Railroaded by coal
Our upbeat view on coal is an obvious warning sign for Chinese IPPs. Although we still
expect tariffs to go up, the timing remains uncertain given inflation concerns, and the
IPPs will come under increasing stress from rising coal prices. We estimate that fuel as
a proportion of total operating costs will rise to 70% in FY08F (from 61% in FY06), and
we have lowered our net profit forecasts for the three Chinese IPPs in our universe by
11.9-27.1% for FY08F (implying net profit declines of 12.8-18.7% y-y), and 1.5-25.6%
for FY09F. In FY09F, Datang Power shows the only rebound with projected net profit
growth of 8.7%, ironically after factoring in contributions from its coal mines. Without
such a buffer and tariff increments, we would expect continued earnings declines at
Huaneng Power and Huadian Power. While valuations do not look demanding, at 15%
below historical average P/BVs, only Datang’s integration and diversification efforts
offer longer-term comfort and support our BUY call. Huaneng Power’s FY08F dividend
yield of 4.3% backs up our NEUTRAL call, but we would REDUCE and switch out of
Huadian Power.
Fuel risks on the upside
Raise tariffs or suppress coal prices?
Integration and diversification: way to go
Is the sector inexpensive and defensive?
Contents
Fuel risks on the upside 3
Domestic coal prices have room to rise 3
Lower proportion of contract coal 5
Freight hikes adding to the woe 6
All under fuel cost pressure 7
Raise tariffs or suppress coal prices? 9
As coal pricing reform is pushed ahead… 9
…electricity tariffs remain regulated 10
Tariffs have to increase but timing is uncertain 11
Only tariff reform can address root causes 12
Utilisation hours could rebound in 2H08F 14
Demand to stay resilient 14
Capacity expansion is slowing down 15
Outlook for utilisation hours 17
Energy-saving dispatch to benefit large IPPs 18
Integration and diversification: way to go 20
The rush to acquire coal mines 20
Diversifying into hydro and nuclear offer cushions 20
Datang Power ahead of the pack 21
Is the sector inexpensive and defensive? 24
Datang Power remains our preferred pick 24
Earnings outlook 24
DCF and relative valuations 26
How far from historical trough? 26
High net gearing to climb 30
Potential risks 30
Earnings and fair value sensitivity to US economy 31
Latest company views
Datang Power 34
Huaneng Power 38
Huadian Power 42 |
