Industry context--IPPs
High attendance at the power utilities panel discussion and investor
meetings during our China Conference affirms renewed interest in the
sector. More importantly, we think many investors continue to seek to
increase their holdings in the IPPs. Key takeaways include the following:
(1) Major IPPs are considering acquisition opportunities regarding the
State Grid power generation assets. Pros: clear operating track record of
quality assets and lower net asset value (much depreciated). Cons: laborintensive
operations for older plants and uncertainty in “guaranteed”
utilization hours once the plants are no longer owned by the power grids.
(2) Implementation of competitive bidding remains difficult in part due to a
lack of a well-defined mechanism. Its success will hinge on the progress of
overall sector reform involving (partial) separation of transmission,
distribution, and retail of power in order to enhance competition.
(3) There remains a lack of consensus about coal price movements (up or
down). However, most agree that whatever the changes are, they should
be modest.
(4) Government continues to encourage investments in wind and nuclear
energy through subsidies. However, risks include uncertainty in tariffs.
Industry context--Water
Investors are drawn to either event-driven ideas (Shanghai Raw Water) or
long-term turnaround and growth story (Tianjin Capital).
(1) Many water utilities have grand expansion plans spanning multiple
regions with 1) economy of scale; 2) higher affordability; and 3) strong
growth potentials. We also see rising consolidation in the market.
(2) We think foreign companies (e.g. Veolia and Suez) may increase their
operations in the Chinese water markets in part due to: 1) increased
transparency in the bidding process; and 2) government’s preference.
(3) We expect water utilities to raise debt or equity in order to finance their
ambitious expansion plans. Many of them have the flexibility to raise
gearing.