Hong Kong company reporting season

Chinese power firm Huaneng posts worse than expected 31 per cent fall in interim profit

PUBLISHED : Tuesday, 02 August, 2016, 7:36pm
UPDATED : Tuesday, 02 August, 2016, 11:06pm

Huaneng Power International, the listed flagship of the nation’s largest power producer China Huaneng Group, posted a worse than expected 31 per cent year-on-year drop in net profit for the first six months of the year.

The Beijing-based company reported a net profit of 6.18 billion yuan, down from 8.95 billion yuan in the year-earlier period. It was 12.8 per cent lower than the 7.09 billion yuan average estimate of analysts at Citi, Deutsche Bank and Morgan Stanley.

“Most [Hong Kong-listed mainland Chinese] power producers should see first-half net profits below consensus estimates due to tariff and [plant] utilisation cuts,” Citi head of Asia utilities research Pierre Lau in a note ahead of the results.

Huaneng Power is estimated to see an 8.8 per cent decline in net profit to 12.45 billion yuan for the whole of this year, according to the average estimate of 18 analysts polled by Thomson Reuters.

They forecast its net profit to slide further to 11 billion yuan next year and to 7.7 billion yuan in 2018, amid rising industry excess capacity and policy reform that has seen intensifying competition in power selling prices and volumes.

Revenue slid 18.96 per cent year-on-year to 52.92 billion yuan, on the back of a 8.6 per cent decline in power output, as well as lower power prices as a result of a cut to state-stipulated tariffs in January and greater sales of power at lower prices directly negotiated with large industrial end-users.

No interim dividend was declared.

Gross profit margin was squeezed by 1.84 percentage points to 28.61 per cent as revenues fell faster than costs, the company said in a filing to Shanghai’s stock exchange.

There will be a surplus in the capacity of overall national electricity supply
Huaneng Power company statement

The profit decline came despite lower coal and interest expenses.

Also hurting coal-fired plant utilisation was major excess industry capacity and reforms facilitating direct trading between generators and large industrial end-users.

Such sales are encouraged by Beijing as part of industry reform to enhance efficiency through competition and reduce power costs for manufacturers by allowing users and generators to directly negotiate volumes and prices, bypassing power distributors.

The distributors, which used to earn fat profit margins on state-stipulated prices with no incentives to cut costs, have been forced to lower operating costs under the power pricing reform.

Huaneng Power’s average first-half plant utilisation fell 12.5 per cent year on year to 1,839 hours, it said in a filing to Hong Kong’s stock exchange.

The coal-fired power industry as a whole has seen plant utilisation rates fall to their lowest levels in 38 years. Higher hydro power output due to unusually high rainfall was a factor cutting into coal-fired plants’ output.

Lower plant utilisation has an adverse impact on profits since more fixed costs such as plant depreciation and maintenance are borne by each unit of power sold.

Huaneng Power, predominantly a coal-fired power generator, has seen utilisation of its plants squeezed by weak power demand growth, and rising competition from nuclear and renewable energy output.

“There will be a surplus in the capacity of overall national electricity supply,” Huaneng Power said in the Hong Kong filing.

A substantial rise in cross-regional power transmission “has squeezed the generation potential” of coal-fired plants in Henan, Chongqing and southeast coastal regions in the year’s first-half, while the commissioning of nuclear plants in Liaoning, Fujian and Guangdong also had a negative impact on coal-fired plants’ output.

At the end of June, some 12.87 per cent of Huaneng Power’s total generating capacity, in which it had a controlling stake, was cleaner energy units fuelled by hydro, wind and solar energy, besides natural gas.

Its total controlled capacity on June 30 had risen 2.7 per cent year on year to 82.57 giga-watts.

Amid concerns of falling profits amid intensifying competition, Huaneng’s share price has tumbled 33 per cent since reaching this year’s intra-day high of HK$7.3 on April 13, underperforming rival China Resources Power’s 18.7 per cent decline since its year-to-date intra-day high on April 14.