Huadian Power just issued a positive profit alert on the website of Shanghai Stock Exchange. Under PRC GAPP, the company expects FY13 net profit (attributable to shareholders) to rise by 170% to 195% yoy. In 2012, the company’s net profit under PRC GAPP was Rmb1,48mn. Hence, Huadian’s net profit will be in the range of Rmb3.83bn to Rmb4.18bn as per the profit alert, with the midpoint of Rmb4.0bn being 8% above our estimate of Rmb3.7bn (under international GAAP, same as consensus).
Deutsche Bank view: We view the positive profit alert as an upside surprise as even the low end of earnings guidance is 3% above our estimate with the high end 13% above. Based on such a strong FY13 results, the stock is trading at only 5.1x historical trailing PE (FY13), the lowest in its trading history. Moreover, the company indicates they are likely to raise dividend payout to 40% from 32% last year, which implies a dividend yield of 8%. Reiterate Buy on the stock with a target price of HKD5.5. Huadian is one of our top picks among China IPPs. We also include below key takeaways when we met the company last week during our dbAccess China conference.
Coal price: Standard coal price in 2013 averaged RMB650-660/ton, down 15-17% yoy (vs. RMB782/ton in 2012). In 4Q13, standard coal price averaged RMB640-650/ton (up 3% qoq). For 2014, management expects standard coal price to be lower at RMB630-640/ton (down 3-4% yoy), given the abundant supply and constrained demand. Management expects QHD coal price to drop to RMB550-560/ton within a month and stay at this level for the rest of the year. In 2013, contract coal accounted for one-third of Huadian's total coal consumption. The company also plans to increase the proportion of imported coal this year (5-6m tons in 2013).
Tariff: Management believes another tariff cut is unlikely nationwide in 2014. However, the possibility of a tariff cut along coastal provinces in eastern China cannot be ruled out as power plants there have highest dark spread. The impact on Huadian Power is limited as the majority of its assets are located in Shandong province.
Utilisation and capacity: Management expects coal-fired plants’ utilisation to see slight improvement in 2014-15 due to low capacity addition in Shandong province. Gas-fired power plants: In 2014, the company plans 3,000MW of new capacity – 2,000MW coal-fired, 500MW wind, 200-300MW gas-fired, 10MW solar and some hydro. New capacity in 2015 will be 2,000-3,000MW. 2014 capex will be c.17bn.