Huadian Power International unveils asset injection of 5.1GW from parent company

The injection's at attractive terms.

Huadian Power International Co. has announced an asset injection of 5.1GW from its parent company, and it is expected the transaction will be 6.5% accretive to Barclays' 2015E earnings.

According to a research note from Barclays, the company will acquire 82.5627% interest in Hubei Power Generation Co. from its parent company, for RMB 3.85bn, which is agreed upon to be paid in cash.

The terms for the asset injection transaction are attractive at 4x P/E and 0.8x P/B based on 2014 financials of the target company, in Barclays' view.

This compares favourably for Huadian given its current valuation multiples at 9.5x P/E and 1.7x P/B on Barclays' 2015 earnings forecasts.

Barclays notes that the proposed asset injection will help Huadian to offset the potential decline in earnings from a tariff cut announced in April 2015 and further softening of utilization hours for thermal power in China.

Here's more from Barclays:

Asset injection is significant in size: The proposed 5.1GW asset injection is in line with its guidance of 5.0GW; however, the timeline is ahead of its previous guidance for an asset injection by 2017.

The proposed capacity is equal to 13.4% of Huadian's existing consolidated capacity, which will increase to 43.2GW once the transaction is complete. This is in addition to 8.2GW under construction and will come on line in next 2-3 years.

Attractive terms are key driver for transaction to be earnings accretive: We expect a 6.5% earnings accretion from the transaction to our 2015 forecasts (assuming the transaction completes by end of 1H15).

The implied valuations from the transaction are attractive on traditional profitability metrics as well as EV/capacity. RMB 15.7bn of total assets for the target company and acquisition consideration of RMB 3.85bn implies an EV/Capacity of RMB 3.8mn per MW, which is lower than the replacement cost of RMB 4.0-5.0mn per MW for thermal power plants in China.

Strong cash flows to support the acquisition: Although Huadian had RMB 108.7bn in outstanding debt at end-2014, implying a gearing of 343%, we do not see the funding of truncation a potential issue.

Huadian generated operating cash flow of RMB 8.4bn in 1Q15, which was one of the highest quarterly cash flow since 2010. Therefore, the acquisition price of RMB 3.85bn at less than 50% of its 1Q15 cash flow should not hinder Huadian's ability to fund the transaction, in our view.