1、Asia Pacific Equity Research 06 August 2010 Huadian Power International - H Neutral 1071.HK, 1071 HK Highest fuel cost increase, cost control track record concern Price: HK$1.90 Price Target: HK$1.90 China China IPPs Chapman DengAC (852) 2800-8577 Boris Kan (852) 2800-8573 J.P. Morgan Securities (
2、Asia Pacific) Limited 1.52.53.5HK$Aug-09 Nov-09 Feb-10 May-10 Aug-10Price Performance1071.HK share price (HK$HSCEI (rebased)YTD 1m 3m 12mAbs -7.3% 2.7% 2.7% -36.5%Rel -2.1% -5.7% -2.4% -37.8%Huadian Power International - H (Reuters: 1071.HK, Bloomberg: 1071 HK) Rmb in mn, year-end Dec FY08A FY09A FY
3、10E FY11E FY12ERevenue (Rmb mn) 29,997 36,450 44,903 50,763 61,537Net Profit (Rmb mn) -2,560.11,157.2 403.9 790.5 1,402.6EPS (Rmb) (0.43) 0.17 0.06 0.12 0.21DPS (Rmb) 0.00 0.04 0.01 0.04 0.08Revenue growth (%) 47.5% 21.5% 23.2% 13.1% 21.2%EPS growth (%) -313.9%-140.2%-65.1% 95.7% 77.4%ROCE -1.0%5.4%
4、3.9%4.5%5.3%ROE -19.9% 8.4% 2.5% 4.7% 8.1%P/E (x) -3.9 9.8 27.9 13.3 8.0P/BV (x) 0.9 0.7 0.7 0.7 0.6EV/EBITDA (x) 22.4 9.4 11.2 10.3 8.1Dividend Yield 0.0% 2.1% 0.7% 2.1% 5.0%Shares O/S (mn) 1,431Market cap (Rmb mn) 2,372Market cap ($ mn) 350Price (HK$) 1.90Date Of Price 04 Aug 10Free float (%) 89.1
5、%3mth Avg daily volume 6,025,124.003M - Average daily Value (HK$ mn) 10.86Average 3m Daily Turnover ($ mn) 1.60HSCEI 12,129Exchange Rate 7.76Fiscal Year End DecSource: Company data, Bloomberg, J.P. Morgan estimates. See page 12 for analyst certification and important disclosures, including non-US an
6、alyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single f
7、actor in making their investment decision. We assume coverage of Huadian Power International H with a Neutral rating and June-11 SOP PT of HK$1.90. We believe Huadian is one of the most-vulnerable IPPs due to its high exposure to Shandong province, where the coal price increase YTD is significantly
8、higher than the national average. Also, we find managements track record in controlling fuel costs to be less than satisfactory. Although Huadian has contracted 80-90% of its coal supply needs, management said that the fulfillment rate dropped to as low as 30-40% in 1Q2010 due to the widening gap be
9、tween spot and contract coal prices. As such, we have factored in a FY2010 unit fuel cost increase of 17% for Huadian, the highest among China IPPs. In 1Q10, the company reported net profit of Rmb77 million, which was squeezed by a 16% rise in unit fuel costs. Management said that coal prices were f
10、lat in April and May. Coalmine development: Huadian-controlled coal mines wont commence operation until 2011-12. We are concerned about its coal strategy execution given the companys lack of experience in the field. Cost control record a concern: We agree that Huadian is the most geared play for sec
11、tor profitability recovery given its extremely low operating margin. However, we are concerned about managements cost control track record and therefore have a cautious stance. In addition, we see high equity-refinancing/dilution risk down the road, with the company being the most highly geared IPP
12、on our estimates. Valuation, price target, key risks: Huadian is trading at 27x 2. Regulatory risk in tariff hike; 3. Lack of geographic diversification: Huadian had more than half of its capacities in Shandong province, so Huadian has exposure to any Shandong. Upside risks:1. Any solid execution in
13、 coalmine exploration might trigger re-rating on the stock. CPI CRP Datang Huadian Huaneng-H 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E Revenues 14,793 14,834 45,134 55,390 60,698 69,556 44,903 50,763 97,466 106,764 Net income (reported) 429 628 5,624 7,047 1,380 2,382 404 790 3,703
14、 4,794 EPS (reported) 0.08 0.12 1.20 1.50 0.11 0.19 0.06 0.12 0.28 0.34 Net profit growth -17% 47% 6% 25% -14% 73% -65% 96% -25% 29% EPS growth -17% 47% 6% 25% -16% 69% -65% 96% -31% 20%PER 17.3x 11.2x 14.4x 11.5x 24.9x 14.1x 27.1x 13.2x 13.8x 10.9x PBR 0.6x 0.5x 2.0x 1.8x 1.1x 1.1x 0.7x 0.6x 0.9x 0
15、.9x Dividend Yield 2.6% 3.9% 3.7% 3.9% 2.0% 3.6% 0.8% 2.3% 3.5% 4.7% Net debt to equity 284.9% 301.5% 157.9% 157.8% 507.0% 548.3% 515.6% 597.2% 226.1% 245.5% Source: Company reports and J.P. Morgan estimates.3 Asia Pacific Equity Research 06 August 2010Chapman Deng (852) 2800-8577 Investment thesis
16、 We recommend investors to stay cautious on Huadian due to its extremely-low contract fulfillment rate which led to a unit fuel cost increase YTD that is higher than its peers, unsatisfactory management track record in controlling fuel costs, and uncertainty in coal mine investment. Shandong: A toug
17、h market to operate in According to management, Shandong, the main operational region for Huadian, has experienced the highest coal price increase in 2010 in the country. We believe this is because most of the Shandong power plants can source coal from local mines or Shanxi only by railway, due to t
18、he lack of large port facilities for coal transportation in the region. As a result of the significant gap between spot and contract coal price, Huadians contract coal fulfillment rate has dropped massively to around 30% level in 1Q2010, thus the company had to procure over 70% its coal at a high pr
