Analyst Note| Jennifer Song |
Huaneng’s strong third quarter results again beat CapitalIQ annualized and our expectations, with recurring net profit more than doubling to CNY 3.1 billion from a year ago. We think the lower-than-expected fuel cost is the key driver, reflecting Huaneng’s relatively efficient coal purchasing strategy, but we expect its coal cost to rise in the fourth quarter, as the low-cost inventory should have been consumed. Nonetheless, future coal costs are expected to be benign with ample coal supply, and we expect Huaneng’s operating margin to stabilize at around the 14.3% level from 2021. We think the company’s plan to add renewables as China cuts back on coal-fired generation is positive, but we note the potential risk to cash flow.