CITICS*SECTOR RESEARCH*CITICS-Power Sector Monthly Tracker for Nov. 2008

Dear all,
Attached please find the morning minutes for Power Sector Monthly Tracker for Nov. 2008 by Yang Zhishan and Wu Fei.
 
Macro-economy, the Olympics, real estate sector etc render the power consumption growth rate plummeting by 5.4%. The total power consumption from January to September has increased by 9.7% yoy, and the accumulative growth rate has declined by 0.5% mom and by 5.4% yoy. The national power utilization hours have reduced by 138 hours or by 3.7% yoy on an accumulative basis, of which the thermal power reduces by 166 hours or 4.2%. The power consumption rate for September is only 6.2%, which is slightly higher than the 5.4% for August. North China witnesses increasing decline; East China sees slight recovery; and South China basically remains unchanged. But in Northeast and Northwest China, the growth rates have fallen greatly mom, which may be attributable to the setbacks of heavy industry. Deducting the factor of the Olympics, the national power consumption growth rate for September is 7.8%, slightly recovering mom.
International coal price and ocean freight plummet; domestic coal price falls slightly; and the stock of electrical coal continues to recover. In October, the Australian coal price dropped dramatically by some 30%; the domestic Qinhuangdao coal price declined slightly by 5% to 10%; the delivery price in coast areas fell by 7%; the ocean freight continued to plummet to a new low since 2007; and by the end of September, the available days of coal stored at power plants returned to the normal level of 17 days.
Losses suffered by thermal power in the third quarter are slightly more than our pessimistic prediction. The coal prices for most thermal power companies in the first three quarters have increased by over 40% yoy, and the net profit attributable to their parent companies in the sector amounts to RMB -5.59 bn, down 133.6% yoy. The losses in the third quarter amount to RMB5.38 bn, and the loss percentage has risen by 213.6% qoq, which is consistent with our judgment of worse performance, except that the rise is slightly higher; the increase of costs and financial expenses, as well as the decline of return on investment, is the main reason for the even worse sector losses. We predict that the losses of thermal power in the fourth quarter will narrow down.
Sector Risks: we predict that the utilization hours in Q408 and 2H09 will decline dramatically, and the specific extent of the decline is difficult to predict, to which we should keep alert.
We maintain the "Underperform" rating of the sector temporarily. It has been established that the trend of the profits for the thermal power sector has bottomed and started to recover gradually. The performance in 2009 will be very sensitive to the coal price, and on the assumption that coal price and utilization hours will fall greatly in the current market, we predict that it is still possible for Huaneng Power International Inc. to turn around and earn slight profits; the sector's absolute P/B gets close to the historical bottom. Therefore, we maintain the "Underperform" rating of the sector temporarily, waiting for the clear-up of coal price and utilization hours.