19、ice in the spot market. Therefore, in 1Q2010, Huadians unit fuel cost increase rose 16% from the FY2009 average. Management mentioned that coal prices were still hovering at a high level during April-May, and it does not expect material fall in the spot coal price. Therefore, we have factored in a 1
20、6% unit fuel cost increase for FY10, the highest amongst major IPPs on our estimates. Coalmine development: Still waiting for solid execution Huadian started to aggressively invest in coal mines since 2009, and so far it has invested in various projects, including two in Shanxi with a controlling st
21、ake. The bulk of the capacities from these mines will start in 2011-2012, but management sounds very upbeat on their profit contribution: it expects a net profit contribution of Rmb200 million and Rmb500 million for FY2010 and FY2011, respectively. We remain constructive on IPPs vertical integration
22、 into coalmine development, but since Huadian has no experience in the field and we think its track record in power generation is still less than satisfactory, we would prefer to wait and see evidence of its execution ability. That being said, in the Ningxia coal mine project, Huadian has partnered
23、with Shandong Xinwen Mining Company, a leading mining developer in the country, to mitigate its development risk. We have conservatively factored in a net profit contribution of Rmb143mn and Rmb428mn in FY2010 and FY2011, respectively, from its coalmine operation. 4 Asia Pacific Equity Research 06 A
24、ugust 2010Chapman Deng (852) 2800-8577 Figure 1: Huadian: Power generation vs. Coal mine net profit breakdown 261363801143428602-4008001,2001,6002010E 2011E 2012E(Rmbmn)Pow er Generation profit Coalmine profitSource: J.P. Morgan estimates. Coalmine Province Equity Stake Total Reserve (mn ton) Econo
25、mical Mineable Reserve (mn ton) Production Capacity (mn ton / yr) Heat Content (kcal/kg) 2010E 2011E 2012E 2013E 2014E 2015E Wantongyuan Erpu Shanxi 70% 151.51 73 1.8 5000 - 1.7 3.2 4.7 5.2 5.2 Dongyi Zhonghou Shanxi 70% 128.01 60 1.2 5000 - 1.1 2.6 4.1 4.6 4.6 Fucheng Inner Mongolia 35% 238 156 2.4
26、 4500 4.0 4.0 4.0 4.0 4.0 4.0 Changcheng Inner Mongolia 25% 111 65 0.6 4500 2.0 2.0 2.0 2.0 2.0 2.0 Yinxing Ningxia 45% 1,025 578 5.8 NA - 4.0 4.5 5.0 5.5 6.0 Guangan Sichuan 45% NA NA NA 1.6 1.6 1.6 1.6 1.6 1.6 Gross production 7.6 14.4 17.9 21.4 22.9 23.4 Consolidated production - 2.9 5.9 8.9 9.9
27、9.9 Source: Company reports and J.P. Morgan estimates. SWOT Analysis Strength: Enjoy solid power demand in Shandong, its dominant operation region High sensitive player for industry profitability recovery Weakness: Huadian has no operation expertise in coalmine development Highly stretched balance s
28、heet limited its growth pace Poor track record in cost control Opportunity: Huadian has started to invest in coalmine development aggressively Huadian started to build up its wind portfolio Threat: Without a cost pass through mechanism, Huadians profitability is subject to fuel cost price fluctuatio
29、n risk Capacity growth in its operating region could have downward pressure on Huadians utilization hours5 Asia Pacific Equity Research 06 August 2010Chapman Deng (852) 2800-8577 Key Assumptions Capacity growth and (2) no part of any of the research analysts compensation was, is, or will be directl
30、y or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures 012345678910Price(HK$)Oct06Jul07Apr08Jan09Oct09Jul10Huadian Power International - H (1071.HK) Price ChartUW HK$1.9UW HK$2.5 UW HK$2.8W HK$2.3UW HK$2.4 UW HK$3.3
31、 UW HK$1.4 N HK$3Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgans continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Und
32、erweight.Date Rating Share Price (HK$) Price Target (HK$) 17-Nov-06 UW 2.71 2.30 08-Mar-07 UW 2.57 2.40 30-May-07 UW 4.04 2.50 12-Dec-07 UW 4.37 3.30 13-Feb-08 UW 2.57 2.80 13-Mar-08 UW 2.06 1.90 30-Oct-08 UW 1.50 1.40 12-Aug-09 N 2.83 3.00 Explanation of Equity Research Ratings and Analyst(s) Cover
33、age Universe: J.P. Morgan uses the following rating system: Overweight Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe. Neutral Over the next six to twelve months, we expect this
34、 stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe. Underweight Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) cov
35、erage universe. J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is ava
36、ilable on request. The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2010 Overweight (
37、buy) Neutral (hold) Underweight (sell) JPM Global Equity Research Coverage 46% 42% 12% IB clients* 49% 46% 31% JPMSI Equity Research Coverage 44% 48% 9% IB clients* 68% 61% 53% *Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rule
38、s, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. 13 Asia Pacific Equity Research 06 August 2010Chapman Deng (852) 2800-8577 Valuation and Risks: Please see the most recent c
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