Huaneng RE eyes 2,000 wind utilization hours in 2015

Following weak wind speed in 2014.

After weak wind speed in 2014, with Huaneng RE's wind utilisation falling to 1,875 hours (down 7.6% y-y), management expects wind utilization to rebound to ~2,000 hours in 2015F.

According to a research note from Nomura, this projection is due to potential wind speed recovery in 2015F and an improvement in wind curtailment from 7.8% in 2014 to ~7% in 2015F by allocating more new capacities in non-curtailing areas.

Based on management’s comments, Nomura believes the company will achieve a good start in 2015F, with wind power generation in Jan/Feb/Mar to be up by 7.3%/28%/30% y-y, implying a wind utilisation growth of ~6-8%.

Currently, in Nomura's model, it assumes 2015F wind utilisation to be at 2,020 hours, slightly higher than management’s guidance.

Here's more from Nomura:

2GW capacity growth in 2015F; no change from previous guidance - The company guided for a total capacity addition of 2GW in 2015F, with 1.8GW from wind (23.9% capacity growth) and 0.2GW from solar, consistent with the previous guidance. Among the company’s new wind power capacity, three batches with 0.6GW each will be commissioned in 1H15/3Q15/4Q15.

Overall, we see some earnings upside potential to our estimates, given the new capacity is targeted to commission earlier than our current model assumption (we currently assume majority of the capacity to be commissioned starting from Sept-15). Management expects wind capacity addition to be stable at ~1.5GW pa during the 13th Five-Year Period (2016-20F).

Immaterial impact from future wind power tariff cut - Management expects the impact of the CNY0.02/kWh tariff cut effective from 1 January 2016 to be immaterial, given: 1) 76% of 2014 approved projects; 2) 70% of un-constructed projects with four batches of national pre-approval plans; and 3) 85% of the proposed projects under the 5th batch of national pre-approval plans, are located in Zone IV which has no tariff adjustments.

Though the company also acknowledges the possibility for further tariff cut in future, management believes that the government will assure a reasonable return for wind operators in order to encourage continuous investment amid considering any tariff adjustment plan.

Stable repair and maintenance (R&M) expense in 2015F - Despite the increasing wind power capacity out-of warranty period, R&M expenses in 2014 were down 7.6% y-y. According to management, during 2014, some R&M expenses were classified as “other operating expenses” categories instead of R&M, and some R&M expenses which were related to technological upgrade were capitalised.

As such, if 2014 adopts the same approach as in the previous year, R&M expenses were actually up 15% y-y in 2014. For 2014/15F, there were/would be 1.1GW and 1.4GW wind power capacities, respectively, to be out-of-warranty period, according to the original warranty period mentioned in the contract.

However, after negotiations between the company and wind turbine makers, only 60MW was treated as out-of-the warranty period in 2014. According to management, this situation is likely to continue into 2015F.

Financing cost trending down amid interest rate cuts - With net gearing at 246% by end-2014, we expect the company to be a major beneficiary of any potential interest rate cuts. Further to the 40bps and 25bps interest rate cuts in November 2014 and February 2015, respectively, management believes the effective interest rate will be down by 50bps, from the current 5.82% to 5.32%.