China mulls plans to create three mega power firms in US$855b remix

PUBLISHED : Monday, 08 May, 2017, 10:24pm
UPDATED : Monday, 08 May, 2017, 10:24pm

China is considering plans to create three power giants through mergers of eight coal-fired and nuclear generators with combined assets of almost 5.9 trillion yuan (US$855 billion), according to people with knowledge of the plan.

The proposal, which is only one option being considered as Chinese President Xi Jinping seeks to restructure the state-run power sector, hasn’t been finalised and is subject to change, said the people. The mergers are proposed for the unlisted parent companies, not units traded in Hong Kong and Shanghai, the people said.

The three planned power giants would be created through the following combinations:

– China Huadian Corp and China Guodian Corp, two of the biggest coal-fired power generators, may merge with China National Nuclear Corp, the second-biggest nuclear power operator in China. The combined company would have 297 gigawatts of capacity and 2.04 trillion yuan in assets, according to data published on company and regulator websites, as well as annual reports.

– China Datang Corp, one of the five biggest coal-fired generators, may merge with China General Nuclear Power Corp, the largest nuclear power operator, and Shenhua Group Corp, the country’s biggest coal miner, as well as a major rail operator and power producer. The combined company would have 241 gigawatts of capacity and 2.09 trillion yuan in assets.

– China Huaneng Group, the country’s biggest coal-fired power producer, may merge with State Power Investment Corp, a coal-fired power company that also owns State Nuclear Power Technology Corp, the unit building the country’s Westinghouse-designed AP1000 third-generation nuclear reactors. The combined company would have about 262 gigawatts of capacity and assets of 1.75 trillion yuan.

The driver for this idea is probably not just overcapacity, but levels of debt in the parent companies
Simon Powell, UBS Group AG in Hong Kong

“Injecting nuclear power into traditional coal-fired power players could help stabilise their overall portfolio and give them incentives and tools to cut over-reliance on coal,” said Shi Yan, a Shanghai-based utilities analyst at UOB Kay Hian Holdings. “The newly created companies could become ‘too big to fail’ almost overnight, and how to effectively prevent them from becoming new market monopolies will be a hard task to deal with.”

An industry wide regroup would build on Xi’s efforts to cut industrial overcapacity, accelerate the overhaul of the bloated state-owned sector and reduce the country’s reliance on coal. Utilisation at China’s power generation facilities last year averaged 3,785 hours, the lowest since 1964, according to the National Energy Administration.

“The driver for this idea is probably not just overcapacity, but levels of debt in the parent companies,” said Simon Powell, head of Asian utilities research at UBS Group AG in Hong Kong. “By merging good cash flow companies with not-so-good, then perhaps the debt burden gets eased. Given that the proposed changes are at the parent company level and the listed companies remain as are for now, then not much changes for shareholders in the short term.”