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Hong Kong company reporting season

China Resources Power cuts capital expenditure after posting weaker than expected interim profit

PUBLISHED : Thursday, 18 August, 2016, 12:53pm
UPDATED : Thursday, 18 August, 2016, 10:28pm

China Resources Power has announced a major cut to its annual capital expenditure and raised dividend despite posting a lower than expected 21.7 per cent interim profit decline.

The decline was caused by the adverse impact of lower plant utilisation amid severe industry overcapacity and weak demand, which more than offset the benefits of lower fuel costs.

China Resources Power, the listed power generation unit of state-backed conglomerate China Resources Holdings, posted net profit of HK$5.34 billion for the first six months, down from HK$6.81 billion in the year-earlier period.

It was 9.6 per cent lower than the HK$5.91 billion average estimate of analysts at Citi, Deutsche Bank and Morgan Stanley.

An interim dividend of 12.5 HK cents was declared, 25 per cent higher than the 10 HK cents paid last year.

China Resources Power said it will cut back on capacity expansion spending in view of the weak economic environment and industry overcapacity.

While we would rather the cuts are on coal-fired plants, any cut in capital expenditure is a good thing as it frees up cash flows for dividends
Simon Powell, UBS

“The group will control the pace of capital expenditure based on the macroeconomic conditions of China, in particular the demand and supply of electricity,” China Resources Power said in a filing to Hong Kong’s stock exchange on Thursday.

It has cut its capital expenditure budget for this year by 25.7 per cent to HK$17.1 billion from HK$23 billion announced in March.

The vast majority of the reduction was on the construction of hydro power plants, as well as wind and solar farms.

It is not exactly clear how much the firm’s expansion plan announced in March would be curtailed. At the time, it targeted generation capacity to reach 36.6 gigawatts (GW) by the end of the year, 38.9GW by the end of next year and 43.5GW by the end of 2018.

It stood at 34.6GW on June 30, of which 4.8GW is wind, solar and hydro capacity.

As investors reacted to the dividend rise and capital expenditure cut, China Resources Power’s shares on Thursday closed 1.34 per cent higher at HK$13.64. They have fallen 9.5 per cent year to date, underperforming the Hang Seng Index’s 5.1 per cent rise.

“While we would rather the cuts are on coal-fired plants, any cut in capital expenditure is a good thing as it frees up cash flows for dividends,” UBS head of Asian utilities research Simon Powell told the Post. “The planned expansions of coal-fired plants by the industry does not make sense in light of the weak demand growth and government policy favouring clean energy.”

It might be too late for China Resources Power to cut coal-fired projects already being built this year as they have a much longer construction lead time than wind and solar projects, he added.

First-half revenue fell 16 per cent year on year to HK$31 billion, on the back of a 0.7 per cent decline in power output – due mainly to a cut in state-stipulated power selling price early this year – and an 11 per cent discount on output sold directly to large customers on negotiated unregulated tariffs.

The effect of lower tariffs more than offset cost savings from an 18.1 per cent year-on-year fall in fuel cost per unit of output at its coal-fired plants, which make up the vast majority of its total generation capacity.

Output from newly commissioned plants helped China Resources Power cushion the 8.7 per cent fall in output from its other plants due to low electricity demand growth, rapid growth in new capacity and intensified competition after industry reform.

China’s electricity consumption grew 2.7 per cent in the first half of the year as economic growth continues to move from energy-intensive activities to consumption. The full-year projection by China Electricity Council is 2.5 per cent growth, up from 0.5 per cent last year.

China Resources Power’s plants in Guangdong, Hebei and Jiangsu provinces, some of the most economically developed regions in China, saw some of the steepest output declines.

The declines led to an average 8.6 per cent year-on-year drop in first-half utilisation of plants that it owned to 2,315 hours, the lowest level since the firm’s listing in 2003.

Low utilisation is bad for profit margins as more fixed costs need to be borne by each unit of power sold.