Credit Suisse has turned bullish on Chinese power producers amid talk of consolidation of the Middle Kingdom’s state-owned enterprises.
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Reports that the Chinese government wants to combine eight power SOEs into three larger groups would improve the profitability of some of the country’s biggest electricity producers. Credit Suisse reckons it could lead to a 3% increase in tariffs. Here’s the broker’s take on the situation:
Our deep-dive location analysis suggests that combining the major power groups could lead to market share concentration and result in more rational pricing behaviour in the liberalising power market.
The Hong Kong-listed shares of Datang International Power Generation (991.HK) and Huadian Power International (1071.HK) were the big winners, with Credit Suisse lifting both stocks to outperform from underperform.
Datang could benefit from lessened competition in the provinces of Hebei and Inner Mongolia. The broker doubled its price target to HKD3.40 a share from HKD1.70 a share, implying around 27% upside. Datang is their top pick among independent power producers.
We expect DTP to benefit from potential industry restructuring and its improving power utilisation despite coal cost pressure. With a meaningful ROE turnaround, we expect the P/B-based multiple to rerate.
Huadian‘s target price was lifted to HKD4.20 a share from HKD2.40 a share, with Credit Suisse seeing the potential for lessened competition in the province of Shandong. Here’s the broker in their own words:
Despite possible earnings pressure from higher coal cost in 2016, we expect HDP to see a meaningful ROE turnaround in 2017-18, helped by possibly less competition with industry consolidation, as well as normalising coal prices. Trading at 0.7x FY18E P/B (one of the cheapest among peers), we expect its P/B-based multiple to rerate.
Datang shares are up 43% over the past year, while Huadian is down 1.3% over the past year.
May 16, 2017 at 02:25PM
from Robert Guy