Wednesday, April 09, 2008
A Look at the Power Companies - final
Things happened so fast during the last few weeks that I ended up holding some Datang before I looked at the final results, atypical for me but it wasn't a typical March either.
Huaneng's results came up slightly ahead of my estimate while Datang was slightly below, both by about 10%. So it seemed the coal factor had gotten bigger since the 4th quarter, for my estimate was based on 3 quarters of results.
SIZE
Datang vs Huaneng (YOY growth in bracket)
Asset size: $122b (34%) vs 124b (9%)
Power generated: 118b kwh (27%) vs 174b kwh (13%)
Revenue: $32.8b (32%) vs $49.8b (12%)
Commitment: not available yet
As noted before, Datang has been growing at a much faster pace and is now as big as Huaneng in terms of assets. One reader pointed out the apparently lower depreciation rate of Datang (which led to a higher margin), but I think there should be little scope for maneuver in this area as the generators used should be homogeneous. The lower rate is more likely due to the higher growth, i.e. more generators put in use each year which inflated the fixed assets account.
PROFITABILITY
Datang vs Huaneng
Recurring profit: $3.4b (up 22%) vs $5.6b (down 7.5%)
(2006 figure in bracket)
EBIT margin: 23.6% (24%) vs 15.9% (19.3%)
EBT margin: 17.8% (18.7%) vs 12.2%* (16%*)
ROE: 11.5% vs 12%
Gearing: 2x vs 1x
* excluding associates' contribution
Huaneng's margins really contracted and overall profit declined as well. This was surprising as Huaneng was better hedged for coal price, whose effect should be felt pretty evenly across the industry yet this difference in margins was too great to explain. I couldn't find any explanation or even mentioning of this by management.
The lower ROE of Datang was mostly the result of the A-share issue in 2006 (and to a lesses extent the higher MI payout). But its gearing is reaching the comfort limit of any reasonable investor.
COAL PRICE IMPACT
Datang
Tariff hike: $1.2b vs $2.4b*
Fuel cost hike*: $1.66b vs 2.26b
* according to my estimation as management of both were very elusive and didn't say much on this area. I hope more is disclosed in the final reports.
Again like last time, Huaneng seemed better at managing its fuel with it long term contracts. It generated almost 50% more power yet its incremental coal cost wasn't that much greater. The overall situation actually wasn't that dire for both last year and even Datang's net loss of $360m could be easily absorbed.
Going forward Huaneng gave indication of 18% increase in coal cost in 2008 whilst Datang's figure was 12%. I have no idea why Huaneng's figure is higher as it has contracts running until 2009 for 1/4 of its demand (based on 2006). Datang's figure was lower and some quoted management saying its coal mines will be meeting part of the demand this year. I'm really not sure about the accuracy of this.
Next I try to quantify the impact of further coal price increase.
Huaneng vs Datang
2007 generation: 173.7b kwh and 118.3b kwh
2008 growth*: 12% vs 25%
2007 avg fuel cost**: $0.16/kwh vs $0.129/kwh
2008 increase: 18% vs 12%
Incremental cost: $5.6b vs $2.3b (before tax and MI)
*very slightly lower than 2007
** fuel cost divided by total power generation
The result was dramatic to say the least. For reference last year earnings were $5.6b and $3.4b respectively. Although new capacities will bring in some contribution to partly offset the increases but risen interest cost (esp. for Datang) will be working in opposite direction.
If nothing happens between now and the end of the year, Datang will probably see a 1/2 to 2/3 decline in profit and Huaneng wlll be barely profitable. In fact, the news had it that the whole power generation industry had losses for the first 2 months of 2008; however I couldn't really reconcile the figures to that fact. But nevertheless the situation is bad like everyone knows.
CONCLUSION
How long will this tariff control remain in place is not a question I can answer. But there are believers in the market, like myself, as the prices of Datang and Huenang are far from distressed level. Huaneng is cheaper at 11x p/e vs Datang's 14x but with a higher yield of 5.6% vs 2.8%. I'd say the valuation is fair and there isn't bargain here. Calculating 2008 p/e is not meaningful as it won't be a normal year, and you don't need it to convince yourself not to buy anyway, i.e. if you are negative toward the power sector.
However if you believe the power industry should enjoy normal growth many years down the road, then I suggest you choose the higher grower.
DISCLOSURE: I hold 991 and no 902 at time of writing.
Huaneng's results came up slightly ahead of my estimate while Datang was slightly below, both by about 10%. So it seemed the coal factor had gotten bigger since the 4th quarter, for my estimate was based on 3 quarters of results.
