Huadian Power International:1H profit down 30%YoY;UHV,nuclear &DPS competition rising in Shandong
1H profit down 30% YoY, 19% below consensus
Huadian (HDI) reported 1H16 net income of Rmb2,469mn, down 30.6% YoY, in line withour estimate of Rmb2,500mn, but 19% below consensus. Net of one-off items, HDI’s1H16 recurring profit dropped 29% YoY to Rmb2,560mn and 1H recurring RoIC droppedto 6.4% from 8.8% in 1H15 and 9.6% in FY15, lower than Huaneng’s (HNP) 8.1%, ChinaResources Power (CRP)’s 8.7% and China Power International (CPID)’s 9.3%. we projectHDI’s RoIC to drop to 6.4%/5.8% in FY16/17E. HDI’s 1H16 debt to capital ratio was67.2% vs 67.0% in FY15. HDI’s avg cost of debt dropped from 5.6% in 1H15 to 4.4% in1H16. This compares to HNP’s cost of debt 4.3%, CRP’s 4.6% in 1H16 and CPID’s 4.7%.
UHV, nuclear power, DPS competition rising in Shandong
The commissioning of Ultra High Voltage (UHV) power lines importing power intoShandong (SD) and the new Haiyang nuclear power units in SD will lower utilization ofHuadian’s thermal units in SD. We estimate HDI to have sold around 20% of its 1H totalpower output via DPS at 12-13% tariff discount in 1H16. In comparison, CPID soldaround 15% in DPS at around 10% tariff discount; HNP sold 18% of 1H output via DPSat 23% tariff discount; CRP sold around 18.2% at 11.6% discount in 1H16. HDI’s 1H16unit fuel cost dropped by 18.7% YoY, more than CR Power’s 18.1% YoY drop, but lessthan HNP’s and CPID’s 22.1% and 21.0% YoY drop in 1H16. We have assumed in ourmodel, a 7.0% YoY unit fuel cost drop in 2016. For every 1% change in unit fuel cost, weestimate Huadian’s 2016E net income would change by 2.1%.
EPS estimates & PO unchanged; maintain Underperform
We maintain our 2016-17 EPS estimates and our H share PO of HK$3.1 and A share POof Rmb3.3 and Underperform rating. We await more information from HDI’s briefing callto be held at 4:15pm on Aug 31. Our 2016-17 EPS estimates are 16.2-10.7% belowconsensus. We assume HDI’s tariff to drop 7.6% YoY in 2016E and FY16E thermal unitutilization hours to drop 9.5% YoY. HDI is trading at 6.96-7.1x 2016-17E EV/EBITDA, vsour H share based PO implied 2016-17E EV/EBITDA of 6.79-6.92x.