CITIC Securities Research: CHINA POWER's profits last year were below expectations, but the dividend surprise maintains a "Buy" rating with a target price of 3.9 yuan

HSBC Global Research published a report indicating that China Power International (02380.HK) is expected to see a 13% year-on-year decline in net profit to RMB 2.9 billion in 2025, which is below market expectations. However, excluding the one-time tax expense of RMB 357 million related to the restructuring of hydropower assets, the recurring net profit is RMB 3.3 billion, in line with the bank's expectations. The dividend payout ratio increased from 60% to 70%, with a slight increase in the dividend per share, equivalent to a dividend yield of 6%. Management has announced plans to disclose a new dividend policy for the next three to five years, which is expected to include guidance on the trend of dividends per share, rather than just the payout ratio. The bank believes this move will significantly enhance dividend visibility during the industry's profit downturn cycle.

The report stated that last year's operating cash flow grew by 74% year-on-year to RMB 18.5 billion, while capital expenditure fell by 36% year-on-year to RMB 18.2 billion, resulting in positive free cash flow for the first time in a decade. Management expects capital expenditure to remain at around RMB 20 billion annually over the next five years. The company anticipates a year-on-year decline in unit fuel costs of 3% to 5% this year, with the coal-to-power price difference remaining relatively stable. The bank believes that the company's exposure to imported coal is limited, giving it an advantage over peers in the current coal market, but it considers management's view of flat coal power profits to be overly optimistic, predicting a 12% decline in profits this year.

HSBC has lowered its earnings forecasts for China Power for 2026 and 2027 by 6% to 16% to reflect the downward adjustment of electricity price assumptions, maintaining a target price of HKD 3.9 based on SOTP, equivalent to a forecast price-to-book ratio of 0.7 times for 2026, and maintaining a "Buy" rating. The bank believes that a potential upgrade in the dividend policy could make China Power one of the most clearly dividend-prospecting stocks among H-share power companies, with a low valuation