Huadian reported unaudited 1Q16 results under PRC GAAP. Net profit wasdown 11% yoy to Rmb1.8bn (on retrospective basis after adj. for Hubei assetinjection last year), which looks resilient thanks to unit fuel cost and financingcost savings against utilization decline and tariff cut at end 2015. Net profit perkWh is now at Rmb0.042/kWh, which still leaves sufficient headroom forfurther pressure from lower utilization and tariff discounts under direct powersupply. The stock is currently trading at an attractive 0.6x FY16E P/B with anannualized FY16E ROE of 13% that has reflected the tariff cut and impact frommore DPS. Final dividend for FY15 (Rmb$0.3/shr, or 7.8% yield) is set to bepaid on 10 June 2016. Despite a peaking earnings cycle for thermal IPPs in2015, we believe the current share price has more than discounted for thefundamental challenges. We maintain our Buy rating on 1) dividend support,2) improving power demand trends, 3) tightening control of new capacity and4) what we see as the market’s overly bearish view on the sector.
　　Resilient earnings on fuel and financing cost savings
On a retrospective basis after adj. for the Hubei asset injection, revenue in1Q16 retreated by 7% yoy to Rmb16.9bn on 3% output growth offset by 10%lower average tariff (mainly a result of two tariff cuts since 1Q15). Helped bythe fuel cost drop (-22%) and financing cost savings (-21%), the operatingprofit decline narrowed to only 4% yoy. Net profit was down 11% toRmb1.8bn, accounting for 26% of the full-year consensus forecast, in line withhistorical average.
　　Continuously improving balance sheet
　　At the end of 1Q16, the cash balance was sustained at Rmb9.5bn. AfterRm1.4bn of net debt repayment in the period, the balance sheet continues tosee improvement. Net gearing is now even lower at 153% after a sharpdeleverage in 2015 (to 160% from 215%).
　　Expects flat output and more DPS in FY16
　　For the full year 2016, mgmt expects overall output to stay flat yoy (2015:
　　182.5bn kWh), of which direct power supply may increase its contributionfrom 15% in 2015 to around 20% this year. The average tariff discount underDPS is around 10%. We expect the effective interest rate to continue itsdowntrend on loan refinancing in the following quarters.