Huadian Power International Corporation Report Interpretation

Overview

The report reviews Huadian Power International's second-quarter and first-half 2026 results. Although earnings exceeded BofA's forecast due to better-than-expected tariff performance and increased carbon trading income, lower power generation, rebounding coal prices, weaker cash flow, and high leverage remain pressures. BofA therefore maintains its Underperform ratings on both the H-shares and A-shares.

Core views

Huadian Power International's 1H26 net profit before perpetual securities was RMB3.1bn, down 20.5% year over year, implying 2Q26 earnings of approximately RMB1.3bn, down 31% year over year but above BofA's previous forecast of RMB989mn. Excluding one-off items, core profit declined 18% year over year. The earnings beat did not come from growth in power generation but was mainly driven by two factors: first, the implied blended tariff in 2Q26 increased by approximately 1.2% year over year, significantly better than BofA's original expectation of a 1% to 2% year-over-year decline; second, carbon trading-related income increased substantially, driving a 723% year-over-year increase in non-operating income. The relative resilience of tariffs was an important support for the period's results. The blended tariff in 1H26 rose 0.2% year over year, while peers recorded declines of 5% to 7% over the same period; compared with a 2.6% year-over-year decline in 1Q26, tariffs improved significantly in 2Q26. By power source, the coal-fired tariff edged down 0.9% year over year to RMB461/MWh, while the gas-fired tariff rose 5.8% year over year to RMB869/MWh. However, power generation was weak: total power generation in 2Q26 fell 13% year over year, with coal-fired, gas-fired, and hydropower generation declining by 11%, 19%, and 12%, respectively. Therefore, the earnings improvement mainly came from pricing and non-operating income rather than volume expansion. Fuel costs temporarily declined in the first half, but the report believes this trend is unlikely to continue. In 1H26, unit fuel costs for coal-fired units declined 0.9% year over year to RMB250/MWh, unit fuel costs for gas-fired units fell 4.2% to RMB513/MWh, and the average standard coal price declined 2.0% to RMB833.75/tonne. Meanwhile, quarter-to-date spot coal prices have risen 24% year over year. Based on this, BofA expects coal costs to weigh on earnings again in 3Q26 and identifies rising fuel costs, declining tariffs, and pressure on utilization hours as the core reasons for maintaining its Underperform rating. Cash flow and the capital structure also failed to improve despite the earnings beat. In 1H26, operating cash flow declined 41% year over year to RMB9.1bn, capital expenditure fell 27% year over year to RMB4.2bn, and free cash flow still decreased by RMB4.8bn year over year to RMB4.9bn. During the same period, the company added 1.1GW of gas-fired generation capacity. The net debt-to-equity ratio rose to 126% at the end of June, up from 123% at the end of 2025, reflecting leverage pressure amid expansion spending and weaker earnings. The model further forecasts 2026 operating cash flow of RMB18.020bn, capital expenditure of RMB18.861bn, negative free cash flow of RMB841mn, and net debt rising to RMB131.207bn. Regarding shareholder returns, the company announced an interim dividend of RMB0.09 per share, unchanged from the same period last year; the payout ratio increased from 27% in 1H25 to 36%. Contributions from renewable energy associate investments declined: as of the end of June, Huadian Power International held a 27% stake in Huadian New Energy, and its 1H26 investment income was RMB945mn, down 49% year over year. The report believes this reflects persistent earnings pressure in the renewable energy industry, consistent with peer trends. BofA's model forecasts adjusted net profit of RMB3.750bn and EPS of RMB0.323 in 2026, with EPS declining 31.9% year over year; the Visible Alpha consensus EPS estimate is RMB0.28. Adjusted net profit for 2027 and 2028 is forecast at RMB3.843bn and RMB4.086bn, respectively, with EPS of RMB0.331 and RMB0.352 and growth rates of 2.5% and 6.3%, respectively, indicating only a slow recovery after the significant step-down in earnings in 2026. Revenue and operating profit in 2026 are forecast at RMB120.292bn and RMB5.843bn, respectively, both below 2025 levels. Regarding valuation, the H-share target price of HKD3.50 is based on a target price-to-book ratio of 0.65x. The report believes that, given the high volatility of earnings, the price-to-book ratio better captures short-term market opportunities, and its historical trend has a relatively close relationship with the forward ROE of the covered Chinese independent power producers. The valuation section uses a forecast 2026 ROE of 7.6% to determine the target price-to-book ratio, but the financial forecast table lists a 2026 ROE of 5.3%, indicating a discrepancy between the two figures. The A-share target price of CNY4.10 is based on a 32% premium to the H-shares. These target prices were set on April 9, 2026, and are both below the current H-share and A-share prices of HKD3.98 and CNY4.61 stated in the report. Regarding risk scenarios, if Chinese coal prices rise faster than expected due to economic growth, absolute earnings and the share price may remain under pressure. Even if the company outperforms peers due to potential coal asset acquisitions, its absolute share price could still decline because of lower overall earnings. The report also notes that the company has yet to demonstrate execution capabilities in coal-related assets, projects or acquisitions may underperform expectations, and expansion may require equity financing. Conversely, performance could exceed the report's expectations if upstream coal assets commence production ahead of schedule or if the company successfully acquires more attractive coal or power assets.

