Huadian Power sets eyes on boosting IPP business

8.2GW project is under construction.

It has been noted that Huadian Power International's reported EPS of RMB0.74 was 9% ahead of Barclays' estimate.

According to a research note from Barclays, this is despite a RMB1.2 billion impairment booked in 2014.

This implies a 15% q/q increase in net income in 4Q, despite a revenue decline due to the September 2014 tariff cut.

Better-than-expected earnings reinforce Barclays' view that lower coal prices will: 1) lead to higher, sustainable earnings and cash flows in the medium term; and 2) mitigate the impact from the tariff cut.

Barclays' key concerns with Huadian's investment case are its above-average exposure to coastal China with more than c52% of its installed capacity in coastal provinces (subject to the risks of nuclear ramp-up and power imports through UHV grids) and high operating leverage.

This is reflected in its guidance for 2015 implying flat power generation on a y/y basis as the company expects a decline in utilization hours. Capex guidance, however, remains high at RMB16 billion for 2015.

Here's more from Barclays:

Strong 4Q despite tariff cut: Net income in 4Q14 increased 15% q/q mainly due to a continued decline in coal prices, offsetting the impact of the September 2014 tariff cut.

Stronger earnings translated into a higher dividend for 2014 of RMB0.27/share. This is up c17% y/y and implies a dividend yield of 5.6%. Operating metrics including capacity additions and utilization hours are mostly in line with our estimates.

Solid cash flows, good payout ratio: Huadian generated RMB17 billion of operating cash flows in 2014, up 10% y/y and one of the highest levels the company has seen. A 40% payout enables investors to immediately access most of the strong cash flows.

Capacity growth pipeline remain strong: The organic growth pipeline in its IPP business (8.2GW under construction at the end of 2014), potential asset injection of 5000MW from the parent company (by 2017 at the latest) and a stake in a nuclear power project (JV with CNPC for 1000MW pending NDRC approval) are among the notable drivers for Huadian's installed capacity growth in the medium to long term.

Strong cash flows would mean that growth and balance sheet de-gearing can move ahead simultaneously, in our view. Importantly, the proportion of clean power will increase from just 8% in 2013 to c20% by 2017, on our estimates.