Daiwa: HUANENG POWER (00902) Q4 Core Net Profit Falls 84%; Coal-Fired Power Profitability Weakens Further; Rating "Underperform"

Daiwa released a research report stating that HUANENG POWER (00902)'s Q3 net profit fell 77.8% YoY to RMB1.24 billion, and recurring net profit fell 84.4% YoY to RMB816 million; first three quarters net profit fell 47.3% YoY to RMB7.82 billion, far below already-low expectations. The bank had earlier warned investors to watch for downside risks and currently maintains an "Underperform" rating. The bank noted that the company's coal-fired power profitability deteriorated further, with Q3 coal-fired power pre-tax profit decreasing by approximately RMB5.03 billion YoY, compared to the group's pre-tax profit decrease of approximately RMB5.69 billion YoY, reflecting that the coal-fired power business was the main drag. Revenue during the period fell only 3.3% YoY to RMB58.94 billion, but operating costs rose 7.9%, and gross margin narrowed by approximately 9.2 percentage points to about 11.4%. The company attributed the decline in first three quarters profit to lower domestic power generation and settlement electricity prices, as well as higher unit fuel costs for electricity sales. The bank stated that it had earlier reminded investors to watch for downside risks and currently maintains a cautious view on HUANENG POWER's profit recovery prospects, believing that the results further confirm its concerns about coal-fired power margins and shareholder distributions, but the recovery in the wind power business is encouraging, and it will monitor management's outlook on electricity prices and delivered fuel costs.