2021 results in line with our expectations
　　Huaneng Power International (Huaneng) announced its 2021 results: Revenue rose 20.8% YoY to Rmb204.61bn, while net loss totaled Rmb10.26bn (vs. net profit of Rmb4.57bn in 2020), in line with expectations. Overall, high coal prices weighed on the firm’s results in 2021.
　　Wind and solar power segments recorded net profit Rmb4.1bn and Rmb600mn, with net margin at 41% and 31%. Huaneng’s earnings　from the renewable energy business increased notably for two reasons.First, the firm’s incremental wind and solar power installation totaled 2.4GW and 0.8GW. Second, its wind and solar power utilization hours increased 7% and 11% YoY to 2,250 and 1,286 hours. Huaneng leads the power industry in terms of return on assets. We believe this factor underscores its strong cost-control capabilities. Its assets were mostly built on its own. Huaneng holds large equity stakes in its asset projects.
　　Coal-fired power segment: Net loss reached Rmb14.2bn; operating cash flow fell notably and leverage ratio increased. Huaneng’s　thermal power sales volume and tariff rose 11.8% and 6.2% YoY in 2021 driven by China’s efforts to ensure supply of thermal power. However, fuel cost of its coal-fired power generation units grew 56% YoY to Rmb312.2/mWh, and spark spread slipped to Rmb50/mWh.Consequently, the firm’s net operating cash flow contracted from Rmb42.05bn in 2020 to Rmb6.03bn in 2021. Meanwhile, capex remained largely unchanged. As such, liability/asset ratio increased from 67.7% to 74.7%.
　　Trends to watch
　　Total capacity of wind and solar power units starting operation in 2021　missed expectations. However, the volume of incremental grid connection reached 5.8GW, which will help Huaneng achieve its target for 2022. The company plans to have 8GW of wind and solar power units start operation in 2022, with 3GW from wind power units and 5GW from solar power units.Huaneng is confident about achieving this target despite lingering unfavorable weather conditions and COVID-19 resurgence. It intends to raise operating efficiency, increase cash flows, and rely on equity financing to push its　leverage ratio down to 70%. The firm’s renewable energy projects that were approved by regulators in 2021 had a combined capacity of more than 25GW.
　　Coal-fired power business still likely to suffer a loss in 1Q22. March and April are a key period for regulators to push fulfilment of mid- and long-term thermal coal contracts. We estimate that the firm’s fuel cost still reached Rmb0.36/kWh in 2M22 despite a MoM contraction. Even if higher power tariff is taken into consideration, we calculate the spark spread should be only around Rmb0.07/kWh for Huaneng’s coal-fired power units, which is insufficient for offsetting the firm’s other fixed costs and expenses. In other words, we expect Huaneng’s coal-fired power business to still face a slight loss in 1Q22. Nevertheless, we believe the National Development and Reform Commission (NDRC) may keep a close eye on signing and fulfilment of mid- and long-term thermal coal contracts in March and April. We think this factor will help power firms improve their profitability in 2Q22.
　　Financials and valuation
　　We leave our 2022 earnings forecasts unchanged. We slightly raise our 2023 forecasts by 4.8% to around Rmb12.06bn given installation of renewable energy and rising returns from thermal power units.
　　Huaneng-H is trading at 4.9x 2022 and 3.6x 2023 P/E, and Huaneng-A is trading at 12.3x 2022 and 9.2x 2023 P/E.
　　Huaneng-H: Maintain OUTPERFORM rating and target price of HK$4.90, offering 50.3% upside, and implying 7.3x 2022e and 5.5x 2023e P/E.
　　Huaneng-A: Maintain OUTPERFORM rating. We raise TP 30.6% to Rmb10.80 to reflect our optimistic forecasts for the firm’s earnings. Our new target price offers 53.0% upside, and implies 18.8x 2022e and 14.1x 2023e P/E.
　　Risks
　　Coal price control less effective than expected.