Anticipating sequential earnings improvement ahead on further coal price drop
Management advised that Huadian has been at net loss since 4Q16, due to thesubstantial coal price spike. For Huadian, the net profit breakeven level at thestandard coal price (excl. VAT) is around Rmb630, estimated based on currentutilization of 4,600hrs and tariff of Rmb0.37/kWh (incl. VAT). Managementthinks it is highly likely the company will turn profitable from 2Q17, as only afurther Rmb20/ton decline in the standard coal price from the currentRmb650/ton is needed to bring it to breakeven level. The spot coal price is nowon a downward trend and management believes it could be further broughtdown through the government’s order to allow more small coal mines to carryout a 330-day policy instead of a 276-day policy.
More disciplined coal capacity addition and capex plan observed
Regarding new coal capacity, Huadian has pushed back the constructionschedule for quite a few projects, such as Laizhou (2*1000MW) and Yongli(2*660MW). Now the company expects only 1*660MW (Shiliquan expansion)and 2*1000MW (Wuhu II) to be installed in 2017 and 2018, respectively.Hence, the capex budget this year and next is guided down to the Rmb15-16bn level from the prior Rmb18-19bn. In particular, an increasing portion ofcapex will be invested in wind/solar projects, which are expected to increase toc.600MW this year from c.300MW in 2016.
Direct power supply in 2017: likely stable volume mix with narrowed tariffdiscount
According to management, Huadian sold close to 30% of its total output on amarket basis in 2016, at an average tariff discount of around 12%. Looking into2017, management expects the market-based volume mix to stay at a similarlevel and is unlikely to be raised to 40%. On the tariff front, managementexpects the tariff discount via bidding this year to narrow, given the lack of atimely tariff pass-through of the increased fuel cost.
Potential utilization pressure for Shandong with more local and import powersupply
In 2016, Ximeng-Shandong UHV line commenced operation and started toimport power from Inner Mongolia to Shandong. Also, another two UHV linesconnecting Inner Mongolia and Shandong are now under construction and arescheduled to operate in 2017-18. Management recognizes the potentialutilization pressure for the company’s units in Shandong, given more UHVpower imports. In addition, 4*600MW of Weiqiao, previously operating ascaptive power plants, may start to sell electricity to the public grid this year.