20141103-法国巴黎银行-Power_reforms__winners_and_losers_21页_620kb

Power Reforms: Winners and Losers Summary

Core Content

This document discusses the potential resumption of power reforms in China, focusing on the implications for power grid companies and independent power producers (IPPs). The reforms aim to liberalize the power market by introducing changes to power tariffs, generation plans, and transmission/distribution structures. The document also outlines the financial outlook for specific IPPs, including Huadian Power, Huaneng Power, Datang International Power, and CR Power, based on projected performance and market conditions.

Main Points

Power Reform Resumption

• Background: Power reforms were first introduced in 2002 by the State Council, but progress stalled.
• Reasons for Resumption: Weak power demand, State Grid's monopoly, and environmental protection pressures are key factors.
• Key Reforms:
  • Liberalization of power tariffs (on-grid and retail).
  • Opening of IPPs' generation plans.
  • Independent electricity trading entities.
  • Regulation of transmission and distribution tariffs.
  • Encouragement of private investment in transmission and distribution.

Impact on Power Grids

• Expected Outcome: Power grids (State Grid, Southern Grid, Inner Mongolia Grid) are likely to be significant losers due to:
  • Changes in profit models (from the tariff gap to regulated tariffs).
  • Loss of monopoly in buying from IPPs and selling to end-users.
  • Increased competition in the transmission and distribution market.
• Subsidiaries Affected: UHV equipment subsidiaries like XJ Electric and Henan Pinggao may see reduced orders from State Grid.

Impact on IPPs

• Overall Benefit: IPPs are expected to benefit from direct sales to large users.
• Volume vs. Margin:
  • Increased production volume.
  • Discounted tariffs due to weak demand.
• Sector-Specific Benefits:
  • Hydro Power: Benefits most due to low operational costs.
  • Nuclear Power: Second in benefits.
  • Thermal Power: Moderate benefits, with some margin contraction.
  • Wind & Solar: Smaller benefits due to higher operational costs.
• Huadian Power: Expected to benefit the most due to its inland service areas with balanced demand and supply, leading to lower discount on tariffs.

Key Financial Estimates

Huadian Power

• Rating: BUY
• Target Price (HKD): 6.58
• Upside: +11.1%
• Projected Performance:
  • Recurring EPS: Expected to grow from 0.21 in 2012 to 0.71 in 2016.
  • Operating EBITDA Margin: Expected to increase from 24.5% in 2012 to 34.5% in 2016.
  • Net Margin: Expected to increase from 2.5% in 2012 to 7.6% in 2016.
• Downside Risks: Spot coal price rally in inland areas and interest rate hikes.

Huaneng Power

• Rating: BUY
• Target Price (HKD): 10.33
• Upside: +8.5%
• Projected Performance:
  • Recurring EPS: Expected to grow from 0.39 in 2012 to 0.89 in 2016.
  • Operating EBITDA Margin: Expected to increase from 21.0% in 2012 to 25.8% in 2016.
  • Net Margin: Expected to increase from 4.1% in 2012 to 7.7% in 2016.
• Downside Risks: Spot coal price rally and further weakening power demand in coastal areas.

Datang International Power

• Rating: BUY
• Target Price (HKD): 4.31
• Upside: +5.9%
• Projected Performance:
  • Recurring EPS: Expected to grow from 0.54 in 2013 to 0.71 in 2016.
  • Operating EBITDA Margin: Expected to increase from 30.4% in 2013 to 34.5% in 2016.
• Downside Risk: Any delay in the disposal of coal chemical assets.

CR Power

• Rating: REDUCE
• Target Price (HKD): 17.78
• Downside: -21.2%
• Projected Performance:
  • Recurring EPS: Expected to decrease from 0.54 in 2013 to 0.71 in 2016.
  • Operating EBITDA Margin: Expected to decrease from 30.4% in 2013 to 34.5% in 2016.
• Upside Risks: Conclusion of ongoing investigation into CR Group's ex-chairman and write-offs related to the Shanxi Taiyuan coal mine.

Financial Metrics

Summary of Investment Thesis

• Power Reforms: Expected to start with direct sales of electricity, encouraging IPPs to negotiate directly with large users.
• Tariff Adjustments: Retail tariffs will be determined by local demand and supply, with residential tariffs potentially lifted.
• Coal Price Recovery: Expected for the rest of 2014, impacting thermal power producers.
• Market Structure: New electricity trading entities and liberalized tariffs will increase competition and reduce the monopoly power of State Grid.

Risk Factors

• Downside Risks:
  • Strong recovery in power demand.
  • Strong rally in spot coal prices.
• Upside Risks:
  • Conclusion of investigations.
  • Write-offs related to coal mines.

Conclusion

The resumption of power reforms is expected to bring significant changes to the power market, with IPPs benefiting from increased volume and potential tariff adjustments, while power grids face reduced profits and increased competition. Huadian Power is projected to be the top performer among IPPs due to its inland service areas and balanced demand. The financial outlook for the companies is positive, but they remain sensitive to coal price fluctuations and interest rates.