Our target price of HK$5.25 is based on a DCF model, which we think is suitable for power companies such as Huadian that operate in a largely stable industry with predictable cash flows. Our model factors in our earnings forecasts up to 2030E and a terminal growth rate of 4.0% thereafter. Our WACC for Huadian is 8.3%, assuming: (1) a risk-free rate of 5.2%, (2) a market risk premium of 6.8%, (3) an equity beta of 1.2x, according to Bloomberg, (4) 6.5% cost of debt, (5) a targeted debt-to-capital ratio of 60.0%, and (6) a corporate tax rate of 25%.

Downside risks that could drive shares below our target price are: 1) lower-than-expected generation volume; 2) higher-than-anticipated coal prices; 3) lower-than-expected tariff; and 4) lower-than-expected capacity growth.