Huadian Power's 3Q14 net profit jumps 28.1% to CNY1,573mn

Its gross margins are also looking good.

Huadian Power has reported its 3Q14 results, with net profit up 28.1% y-y to CNY1,573mn. Further, stripping out the one-off items—for example, disposal gain/loss of noncurrent assets, government subsidies—recurring earnings rose 16.1% y-y to CNY1,557mn, in line with our estimate of CNY1,503mn.

According to a research note from Nomura, further, despite an on-grid tariff cut effective from 1 September 2014, Huadian Power is expected to maintain its gross margin, thanks to the significant unit fuel cost drop of 11-12% y-y in 2014.

Meanwhile, 3Q14 revenues fell by 4.3% y-y to CNY16,947mn, mainly due to the 2.6% drop in the net power generation and the weighted average ongrid tariff cut of CNY7.3/MWh effective from 1 September 2014.

Here’s more from Nomura:

Operating cost also declined 6.7% y-y to CNY12,422mn, thanks to: 1) 2.6% gross power output drop; 2) 12.3% y-y unit fuel cost drop for the coal-fired power; but partially offset by: 3) 13.2% y-y unit fuel cost increase for the gas-fired power. For 2014F, management guided for a coal-fired unit fuel cost drop of 11-12% y-y, in line with our estimate of 11.8%.

Despite the 3.8% of power output growth for 9M14, the company’s overall utilization dropped by 111 hours to 3,711 hours, mainly due to: 1) soft domestic demand amid weak economy and 2) lower wind speed.

Given the relatively stable interest rate level (effective interest rate at 5.8% for both 3Q14 and 2Q14), net financing expenses remained flattish (down 1.2% q-q) in 3Q14.

Thanks to the improved profitability of the associate power companies, the shares from associates and JCE in 3Q14 were up by 94.2% to CNY250mn.

As a result of the operational improvement, together with the recent equity issuance, net-debt-to-equity dropped significantly to 358% at end-September 2014 vs. 482% at end-December 2013.

2014 power generation target revised downwards to 180mn MWh (vs. previous 186mn MWh). We believe management’s target is achievable, as it implies 4Q14F power output to be flat y-y (ie, 45.2mn MWh for 4Q14F vs. 45.5mn MWh in 4Q13).

Asset injection to be materialized soon. Management is currently proactively in discussion with the parent group regarding potential assets to be injected into the listed company.

Unlike Huaneng Power with a largescale parent asset injection, Huadian Power may choose to have several times of parent’s assets injection but on a smaller scale.

Per Huadian Power, the company expects to use cash to settle the consideration.

Capacity addition to show a CAGR of 10% pa during 2014-20F. Together with the asset injection, management aims to achieve a 10% capacity CAGR during 2014-20F.

For the rest of 2014, Huadian Power targets to commission a 200MW gas-fired project as well as several wind power projects.