China Longyuan braces itself for impacts of IPP tariff cut

Earnings could be dragged this year.

China Longyuan Power reported an in-line set of results for 4Q14, and although headline EPS of RMB0.13 was 13% ahead, operating profit of RMB2.01 billion was 2% lower than Barclays' estimates.

According to a research note from Barclays, full-year 2014 EPS of RMB0.32 was 15% lower than Bloomberg consensus of RMB0.38.

Importantly, wind power capacity addition of 1.58 GW in the full year 2014 was in line with company guidance and Barclays' estimates, while utilisation hours were marginally lower than Barclays' estimates.

The company announced a dividend of RMB0.597/share, which is slightly lower than our estimates for RMB0.61/share and has increased 25% y/y.

Net debt of RMB67 billion was ahead of Barclays' estimate of RMB62.7 billion by end of 2014, and increased 24% y/y.

Barclays believes that the outlook for wind power capacity additions in 2015 is important for Longyuan given that the potential risk of a tariff cut in its IPP business is likely to be a drag on earnings.

Here's more from Barclays:

In-line results, sequential improvement in 4Q14: Operating profit of RMB2.01 billion for 4Q14 was broadly in line with our estimates.

However, a lower-than-expected net finance cost and lower minority interests have helped bring net income 13% ahead of our estimates for 4Q14.

Net income in 4Q14 improved fivefold sequentially; better wind conditions were the key driver, resulting in a 68% q/q increase in wind power generation.

Wind speed has improved in 2015, capacity addition is key: Wind speed in China YTD 2015 has been improving both sequentially and on a y/y basis, which we believe will likely help wind power companies to improve utilisation hours in 2015.

This is reflected in a 12.3% y/y increase in power generation in the first two months of the year. Moreover, Longyuan has reported that it had 2.3GW of projects under construction as at the end of 2014, meaning that capacity addition for the company in 2015 could potentially be better than last year, in our view.

Tariff cut in IPP could be a drag on earnings in 2015: Huaneng has 1.9GW of IPP capacity in its asset portfolio (12% of its operating profit in 2014). Profitability in the power business declined 31% y/y in 2014, mainly due to lower utilisation hours.

While the outlook for utilisation hours for IPPs is unlikely to improve in 2015, the potential risk of a tariff cut could bring additional downside to its IPP earnings in 2015, in our view.