China's hydropower capacity picked up by 30% between 2012-2014

Water levels in key dams are getting better.

It has been noted that hydro power in next six months in China is likely to stay strong as the rainy season begins.

According to a research note from Barclays, water levels in key dams are starting off better than last year. The magnitude of the hydro power pickup depends on the rains, but Barclays notes that hydro power capacity itself increased significantly in 2014 (+8% y/y, +30% between 2012 and 2014).

The impact of tariff cuts will be another negative driver for IPPs' profitability, but Barclays expects the lower coal prices to soften the blow to a large extent. However, cash flows continue to be strong for IPPs, up 21% y/y in 1Q15.

In Barclays' coverage, Huaneng appears positioned ahead of peers as its non-organic growth should offset lower utilisation hours while the stock has the highest dividend yield.

CPI, on the other hand, is likely to be beneficiary of the stronger hydro season while, structurally, it could also be a key beneficiary of asset injections.

Here's more from Barclays:

Stronger cash flows remain key positive for investment cases: Operating cash flows in 1Q15 for China IPPs in our coverage came in ahead of our estimates, up 21% y/y. Although we expect IPPs to maintain elevated cash flows medium term, the companies' free cash flow profiles should improve even further, in our view.

The growth profiles for most companies have already peaked and will start to decline in next 2-3 years. Therefore the sector could see continued strong free cash flow yields at lower prices while dividend yields are already attractive.

Hydro season a key swing factor for utilisation hours in next 3-6 months: The seasonality of hydro power generation in China is reasonably well understood by investors, in our view. However, we believe two things are worth remembering: 1) Hydro power capacity has increased significantly since 2012.

Most of the installed capacity ramped up in past 12-18 months, and hence, 2015 could see stronger generation even in a moderate rainy season (hydro generation was up 18% y/y in 1Q15). And 2) the rate of water receding in three Gorges dam has been slower by 2-3%, which could support the early pickup in hydro power even with moderate rains, in our view. Finally, utilisation hours for hydro power generation have historically picked up by 78% from the 1Q average while that for thermal power has declined by 4% in the following six months.

Lower coal prices to offset tariff cuts but risk of further cuts cannot be ruled out: Coal prices are continuing to go down in China. The spot price of RMB402/t is significantly lower than the 1Q15 average of RMB482/t, which we believe should more than offset the earnings impact from the tariff cuts for IPPs. However, the continued weakness in coal prices could be an additional trigger for policy makers in China to review IPP tariffs, in our view. In that context, we note that we have already factored in an additional tariff cut of RMBc1.5/kWh in 2016; thus, the downside to our earnings estimates should be limited.