What's in it for China IPPs in the proposed power reform framework?

The first draft has been announced.

It has been noted that the proposed framework for power reforms likely to be net beneficial for China IPPs.

According to a research note from Barclays, NDRC announced a first draft on the preliminary framework for the much awaited power sector reforms last week.

Barclays believes that the framework is largely consistent with market (and Barclays') expectations and the key thrust of reforms is on strengthening the power distribution mechanism.

The policy emphasis is on direct selling of power to large industrial consumers, which can help IPPs to selectively improve their utilisation, which at times is hindered by grid connectivity issues.

The hydro power sector is likely to see a better share of impact from proposed reforms, where China Power International (EW) has the highest exposure in Barclays' coverage.

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.