IPP
, Hong Kong

China Power International's hydropower segment boosted by tariff hikes

Analysts applaud their strong headline results.

China Power International Development Ltd. (CPI) delivered strong headline results with reported EPS of RMB 0.39, 16% ahead of Barclays' estimate.

According to a research note from Barclays, however, the underlying operating profit was 5% lower than its expectations.

Profitability for the coal power business was marginally lower y/y despite lower fuel costs while hydro power reported a double-digit increase in operating profit on a y/y basis.

The seasonal slowdown in hydro generation, and the persistent headwinds for coal IPPs will likely drive power generation lower in 2H15, which Barclays believes will be offset by the ramping up of the 1GW Pingwei-III power plant commissioned in May 2015.

The organic growth pipeline of CPI is relatively stronger than those of peers on a smaller base of installed capacity.

Moreover, lower gearing than peers together with RMB 7.2bn optionality with its 17% stake in Shanghai Power should help the company to comfortably pursue growth in the medium to long term.

Here's more from Barclays:

Stronger headline results: EPS at RMB 0.39 was 16% ahead of our estimate. Despite the 5% weakness in underlying operating profit compared with our estimate for 1H15, associate income ahead of our estimate helped to deliver the beat.

Despite the smaller-than-expected decline in tariffs and the larger-than-expected decline in fuel costs, profitability for the coal IPPs business fell short of our expectation. However, the y/y increase in tariffs for hydro power helped the segment to report a y/y increase in operating profit. Net debt at RMB 39.4bn was 7% lower than our estimate.

Organic growth to remain strong in next three years: CPI has 12.3GW of approved projects in its coal IPP portfolio of which 2.3GW are at advance stages of development.

Most of these plants are ultra super critical; thus, they will likely have better economics than its existing plants and dispatch priority. This equates to c45% of its consolidated installed capacity, which, therefore, could help the company to outpace its peers in terms of capacity growth.

17% stake in Shanghai Power is a key optionality: The stake in valued at RMB 7.2bn on a mark-to-market basis, which equates to 25% of CPI's share price. Further monetization of its stake (CPI sold 40mn shares in 2Q15 for RMB 1.3bn) could reduce CPI's debt by 17% and help fund its growth program for next three years, on our estimates.

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