Please ensure Javascript is enabled for purposes of website accessibility

Not Huaneng Power's Finest Hour

By Toby Shute – Updated Apr 5, 2017 at 9:36PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Chinese power producers face a full-blown coal crunch.

Here in Fooldom, when we talk about corporate social responsibility, we're typically referring to practices that ensure sustainable profit growth over the long haul. In China, that notion of social responsibility has been turned on its head.

Over there, it's become akin to a civic duty for companies to provide an uninterrupted flow of goods and services at below-market prices. To do otherwise would further stoke inflation, which was galloping at about an 8% clip in the first quarter. For the companies operating at a loss, the best one can hope for is either a buyout by a more politically favored competitor, or the sort of subsidy recently awarded to China Petroleum & Chemical (NYSE: SNP) -- and withheld from pickled PetroChina (NYSE: PTR).

Another company feeling the pinch is Huaneng Power (NYSE: HNP), the country's largest independent power producer. While Chinese refiners are getting reamed by the ramp in oil prices, Huaneng is getting clocked by the cost of coal. In the first quarter, the company dutifully generated over 18% more power than last year. The reward? An 80% drop in net profit.

A lot of smart Fools view this squeeze as temporary. And it is, of course. Either coal prices will cool (not looking very likely this year), or the government will allow utilities to raise their prices somewhat.

Speculation about the latter was prevalent in the business press yesterday. That chatter, combined with news of a Chinese tax reduction on stock trading that looks to have lifted shares of everyone from Aluminum Corporation of China (NYSE: ACH) to China Life Insurance (NYSE: LFC), delivered a pretty stunning gain for Huaneng's shares yesterday. Who knew investing in utilities could be so exciting?

Huaneng is, by all accounts, one politically favored company that will emerge from the current coal crisis intact. Between this knowledge and the company's delicious dividend, that may be enough to assuage investors during this tumultuous time.

As for me, I prefer companies with a little more control over their own destiny.

Related Foolishness:

Huaneng Power is both a Rule Breakers recommendation and an Income Investor pick. The two services offer quite distinct, but rosy, views of the company's future and you can check out either write-up, along with all other past recommendations, with a 30-day free trial of either service.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Huaneng Power International, Inc. Stock Quote
Huaneng Power International, Inc.
HNP
$18.73 (-3.48%) $0.68
PetroChina Company Limited Stock Quote
PetroChina Company Limited
PTR
$43.03 (-1.36%) $0.59
Aluminum Corporation of China Limited Stock Quote
Aluminum Corporation of China Limited
ACH
$8.75 (-6.92%) $0.65
China Petroleum & Chemical Corporation Stock Quote
China Petroleum & Chemical Corporation
SNP
$43.60 (-0.91%) $0.40
China Life Insurance Company Limited Stock Quote
China Life Insurance Company Limited
LFC
$6.61 (-0.45%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.