Datang International's power generation down 14% to 38.9b kWh

Will coal price drop offset this decline?

Datang International Power Generation Co.'s reported EPS of RMBc5.8 was 21% lower than Barclays' estimates, which it believes was driven by losses in its coal-to-chemical business.

According to a research note from Barclays, however, despite lower-than-expected operating profit, operating cash flow was 28% ahead of Barclays' estimates and has doubled q/q.

Power generation declined 14%, which Barclays notes is in line with comparable declines reported by peers.

Datang's investment case is clouded by its loss-making coal to chemical business, for which the company is in the process of negotiating a disposal.

Here's more from Barclays:

Weaker headline earnings amid q/q decline in power generation: Operating profit of RMB3.27 billion was 16% lower than our estimates and declined 27% q/q. Net power generation in the quarter declined 14% q/q to 38.9 bn kWh.

The company has also announced that its power tariff will decline by an average RMBc1.89/kWh, which we see as additional headwind for profitability in 2Q, although the decline in coal prices will likely offset the revenue decline from tariff cut.

Stronger cash flow reiterates attractive dynamics of standalone power business: Operating cash flow in the quarter was RMB7.2 billion and has doubled sequentially.

Although the company has not disclosed the breakdown between profitability of its power and coal to chemical business, stronger cash flows could potentially be driven by its power business. Losses in coal-to-chemical are mostly driven by lack of operating income to absorb depreciation and interest costs, with minimal impact on cash flows.

Coal to chemical appears to have driven headline weakness: Two ways we surmise that headline weakness was driven by coal-to-chemical business is by looking at effective tax rate and minority interest. 42% tax rate in the quarter implies that tax on profits from power has been normal, while PBT was depressed due to non-cash losses from coal-to-chemical.

Minority interest in the quarter was 16% of PAT, compared to average 28% in Q1-Q3 2014. This again reiterates that, positive attributable income from power business has been offset by attributable losses from its coal-to-chemical business, in our view. The company will hold investor conference call tomorrow at 3.30pm and we hope to get some more colour on the sources of weakness.