国投电力(600886)

Better earnings stability than a thermal peer, more upside than hydro peers

SDIC enjoys higher earnings visibility, as well as stability, than thermal powerpeers, due to its 57% capacity exposure to hydropower. Over 2016-1H17,almost all the earnings came from the hydro segments. Meanwhile, SDIC’sthermal business can also benefit from accelerating supply-side reform andyear-end tariff hikes. We expect SDIC to turn FCF positive starting in 2018,thanks to earnings recovery and better capex discipline, indicating potentialupside to our assumed 35% payout ratio and dividend yield of 3%. Relative toYangtze Power, SDIC is an overlooked A-share hydro name, with an attractivevaluation and similarly strong hydro capacity pipeline. Reiterating Buy.

Positive tariff outlook, better capex discipline, improving free cash flow

SDIC’s 1H17 results were slightly below expectation, with a 13/37% yoydecline in reported/recurring net profit, but still much better than thermalpeers, which are near breakeven. Thermal tariff recovered by 7.5% yoy, due toa lower DPS discount. Hydro tariff dropped 6% yoy in 1H17 but the decliningtrend slowed in the second quarter. Management expects the discount tonarrow going forward, with less competition from peers. Furthermore, its interprovincialhydro power sales tariff should benefit from the thermal tariff hike inJuly and potentially another round at year-end. In response to supply-sidereform, SDIC is delaying three coal-fired generation units (total 3GW) and plansno other thermal capacity additions over 2017-19E. We expect its free cashflow to reach c.Rmb8.0bn in 2018/19E, supporting a stable dividend outlook