Management hosted an analyst call this afternoon on 1H16 results announcedlast night. For the below-expected 2Q earnings, management explained it ismainly due to extra output drop in units maintenance, in addition to normalseasonal fluctuations. Management expects utilization hours to catch up in 2H,full-year unit fuel cost to drop 7-10% and finance cost to be cut by another29bps in 2H, while direct power supply mix guidance is raised to 30% this year.The company is turning more rational in thermal power investment andindicates a likely delay in further thermal capacity addition post 2016.
Guidance on utilization hours, output, fuel cost and finance cost
While 1H thermal utilization dropped by 254hrs (-12%), the company sees thedecline is narrowing since July, partially on hot weather. On expectation offurther power demand recovery, more direct power supply and less plannedoutage, mgmt expects FY16 utilization decline should be less than 1H andtotal output should stay yoy stable at c.180bn kWh. Its 1H overall UFC (incl.gas) was down 16% yoy and coal UFC was down 19% yoy. In view of the coalprice hike recently, mgmt now guides a 7-10% decline in FY16 UFC. At currentdark spread, no coal-fired plants are operating at loss in 1H. Avg. finance costis guided at 4.2% in 2H, suggesting another 29bps cut from 4.49% in 1H.
Expecting 30% direct power supply mix this year, unlikely to exceed 50%
Huadian sold 16.2bn kWh output under direct power supply, accounting for20% of total output. Avg. tariff discount is c.Rmb47cents/MWh, or 12% lowerthan on-grid tariff. In particular, Shandong province, where locates 35% ofcompany’s total capacity, settled c.7bn kWh under direct power supply at aRmb50cents/MWh discount during the period. Based on contracts signed,management expects direct power supply volume to further expand in 2H andfull-year contribution could reach c.30%, higher than its prior guidance of 20%.Nevertheless, they think it is unlikely they would see the national direct powersupply mix to exceed 50% in the near future, given current power tradetechnology not being able to accommodate retail sales at such scale yet.
More conservative tone in post-16 capacity addition plan
Huadian spent Rmb5.6bn Capex in 1H and generated free cash flow ofRmb5.4bn. It plans to invest another Rmb13.4bn in 2H. Out of the Rmb19bnplanned Capex this year, 40% is intended for thermal, >20% for wind/solar,c.25% for emission upgrades and the rest for heat, coal and others. This wouldtranslate into 1.86GW coal, 558MW wind and 294MW solar capacity additionin 2016. For 2017, while management guided a largely stable Capex atRmb18-19bn, they also expressed a more conservative tone than before interms of further coal-fired plants investment. The company has a total of14.5GW capacity pipeline as end-1H16, including 12.4GW thermal. Thecompany will accelerate wind/solar capacity addition while consider topostpone certain coal-fired plants based on individual return outlook.