Huaneng’s 2020 Profit and Dividends Below Expectation; FVE Cut on Higher Spending, Lower Utilization

We cut our fair value estimate on no-moat Huaneng Power International to HKD 3.80 per share from HKD 4.24, after lowering our capacity utilization rate of its coal-fired power plants. Huaneng’s 136% year-over-year jump in net profit to CNY 2.6 billion in 2020 was mainly due to lower-than-expected fuel cost and a low base in 2019. However, we think the market will be disappointed by the continued impairment charges as Huaneng continues to write down the value of its coal-fired power plants on declining utilization rates triggered by China’s shift toward renewables. While this does not impact our free cash flow estimates for Huaneng, it does lead to lower declared dividends. Huaneng’s payout is based on its reported net profit and not its recurring profit. As a result, 2020 declared dividend is HKD 0.18 per share versus our previously forecast HKD 0.39 per share. This still represents a decent 7.7% dividend yield based on the March 24 close of HKD 2.74, but well short of what it could have been. Going forward we factor in an annual impairment charge of CNY 3.6 billion and payout ratio of 50% through 2025.