According to China Times, China National Development and Reform Commission (NDRC) has already started reviewing the next round of coal-fired on-grid tariff cut due to local government’s request on quick drop of coal price and ongoing economy downturn. Previously, NDRC has lowered thermal tariff by Rmb2cent/kWh in April and published the Guidance on Promoting Power Pricing Mechanism Reform in mid October. We believe the market has well anticipated the potential tariff downside risk as seen by Huaneng’s reported 9M15 earnings equals to 92% of Bloomberg FY15 consensus. On our estimate, the street consensus has incorporated a Rmb3cent tariff cut for FY16.
The market looks to expect a c.7% tariff cut (~Rmb3cent/kWh)
China Times reported that NDRC has already started the review of thermal tariff cut as a result of historically low coal price since 2004. Local government requested to have no less than an average of Rmb2cents/kWh tariff cut, and the final announcement is likely to be issued by year end. We think the market has factored in a 6-7% tariff cut based on the following; 1) Huaneng generated a Rmb0.055/KWh net profit in 3Q15; based on current spot price, we expect a further c.Rmb10/ton coal price decline in 4Q, which suggests another Rmb0.002/KWh net profit upside; 2) based on consensus, it seems the market expects a Rmb0.04/KWh net profit for FY16E. After adjusting for tax impact and minority interest, we think the market has already incorporated a Rmb0.03/KWh tariff cut “(0.055+0.002-0.04)/(1-25%)/(1-23%) = 0.03”.
Renewable surcharge hike around the corner
We learned from industry experts during our Beijing Trip that renewable surcharge is likely to be raised soon by Rmb0.01/kWh to Rmb0.025/kWh (inc.VAT) along with coal-fire on-grid tariff cut, to relieve the prolonged delay in subsidy payment. Currently the renewable surcharge collection rate is nearly 90%, and we believe the potential surcharge lift will help accelerate subsidy payments and improve developers’ cashflow. Also, we think ultra-low emission units will get additional tariff compensation, similar to units with De-SOx/DeNOx facitilies.
