Huadian Power International's margins seen to have peaked

Its share price has also been stellar.

Huadian Power International's 3Q14 revenue was CNY16,947m, down 4.3% YoY, with the decline mainly driven by a 2.6% YoY drop in power generation in 3Q14.

According to a research note from Maybank Kim Eng, meanwhile, 3Q14 net profit rose 28% YoY to CNY1,573m (under PRC GAAP), higher than market estimates.

Net profit growth of 28% was mainly driven by margin expansion on the back of cheaper coal in 3Q14.

The report noted that Huadian is the most sensitive to coal prices among companies under Maybank Kim Eng's coverage due to its operating leverage.

As such, its share price has performed well in the last 12 months, up 51% owing to weaker coal prices, in Maybank Kim Eng's view.

Here's more from Maybank Kim Eng:

Maintain HOLD as we believe Huadian’s margins have probably peaked as we see limited room for further downside for the spot coal price.

We forecast the margin in 2014E will be 21% but will drop to 19% in FY15E.

Although we forecast coal cost will remain low without a sharp rebound, we forecast margin decline in FY15E will also be driven by lower average tariff in FY15E.

3Q14 financial expenses were CNY1,598m (based on PRC GAAP), up 6% YoY.

We believe the stronger operating cash flow could help lower net gearing and we forecast it will drop to 283% at the end of FY14E from 397% at end-FY13.

Although we believe earnings growth will be limited, we forecast the company’s dividend yield will be attractive at 6% in FY14E.

Maintain HOLD and DCF-based TP of HKD5.10. Possible asset injections from its parent could be a potential positive catalyst.