A high-yield hydro play with upside from thermal tariff hike
长江电力(600900)
Yangtze reported in-line 1H17 results with net profit up 7% yoy. Yangtze will enjoya higher tariff for its inter-provincial power sales in 2H17 thanks to a thermal tariffhike in July. Furthermore, it may also benefit from another round of thermal tariffhikes at year end. The company also has further room for financial cost savingsas the mgmt aim to lower their debt/asset ratio to 30%. We maintain Buy onYangtze due to its unique dividend commitment supported by highly predictablecash flows which generate a an attractive 4.3% 2017E yield.
1H17 results in line
Yangtze's net profit was up 7% yoy to Rmb8.1bn in 1H17, in line with our forecast.The growth is mainly driven by cost savings (SG&A -18% yoy; financial cost -13%yoy) and investment gains (+82% yoy), partially offset by weaker net output (-4%yoy). Generation declined in Three gorges (-11%) and Gezhouba (-4%) due to weakwater flows and slightly increased in Xiluodu and Xiangjiaba (+4%). Free cashflow reached Rmb10bn in 1H17.
Key takeaways from conference call
Tariff: Mgmt expect a higher tariff in second half for their inter-provincial powersold by Xiluodu and Xiangjiaba to Shanghai and Guangdong thanks to the thermaltariff hike on 1 July. There is further room for tariff hikes if the fuel cost passthroughfor thermal plants is executed at year end.
Power output: Mgmt expect full-year output to reach 191-200 bn kwh. Thegeneration was impacted by a typhoon in July-Aug but has started to recover inSept. Market-based volume is expected to rise over the next few years.
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