Huaneng RE cuts down on administrative expenses

As SOE reforms are taking place.

Amid the SOE reform, Huaneng Renewables Corporation is carrying out cost savings initiatives, targeting areas such as administrative expenses and travel & entertainment.

According to a research note from Nomura, it expects to see a more efficient and effective cost structure for Huaneng RE going forward.

Nomura also believes it will be sustainable given the continuous efforts in SOE reform for the government.

In line with this, with strong capacity growth and capex needs ahead, the potential for an equity financing is also seen.

However, as long as any financing exercise is accompanied by capacity growth, much EPS dilution risk is not expected.

Here's more from Nomura:

The increase in operating expenses in 1H14 was lower than consensus and our expectation.

This was mainly attributable to a lower-than-expected increase in repair & maintenance (R&M) costs and the y-y drop in the administrative expenses.

Having said that, we remain cautious on R&M costs given that most of the wind turbines will be subject to R&M during the low wind speed season (i.e. from June to September), which may lead to much higher R&M costs in 2H vs. 1H (2H may experience 3x higher R&M costs than 1H).

Currently in our model, we expect 5.5% y-y growth in R&M costs for 2014F to CNY96mn (1H14 at CNY21mn).

On the other hand, per management, the decline in administrative expenses should be sustainable, given its better cost control amid the SOE reform.