Here's how the change in China's benchmark lending rate will affect IPPs

Will the 20% outperformance be hurt?.

According to Barclays' recent report, they view the 40bp reduction in the benchmark lending rate in China as a positive for our IPP and renewable sector coverage. Although the rate cuts would benefit the overall sector, which has a relatively high gearing, companies with more operational and financial leverage would benefit more.

Here's more from Barclays:

If the monetary easing results in a temporary recovery in growth rates, we would see this as positive for the sector as well, but more so for the IPPs as they are the swing capacity in case demand is better than expected.

The Chinese power sector in general has seen an average c20% outperformance in the six months following a rate cut in the last two cycles of monetary easing by the PBoC, and we think the trajectory could be similar this time.

We maintain our preference for IPPs over renewable power. High sensitivity to interest rates could mean sector-wide earnings upside: Gearing for the Chinese power producers varied from 125% to 479% in 2013.

Hence, while we view the interest rate cut as positive, we believe Datang (EW), Huadian (EW) and Datang Renewable (UW) in our coverage have the highest sensitivity to interest rate changes.

We estimate a 25bp reduction in average funding cost could add 1.5-8.6% to 2015E EPS for our coverage stocks, all else being equal. If there are two more 25bp rates cuts in 1H15, as our economist expects (see here), that could result in 2.2-10.4% earnings accretion in 2016E on our estimates.