15 February 2008

Huaneng Power International - HNP - A Zacks Top 10 for '08

Zacks teasing pitch for HNP:

Stock #4: Chinese power company becomes more powerful. They increased power generation by double digits in a country that's thirsting for consumable energies.

Click on today's HNP chart below to fill up your monitor with historical price goodness.

As you can see, HNP's stock price has been beaten down as of late, towards its 52-week low.

Here's what Morningstar analyst Paul Justice thinks of HNP:

Huaneng Power International is the largest independent electricity producer in China. Due to strong growth in demand for electricity and an aggressive acquisition strategy, Huaneng has enjoyed robust demand growth in recent years. Now that government appears willing to link electricity prices more closely to coal prices, after a few years of rapid and uncollected cost increases, Huaneng appears ready to harvest substantial profits for several years and deliver hefty returns to risk-tolerant investors.

We expect demand for electricity in China to increase at a rate of about 10% annually during the next several years, providing Huaneng with a solid operational tail wind. To make things even better, most of Huaneng's power plants service the more developed eastern portion of China, where electricity demand is consistently strong.


As it is controlled by HIPDC (Huaneng International Power Development Corporation), a state-owned company, and has strong relationships with the central and local governments in China, Huaneng has been able to build a portfolio of about 25 power plants, most of which are protected from significant competition.

Typically, the price of this protection from competition is strict regulation of the amount and timing of electricity generation and rate-setting. This is the case for Huaneng, which has little control over the price at which it sells its electricity. If costs increase significantly, the company might not be allowed to pass these higher costs on to its customers. Not only is such an event a risk, it has also been a reality in the last year, when coal prices skyrocketed but Huaneng was unable to raise prices in step, leading to a return on invested capital that failed to match the company's cost of capital. We expect coal prices to wreak less havoc on Huaneng going forward, which, accompanied by strong revenue growth, should push Huaneng's operating margins higher during the next decade.

So it seems that the price of HNP shares is down thanks to the overall decline in the price of shares in Chinese companies, combined with the recent increases in the price of coal.

The Hang Seng index is back to levels last seen in July. Of course, the index climbed 50% and then plummeted back over the course of the last six months or so.

With regards to the price of coal, Goldman Sachs today called a top on the price of coal, which should be good news for a coal consumer like HNP.

From the Marketbeat blog at WSJ:

February 15, 2008, 4:05 pm
Four at Four: Letting It Steep
Posted by Tim Annett
Coal stocks got burned up Friday after analysts at Goldman Sachs downgraded the sector to 'cautious' from 'neutral.' The problem in Goldman's eyes? Coal has come too far, too fast. "A perfect storm of international supply problems has driven U.S. coal pricing — and coal stocks — to record levels," Goldman wrote. Indeed, coal stocks have been beating the market by a healthy margin, gaining about 30% since the middle of last month, versus a 3% increase over the same period for the Russell 3000. Consol Energy shares dropped 6% after Goldman cut the stock to "neutral" and removed it from its conviction buy list. Peabody Energy, likewise cut to "neutral" by Goldman, tumbled 2.5%

From CNBC:

7:07 PM ET
14 minutes ago
Dow, S&P and NASDAQ Turn in a Positive Weekly Performance Despite Negative News
Posted By:Gina Francolla | Yolaiki Gonzalez | Giovanny Moreano
Topics:Commodities | Stock Market

-Central Appalachian Coal that trades on the NYMEX is up 50% in 2008.
*Coal producers fell today on the Goldman downgrades due to historic multiples and the run up in commodity prices that are most likely at a top. Foundation Coal is trading at a P/E of 72.1.

Keith Fitz-Gerald from Moneymorning.com gives seemingly conflicting advice in suggesting shares of HNP. He touts the stock in spite of his thesis that the price of coal is going to double, contradicting the Goldman outlook.

A good ancillary play on coal is Huaneng Power International Inc. (HNP). Huaneng Power is a major China power producer - meaning it's also a big user of coal.

At yesterday's close at $34.57, Huaneng's share price is near its 52-week low of $31.92 and is well off its 52-week high of $57.50. According to Fitz-Gerald, rising coal prices have played a part in Huaneng's share-price decline.

Fear not, Fitz-Gerald says. China's central government would never allow a major power producer to fail. And the share price will rebound and grow as China's economy advances, he said.

Plus, Huaneng's stock pays a $2.70 a share dividend, giving the stock a yield of about 8%. In a market as volatile as this one has been, owning income-producing shares is crucial for investors who want to maximize their portfolio profits, according to Fitz-Gerald.

HNP has a PEG of 0.6 according to Morningstar. That's better than its sector competition.

My take is HNP has many attractive attributes:

• Low PEG;
• Beaten-down share price that looks like it may have bottomed out;
• Generous dividend approaching 8%;
• Goldman-endorsed top call on coal prices; and
• The continued growth of China after a significant but healthy market correction.

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