Citics Research Ideas

Monthly Tracker of Power Sector in November, 2008, Slightly more than expected deficits;coal price, the key to future performance -- Yang Zhishan and Wu Fei --Underperform (Reiterate)

5.4% slowdown in power consumption growth due to macro economy, Olympic and real estate.  The power consumption of the whole society increased by 11.7% from Jan to September this year with the cumulated growth rate decreasing by 0.7 ppt mom and 3.9 ppt yoy. The nationwide utilization hours dropped by 138 hours or 3.7% yoy, among which the thermal power dropped by 166 hours or 4.2% yoy. The total power consumption only increased by 6.2% yoy in September, slightly higher than the 5.4% recorded in. The power consumption growth rate continued decreasing in Northern China, picked up slightly in Eastern China, remained unchanged in Southern China. The slowdown of heavy industry enlarged the drop of the mom growth rate in Northeast and Northwest. Without factoring in the Olympic effect, the nationwide power consumption growth rate is 7.8% yoy in September.

Drastic slump of international coal price and ocean freight; Slight drop of domestic coal price and rebound in thermal coal storage. There was a 30% slump of Australia coal price in October, while the domestic coal price dropped by 5~10% in Qinghuangdao and by 7% in coastal power plants. The ocean freight continued diving and plunged to new low since 2007. By the end of September, the available supply days of thermal coal storage picked up to 17 days, the regular number for most plants.

Losses of thermal plants of 3Q08 went slightly beyond our previous pessimistic opinion. Power companies within thermal sector carried the burden of 40% higher coal price and resulted in a net profit attributable to parent shareholders of -5.59 billion in 1-3Q08, which declined by 133.6% yoy. The total deficit of 3Q08 was 5.38 billion and the rate of deficit companies increased by 213.6% mom. Industry-wide deficit proved our previous judgment, though slightly more than expected. The increasing cost and financial expense, together with the lower investment income, enlarged the deficit mostly. The deficits of 4Q08 will become to narrow.

Risk factors. We think the total utilization hours of 4Q08 and 1H09 will continue decreasing, though not sure about the downside extent.

The Underperform rating of the industry is reiterated. The sector P/B is close to its historical low. It is clear that earnings of thermal power is bottoming out and picking up. The performance of 2009 is highly sensitive to the coal price. With the assumption of lower coal price and less utilization hours, we estimate Huaneng still has the chance to make up the deficits and get slight profits. We maintain the “Under-perform” rating of the industry unchanged and pay close attention to the coal price and utilization hours.

Thanks and Best regards,