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CSCI-Utilities-China Coal-fired Power Monthly：Coal prices stabilizing amid NDRC measures - 20171120

Coal prices stabilising amid NDRC measures

• The NDRC has recently rolled out a series of measures to ensure stable coal supplies and prices to meet heating demand over the winter. Thus, the coal price will be refrained from rising further during the traditional peak season.
• Incentivised by the 3Q profitability improvement and coal price stabilisation, the coal-fired power sector has experienced two rounds of rebound during the last week of Oct to the first week of Nov. 
• We reiterate our POSITIVE view on the coal-fired power sector, in light of the further profitability improvement driven by the potential of a second round of tariff hike to be announced in late Dec and becoming effective on 1 Jan 2018. 

Power consumption growth slowing down due to seasonal demand off. In Oct, China’s social power consumption reportedly has increased by 4.9% YoY but decreased by 3.5% MoM (vs. +7.1% YoY and -11.3% MoM in Sep). For 10M17, power consumption growth has slowed down to 6.8% YoY (vs. 7.0% of the 9M17). Though power consumption in the secondary industry recorded a mild growth (2.9% YoY and 6.7% MoM) in Oct, all of the other industries posted declining growth in the range of 15%-28% MoM amid cooler weather in the Fall. Nonetheless, we expect power consumption growth will gather pace in November as China enters the winter season.

Hydro power generation growth remained solid. With a recovery in the water inflow since July, hydro power posted four consecutive months of increase during Jul-Oct, gaining 16.9% YoY in Oct and 2.2% YoY for 10M17 (vs. 18.6% YoY in Sep and 0.3% for the 9M17). In contrast, the growth rates of other power sources have slowed down in Oct, among which coal-fired power has dropped 2.8% YoY (vs. -0.5% YoY in Sep) during the period whilst the 10M17 growth rate has slipped to 5.4% YoY from 6.3% YoY. We anticipate coal-fired power will pick up gradually starting in November, when North China turns on the central heating powered by cogeneration.

The NDRC adopted strict administrative measures to prevent abnormal fluctuations in coal prices. The NDRC has especially during the period from 27 Oct to 15 Nov warned coal producers, via public as well as internal channels, against price manipulation, since this is a rather sensitive period considering the annual signing of mid-/long-term coal supply contracts for 2018 will be held in late November. Under the government’s pressure, the QHD5,500k coal price has gradually come down by RMB5/t and stabilised to RMB620/t. Amid strict measures adopted by the government, we expect the coal price to fluctuate between RMB600/t and RMB630/t in the remainder months of 2017. (Please refer to page 2 for the details of the NDRC’s policies.)

Sector picks. The power sector has declined by as much as 8% since October’s social power consumption figure was released on 15 Nov, reflecting market’s disappointment in the monthly power consumption leading up to announcement and concerns over a slowdown in economic growth during the 4Q. However, we believe this is only a temporary retreat in light of the potential gradual recovery in power consumption starting in November as well as the fundamental profitability improvement in the 2H. In stock picks, we will maintain our Buy rating on Huaneng Power (902.HK, TP: HKD6.00), China Resources Power (836.HK, TP: HKD16.00), and Datang Power (991.HK, TP: HKD3.30) given their relatively higher utilisation of coal-fired power assets than peers.