If Taishan company does not have enough RMB 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 euro to Taishan company as agreed in the contract. If the counterparty fails to pay as agreed, Taishan 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 trading carried out by Taishan company aims to reduce the impact of exchange rate fluctuations, and there is no risk speculation. The trading quota of foreign exchange derivatives of Taishan 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 RMB income of Taishan 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 Taishan company in foreign exchange derivatives transactions are financial institutions with good credit and have established long-term business relations with Taishan company, and the performance risk is low.
4. Other risk control measures. Taishan will carefully review the contract terms signed with counterparties and strictly implement the risk management system to prevent legal risks.
The company and tsnpc 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、 Conclusion of feasibility analysis of proposed foreign exchange derivatives transactions
The foreign exchange derivatives transaction of the company’s subsidiaries 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, and 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.
January 17, 2022
