Thursday, February 28, 2008
A look at the Power Companies - part ii
COAL PRICE IMPACT
Datang
Tariff hike: $758m
Fuel cost hike: $1.1b
Huaneng
Tariff hike: $1.4b*
Fuel cost hike: $1b*
* not disclosed so I had to calculate myself which could be very wrong
Huaneng is better at managing its fuel, remember it generated 50% more power than Datang yet its incremental fuel cost (from price increase) was lower. On the other hand, Huaneng’s higher revenue from tariff hike was only the logical result of its larger scale.
Huaneng dealt with the coal problem by entering into long term contracts with miners to ensure supply and probably lock-in purchase price ahead too. The last annual report showed it had secured $5.5b of coal supply a year, about ¼ of 2006 requirement, up to 2009. So Huaneng should continue to have a cost advantage over Datang in the short run.
Datang is more ambitious and is prepared is spend $10b in developing coal mines in Inner Mongolia. Part of the output will also be used to generate natural gas of some sort (I’m no scientist).
Because of their expansion, Datang and Huaneng have so far hung out alright even past tariff hike lagged, both in time and dollar terms, behind the increase in coal price.
But now as further tariff hike is uncertain, I tried to estimate how much negative impact that will cause. To start I’d assume further fuel cost increase to be $1b for every 6 months, which is the same as 1st half of 2007, for Datang and Huaneng.
To put things in perspective $1b is about 1/3 of interim EBT for both Datang and Huaneng.
With an EBT margin of 19.3% and 13.3% respectively, it’d suggest a further $5.2b and $7.5b of turnover are needed to produce enough margin to offset the additional fuel charges of $1b. These mean a 6-month-growth rate of 30%+ for both, much higher than the full year growth of 42% for Datang and 21% for Huaneng. (Note: actually the EBT margin going forward should be lower because of higher fuel cost but I recken the new capacities will probably come with some tax concessions and the two will cancel out to a certain extent.)
CONCLUSION
The answer to the 1st question is no: neither can withstand a tariff freeze for very long without seeing a decline in profit. Datang however is slightly more resilient because (i) it has a higher turnover growth, and (ii) it pays higher taxes and MI which means the net effect to bottom line will be relatively smaller.
The bigger question is how long will this price control be in place? If it’s like the petroleum market then the outlook is indeed very dim. Sinopec has been running losses 3 years in a row but the price reform is still nowhere in sight. But the picture here is slightly more complicated as the total industry profit is shared between the power grids and the power plants, i.e. the power plants sell power to the grids who then resell it to end consumers. As the power grids are said to be very profitable, the government should have some space to maneuver if it so wishes. However, whether anything will be done when the grid companies are themselves preparing for listing is another question mark. If the grid companies are squeezed too tight then their ability to raise funds to build/revamp the power network is compromised.
Valuation wise it'd seem the market has assumed that price control will go away in the not too distant future. Datang at $5.6 has a capitalization of $65b and Huaneng at $6.6 had a capitalization of $80b. Both have a recurring p/e of 17x or thereabout according to my estimation, seems not justifiable if continuing results are seen to be flat or declining. (Note: the ongoing p/e will go lower as RMB appreciates)
Since the results are shortly due there's no need to guess. If the price cap does go away then profit of both should go in tandem with the pace of expansion, and Datang should have the upper hand. It's the preferred choice between the two.
DISCLOSURE: I don't hold 991 or 902 at time of writing.
Datang
Tariff hike: $758m
Fuel cost hike: $1.1b
Huaneng
Tariff hike: $1.4b*
Fuel cost hike: $1b*
* not disclosed so I had to calculate myself which could be very wrong
Huaneng is better at managing its fuel, remember it generated 50% more power than Datang yet its incremental fuel cost (from price increase) was lower. On the other hand, Huaneng’s higher revenue from tariff hike was only the logical result of its larger scale.
Huaneng dealt with the coal problem by entering into long term contracts with miners to ensure supply and probably lock-in purchase price ahead too. The last annual report showed it had secured $5.5b of coal supply a year, about ¼ of 2006 requirement, up to 2009. So Huaneng should continue to have a cost advantage over Datang in the short run.
Datang is more ambitious and is prepared is spend $10b in developing coal mines in Inner Mongolia. Part of the output will also be used to generate natural gas of some sort (I’m no scientist).
Because of their expansion, Datang and Huaneng have so far hung out alright even past tariff hike lagged, both in time and dollar terms, behind the increase in coal price.
But now as further tariff hike is uncertain, I tried to estimate how much negative impact that will cause. To start I’d assume further fuel cost increase to be $1b for every 6 months, which is the same as 1st half of 2007, for Datang and Huaneng.
To put things in perspective $1b is about 1/3 of interim EBT for both Datang and Huaneng.
With an EBT margin of 19.3% and 13.3% respectively, it’d suggest a further $5.2b and $7.5b of turnover are needed to produce enough margin to offset the additional fuel charges of $1b. These mean a 6-month-growth rate of 30%+ for both, much higher than the full year growth of 42% for Datang and 21% for Huaneng. (Note: actually the EBT margin going forward should be lower because of higher fuel cost but I recken the new capacities will probably come with some tax concessions and the two will cancel out to a certain extent.)
CONCLUSION
The answer to the 1st question is no: neither can withstand a tariff freeze for very long without seeing a decline in profit. Datang however is slightly more resilient because (i) it has a higher turnover growth, and (ii) it pays higher taxes and MI which means the net effect to bottom line will be relatively smaller.