Analysis framework

The report first derives standalone second-quarter earnings from first-half profit and compares them with BofA's forecast and core profit excluding one-off items. It then decomposes the earnings beat by power generation, tariffs, unit fuel costs, and non-operating income before examining cash flow, capital expenditure, dividends, investment income from associates, and changes in leverage. Finally, combining its 2026—2028 earnings forecasts, it determines the H-share target price using the historical relationship between price-to-book ratios and ROE, derives the A-share target price using the A/H-share premium, and sets out risk scenarios involving coal prices, asset execution, and financing.

Methodology notes

• Valuation MethodPB valuation

  Target Price-to-Book Valuation

  The report values the H-shares at a target price-to-book ratio of 0.65x because Huadian Power International's earnings are highly volatile, while the historical price-to-book ratios of Chinese independent power producers have shown a strong relationship with forward ROE performance.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of Power Generation, Tariffs, and Unit Fuel Costs

  The report separately analyzes power generation, tariffs for different power sources, and unit fuel costs to determine whether profit changes came from volume, price, or costs, thereby confirming that the period's earnings beat was mainly driven by tariffs and carbon trading income.

• Corporate Fundamentals and Financial FrameworkFree cash flow analysis

  Operating Cash Flow Less Capital Expenditure

  The report measures free cash flow as operating cash flow less capital expenditure to assess whether earnings can cover expansion investment; 1H26 free cash flow declined to RMB4.9bn, and the model forecasts negative RMB841mn for 2026.

• Corporate Fundamentals and Financial Framework

  iQmethod Standardized Financial Metrics

  The report uses BofA's iQmethod standardized definitions for metrics such as ROE, operating margin, cash realization ratio, asset replacement ratio, and net debt-to-equity ratio to maintain consistency across historical forecasts and intercompany comparisons.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Huadian Power International H-shares (01071.HK)

  Second-quarter results beat expectations, but rising coal prices, lower power generation, and earnings pressure led the report to maintain its Underperform rating.

  Strengths

  Blended tariff performance was significantly better than peers, carbon trading income increased, and the interim dividend remained stable.

  Weaknesses

  Power generation declined, cash flow weakened, renewable energy investment income fell, and the net debt-to-equity ratio rose to 126%.

  Comparison

  The 1H26 blended tariff rose 0.2% year over year, while peers declined 5% to 7% over the same period; the target price is HKD3.50 versus the current price of HKD3.98.

  Risks

  A larger-than-expected increase in coal prices, weaker-than-expected execution of coal assets, and equity financing required for expansion.

• Huadian Power International A-shares (600027.SS)

  The operating fundamentals are the same as for the H-shares, while the A-share target price is derived using a 32% premium to the H-shares; the rating is also Underperform.

  Strengths

  Benefits from tariff resilience, carbon trading income, and the potential commencement or acquisition of upstream coal assets.

  Weaknesses

  Earnings are expected to decline significantly in 2026, free cash flow is forecast to turn negative, and fuel cost pressure may intensify in the third quarter.

