Summary – We reiterate our Buy rating on Huaneng for (i) gross generation +11.5% yoy to 208.2M MWh in 1H18, including +14.5% yoy to 103.9M MWh in 2Q18 boosted by strong economy high temperature and low hydropower output; (ii) unit fuel cost to drop 1-2% qoq in 2Q18E, though its target to have unit fuel cost to 5% yoy in 2018E looks not easy to achieve; and (iii) attractive 0.9x 2018E PER and 4.7% yield with payout ratio +20ppts yoy to 70%. We forecast its net profit to +7.2x yoy to Rmb2bn in 1H18E with average tariff of power plants in China +2.72% yoy to Rmb419/MWh, offsetting much of the unit fuel cost +6.7% yoy to Rmb230/MWh, and power plant utilization +10.9% yoy to 2,221 hours.
High generation growth in 1H18 – Huaneng’s gross generation was +11.5% yoy to 208.2M MWh in 1H18, including (i) +10.9% yoy to 191.5M MWh from coal-fired units boosted by strong power demand +9.4% yoy to 3,229M MWh nationally amid strong economy but weak hydropower output (+2.9% yoy to 462M MWh in 1H18) amid low rainfall; (ii) +7.7% yoy to 10.4M MWh from gas-fired units for new gas-fired units added in Jiangsu, Guangxi and Beijing in 2H17; (iii) +50.0% yoy to 5.8M MWh from wind, solar and biomass units for capacity expansion as well as better resources; and (iv) -13.5% yoy to 0.47M MWh from hydropower units amid less water inflow. Its generation growth exceeded our 2018E forecast of +3.9% yoy.
1H18E results preview – We forecast Huaneng’s net profit to +7.2x yoy to Rmb2bn in 1H18E, including Rmb0.8bn in 2Q18E, driven by (i) average PRC on-grid tariff +2.72% yoy to Rmb419/MWh from tariff rise on 1 July 2017, offsetting much of the unit fuel cost +6.7% yoy to Rmb230/MWh; and (ii) gross generation +11.5% yoy to 208.2M MWh with average coal-fired unit utilization +10.9% yoy to 2,221 hours. Huaneng will announce its 1Q18 result in the evening of 31 July.
Competitive Singapore market – Huaneng’s Tuas Power in Singapore had market share -0.7ppts yoy to 20.8% in 1H18.