China power sector:Sept power demand slightly recovered

Event

    September power demand recovered slightly to +2.7% YoY from negativegrowth in August (-1.5% YoY), mainly driven by an expected improvement inIP growth (our forecast of +7.5% YoY vs +6.9% YoY in Aug) and the fadingout of a high base effect last year, which more than offset the plummetinggrowth in the residential segment due to the colder summer. Before thegovernment introduces stimulus measures, we believe economic activityshould remain weak, and hence, power demand. Thus, we see low risk of asignificant increase in coal prices to impact coal-fired IPPs’ profit margins.

    Impact

    September electricity consumption recovered to +2.7% YoY from -1.5%YoY in Aug, mainly driven by an expected improvement in IP growth (ourforecast of +7.5% YoY vs +6.9% YoY in Aug) on credit loosening in Sep andthe fading out of high base effect last year. As a result, electricity consumptionfor the manufacturing and service segments rebounded to +5.2% YoY (from -1.5% YoY in Aug) and +4.9% YoY (from +1.1% YoY in Aug), respectively. Asaffected by the colder summer this year, power consumption for theresidential segment dropped 10.2% YoY (vs -5.7% YoY in Aug).

    Average plant utilization dropped at a slower pace of 7.6% YoY in Sep(vs -10.4% YoY in Aug), due to a lower increase in generating capacity in themonth (+4.4GW vs +5.5GW in Aug), coupled with a mild recovery in powerconsumption. With further improvement in hydropower utilization (+13.4%YoY in Sep), coal-fired power utilisation remained suppressed (-11.5% YoY inSep). For 9M14, only hydropower utilization recorded positive growth of+3.2% YoY vs -4.9% YoY for coal-fired and -12% YoY for wind.

    Power plant investment increased 26% YoY or 57% MoM to RMB39bn inSept, mainly driven by a sharp increase in both hydropower (RMB12.8bn vsRMB5.7bn in Aug) and coal-fired power investment (RMB9.7bn vs RMB5.6bnin Aug). In 9M14, power plant investment for the country still dropped 11.4%YoY to RMB211bn vs power grid investment rose 3.5% YoY to RMB264bn.

    Spot thermal coal price (QHD5,500kCal) slightly recovered to RMB490/t,after a stagnation for 2 months. With an expectation that weak power demandpersists before the launch of stimulus measures, the introduction of higherimport tax for thermal coal and the winter pre-stocking for IPPs should onlyhelp spot coal price to recover mildly in 4Q14. Thus, coal-fired IPPs’ profitmargin should remain stable in 2H14 vs 1H14.

    Outlook

    With our expectation that downstream demand will remain weak until somestimulus measures unfold, coal-fired generation should remain suppressedwhich reduces the risk of a sharp rebound in coal price, and hence maintainstheir profit margin. We prefer China Power Int’l on its high leverage onhydropower recovery and CR Power on strong capacity expansion.