Huaneng Power: Brownouts Ahead

Build it and they will come. Build too much of it, and sometimes the repo men will come. I'm certainly not suggesting that HuanengPower (NYSE: HNP  ) is in that much trouble, but it does look like this Chinese power company will have to navigate falling utilization rates in the near term.

This large power utility reported decent first-half results, by and large. Revenue rose a bit more than 5% as the company benefited both from higher generation and some rate relief.

Huaneng saw real benefit, though, on the expense lines. Fuel costs were nearly flat in aggregate and fell on a per-unit basis. Likewise, depreciation expense growth trailed revenue growth, and maintenance expense actually fell. That ultimately translated into 25% growth in operating income and 29% growth in first-half profits.

As you can imagine, that fuel-cost news is welcome for shareholders -- rising fuel costs have been a problem for this company for a little while now, and the combination of easing coal prices and higher tariffs will help. But just as one problem eases, another is cropping up. Power companies have been adding a lot of capacity in the eastern areas of China, and it looks like utilization rates will start falling. Over the long haul, I'm sure consumption will suck up the surplus capacity, because that's pretty much what always happens. In the meantime, though, it could make for rougher sailing.

So what should investors who want a piece of China do? Well, there are certainly other large companies out there like China Mobile (NYSE: CHL  ) and China Life Insurance (NYSE: LFC  ) , though the latter seems pretty pricey to me. There are also ideas further off the beaten path in Pink Sheet-land, like Swire Pacific, HarbinPower Equipment, or Esprit, which could at least be worth a look.

Huaneng will be OK for the long run, and patient investors might still want to consider it today. But just remember that not every Chinese investment idea is a golden ticket to easy money.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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Related Tickers

10/25/2016 4:02 PM
HNP $24.95 Up +0.37 +1.51%
Huaneng Power CAPS Rating: **
CHL $58.30 Down -0.31 -0.53%
China Mobile CAPS Rating: ****
LFC $12.90 Down -0.04 -0.31%
China Life Insuran… CAPS Rating: **