Chinese IPPs pop the champagne on unexpectedly lower tariff cut

While QHD coal price continues to drop.

Based on a media report, the national average coal-fired on-grid tariff cut is CNY9.3/MWh, starting from 15 August 2014.

According to a research note from Nomura, the above magnitude represents about a 2% cut, which is lower than consensus and its estimates of 3-5%.

As such, Nomura said that some upside potential to our current IPPs’ earnings estimates may be expected.

Here's more from Nomura:

For the coal price, given the weak demand from downstream even in the traditional peak summer season, the coal price continues its downward trend, and has broken its 7-year low to CNY480/ton.

This is consistent with our expectation that the 2014F unit fuel cost drop for the China IPPs is likely to beat the companies’ previous guidance of 3-5% drops.

Our top pick in the sector remains Datang Int’l Power (991 HK, Buy), with the further re-rating potential upon the disclosures of the non-power assets disposal details, which we believe is not fully reflected in the current share price.

We also remain positive on CPID (2380 HK, Buy) given the rebound in the hydropower generation in 2H14, strong capacity growth plan, together with its attractive valuation vs. peers, especially with its relatively high dividend yield.