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Chinese IPPs: charging up
We are turning positive on Chinese IPPs as ever-increasing power
demand should support utilisation in 2007. The commissioning of
new projects should reduce coal consumption and boost margins,
while strong capacity growth should drive earnings.
Target price upgrades; top pick China Power
We upgrade our target prices on the Chinese IPPs after factoring in: 1) a slower rate
of utilisation decline in 2007; 2) renminbi appreciation in 2007-09F; 3) expected
improvements in efficiency from the commissioning of greenfield projects; 4)
inclusion of newly approved greenfield projects; and 5) rolling over our target prices
from end-06 to end-07. We have Buy ratings on China Power, CR Power, Datang
(from Hold) and Huadian (from Sell), and a Hold rating on Huaneng (from Sell).
Utilisation recovery may arrive earlier than expected
Power demand in China should maintain its high growth rate of 12-13% pa in 2007-
08F. Given the high consumption base at end-06, the planned new capacity of 95GW
in 2007 and 80GW in 2008 is likely to drag down the country's utilisation only
slightly, by 4-5% in 2007F, and then recover in 2008F. As the government plans to
allocate more power output to larger-scale, more efficient power plants in order to
reduce coal consumption, we see potential upside for IPP utilisation.
Profit margins bottoming out
IPPs have finalised all their coal contracts for 2007 with 5-10% increases in contract
prices. To compensate for this higher fuel cost, IPPs are currently in discussions with
the government regarding a tariff increase, which we expect to be put through in
mid-2007. Although the new tariff formula only allows IPPs to pass-through 70% of
the coal cost increase, as their upcoming greenfield projects are more efficient and
require less coal, this should alleviate any remaining cost pressure and maintain the
IPPs' profit margins.
Strong capacity expansion set to drive earnings
As the flagship companies of the power generating groups in China, the IPPs' capacity
growth targets (14-125%) are higher than the industry average for 2007-08.
Moreover, we see further upside for China Power and CR Power given that their net
gearing is still at a low level of <80% versus other IPPs' 100-160%.
Contents
U T I L I T I E S 8 M A R C H 2 0 0 7 2
I N V E S T M E N T V I E W
Investment snapshot 3
Valuation improving 4
We are turning positive on the Chinese IPPs as we expect their EPS to remain high
out to 2008 due to utilisation recovery, Rmb appreciation, margin improvement
and capacity expansion.
Target price upgrade 4
Still lagging the market 6
Top pick – China Power 6
Room to expand further – China Power and CR Power 8
Utilisation recovery in 2008F 9
New capacity addition in 2007 (95GW) should only lower China’s plant utilisation
by 4-5%. As capacity additions are likely to slow down after 2007, utilisation for
the country should start to pick up again in 2008.
2006: Strong power demand should absorb high capacity addition 9
2007: Utilisation set to bottom 10
Benefit from energy saving policy 12
The government’s new policy on energy saving should benefit the listed IPPs as
their large-scale power projects, with lower coal consumption, should be given a
higher priority to dispatch electricity to the power grid.
Policy to cut energy consumption per unit of GDP by 20% 12
Power industry – reduction of coal consumption 12
Profit margins bottoming out 17
We expect IPPs to pass on much of the cost of higher contract coal prices to
power grids in the form of tariff hikes. Combined with lower coal usage from new
power projects, this should alleviate any margin pressure for IPPs.
Expansion set to drive earnings growth 18
Being the flagship companies of the PRC power generating groups, the listed IPPs
should expand faster than the national average. In the IPP sector, we see further
upside to China Power and CR Power due to their low gearing.
C O M P A N Y P R O F I L E S
Company profiles 19
China Power International 20
China Resources Power Holdings 27
Datang Intl Power Generation 34
Huadian Power International 41
Huaneng Power International 48
A P P E N D I X
Appendices 55
1. PE band charts 55
2. PBV band charts 56
3. Yield band charts 57
4. Winners and losers 58
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