Sale of Datang's non-core operations viewed as good strategy

So it can focus on power-generation.

The framework agreement that Datang International Power entered with China Reform Corp (CRC) for a proposed reorganization of its coal-to-chemical and related businesses has been viewed as positive for the company's operations.

According to a research note from Maybank Kim Eng, it views the sale of the non-core operations as positive. It also noted that in 2013, the coal-to-chemical project of Datang suffered a CNY910m loss due to high depreciation and coal-to-gas projects Keqi and Fuxin also bear delay risks.

Maybank Kim Eng noted that it thinks it is a good strategy to sell the stake in the coal-to-chemical and related businesses to reduce the uncertainties and put more focus on Datang's strength in power-generation.

It also said that although this disposal may produce a one-off loss, the pros are the possible earnings improvement in the longer term without a depreciation burden and the likely reduction in total capital expenditure to improve net gearing.

Here's more from Maybank Kim Eng:

The Duolun Coal Chemical project (60% owned by Datang) has been the market's concern as it required large capital expenditure and led to a depreciation cost burden.

In January 2013, depreciation of fixed assets of CNY16.34b in aggregate commenced; in April 2013, depreciation of fixed assets of CNY517m began and CNY8.2b fixed-asset depreciation started in Oct. 2013.

Last year, the project made a loss of CNy910m and the project-utilization rate was around 46%. In fact, we estimate the project requires an 80% utilization rate to break even.

For the coal-to-gas projects, we are also concerned about the delay risks similar to those in the Duolon project.