Huadian Power's 2Q15 power generation slipped 7.9%

In line with China's decreasing utilization hours.

Power generation in 2Q'15 declined 7.9% y/y for Huadian, which is in line with the 9% y/y decline in the national utilization hours in China (-10% y/y in July).

According to a research note from Barclays, risks from utilisation hours and composition of growth are key headwinds.

Higher operating and financial leverage means earnings risks are higher for Huadian than its peers. Moreover, the company has 3.4GW of growth projects based on gas, where Barclays does not see favorable economics.

This is c9% of its existing installed capacity, and profitability is highly dependent on government support and subsidies in China.

Here's more from Barclays:

Huadian's headline earnings are in line with the positive profit alert issued in early August. However, implied 2Q15 EPS was down both q/q and y/y, which indicates a petering out of the earnings growth momentum we have seen for the past 3 years.

Moreover, the better-than-expected earnings this quarter was mostly driven by lower finance costs and better than expected associate income. Underlying operating profit was 8% lower than our expectations for 1H15.

Going forward, three key drivers likely to have greater influence over the investment case are 1) continuing weakness in coal IPP utilization hours in China and higher downside leverage to earnings from it for Huadian, 2) slower balance sheet de-leveraging given the high level of existing debt, and 3) a greater proportion of gas-fired power plants in its growth projects, where economics are highly dependent on government subsidies.