China IPPs' cash flow story unfolding unexpectedly stronger

But will this development last?

It has been noted that the cash flow story of IPPs in China is unfolding stronger than expected.

According to a research note from Barclays, the 2014 dividend announced by IPPs has increased 5.7% y/y exceeding the average earnings growth registered by the sector.

This is complimented by increase in free cash flows, which has aggregated to RMB130bn in 2014, up c15% y/y.

Barclays noted that it expects that free cash flows for the sector will continue their growth trajectory, given our expectation of normalisation of capex in next three years.

Here's more from Barclays:

2014 results for the IPP sector have demonstrated that a substantial proportion of the incremental cash flows will feed back to investors.

Dividends announced by most companies have been the highest in their recent history as a function of elevated earnings.

Going forward, we expect that with normalising capex, stronger free cash flows would continue and dividends would be well covered.

The sector is trading at a 5.2% dividend yield and Huaneng Power (OW) is leading the pack with its 50% payout ratio. The risk of tariff cuts is the biggest overhang.

However, the balance sheet deleveraging and consequent EV rebalancing should continue to offset any setbacks in the IPPs cash flow story, in our view.

The power reforms framework announced by the NDRC last week is widely seen as a risk, but could also provide an opportunity for IPPs to invest some of their cash flows for better returns.

We update our estimates with 2014 results and mark to market our commodity price assumptions; we lower our price target for Huaneng Power to HK$12 (from HK$13) while ratings are all unchanged.