|Maintain BUY on Huaneng Power (902) on better-than-expected 1Q14 result
Huaneng Power (902, $7.78) reported that net profit in 1Q14 increased by 44.2% yoy to RMB3.6bn (EPS: RMB0.26), better than market expectation. Comment: The strong growth in bottom line was mainly due to decrease in unit fuel cost and interest expenses. Power demand was in fact weak in 1Q14 as power generation in the PRC market grew 4.2% yoy only. Dragged by 0.8% yoy tariff cut, revenue climbed 2.2% yoy to RMB32.5bn. In spite of weak demand, gross profit margin increased from 21.6% in 1Q13 to 24.0% in 1Q14, underpinned by 5% cost saving from unit fuel cost. As a reference, average QHD coal prices in 1Q14 dropped 10% yoy and 2% qoq. Financing cost also reduced by 4.4% yoy to RMB 1.9bn given lower gearing level.
Looking forward, we expect power demand to remain weak in 2Q14. China’s power consumption only grew 5.4% yoy in 1Q14, mainly attributable to slow recovery of secondary industry. Assuming GDP growth of 7.5%, China Electricity Council forecasts annual power consumption growth at 7% in 2014 versus 7.5% in 2013. On the other hand, we also expect coal prices to remain weak in near term. Coal inventory at power plants, a reflection of short-term demand-supply dynamics, remained high at more than 19 days in past one month (versus historical average level of 16 days).
Weak coal prices in 2Q14 will favour Huaneng Power as the cost saving will more than offset revenue loss from slowing power demand. Factoring in 4% of unit fuel cost saving in 2014 and 4% increment of total power generation, we expect 2014 earnings to reach RMB10.9bn implying the counter is presently trading at 8.3x PER in 2014 with EPS growth of 5%. Assuming 50% of dividend payout ratio, the counter’s prospective dividend yield is expected to be 6%, which is higher than historical average of 5%. As market volatility increases, we believe yield plays will
outperform growth stocks in near term. Maintain BUY on Huaneng Power with a revised 6-month target price of
$9.36, equivalent to prospective dividend yield of 5%. Consensus target price is $9.20.