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CSCI-Utilities-China Power & Coal Monthly：A mild coal price rebound not sustainable - 20190123

A mild coal price rebound not sustainable

Power consumption growth ended 2018 on a strong note. China’s power consumption recorded a solid growth rate of 8.5% YoY in 2018, speeding up from the 6.5% YoY increase in 2017, in particularly with the growth rate notching up to +8.8% YoY and +10.7% MoM in December, thanks to the steady consumption growth in the secondary/tertiary industry and residential power consumption. However, we regard such consumption recovery as seasonally temporary rather than sustainable on a longer-term basis, given the December’s PMI reading of 49.4% versus 50% in November. Looking forward into the first two months of 2019, we anticipate power consumption growth to be flat/slightly down on a YoY basis, given the coming Chinese New Year in February and lackluster economic outlook prior to commencement of the “Two Sessions” in March.

Multi-factors driving a mild rebound in the coal price. The QHD5,550k coal price rebounded mildly to RMB591/t on 22 January 2019 from RMB572/t on 27 December 2018. In our view, the coal price rebound was mainly driven by three factors: 1) implementation of coal import restrictions for the remaining months of 2018 by the NDRC; 2) the cold weather period towards the end of December 2018; 3) market concerns regarding temporary supply shortage subsequent to the coal mine accident in Yulin, Shaanxi province on 12 January 2019.

However, we believe the coal price rebound to be short-lived. In the past month, the mild rebound in the coal price was basically supported by those multi factors that have hurt the overall supply, implying that fundamental demand remains weak. Looking forward into the first two months of 2019, we anticipate coal consumption growth to be flat or come down slightly YoY, to be impacted by the CNY holiday and lacklustre economic outlook prior to the commencement of the “Two Sessions” in March. We anticipate the coal price to reach an almost peak level around mid-February and begin to trend downwards from as early as during end of February and mid-March 2019.

Stock picks: We reiterate our BUY rating on Huaneng Power (902.HK, BUY, TP: HKD6.80) and Huadian Power (1071.HK, BUY, TP: HKD4.20), on the back of their strong earnings growth in light of the YoY decline in fuel cost in 1Q19 for their high net profit sensitivity to coal price change. Meanwhile, we recommend to take profits on Shenhua (1088.HK, HOLD, TP: HKD21.00) on the back of potential coal price drop in the coming two months.