Profit from electricity price increase by 1Q or 5x

Although the performance of Huadian Energy's annual report in 2011 was lower than market expectations, the thermal power sector's profit was expected to increase by approximately 5 times year-on-year due to the increase in thermal power price at the end of last year and the low coal price in the market.

The effect of power price increase shows that there are two main factors influencing the performance of the thermal power sector in the first quarter:

The first was to increase the on-grid electricity prices of thermal power companies three times in April, June and December last year. Its impact on business performance will be reflected in the year-on-year changes in the first quarter of this year. In which only the price increase started on December 1 last year, the on-grid electricity price of coal-fired power plants nationwide increased by approximately 2.6 cents per kilowatt-hour. According to the data, thermal power generation amounted to 608.88 billion kwh in January and February of this year. Assuming that the electricity generation in March this year increased by 6.5% year-on-year (the thermal power generation in March last year was 323.245 billion kwh), the thermal power generation volume in March this year is 344,256 million kwh, the cumulative power generation in the first quarter of this year is estimated to be 953.14 billion kwh. Even if we do not consider the increase in electricity prices in April and June of last year, we will increase the revenue of the thermal power industry by RMB 247.82 billion based on the average increase of approximately 2.6 cents per kilowatt-hour. Since the revenue generated by the increase in electricity prices has hardly increased operating costs, the deduction of 17% of value-added tax will increase the total profit of the thermal power industry by about RMB 20.5 billion.

The second is the impact of changes in thermal coal prices on the cost of thermal power. Taking the Qinhuangdao Port thermal coal price as an example, since November last year, coal prices have experienced a significant decline, dropping by up to RMB 90/t, with a range of 10.46%. However, compared with the average coal price of 778.33 yuan per ton in the first quarter of last year, the coal price in the first quarter of this year was an average of 781.61 yuan per ton, still higher than last year's average price of 3.28 yuan per ton. If the standard coal consumption is 330 g/kWh (approximately 420 g of thermal coal converted to 5500 kcal), assume that 70% of coal used in thermal power is market coal and 30% is contract coal. In addition, this year's contract coal prices have increased, assuming an average increase of 5%, an average increase of 30 per ton (assuming the average coal price last year is 600 yuan / ton), the cost of thermal power industry in the first quarter of this year will increase year-on-year: 0.00042*3.28* 6088.84*0.7+0.00042*30*6088.84*0.3=5.87+23.02, a total increase of about 2.9 billion yuan in costs.

Combined calculations, the total increase in profits of the thermal power industry is approximately 17.6 billion yuan. However, the thermal power industry's financial costs have generally increased. According to the Wind data, the thermal power industry's financial expenses in 2011 increased by 23.28% year-on-year, which is much higher than the 4.11% increase in management expenses during the same period, far more than the 0.68% in 2010 (before November 2010). The level is expected to significantly erode profits, which is estimated to erode profits by about 2 billion yuan. According to Wind data, the total profit of the thermal power industry in the first three months of 2011 was 2.476 billion yuan. In a simple comparison calculation, the total profit in the first quarter of this year will increase by about 5 times year-on-year. It can be expected that the substantial increase in total profits of the thermal power industry in the first quarter of this year is relatively clear.

Huaneng Power's ESP in the first quarter is expected to be about 0.1 yuan. In view of the leading Huaneng Power of the thermal power industry, its first-quarter performance in this year is expected to show a significant year-on-year growth. The company sold 71.134 billion kwh of electricity in the first quarter of last year. Assuming a 7.5% increase in the first quarter of this year, the first quarter of this year is expected to generate 76.469 billion kwh. According to the company’s announcement, the average on-grid tariff started on December 1 last year was increased by 2.88 points/kWh. Based on this calculation, the company will increase revenue by RMB 2.202 billion.

In addition, according to the above-mentioned thermal coal price and contract coal price increase this year (assuming a 4% increase of 24 yuan per ton, and assuming that the company’s market coal and contract coal account for 60% and 40% each), the company’s cost for the first quarter of this year is estimated. The year-on-year increase will be: 0.00042*3.28*764.69*0.6+0.00042*24*764.69*0.4=0.63+3.08=3.71 billion yuan.

Comprehensively, the company's EBIT is expected to increase by 1.831 billion yuan in the first quarter, and the total profit will increase by 1.52 billion yuan after deducting 17% of VAT. After removing 25% of the income tax, the net profit will increase by 1.14 billion yuan per share. The income is about 0.081 yuan. In other words, only the increase in on-grid tariffs at the end of last year would increase the company’s earnings per share by 0.081 yuan. Assuming that the company's earnings per share for the first quarter of last year were unchanged at 0.02 yuan, the company's earnings per share for the first quarter of this year is expected to reach 0.101 yuan, which is an increase of about 4 times year-on-year.

From the current point of view, the uncertainty is whether the company's year-on-year increase in electricity sales can reach 7.5%, and how much the company's contracted coal prices increase. In addition, from the last year's annual report, the company’s financial expenses have grown by a large margin, and this factor may have a negative impact on the results of the first quarter of this year.