Huaneng Power and Beijing Datang should gain from China's power shortage problem China's gross domestic product hit 8.2 per cent in the first half despite Sars and is expected to keep steaming ahead. And the powers behind the throne of China's industrial juggernaut are independent energy producers such as Huaneng Power International and Beijing Datang Power Generation. According to Lehman Brothers analyst Angello Chan, the former will increase generation this year by 25 per cent, the latter by 16 per cent. As China continues to modernise and develop at breakneck speed, demand for electricity will have to keep pace. The market knows this. Shares in Huaneng Power and Beijing Datang rose more than 60 per cent from late April until the middle of this month. Both companies are expected post results next month, and the rapid increase in generation has led Goldman Sachs to raise its earnings forecasts for Huaneng by 11.4 per cent this year, 19.9 per cent next year and 26.1 per cent in 2005. Nomura analyst Pierre Lau expects Beijing Datang's net profits will grow 25.1 per cent year on year. However, despite such positive fundamentals, the stock's surge has spluttered in recent weeks. An European brokerage analyst said the stocks had been rising as if there were no questions that needed asking - he said there were still a few black clouds on the power generators' horizons. For a start the government increased pollution charges on all sectors from this month. The charge for independent power producers sulphur emissions will rise 50 per cent year on year for the next three years. Mr Chan estimates Huaneng's total environmental levy will hit 80 million yuan (HK$74.96 million) this year and 220 million yuan next year. However, CLSA analyst Lance He said the negative impact on Beijing Datang's earnings per share would be limited as its accounted for 1 per cent of the investment banks total profit forecast for this year. Beijing Datang's profits were also sullied by its US dollar interest rate swap which HSBC analyst Ivan Lee said would cost the firm 40 million yuan in after-tax profit in the first half. As a result he has revised down Beijing Datang's full-year earnings by 1.75 per cent from 1.71 billion yuan to 1.68 billion yuan. Goldman Sachs analysts Stephen Oldfield and Jonathan Mok said the recent liquidity rallies had lifted Huaneng Power's shares well beyond their target price of $8.90, and as a result they had downgraded their stock rating to underperform from in-line. The counter closed yesterday at $10.10. For many analysts, the firms' valuation depends on how many assets they acquire in future. According to Thomson First Call, Beijing Datang is trading on 12.4 times next year's expected earnings while Huaneng is trading on 13.6 times. ABN Amro analyst Adrian Fung expects Huaneng's capacity to grow 10 per cent every year and Beijing Datang's 11 to 12 per cent. He said both were set to acquire assets each year adding significant potential upside to their share price. However, other market watchers said Huaneng's closer ties with the powers that be - Huaneng chairman Li Xiaopeng is the son of former premier Li Peng - meant it had far greater growth potential. Phillip Securities research director Louis Wong Wai-kit said power shortages remained an issue in China, pointing out that blackouts were still common. Furthermore he said that after China's accession to the World Trade Organisation, more firms were moving their production bases to the mainland which would translate into higher demand for electricity. 'Until the three gorges come into operation there will still be this power shortage issue,' he said. Beijing Datang shares closed yesterday at $3.85.