Why China Power International Development stands out in China's IPP sector

Thanks to 'decent hydropower exposure'.

Despite Nomura becoming more cautious on the China IPP sector, it noted that it envisages China Power International Development (CPID) as the preferred pick across the sector.

According to a research note from Nomura, it cited several potential catalysts ahead for the stock: higher-than-peers’ unit fuel cost drop in 2015F; a visible capacity growth pipeline with potential for parent asset injection; decent hydropower exposure with potential hydropower tariff hike and strong dividend yield.

Nomura noted that CPID remains as its top pick in the China IPP sector.

Here's more from Nomura:

2015F unit fuel cost guidance: Down ~5% vs. CR Power of ~1% - Further to the 16.2% y-y unit fuel cost drop in 2014, it is difficult for us to envisage a similar magnitude of decline in 2015F.

For 2015F, CPID estimates total coal demand to be 21mn tons, with 18mn tons of coal having already been signed under contracts (with coal price to be reset on a quarterly or even on a monthly basis); while the remaining to be sourced from the spot market directly.

Overall, CPID expects its 2015F unit fuel cost to be down by ~5%. CPID’s guidance is higher than our current assumption of 3.7%, and also higher than the 1% drop guidance from CR Power.

Despite the potential on-grid coal-fired power tariff cut, CPID appears confident that it can maintain the same level of dark spread of >CNY170/MWh for 2015F and onwards.

Utilization: Potential downside from the 2014 level - Given: 1) weak power demand growth (at 4% in 2015 per CPID’s estimate) amid domestic economic slowdown; but 2) continuous new power capacity (100GW in 2015 per CPID’s estimate), on a national basis, management expects a further decline in utilisation in 2015F. Management expects a flat or a slight y-y decline in average utilisation in 2015F.

Specifically for hydropower generation, with ample water reserves since end-2014, hydropower generation was strong for 2015 YTD. That said, visibility for 2015F rainfall and in turn, hydropower utilisation, is still relatively low.

With 2014’s hydropower generation at 15% higher than the 1925-2014’s historical average, the company preliminarily expects 2015F utilisation to be slightly lower than the 2014 level, but higher than the historical average.

Currently in our model, we assume a 10% decline in hydropower utilisation in 2015F. Overall, despite the potential drop in utilisation hours, power generation growth should remain positive, thanks to contributions from the new generating capacities.

Solid project pipeline with potential from parent asset injection - During 2015F, CPID targets to commission Pingwei III (2 x 1,000MW coalfired power project), with units 1 and 2 to come in June and Sep 2015. For clean energy, CPID targets to commission ~160MW for wind and hydropower.

In addition, at present, within the CPI Group, the ratio of power generation asset in the listed company level is relatively low vs. other power generation group in China, probably at <20% for CPI Group. As such, we always envisage the parent’s asset injection as an alternative plan for CPID to increase its capacity.

However, since CPI Group is now undergoing a change of chairman, we believe any parent asset injection plan will only be realized after the appointment of the new chairman, which will probably be in 2H15. Overall the company maintains its long-term target, with 2020F attributable capacity to be 30GW, among which >30% is from the clean energy power generation.