China IPPs:A follow up on tariff hike sensitivity

FY18E EPS sensitivity analysis to tariff hike: Huaneng/Huadian the mostsensitiveWe derive our sensitivity analysis on our base-case scenario: assuming unitfuel cost to rise 20% and fall 5% in FY17/18, and tariff to be flat/up 7-8% inFY17/18, respectively. For thermal IPPs, each 1% tariff hike would enhanceFY18E EPS by 4-9% in our view. On our estimates, Huaneng Power (8.6%) andHuadian Power (7.4%) are more sensitive to tariff change due to higheroperating/financial leverage, followed by Datang (4.9%); while CRP (3.8%) andCPI (3.7%) are relatively less sensitive, mainly mitigated by their higherrenewable exposure. For wind IPPs with coal exposure, each 1% tariff hikewould enhance FY18E EPS by 1% for Longyuan and 1.5% for Huadian Fuxin inour view.

    Thermal tariff hike also positive for wind power’s cash flowA thermal tariff hike, if it happens, would reduce the renewable subsidy need(for wind/solar/biomass) by an equivalent amount. Assuming a national avg.

    thermal tariff of Rmb0.37/kWh (excl. VAT), each 1% tariff hike could reduce therenewable subsidy fund deficit by c.Rmb2bn on our estimates. ForLongyuan/Huaneng Renewables/Fuxin, each 1% tariff hike could enhance theirannual wind cashflow by around Rmb150m, Rmb90m and Rmb70m in FY18E,as they receive benchmark thermal tariff on a monthly basis with subsidiesbeing paid with delays.