Datang Renewable warns of possible loss for 2014

This is despite a hefty 76% power gen recovery.

Datang Renewable has announced that it expects to report a potential loss for full year 2014.

According to a research note fro Barclays, this compares to its expectation of break even for the company in 2014, based on a recovery in earnings in 2H14 from a reported loss of RMB14 million in 1H14.

The report noted that expectations of loss despite a 76% q/q recovery in 4Q14 power generation reflect the magnitude of Datang Renewable's unsustainably high financial leverage, in Barclays' view.

Here's more from Barclays:

As wind speeds remain unpredictable, earnings for Datang Renewable should exhibit higher volatility in a period of adverse wind conditions, in our view.

A lack of growth since 2012, gearing as high as 424% by end 2014E and adverse geographical exposure keep us Underweight on the stock. We prefer Huaneng Renewables (OW) in our China renewable sector coverage.

Growth potential severely constrained: Net capacity additions for Datang Renewable in 2013 were almost zero, while we expect it to add only 300MW of capacity in 2014E compared to over 1.5GW of annual capacity additions planned by its peers. Underperformance on growth could further compound with its 2014E gearing of 424%, compared to a sector average gearing of 278% on our estimates.

Adverse geographical exposure a key challenge: A differentiated tariff cut by the NDRC for new wind power projects in China in January 2015 (no cut for zone IV) has once again highlighted the importance of geographical exposure. Existing exposure to zones will likely have an influence on future growth for wind power companies, while curtailment in zone IV is lower than in other zones. Datang in that context has c70% of its existing wind farms in zones I-III.

Valuations pricing in a sharp turnaround: Despite our optimistic assumptions of 500MW of capacity additions in 2015 and a y/y recovery in utilization hours, the stock is trading at 24.8x P/E on our 2015E estimates. This compares to Huaneng Renewables trading at only 12.8x P/E on our 2015 estimates with sector-leading growth in installed capacity in next three years.