China Longyuan Power posts higher interim profit

PUBLISHED : Tuesday, 09 August, 2016, 9:09pm
UPDATED : Tuesday, 09 August, 2016, 10:40pm

China Longyuan Power, Asia’s largest wind farms developer, posted a better-than-expected 7.2 per cent year-on-year rise in interim net profit on the back of higher output and lower finance costs.

The company, a unit of China Guodian Group, one of the nation’s big five state-owned power generation groups, had a net profit of 2.36 billion yuan for the period, up from 2.15 billion yuan in the year-earlier period.

The profit was higher than the 2.26 billion yuan average estimate by analysts of Citi, Deutsche Bank and Morgan Stanley.

“Longyuan’s earnings are helped by finance cost savings that offset [plant] utilisation declines,” Simon Lee, head of Morgan Stanley’s Asia-Pacific utilities research, said in a note ahead of the results.

First-half finance expenses fell 1.4 per cent year on year to 1.52 billion yuan.

First-half revenue grew 6.2 per cent to 11.21 billion yuan on the back of a 8.6 per cent rise in wind power output, much of it from newly completed projects.

That was partly offset by a 1.7 per cent decline in average wind power prices, a 10.4 per cent fall in average coal-fired power selling prices and a 4.5 per cent decline in coal-fired power output.

No interim dividend was declared, the same as last year’s first half.

Longyuan’s earnings are helped by finance cost savings that offset [plant] utilisation declines
Simon Lee, Morgan Stanley

First-half operating profit from wind farms edged up 1.2 per cent year on year to 3.88 billion yuan, while that of coal-fired power grew 3.4 per cent to 583 million yuan thanks mostly to a 14 per cent fall in per tonne coal cost.

The first-half average utilisation of the company’s wind farms tumbled 9.7 per cent year on year to 980 hours, compared to a 8.5 per cent drop in the national average to 917 hours as reported by the National Energy Administration.

Lower plant utilisation is bad for profits since more fixed costs need to be borne by each unit of power sales.

Due to weak year-on-year demand growth of only 2.7 per cent in the first half and excessively fast growth in new plant additions, mainland China’s coal-fired power – the mainstay of the power industry – has seen the lowest plant utilisation rates in 38 years.

Despite the fact that power generated from renewable sources like wind and solar have dispatch priority at the power grids as it is encouraged and subsidised by Beijing for their environmental benefits, lagging power grid construction and limited local demand in wind and solar energy-rich regions has meant too many wind and solar farms were left idle for much of the year.

Some 21 per cent of the nation’s wind power that was generated was wasted and not sent to the grid in the first six months of the year, up from 15 per cent in the year-earlier period, according to the administration.

The wastage ratio is as high as 47 per cent in Gansu province, 45 per cent in Xinjiang Uygur autonomous region and 39 per cent in Jilin province.

In an attempt to tackle the excess supply problem, Beijing has issued directives forcing local and regional governments to absorb a minimum amount of renewable power so as to provide wind and solar farms certain guaranteed utilisation hours.

But the implementation has proved problematic. “[Power distribution monopoly] State Grid [Corporation] was supposed to have signed prioritised power purchasing agreements with all wind and solar farms by June 30 for power volumes of the year’s second half, but we understand that no contracts were signed,” said Morgan Stanley analysts in a report.

Few provincial governments have published local policies to support the implementation of the guaranteed utilisation hours, and for those that did, they believe execution will be difficult.

In Gansu, one of the worst excess supply hit regions, the government is encouraging wind and solar farms to sell their output at discounted prices directly to end-users instead of through the grid operators, so as to increase their plant utilisation.

China Longyuan’s share price on Tuesday closed 0.1 per cent lower at HK$6.73 ahead of the results and just shy of Monday’s HK$6.81 close that was the highest since late November, amid signs of improvement in wind power plant utilisation rates in some regions.

But it is still a far cry from last year’s high of HK$11.36. The shares have surged 87.5 per cent from the HK$3.60 record low seen mid-February, when concerns about the high renewable power wastage rate was at its worst.