The bigger question is how long will this price control be in place? If it’s like the petroleum market then the outlook is indeed very dim. Sinopec has been running losses 3 years in a row but the price reform is still nowhere in sight. But the picture here is slightly more complicated as the total industry profit is shared between the power grids and the power plants, i.e. the power plants sell power to the grids who then resell it to end consumers. As the power grids are said to be very profitable, the government should have some space to maneuver if it so wishes. However, whether anything will be done when the grid companies are themselves preparing for listing is another question mark. If the grid companies are squeezed too tight then their ability to raise funds to build/revamp the power network is compromised.
Valuation wise it'd seem the market has assumed that price control will go away in the not too distant future. Datang at $5.6 has a capitalization of $65b and Huaneng at $6.6 had a capitalization of $80b. Both have a recurring p/e of 17x or thereabout according to my estimation, seems not justifiable if continuing results are seen to be flat or declining. (Note: the ongoing p/e will go lower as RMB appreciates)
Since the results are shortly due there's no need to guess. If the price cap does go away then profit of both should go in tandem with the pace of expansion, and Datang should have the upper hand. It's the preferred choice between the two.
DISCLOSURE: I don't hold 991 or 902 at time of writing.
Comments:
<< Home
I used to own Huadian, but have slowly switched to Huaneng. I assume that's because of the way Tony has advised us... Huaneng is my third-biggest holding.
My feeling about the Chinese power companies is that they seem to have a fantastic future, but that with runaway fuel cost, and the price controls, they'll get more and more in a squeeze.
Tony says that the govt should allow them to make more profit, but since so many Asian/S-American governments are doing their best to suppress energy prices (subsidizing fuel for instance), I don't think China will do it much different.
Think also about high inflation and super high food price inflation, I don't see electric tarrifs being allowed to rise significantly.
It might be interesting to see whether electric generating companies in other Asian countries are booming, or just muddling around...
Manok...
My feeling about the Chinese power companies is that they seem to have a fantastic future, but that with runaway fuel cost, and the price controls, they'll get more and more in a squeeze.
Tony says that the govt should allow them to make more profit, but since so many Asian/S-American governments are doing their best to suppress energy prices (subsidizing fuel for instance), I don't think China will do it much different.
Think also about high inflation and super high food price inflation, I don't see electric tarrifs being allowed to rise significantly.
It might be interesting to see whether electric generating companies in other Asian countries are booming, or just muddling around...
Manok...
# posted by 
: 3:46 PM, March 01, 2008
: 3:46 PM, March 01, 2008
i hope my words were clear enough that neither power company is a compelling buy, although i like datang more. you correctly stated out most the uncertainties.
i'd love to own only sure bets but it's very hard to find them, for some shares it's the risk of competition i concern the most, for these it's the risk of regulation.
so in the end it's a choice of what risk you want to face and for what return you are willing to take on such risk.
but in any way buying a power share now can't be called a high risk strategy, for at least demand won't flatter for some while.
i'd love to own only sure bets but it's very hard to find them, for some shares it's the risk of competition i concern the most, for these it's the risk of regulation.
so in the end it's a choice of what risk you want to face and for what return you are willing to take on such risk.
but in any way buying a power share now can't be called a high risk strategy, for at least demand won't flatter for some while.
I am holding 1071 in heavy position, reason is the place location is the future growth region. The government is more headace on food , transportation then others. Food must be taken everyday. But USA govt do stupid things to make the whole world suffer . Corn to oil drive its price rocket high, Corn take up the farm that should be for other crops, and made all the food for man, pig, cow... crazy high. I think the govt sill soon limit the coal price, or allow different price structure, allow ing them lower interest rate, or some tax reduction etc.
I have confident that this is a very good time to buy, because the cash flow is excellent in this business.
I have confident that this is a very good time to buy, because the cash flow is excellent in this business.
# posted by : 9:02 PM, March 11, 2008
: 9:02 PM, March 11, 2008
Share price of PRC electricity companies plummet lately. I am confident to the long-term prospect of the sector and i believe rate freeze can't go on forever as it will utlimately impair the generation stability. To me, it's rather a medium-term measure to tackle inflation. I am now thinking to accumulate 902 or 991 by monthly stock purchase plan. Comments?
yes, in fact i couldn't resist the temptation and bought some datang already. the below expected results of 1088 may shed some light for the power plays.
According to the EBIT margin of #902 & #991, u mentioned on part i, it's mainly because they use a different approach on depreciation. For the 5yr run(03-07), #902 had a 7.xx% depreciation to fixed assets ratio, compared with #991's 4.xx%.
Besides the story of price control, I'm more positive about the situation. The CAPEX of Coal miners is at all-time high and several power companies are stepping into the field. Just have a look on #991's ambitious coal investment plan. Coal supply has a high probability surpassing demand in 2-3 years. Also, part of the high coal price problem is due to transportation gap, which the govt is already dealing with it.
PS. I hold #902.
Post a Comment
Besides the story of price control, I'm more positive about the situation. The CAPEX of Coal miners is at all-time high and several power companies are stepping into the field. Just have a look on #991's ambitious coal investment plan. Coal supply has a high probability surpassing demand in 2-3 years. Also, part of the high coal price problem is due to transportation gap, which the govt is already dealing with it.
PS. I hold #902.
Subscribe to Post Comments [Atom]
<< Home
Subscribe to Posts [Atom]