3Q13 net profit up 741% yoy, beating expectation
Huadian released its unaudited 3Q13 results under PRC GAAP. Revenue was up 29% yoy to Rmb17.7bn driven by 26% higher power generation by the newly operated generating units. Combined with falling coal prices, company’s net profit recorded strong increase of 741% yoy to Rmb1.23b, which is 12% above our estimates of Rmb1.1b. On a QoQ basis, 3Q net profit was up 39%.
9M13 earnings up 603% yoy, already 91% of consensus
In 9M13, earnings adds up to Rmb2.9b, up by 603% yoy and accounted for 79%/91% of our/market FY13 estimates. Despite Huadian’s high sensitivity (1% tariff cut will reduce earnings by 9%), market has overly discounted its 4Q earnings considering only 2.8% tariff cut for Huadian in September. We believe our 2013E net profit forecast of Rmb3.7b is highly achievable, which is 15% above consensus.
23% ROE; 24ppt gearing reduction; positive FCF for a third quarter
Huadian’s 3Q net profit implies annualized ROE of 23%. Meanwhile, gearing ratio (net debt/equity) further eased to 340% in 3Q (down 24ppt vs 2Q, 70ppt vs 2012). Considering proposed A share placement to parentco at Rmb3.12/sh (11% premium to current H share price), we expect its gearing will decline by another 40ppt to 300% by end 2013. Furthermore, Huadian has recorded positive free cashflow for a third consecutive quarter. 9M13 total FCF amounted to Rmb3.3b vs Rmb10.5b outflow in 2012.
Market concern overdone, Buy on attractive valuation
To recap, all of the three IPPs reported decent growth in 3Q earnings (Huaneng 92% yoy, recurring; Datang 150% yoy), which should greatly enhance investors confidence in IPPs earnings delivery.
Reiterate Buy on Huadian due to 1) cheap valuation at 5x FY14E P/E and 0.7x P/B; 2) high dividend yield of 6% and 3) quickly improving balance sheet. Our earnings have factored in 4% of tariff cut in 2014. Huadian remains one of our top picks among the IPP universe.