On Wednesday, Huaneng Power International (NYSE:HNP), listed as 902:HK and NYSE:HNP, saw its stock rating downgraded from "Buy" to "Neutral" by Daiwa Securities, with the price target adjusted to HK$5.00 from the previous HK$5.90.
The change was prompted by concerns over fund outflow pressure, despite the company's solid dividend yield. Huaneng Power has experienced a 20% year-to-date increase in its stock price, even after a roughly 15% decline in the past two weeks.
This performance was attributed to earnings revisions due to a downward trend in coal prices since the first quarter of 2024 and potential benefits from power market reform initiatives starting in May.
The company's earnings recovery is thought to have been largely realized, with limited potential for further gains in the second and third quarters of 2024. However, the firm acknowledges Huaneng Power's robust 5.1% dividend yield forecast for 2024, which is expected to provide some support for the stock price.
The upcoming second-quarter earnings report is anticipated to show growth of less than 20% year-over-year, which would be significantly less than the 104% year-over-year growth seen in the first quarter of 2024.
Huaneng Power did not issue a profit alert by July 15, indicating that its first-half 2024 profits are unlikely to deviate by more than 50% year-over-year from the CNY 6,308 million reported in the first half of 2023.
Given the CNY 4,596 million profit in the first quarter of 2024, the second quarter's profits are capped at around CNY 4,866 million, a 20% increase year-over-year. Daiwa Securities forecasts a stable net profit of approximately CNY 4 billion for the second quarter, considering the maintained dark spread above CNY 100/MWh.
For the third quarter of 2024, the firm is conservative on Huaneng Power's earnings growth due to the high base of CNY 6,255 million recorded in the third quarter of 2023.
In contrast, independent power producers (IPPs) with hydropower assets, such as CPID (2380 HK), are expected to deliver strong generation growth in the second half of 2024, supported by hydropower and an attractive 0.7x price-to-book ratio estimate for 2024.
In light of the recent developments, Daiwa Securities has updated its model for Huaneng Power, reducing the 2024 forecast for total and coal-fired generation by 3% to account for weaker generation in the second quarter.
The firm also increased the blended on-grid tariff estimate from CNY 434/MWh to CNY 437/MWh to reflect better-than-expected tariffs in the first half of 2024. These adjustments have led to a 1-2% reduction in the top-line forecast for 2024-2026 and a 4% cut in the earnings per share estimate for 2024.
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