Huaneng Power projects 2% y-o-y decrease in power sales in 2016

Lower utilization hours are to be blamed.

With regard to the outlook of Huaneng Power, the company guided power sales would be down about 2% yoy in 2016 mainly due to lower utilization hours.

According to a research note from Jefferies, 1Q16 average thermal coal price is RMB130/ton lower than 1Q15 (7,000 Kcal, excluding VAT), implying 1Q16 fuel cost would be RMB40/MWh lower than last year which should more than offset the expected RMB26/MWh (ex-VAT) decline in thermal tariff.

Jefferies continues to expect 1Q16 earnings should grow on yoy basis. It, however, acknowledges that in 2H16, margin contraction risk is high.

Here's more from Jefferies:

Excluding the impairment charges, Huaneng’s core earnings came in roughly inline with consensus and our estimates. The company declared dividend of RMB0.47/shr, implying a dividend yield of about 8%. We expect the company could roughly maintain the same level in 2016. Our buy case is supported by (1) dividend yield of >8% and (2) ROE of 16% vs 0.9x 2016 PB. We lower our TP as we see margin contraction risk as high in 2H16.

2015 Review: Reported net profits came in at RMB13.8bn. Excluding the RMB3bn impairment charge, net profits should be RMB16.1bn, roughly in line with our estimate and slightly above consensus of RMB15.8bn. ROE reached 18% in 2015 (21% excluding impairment). The company declared dividend of RMB0.47/shr, implying a dividend yield of 8.2% based on yesterday’s closing price on a payout ratio of about 50%. Free cashflow is RMB8bn, implying FCF yield is 9%.

Trimming earnings estimates: We cut 2015/16 earnings by about 15% on higher overhead assumptions due to lower utilization hours. We are still expecting a dividend yield of 8% and FCF yield of 10% for 2016. ROE should stay high at above 16% in 2016.