Huaneng Power (HNP): China energy giant

By Paul Goodwin, Editor of Cabot China & Emerging Markets Report
From Cabot Wealth Advisory 4/2/13. Sign up for Free Cabot Wealth Advisory

For my stock pick today, I choose Huaneng Power (HNP), the Chinese energy giant that turns coal into electricity. And with 48 power plants in 19 Chinese provinces and one in Singapore, the company burns a lot of coal.

With a market cap of over $15 billion and annual sales of over $21 billion, Huaneng Power is a big player in the Chinese energy picture. While the government would like to move toward renewable sources like wind and solar power, the enormous demand for increasing amounts of electricity (and the huge reserves of coal in China) make it a practical necessity to use what’s available.

Huaneng has an active program to mitigate its impact on air pollution, including the first-in-the-world generating plant to use seawater as a desulfurization agent. The company’s new plants also use super-critical combustion technology to increase efficiency and reduce CO2 emissions. But for now, the big story for Huaneng is its buying power for coal and its active program of new plant construction.

The company’s earnings per share have gone from about $1.25 five quarters ago to $2.73 in the latest quarter. The stock also pays a small dividend (0.6% forward annual yield). But the most impressive thing about Huaneng Power in many ways is its stock chart. HNP bottomed at 15 in October 2011 and has climbed steadily as earnings have improved. HNP is now trading above 43, and looks to have more coal for its boilers.

This is a thinly traded stock (just 63,000 shares per day on average) so volatility is potentially high. Short interest is at a reasonable 3.5 days of trading, which is neither threatening nor a short-covering opportunity. HNP is a good play on the global demand for electrical power in general and the still-robust growth of China in particular. I think it’s buyable on a pullback to 41. A drop to 38 would be bearish.

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