Chinese coal-fired power firms to post weaker profits amid capacity glut
Weak power demand and rapid growth in new generation capacity to hurt profits of key players
Huaneng Power International is expected to kick off on Tuesday the reporting season for Hong Kong-listed mainland Chinese firms that focus on coal-fired power generation, whose interim profits are expected to have fallen due to lower power prices and falling plant utilisation.
This is despite the fact that savings on fuel costs and interest expenditure from weaker coal prices and interest rate cuts have helped soften the blow.
“For players with more [coal-fired generation] exposure, we expect profit to be ... hurt by lower tariffs as a result of both tariff cuts in January [this year] and higher direct power [sales to big end-users that attract lower tariffs], and lacklustre output,” Michael Tong head of Hong Kong and China research at Deutsche Bank said in a research report.
According to Tong, Huaneng, the listed flagship of China’s largest power producer China Huaneng Group, is likely to report a 26 per cent year-on-year decline in first-half recurring net profit to 6.76 billion yuan, while rival China Resources Power (CRP) may see a 23 per cent drop to 5.81 billion yuan. Huadian Power International, another key player, could slide 16 per cent to 3 billion yuan.
Simon Lee, head of Morgan Stanley’s Asia Pacific utilities research, expects milder profit declines of 18.5 per cent for Huaneng, 15 per cent for CRP and 15.1 per cent for Huadian.
He said that a 9 per cent year-on-year decline in utilisation hours of the entire fleet of the mainland’s coal-fired plants, due to weak power demand growth and rapid new generation capacity growth, has played a big role in the profit squeeze.
Power demand on the mainland grew 2.7 per cent year-on-year during the first six months of this year, which was far outstripped by a 11.3 per cent year-on-year increase in installed power generation capacity as at the end of June.
This happened amid a construction boom of coal-fired, nuclear, wind and solar projects, as investors were encouraged by higher industry profits in earlier years, thanks to sharp falls in coal prices and higher subsidised power tariffs for clean energy.
But the building boom, coupled with sharply weaker demand caused by China’s economic transition away from energy-intensive industries into service sectors, has led to major surplus capacity and the lowest plant utilisation in 38 years.
Low utilisation is bad for a plant’s profitability since more fixed costs like asset depreciation and maintenance have to be absorbed by each unit of power sold.
Analysts expect the glut to result in much lower capacity addition in the years ahead.
Lower coal prices, with the average price of coal shipped through Qinhuangdao – China’s largest coal port – declining 16 per cent year-on-year in the year’s first half, were insufficient to offset the impact from lower plant utilisation and power prices.
Coal costs typically accounts for around two-thirds of a power plant’s total operating cost.
Coal-fired power producers on average suffered an 11 per cent year-on-year fall in power prices, as a result of an average 7 per cent cut in state-stipulated prices in January and rising direct sales to large industrial users at cheaper prices, according to calculations by Morgan Stanley and Citi’s analysts.
Such sales are encouraged by Beijing as part of industry reform to enhance efficiency via competition and reduce power costs for manufacturers, since such sales allow users and generators to directly negotiate volumes and prices, bypassing the power distributors.
The distributors, which used to earn fat profit margins on state stipulated buying and selling prices with no incentives to cut costs, have been forced to lower operating costs under power pricing reform.
According to Morgan Stanley’s analysts who recently met with industry officials in Guangdong province, which has limited energy-intensive industries, is aiming for direct power sales to account for half of its total power sales by 2020, up from 8 per cent this year.
This applies to electricity generated from both fossil fuel and renewable energy.
“Using power reforms to reduce corporate costs via power tariff cuts is a consensus among central and provincial governments,” Morgan Stanley’s analysts said, adding larger tariff discounts are expected this year as more sales are subject to competition and direct negotiations between buyers and generators.
Meanwhile, CLP Holdings, the larger of Hong Kong’s two power utilities, is tipped by Citi’s head of Asia utilities research Pierre Lau to post on Monday a 5 per cent year-on-year rise in first-half net profit to HK$6 billion, with higher profits from Hong Kong and India more than offsetting declines in Australia and mainland China.