Sunny outlook await for Chinese IPPs' half-year earnings

As power tariffs were uncut in 1H.

It is estimated that Chinese IPPs' 1H14 net profit jumped ~26% YoY on average, possibly beating market expectations, as power tariffs were not cut in 1H while coal prices were lower.

According to a research note from Maybank Kim Eng, Chinese IPPs continued to enjoy decent margins due to weak coal prices amid the on-grid tariff in 1H14 not being cut.

In 1H14, the average Qinhuangdao spot coal price (5500 kCal, Shanxi Premium Blended) was CNY538/tonne, down 12% YoY. The decline was mainly due to the higher base in 1H13.

For Chinese gas distributors, meanwhile, their 1H14 profit growth was likely robust as it is estimated that natural gas sales grew by 20-25% YoY. Interim results are likely to be in line with market expectations.

Here's more from Maybank Kim Eng:

Among the five IPPs, we estimate Huadian will record the strongest earnings growth (+60% YoY) as it has the highest operating leverage. Huadian disclosed during its recent profit alert that 1H14 net profit rose by an estimated 55-65% YoY.

Despite possibly strong 1H14 results of IPPs, maintain NEUTRAL rating as we expect coal-fired tariff cut will happen in 3Q14, lowering IPP margins.

Chinese gas distributors: Interim results are likely to be in line with market expectations. We expect natural gas sales to vehicle users were the growth driver that probably contributed at least 30% YoY.

We estimate the average penetration rate to residential users is about 45%. Compared with a mature market of 70%, there is still around 25% more room left for growth.

We estimate 15-23% of total revenue came from connection fees. However, the gross margin of connection fees may record a small decline (eg 3-4ppts) due to a higher proportion of old building connections.