Datang Power on the cusp of removing a big drag on its profitability

The sale could rack up around RMB79b.

According to Barclays, they believe Datang Power is mulling over removing a key drag on its investment case, the coal-to-chemicals business. A potential asset disposal pursuant to an agreement signed in July 2014 could lead to both a debt reduction and a strengthening of its earnings profile with the de-consolidation of this loss-making business. Its profitability in the power business continues to be sector-leading.

Here's more from Barclays:

Despite a share price rally since July when the deal was announced, it is trading at a 30% discount to its 10-year average P/B, even before any potential positive earnings impact from the disposal. We increase our 2015 and 2016 earnings estimates by 18-20% due to a higher-than-expected rate of interest capitalization and lower-than-expected minority interest.

Datang Power asset sale could boost earnings: We estimate that a stake sale could be worth between RMB12bn and RMB79bn, based on our scenario analysis. This could be a positive catalyst and lead to 5-46% potential earnings upside for Datang in 2015 from our base case forecasts. We have not incorporated this in our estimates at this time.We believe Datang Power is on the cusp of removing a key drag on its investment case, the coal-to-chemicals business.

A potential asset disposal pursuant to an agreement signed in July 2014 could lead to both a debt reduction and a strengthening of its earnings profile with the de-consolidation of this loss-making business. Its profitability in the power business continues to be sector-leading.

Despite a share price rally since July when the deal was announced, it is trading at a 30% discount to its 10-year average P/B, even before any potential positive earnings impact from the disposal. We increase our 2015 and 2016 earnings estimates by 18-20% due to a higher-than-expected rate of interest capitalization and lower-than-expected minority interest.

We estimate that a stake sale could be worth between RMB12bn and RMB79bn, based on our scenario analysis. This could be a positive catalyst and lead to 5-46% potential earnings upside for Datang in 2015 from our base case forecasts. We have not incorporated this in our estimates at this time.

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