Event: Huadian expects 2013 net profit to increase by 170 -195% YoY
Huadian has issued a positive profit warning. It expects its net profit for 2013 to increase by 170 -195% YoY from Rmb1,418m in 2012 under PRC GAAP, implying a preliminary net profit of about Rmb3,829m to Rmb4,18 3m in 2013.
Impact: Preliminary profit for 2013 was stronger than we expected
The estimated profit for 2013 according to the announcement was 10 - 20% higher than our 2013 net profit forecasts. We think this is primarily because of a higher than expected utilisation rate of coal -fired units (3ppt higher than UBSe) and a lower than expected unit fuel costs. The coal prices for their Shandong power plants (50% of its portfolio) only increased by 3.7% at end-2013 from its trough in mid- 2013, compared to 23% spike of Qinhuangdao coal price by end-2013.
Action: Keep Buy; attractive valuations
We have a Buy rating on the stock. We believe downside to the share price is limited because the current valuation already assumed tariffs would be cut. We assumed a 4.4% tariff cut effective on 1 January 2014 and at average coal price of Rmb540/t in 2014. If tariff was not cut, there would be 36% upside to our 2014 earnings forecasts and the shares will be trading at 5.0x 2014E P/E.
Valuation: DCF -based price target of HK$4.9; Buy rating
We use a WACC of 6.4%, with explicit cash flow to 2018E, assuming a terminal growth of 5% at a terminal ROIC of 6.5%.