[20081120] CITICS*SECTOR RESEARCH*CITICS-Power Sector Data Review October 200 generation, existing, factors, monthly, memory

yangruoxin

   The short-term demand "vacuum" led to a sudden drop in growth. Total power generation and consumption in October was -4.0% and -2.2% respectively, lowest year-to-year growth rate in recent memory. With Olympic factors no longer existing, the short-term macro demand "vacuum" really dragged down the rate of growth for the power sector. Chemical, ferrous and non-ferrous sectors contributed the most to the negative growth, while most heavy industries saw monthly negative growth rate in October. From a regional perspective, the negative monthly power growth rate emerged in all the provinces, among which Guizhou and Inner Mongolia contributed the most.
        Both generation and consumption will slow down and average thermal utilization hours will drop by 6-9% in 2009. We estimated the power consumption growth rate of 2008 to 2010 as 6.6%, 2.9% and 4.8%, respectively. Assuming that the consumption growth rate of 2009 stands at 0%, 3% and 6%, we estimated the operation rate of thermal power units to drop by 9.4%, 6.0% and 2.4%, respectively. Therefore, the utilization hours will get close to the lowest level its been since 1998.
        Misfortune, that is where happiness depends; thermal power will turn profitable for sure in 2009. There was a 10% slump of the price for 6,000 kcal/kg coal in Qinhuangdao market last week. With the price driven down by the demand side, we think the government will postpone the hike of the power tariff. More than 80% of the thermal plants will benefit from falling coal prices against the dropping utilization hours.  Assuming 5% less utilization hours and a 10% lower average coal price, we estimated that 300MW thermal units could turn profitable and 600MW units could gain half of the normal average earnings.
        Risk factors: Marco economy fluctuation shortened the predicable cycles and may reduce forecast accuracy; if coal prices are support by production limitation or too fast macro recovery, thermal power will slow down the recovery.
        Considering the value for investment portfolios, we upgrade the rating of the industry to "Neutral". Power sector is currently one of several sectors which are bottoming out and picking up. Compared with those industries just starting to down trend, the power sector is notably attractive. Static P/B are between 1.1~1.8X for most companies, while the fair range should be 1.5~2.0X. Thus, we upgrade the rating of the power sector to "Neutral". We pick Huaneng (600011), Guangdong Electric Power (000539), GD Power Development (600795), Jiantou Energy (000600) which benefit form the dropping coal prices; Guiguan (600236) for its improved fundamentals and extreme resilience; Guotou (600886) for its stable performance and Baolihua New Energy (000690) and Jinshan Energy (600396) for their rapid growth and relative low P/E.
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