China IPPs brace themselves for more rounds of tariff cuts

It depends on higher FCF.

It has been noted that potential tripling of operating cash flows together with substantial improvement in FCF (from being FCF negative) are two key changes the new cycle for coal-to-power in China will herald for the IPP sector in the next 3-5 years.

According to a research note from Barclays, a prolonged period of lower coal prices could bring a few more rounds of tariff cuts, which Barclays has factored into its estimates.

Despite that, it estimates FCF yield for the IPPs under its coverage (CR Power, Huaneng,Datang, CPI and Huadian) improves to over 30% by 2018E.

Moreover, Barclays estimates cumulative FCF between 2013 and 2018E could exceed the current total market capitalisation of the five IPP companies.

FCF yield for the China IPP sector is likely to standout in the global context, where Bloomberg consensus estimates imply positive FCF yield only for European and Japanese power companies, while most other Asian and US power companies should on average have little or negative FCF in 2015.