1H NP growth wiped by coal-chemistry loss; eyes on disposal progress
Datang delivered good results in power segment with PBT +46% yoy in 1H like its peers (Huaneng NP+21%; CR Power recurring NP +30%; China Power Int’l recurring NP +41%). However, the growth was wiped out by the widened loss from coal-chemistry and earnings decline from coal sales; as such, 1H14 NP was flat at Rmb2.0bn, or 6% below our expectation. Given Rmb1.4bn pre-tax loss registered in 1H, the potential coal-chemistry restructuring would unlock significant upside potential for the company with NPV/share up to HK$5.5 if disposed at book value (see our note on 8 July). On the other hand, the loss from nuclear should not be a major concern with a full 6-months operation for the 2 units in 2H. Besides, the announced tariff cut is milder than expected, indicating 14%/13% upside to our current 14/15E earnings under steep coal price decline YTD (calculated by assuming Rmb520/ton coal price in 2H14 and 2015 while keeping other operating assumptions unchanged). Maintain Buy.
1H14 NP flat yoy, slightly below; FCF turned positive
Datang’s 1H14 net profit was flat yoy at Rmb2,029m, which is 6% below our estimates of Rmb2,152m and accounts for 45%/47% of DB/consensus FY14E earnings. The earnings miss mainly comes from non-thermal businesses (coal-chemistry/coal sales/nuclear) though power segment trended well with PBT up by 46% yoy to Rmb5,513m. No major asset impairment has been booked in 1H. While net gearing (net debt/total equity) remained high at 293%, FCF (net of interest expense, under PRC GAAP) turned positive at Rmb800m on stringent capex during the period (-27% yoy to Rmb9.1bn).
Earnings drag from non-thermal businesses
Coal-chemistry: pre-tax loss widened to Rmb1,367m in 1H14 (vs. loss of c.Rmb500m in 1Q14 and Rmb519m in 1H13). The polypropylene output of 68,200tons (vs. 37,300 tons in 1Q) indicates still low utilisation at c.30% and lags behind its full year target of 300,000 tons. Meanwhile, Keqi coal-to-gas project is still under trial operation.
Coal sales: PBT declined by 80% yoy to Rmb100m in 1H14
Nuclear: share of loss from Ningde Nuclear amounted to Rmb116m in 1H14 (vs. Rmb43m profit in 1H13) mainly due to a 90-day maintenance for unit 1 in 1Q (conducted to tackle equipment failures) and limited contribution from unit 2 (into operation on 7 May).
Key things to watch during results briefing
Datang will hold an analyst briefing at 9:30am, 28 Aug (5F, Island Shangri-La). Key things to note includes: (i) unit fuel cost decline and whole year guidance; comment on the just announced tariff cut and estimated impact; update on capacity addition schedule; (ii) expected nuclear profit contribution in 2H and commission schedule of Ningde unit 3 and 4; progress in coal-chemistry restructuring; (iii) strategic focus after coal-chemistry disposal, potential asset injection; capex and funding.