3Q earnings up 150% yoy with annualized ROE of 16%
Datang’s reported its 3Q13 revenue down 7% yoy due to a 6% yoy decrease in power generation. However, net profit surged 150% yoy to Rmb1,786m driven by a 22% yoy reduction in fuel cost, which is 11% higher than our estimate of Rmb1.6bn. 3Q net profit implies annualized ROE of 16% vs 10% in 2012. In 9M13, total net profit went up by 104% to Rmb3.7b, accounting for 71%/78% of our/market FY13 estimates.
Strong 88% qoq improvement, consensus subject to upward revision
On a qoq basis, Datang’s 3Q13 net profit was up 88% with 15% qoq lower fuel costs. Compared to Huaneng, the qoq improvement is much stronger even considering Huaneng's asset impairment charges in 3Q. The key reason is that Datang uses more rail/truck transported coal that recorded a sharper decline in 3Q than seaborne coal. Current consensus estimates indicate a 41% qoq decline in 4Q earnings, which we see as too conservative based on a 3.4% tariff cut and 7% earnings sensitivity. We maintain our earnings estimate, which is 10% above street.
Improved gearing, FCF breakeven
With better profitability, Datang’s gearing has been declining steadily, to 274% in 3Q13 from 317% in 2012 year-end. Also worth mentioning is that Datang saw its FCF breakeven in 9M13 vs Rmb8.2b outflow in 2012.
Buy with DCF based target price of HK$4.4
We reiterate our Buy on the stock given its attractive 6.4x PE, 0.8x PB vs 6% dividend yield on FY14E (our earnings estimate factors in a 4% tariff cut in 2014). We believe the tariff cut concern is overly discounted in the price. In addition, we expect likely power sector reform ahead to improve the regulatory environment of IPPs.
Management will host a conference call at 3:00PM HK time on 31 Oct (Dial in (852) 3005 1380, passcode 8626#). Key things to listen for include breakdown of earnings between power and non-power business, Dunlun project utilization update, Keqi coal to gas project commencement date and city-gate selling price.