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Huaneng turnaround fires up power stocks

Shares in mainland power producers rose yesterday after industry leader Huaneng Power International posted stronger than expected third-quarter earnings on the back of strong electricity demand growth and lower coal prices.

Huaneng on Tuesday night reported third-quarter net profit of 2.16 billion yuan (HK$2.45 billion), compared with a loss of 2.15 billion yuan a year earlier, thanks to lower fuel costs and higher power prices.

For the first nine months, net profit was 4.13 billion yuan, against a loss of 2.56 billion yuan previously.

The nine-month profit is already higher than the 3.83 billion yuan full-year net income forecast by 26 analysts polled by Thomson Reuters, implying they underestimated its profit.

'We intend to revise up earnings significantly due to the better than expected cost controls and generation trends,' wrote BOC International analyst Peter Yao Sheng in a research note.

Pierre Lau, the head of Citigroup's regional utilities research, said in a research report that Huaneng's third-quarter fuel cost per unit of output was 212 yuan per megawatt-hour, down 30 per cent year on year and 4 per cent lower than in the second quarter. For the nine months, unit fuel cost fell 15 per cent year on year.

Coal cost is a key profit factor, as it accounts for about 66 per cent of Huaneng's total operating costs.

The year-on-year profit turnaround was also due to a 5.16 per cent increase in its average power price early in July last year and a 5.67 per cent rise in mid-August that year.

Shares in Huaneng shot up 7.5 per cent to close at HK$5.56 yesterday, while Datang International Power Generation rose 4 per cent to HK$4.19. Huadian Power International Corp rose 4.1 per cent to HK$2.54, China Resources Power Holdings surged 4.8 per cent to HK$18.06 and China Power International Development climbed 7.3 per cent to HK$2.35.

Datang last night also posted a net profit of 1.05 billion yuan for the first nine months, against a loss of 1.87 billion yuan a year earlier. Analysts polled forecast that it would post a full-year profit of 2.57 billion yuan.

Industry executives said price cuts would affect plants in coastal provinces except Shandong, while prices at plants in some inland provinces would be raised.

Separately, Huaneng said it had agreed to take a 30 per cent stake in a joint venture with controlling shareholders China Huaneng Group and Huaneng International Power Development that would build four nuclear power reactors in Shandong at a cost of five billion yuan.

It is the second mainland-listed power firm to invest in a nuclear power plant, after Datang took a 49 per cent stake in 2006 in Fujian province's Ningde project. Lau quoted Huaneng management as saying it preferred to invest in nuclear power projects than in coal mines, citing the likelihood that price reform would see a close linkage between coal and power prices in the long term.

'Huaneng believes there is high execution risk for power firms engaging in coal mining, which is a new business for them,' Lau said.

The group's strategy sets it apart from its rivals, which are chasing coal mine assets to hedge against a repeat of last year's industrywide losses caused by state control on power prices amid surging coal prices.

Underestimated

Surprise earnings upturn leads analysts to revise forecasts

The amount of profit Huaneng posted for the first nine months, in yuan: 4.13b yuan

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