Huadian reported its 1Q14 unaudited results under PRC GAAP with net profit increased by 48% yoy to Rmb1.2bn. This is in line with the 45-50% yoy growth guided in its profit alert on 23 April and accounts for 30%/31% of consensus full year forecast while normally the proportion should be less 25% given the seasonality (under stable coal price and tariff outlook). During its results conference call this afternoon, management is upbeat on the company’s outlook and we see several positives to drive the stock’s upside momentum including 1) strong results in 2Q14E given utilization improvement and further decline in coal prices 2) accelerated asset injection and 3) relieved tariff cut concern. The stock is currently trading at 7.1x 14E PE, 1.0x14E PB vs. 1Q14 annualized ROE of 20%, with Rmb0.225/share dividend (7.0% yield, est. ex-dividend date of 25 June). Maintain Buy and Huadian remains our top pick among IPPs.
2014 coal-fired utilization +23~73hrs yoy; most positive guidance among peers
In 1Q14, Huadian’s coal-fired units recorded utilization hours of 1,361 (+11hrs yoy) vs. national average of 1,228hr (-3hrs yoy). Driven by a potential power deficit in Shandong (where c.50% of Huadian’s capacity are located), the company guided a 5,500-5,550 utilization hours for coal-fired units in 2014 (up from 5,477hrs in 2013). This is the most positive guidance among the five HK-listed IPPs as the others guided flat or slightly decrease in utilization hours.
Unit fuel cost down 5.9% yoy in 1Q14; further qoq decline in 2Q14
1Q14 unit fuel cost averaged at Rmb208.37/MWh, down 5.9% yoy while remained largely flat qoq (-0.5%). The company expects the coal price to stay at 1Q level or even lower for the rest of the year. In fact, the company expects a further decline qoq in 2Q14 given the weak demand, as its coal purchasing price decreased by Rmb15~20/ton in April vs. March.
Tariff cut impact can be passed through, should not be a concern
Management does not rule out the possibility of tariff cut this year but says it is unlikely in 1H14. Besides, Huadian is confident to maintain profitability even if a tariff cut materializes, as it can effectively pass through the earnings pressure by lowering coal purchasing price given its stronger bargaining power. As a reference, Huadian’s net profit stayed stable at c.Rmb1.2bn in 3Q13/ 4Q13/1Q14 despite the tariff cut in Sept 2013.
Acceleration in asset injection progress; update on A share placement
In 16 April 2014 announcement, Huadian Group (c.110GW capacity, 3x of Huadian’s) reiterated its intention to inject conventional energy based power assets to Huadian within three years. Despite still unclear specific assets and timeline, Huadian said the process accelerated recently. Meanwhile, the company targets to complete its A share placement in June-July 2014, which will supplement working capital and further improve gearing (net gearing down 19ppt from end-2013 to 312% in 1Q14).