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The best is yet to come for Chinese IPPs
We reiterate our Buy ratings on China Power International (on CL), Huaneng,
and China Resources Power. We think the market is not fully appreciating
recent major structural changes to independent power producers (IPPs):
1) Cash: IPPs are transitioning from a capex-driven expansion phase to one that
is capex-disciplined, with positive free cash flow generation (e.g., Huaneng);
2) Earnings: Prior trends of rising coal costs, falling power plant utilization, and
rising interest rates are reversing, resulting in sizable earnings growth;
3) Stocks: Because of such structural recovery, we expect previous stigma
on this sector to fade as the market embraces earnings/cash flow growth.
Structural oversupply in thermal coal has become more evident
We reiterate our long-held investment thesis of thermal coal oversupply in
China over 2013E-2014E. Our scenario analysis implies further downside
risks to our base-case scenario, which assumes 8% yoy decline in
Qinhuangdao coal (5,500kcal) spot prices.
We expect lackluster power (coal) demand growth: 1) 7% yoy growth in
national power generation (below GS Global ECS Research’s forecast for GDP
growth); 2) even lower coal-fired generation growth due to rising alternative
energy supply, e.g., faster nuclear power commissioning into 2015E.
We think thermal coal supplies will remain robust relative to demand: 1) limited
production cuts especially among state-owned coal suppliers as their priority
may be market share at the expense of profits; 2) railway transportation capacity
growth (9%/12% in 2013E/2014E) may reduce coal delivery time and costs; 3)
marginal production costs may see downside risks as government levies and
logistics costs adjust to new market dynamics; and 4) potential increase in coal
imports, especially from the US (off a low base) due to a gradual shutdown of
coal-fired power plants and potential shale gas substitution.
Buy CPI (CL), Huaneng, CRP; attractive valuation with dividend yield
On our 2013 estimates, CPI/Huaneng/CRP trade at P/E of 7X/8X/9X, with
dividend yields of 6%/7%/3% and free cash flow yields of -5%/9%/1%.
We raise 2013E-2014E EPS for our H-share coverage an average 7% and 12-
month P/E-based target prices an average 6%. Key assumptions: 1) flat tariffs
into 2014E; 2) unit coal costs to fall 3%-5% yoy; 3) utilization to rise 1% yoy in
2013/2014; and 4) effective interest rate to fall 50bp in 2013 and flat in 2014.
2012-12-04_高盛亚洲_Utilities： Power - IPPs：Structural not just cyclical growt.pdf
(1.3 MB)
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