Huadian Power International hits highest ever quarterly net income at RMB1.8b

Will tariff cuts keep the celebration short?

Reported EPS at RMB0.20 was in line with estimates for 1Q15, which also saw the highest ever quarterly net income for Huadian Power International Co.

According to a research note from Barclays, 1Q15 earnings should be ahead of consensus given that Barclays' full year 2015 forecast is 12% ahead of Bloomberg consensus.

More importantly, operating cash flow at RMB8.3 billion in 1Q15 is the strongest ever quarterly cash flow reported by Huadian and is 57% ahead of Barclays' estimate.

Relative to its peers, Huadian's business model has the highest leverage on both operating and financial metrics.

Therefore, while the tariff cut is likely to be a headwind for earnings, Barclays expects the lower coal prices to more than offset the potential revenue decline.

However, lower-than-expected utilization hours could be an additional headwind, in Barclays' view.

Here's more from Barclays:

Strongest ever headline numbers: 1Q15 net income at RMB1.8bn is the highest ever quarterly net income for Huadian, while H share issuance in 2014 has led to a 4% q/q decline in EPS. Improved profitability was driven by lower costs, given that revenue in the quarter declined 6% q/q.

Solid cash flow aided by release of working capital: Huadian reported RMB8.3 billion operating cash flow for 1Q15. This is the highest ever operating cash flow reported by the company.

The accelerated increase in cash flow was aided by a RMB1.1 billion q/q decline in inventories due to lower coal prices.

Although better-than-expected cash flows are positive, Huadian has among the highest gearing in the sector (343% at end-2014), thus the de-gearing is likely to take longer than peers, in our view.

Lower coal prices to offset the earnings impact from tariff cut: Spot coal prices have declined to RMB404/t compared to 1Q15 average prices of RMB482/t.

This is potentially a significant boost for Huadian considering its operating leverage and could offset the impact from the tariff cut announced by China's NDRC last week.

However, should the 1Q weakness in utilization hours extend into 2Q, earnings could take a sequential hit, in our view.