SIZE
Datang vs Huaneng (YOY growth in bracket)
Asset size: $122b (34%) vs 124b (9%)
Power generated: 118b kwh (27%) vs 174b kwh (13%)
Revenue: $32.8b (32%) vs $49.8b (12%)
Commitment: not available yet
As noted before, Datang has been growing at a much faster pace and is now as big as Huaneng in terms of assets. One reader pointed out the apparently lower depreciation rate of Datang (which led to a higher margin), but I think there should be little scope for maneuver in this area as the generators used should be homogeneous. The lower rate is more likely due to the higher growth, i.e. more generators put in use each year which inflated the fixed assets account.
PROFITABILITY
Datang vs Huaneng
Recurring profit: $3.4b (up 22%) vs $5.6b (down 7.5%)
(2006 figure in bracket)
EBIT margin: 23.6% (24%) vs 15.9% (19.3%)
EBT margin: 17.8% (18.7%) vs 12.2%* (16%*)
ROE: 11.5% vs 12%
Gearing: 2x vs 1x
* excluding associates' contribution
Huaneng's margins really contracted and overall profit declined as well. This was surprising as Huaneng was better hedged for coal price, whose effect should be felt pretty evenly across the industry yet this difference in margins was too great to explain. I couldn't find any explanation or even mentioning of this by management.
The lower ROE of Datang was mostly the result of the A-share issue in 2006 (and to a lesses extent the higher MI payout). But its gearing is reaching the comfort limit of any reasonable investor.
COAL PRICE IMPACT
Datang
Tariff hike: $1.2b vs $2.4b*
Fuel cost hike*: $1.66b vs 2.26b
* according to my estimation as management of both were very elusive and didn't say much on this area. I hope more is disclosed in the final reports.
Again like last time, Huaneng seemed better at managing its fuel with it long term contracts. It generated almost 50% more power yet its incremental coal cost wasn't that much greater. The overall situation actually wasn't that dire for both last year and even Datang's net loss of $360m could be easily absorbed.
Going forward Huaneng gave indication of 18% increase in coal cost in 2008 whilst Datang's figure was 12%. I have no idea why Huaneng's figure is higher as it has contracts running until 2009 for 1/4 of its demand (based on 2006). Datang's figure was lower and some quoted management saying its coal mines will be meeting part of the demand this year. I'm really not sure about the accuracy of this.
Next I try to quantify the impact of further coal price increase.
Huaneng vs Datang
2007 generation: 173.7b kwh and 118.3b kwh
2008 growth*: 12% vs 25%
2007 avg fuel cost**: $0.16/kwh vs $0.129/kwh
2008 increase: 18% vs 12%
Incremental cost: $5.6b vs $2.3b (before tax and MI)
*very slightly lower than 2007
** fuel cost divided by total power generation
The result was dramatic to say the least. For reference last year earnings were $5.6b and $3.4b respectively. Although new capacities will bring in some contribution to partly offset the increases but risen interest cost (esp. for Datang) will be working in opposite direction.
If nothing happens between now and the end of the year, Datang will probably see a 1/2 to 2/3 decline in profit and Huaneng wlll be barely profitable. In fact, the news had it that the whole power generation industry had losses for the first 2 months of 2008; however I couldn't really reconcile the figures to that fact. But nevertheless the situation is bad like everyone knows.
CONCLUSION
How long will this tariff control remain in place is not a question I can answer. But there are believers in the market, like myself, as the prices of Datang and Huenang are far from distressed level. Huaneng is cheaper at 11x p/e vs Datang's 14x but with a higher yield of 5.6% vs 2.8%. I'd say the valuation is fair and there isn't bargain here. Calculating 2008 p/e is not meaningful as it won't be a normal year, and you don't need it to convince yourself not to buy anyway, i.e. if you are negative toward the power sector.
However if you believe the power industry should enjoy normal growth many years down the road, then I suggest you choose the higher grower.
DISCLOSURE: I hold 991 and no 902 at time of writing.
Comments:
<< Home
I hold 902 at the time of writing.
I have read Huaneng's annual report (Yr 2005) they have long term coal supply contract with coal supplier. They did the cost control on this part.
I have read Huaneng's annual report (Yr 2005) they have long term coal supply contract with coal supplier. They did the cost control on this part.
yes, i had the same impression reading the 06 annual accounts. so it's still a question mark to me why mgmt forecasted a 18% increase in coal cost which is higher than its competitors. maybe it has to do with the location of its plants, i.e. far away from coal mines.
Post a Comment
Subscribe to Post Comments [Atom]
<< Home
Subscribe to Posts [Atom]