HDFX’s 1H19 earnings miss on 1) higher repair and maintenance cost allocation in 1H19; 2) surprising other operating charges from transferring power generation rights; and 3) lower-than-expected nuclear share profit. We trim FY19E EPS outlook by 12.7%, and maintain FY20-21E EPS largely unchanged. Valuation is not demanding, maintain BUY with TP unchanged at HK$2.00.
- 1H19 earnings missed. Revenue was RMB9,781mn, up 10.5% YoY. Revenue growth was mainly driven by hydro power, gas distributed and other power generation. Repair and maintenance costs and other operating costs surged 9%/92.7% YoY respectively, due to higher costs allocation in 1H19, as well as significant costs associated with power generation rights transferred to third parties. Share profit from nuclear investments was also lower than estimates. Net profit was RMB1,548mn, up 4.5% YoY. The results was 14.2% lower than our estimates.
- Raised FY19 hydro power utilization outlook by 10%. Based on 8M19 hydro power generation performance, mgmt. raised FY19 outlook by 10% from 3,500 hours to 3,850 hours. Hydro tariff is expected to be stable as HDFX’s hydro tariff was significantly lower than projects in nearby provinces.
- Surprisingly good coal-power tariff. Coal-power revenue beat our estimates, as coal-power tariff raised RMB8.59/MWh to RMB344.53/MWh. Standard coal costs declined 12.1% to RMB697.13/tonne. We expect the segment’s tariff and costs structure to remain stable in 2H19.
- Nuclear profit exhibited short-term decline. Share profit from Fuqing declined by ~RMB200mn due to less power generation. Sanmen 2# also experienced outage shortly after commercial operation in 4Q18. We trim nuclear share profit by 19.6% in FY19E to factor in those earnings impacts.
- Subsidy receivables amounted to RMB10.1bn. HDFX had accumulated RMB10.1bn subsidy receivables. Mgmt. had RMB4.1bn recycled through ABS/ABN issuance with interest costs of 4.08%. We expect subsidy receivables will be a key factor causing pressure to HDFX’s valuation.
- Trim FY19E EPS by 12.7%; TP maintained at HK$2.0. Based on lower than expected 1H19 figures, we trim FY19E EPS by 12.7% to RMB0.29. FY20-21E EPS projection remain largely intact. According to updated market data, our DCF TP is maintained at HK$2.00 per share. HDFX’s valuation is undemanding. Maintain BUY rating.
