by Robert Hsu | March 19, 2012 9:00 am
Our new buy recommendation this month is the largest publicly listed power company in China, Beijing-based Huaneng Power (NYSE:HNP). Huaneng operates power plants throughout China, with a large concentration of facilities in Singapore and the economically prosperous eastern coastal region.
The company is a major beneficiary of China’s economic growth and increasing usage of electric power. It also is a beneficiary of a major trend taking place in China since 2009: the re-emergence of state-owned-enterprises (SOEs).
To combat the global financial crisis during 2009 and 2010, many large SOE’S such as Huaneng were given huge bank loans to stimulate spending. HNP used this capital to acquire and develop new power assets in the past three years, further cementing its leadership position in the power industry. The company also has expanded vertically, securing more coal and natural gas for power generation.
One of the key growth sectors in the Chinese economy is power usage. In 2011, the company’s power production in China grew by 22%, more than twice the country’s 9.2% GDP growth. Although energy pricing is regulated by the government, Huaneng was allowed to increase its electricity rate in December last year. With the Chinese inflation rate under control, Huaneng will likely have more power to raise prices in the future.
Even with a slowdown in China’s GDP growth rate this year to around 8%, expect to see another year of strong growth for electricity usage this year. As a monopolistic energy provider, Huaneng is well positioned to benefit from this trend.
In addition to strong growth potential, the company pays a nice dividend yield of 4%. The company is expected to release its earnings report March 20, and since I expect a solid report from Huaneng, shares should be bought before the report.
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