Power generators rally on price cut

PUBLISHED : Wednesday, 27 August, 2014, 2:31pm
UPDATED : Wednesday, 27 August, 2014, 2:31pm

Mainland power generator shares listed in Hong Kong mostly rose after the central government confirmed a power price cut for generators by less than half the amount the market was expecting.

The only exception was China Resources Power (CRP), whose president has been suspended from his duties as he is investigated by Jiangsu’s provincial authorities.

As of 11:05am, Huaneng Power International gained 3.6 per cent to HK$8.92, Datang International Power Generation advanced 4.4 per cent to HK$4.28, Huadian Power International climbed 2.1 per cent to HK$5.25 and China Power International Power Development, 2 per cent to HK$3.57.

Industry and energy price regulator National Development and Reform Commission announced last night that from September 1, the national average generators on-grid selling prices will be lowered by 0.93 fen per kilo-watt-hour. Retail prices will remain unchanged.

A rebound in coal prices could put power producers under pressure
Evan Li, Standard Chartered

Analysts had expected a cut of around 2 fen per kWh.

The cut takes into account the need to help producers fund expenditure to install desulphurisation and denitrification equipment so that they can meet more stringent emission requirements implemented since July, the commission said in a statement.

The cut was also to reflect generators’ lower fuel costs, as the price of coal, which powers some 80 per cent of the nation’s electricity output, has fallen over 20 per cent since power prices were last changed in October last year.

Beijing has come up with a coal price pass-through mechanism for the setting of power prices in 2005, which was refined late 2012 so that power prices are partially linked to coal price movements.

But the linkage formula was not implemented properly, resulting in huge losses for power generators when coal prices surged. In the past two years, as coal prices plunged, power prices have been cut by much less than coal prices, and generators’ profitability has been restored.

The commission demanded in last night’s statement that power and coal producers “must take effective measures to maintain power-station coal prices at reasonable levels and avoid overly sharp declines to foster co-ordinated development between the coal and power industries”.

Standard Chartered head of renewables and utilities equities research Evan Li estimated in a research note the tariff cut would result in net profit reductions of 5 to 18 per cent for Hong Kong-listed mainland power generators.

Huadian Power, whose profitability is the most sensitive to power prices, will see the biggest impact, he added.

“We believe the tariff cut removes the near-term risk overhang on further pricing policies,” he wrote. “A rebound in coal prices could put power producers under pressure as the government is scaling down capacity growth in the coal industry.”

Credit Suisse regional head of utilities research Dave Dai said in a note that investors should bear in mind that the price cuts may vary with location and coastal provinces saw slightly bigger cuts than inland regions last year’s price adjustment.

Meanwhile, CRP’s share slid 2.3 per cent to HK$23.15 as of 11:05a.m, after falling up to 3.6 per cent earlier today.

Its spokesman could not be reached by phone this morning and has not responded to email query on the nature of investigation into its president, Yu Youjun.

CRP last night said his duties as president have been “temporarily suspended” and assumed by chairman Zhou Junqing due to the investigation, adding he will remain an executive director.

“This [investigation] may not be a continuation of the corruption story about coal-mine assets in Shanxi province given that [it] is being undertaken by the procuratorate in Jiangsu province, instead of the Central Commission for Discipline Inspection (CCDI),” Standard Chartered’s Li wrote in a note. “However, we view the event as a negative for the stock’s sentiment.”

Song Lin and Wang Shuaiting, both ex-CRP chairmen, have been under graft probes by the CCDI in recent months.

CRP’s former and current directors have been accused by minority shareholders and shareholder activists to have hurt investors’ interest by causing CRP to overpay by billions of yuan on a Shanxi coal mining assets acquisition deal signed in 2010 which has not been completed due to a lack of proper mining permits.