  Comparison

  The target price is CNY4.10 versus the current price of CNY4.61; the target price applies a 32% premium to the H-shares.

  Risks

  Rising coal prices, declining utilization hours and tariffs, delays in asset acquisitions or commissioning, and potential equity financing.

Key data

• 1H26 Net ProfitRMB3.1bnNet profit before perpetual securities, down 20.5% year over year
• 2Q26 Implied EarningsRMB1.3bnDown 31% year over year, above BofA's RMB989mn forecast
• 2Q26 Core Profit-18% YoYExcluding one-off items
• 2Q26 Implied Blended Tariff+1.2% YoYBofA previously expected a 1% to 2% year-over-year decline
• 1H26 Blended Tariff+0.2% YoYPeers declined 5% to 7% over the same period, while 1Q26 was down 2.6% year over year
• Impact of Carbon Trading-Related Income+723% YoYDrove a substantial increase in non-operating income
• 2Q26 Total Power Generation-13% YoYCoal-fired, gas-fired, and hydropower generation declined by 11%, 19%, and 12%, respectively
• Coal-fired and Gas-fired TariffsRMB461/MWh / RMB869/MWhDown 0.9% and up 5.8% year over year, respectively
• 1H26 Coal-fired and Gas-fired Unit Fuel CostsRMB250/MWh / RMB513/MWhDown 0.9% and 4.2% year over year, respectively
• Quarter-to-Date Spot Coal Price+24% YoYBased on this, the report expects 3Q26 earnings to face fuel cost pressure
• 1H26 Operating Cash Flow and Free Cash FlowRMB9.1bn / RMB4.9bnOperating cash flow declined 41% year over year, while free cash flow decreased by RMB4.8bn year over year
• 1H26 Capital ExpenditureRMB4.2bnDown 27% year over year
• New Gas-fired Capacity1.1GWCapacity added in 1H26
• Interim DividendRMB0.09/shareUnchanged year over year, with a payout ratio of 36% versus 27% in 1H25
• Investment Income from Huadian New EnergyRMB945mnDown 49% year over year in 1H26; Huadian Power International held a 27% stake at the end of June
• Net Debt-to-Equity Ratio126%At the end of June 2026, versus 123% at the end of 2025
• 2026E Adjusted Net Profit and EPSRMB3.750bn / RMB0.323EPS down 31.9% year over year; Visible Alpha consensus EPS estimate is RMB0.28
• H-share Target Price-to-Book Ratio0.65xThe valuation section uses 2026E ROE of 7.6%; the financial forecast table lists ROE of 5.3%
• H-share/A-share Target PricesHKD3.50 / CNY4.10The A-share target price is based on a 32% premium to the H-shares

Impact & implications

The report believes that the second-quarter earnings beat mainly reflected temporary improvements from tariffs and carbon trading income and did not alter the fundamental trends of declining power generation, rebounding fuel costs, and weakening cash flow. The 24% year-over-year rise in spot coal prices implies that third-quarter margins may come under renewed pressure, while high leverage, potential equity financing, and execution risks related to coal assets limit valuation upside. BofA therefore maintains its Underperform ratings on both the H-shares and A-shares.

Risks

• Chinese coal prices may rise faster than expected due to economic growth, further reducing the profitability of the power generation business.
• Even if potential coal asset acquisitions help the company outperform peers, its absolute share price may still come under pressure due to lower overall earnings.
• The company has yet to demonstrate execution capabilities in coal-related assets, and commissioning or acquisition progress may fall short of expectations.
• Expansion may require equity financing, creating financing and dilution pressure.
• Upside risks include upstream coal assets commencing production ahead of schedule or the successful acquisition of more attractive coal or power assets.

What to watch

• Monitor further information following the results briefing at 3:00 p.m. Hong Kong time on August 28, 2026.
• Track whether the rise in spot coal prices translates into higher unit fuel costs in 3Q26.
• Monitor tariff resilience, utilization hours, and subsequent changes in coal-fired, gas-fired, and hydropower generation.
• Monitor the commissioning progress of upstream coal assets, execution of coal-power asset acquisitions, and whether equity financing will be required.