1Q22 results slightly beating our expectations
Huaneng’s 1Q22 revenue rose 30.54% YoY to Rmb65.25bn, and attributable net loss declined 129.96% YoY to Rmb956mn. Excluding government subsidies, non-recurring net loss was Rmb1.41bn. New-energy business maintained swift growth, slightly beating our expectations.
　　Revenue jumped YoY. 1) The firm’s 1Q22 on-grid power volume rose 2.4% YoY to 107.7bn KWh, with coal-fired power and gas-fired power at 93.4bn KWh (+1.4% YoY) and 6.6bn KWh (-2.8% YoY). 2) Average power tariff (including tax) grew 19.5% YoY to Rmb501.96/MWh in 1Q22. Thanks to rising prices of direct power sales, the firm disclosed that annual long-term power-supply contracts for most regions realized prices at the regulatory cap, i.e. 20% above benchmark prices.
　　Coal-fired power business still lossmaking, but improved QoQ in 1Q22. We estimate the firm’s 1Q22 average coal cost at around Rmb1,200/t, and unit fuel cost rose about 50% YoY to Rmb360/MWh. Its dark spread is unlikely to cover other cost and expenses. Meanwhile, the firm’s new-energy business maintained swift growth with wind and solar on-grid power volume rising 22.6% YoY. Despite disappointing wind conditions, a part of the 2.4GW new capacity in 2021 was postponed to 1Q22, contributing incremental power volume. We estimate the whole year profit of wind and solar power at around Rmb1.8bn.
　　Higher borrowing increased pressure on financial expenses; operating cash flow improved gradually. The firm’s 1Q22 financial expense rose 15.2% YoY, as its leverage ratio climbed 10ppt YoY to 74.7% in 2021. Operating cash flow declined 26.2% YoY to Rmb8.4bn in 1Q22, significantly improving from the -Rmb16.76bn in 4Q21.
　　Trends to watch
　　We expect coal-fired power business to turn profitable in 2Q22, considering possible downtrend in spot coal prices and gradual implementation of long-term coal contracts. Daily coal consumption rapidly weakened in April, and coal inventory gradually increased at power plants. Power plants are adopting a wait-and-see approach in the near term. Power demand remains soft due to uncertainty in COVID-19 conditions, while coal production remains stable. We expect thermal coal prices to decline marginally in the slack season. The National Development and Reform Commission (NDRC) requires implementation of medium and long-term coal contracts from May 1, 2022, and we think that April will be key for contract signing. As medium and long-term contractual prices of coal return to a reasonable range, we expect easing cost burden for power firms.
　　Financials and valuation
　　We maintain 2022-2023 earnings forecasts. Huaneng H-shares are trading at 5.5x and 4.1x 2022-2023e P/E, and A-shares are trading at 11.8x and 8.8x. The firm’s share price retreated sharply, and we think that its valuation has factored in numerous negatives. We expect positive catalysts ahead, and suggest bottom-fishing. We maintain OUTPERFORM for H-shares and A-shares with TP at HK$4.90 (7.3x and 5.5x 2022-2023e P/E with 34.2% upside) and Rmb10.80 (18.8x and 14.1x 2022-2023e P/E with 59.8% upside).
　　Risks
　　Disappointing implementation of medium and long-term contracts for coal.