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CSCI-Utilities-China Power & Coal Monthly：Coal price on the uptrend - 20180516

Coal price on the uptrend

• China’s coal-fired power companies saw their share prices rebounded by 15%-28% in the past two months, on the back of declines in the coal price and solid earnings recovery.
• The upsurge in power demand and slow coal supply growth will support a hike in the coal price in May, following a dip in April, in our view. From a mid-term perspective, we see the China-US trade disputes to remain an overhang that may pose a risk to China’s economy and in turn the power sector.
• In terms of sustainable profitability recovery going forward, we recommend Huaneng Power (902.HK, BUY, TP: HKD6.00), as its 1H18E and FY18E profits are likely to increase by 7-fold YoY and 100% YoY respectively, due to the local on-grid tariff hike which became effective since the 2H of 2017, expected flat growth of fuel cost in 2018, as well as the relatively low comparable base of last year. Meanwhile, though the coal price is expected to remain on an uptrend in May, we maintain our HOLD rating on Shenhua (1088.HK, HOLD, TP: HKD21.00), given that its production volume is expected to drop in 2018.

Monthly power consumption growth picked up. Social power consumption increased by 7.8% YoY in April, which was faster than the 3.6% YoY increase in March, though slightly higher than the 6% recorded for April 2017, thanks to the rebound in power consumption in the secondary industry, picking up from the negative 1.6% YoY growth in March to reach a 7.2% YoY growth rate in April. For 4M18, social power consumption was up by 9.3% YoY, though inching down from the 9.8% YoY increase for 3M18, it was till faster than the 6.7% YoY growth recorded for the same period of 2017. As the weather gets hot in Mainland China, we expect the power consumption growth trend will remain solid in May.

Recovering growth of coal-fired power. Incentivised by the strong recovery of power consumption, coal-fired and nuclear power generation had largely risen by 7.3% YoY and 6.5% YoY in April, versus 1.4% YoY and 1.7% YoY in March, respectively. Meanwhile, Wind and solar power generation growth still achieved double-digit rates of 22.6% YoY and 26.4% YoY in April, versus 36.8% YoY and 27.9% YoY in March. We attribute the continuous slowdown in in the wind/solar power generation growth to the high comparable base of last year, given that the curtailment rate has stayed at c.7.5% in 4M18. More specifically, hydro power generation has dropped 2.6% YoY in April, improving from a 5.3% negative growth in March. As the water inflow volume increases in the summer, we expect the hydro power generation growth rate to continue to recover in May.

Monthly coal supply slightly declined on restricted imports. The Chinese government has temporarily banned coal imports into the first and second tier ports of selective provinces (e.g. Guangdong, Fujian and Zhejiang) from April this year. Following the implementation of the import restriction, China’s imported coal volume has subsequently dropped to 22.3mnt in April, down 10.1% YoY and 16.5% MoM. Even though domestic coal output was up 4.1% YoY (+1.1% MoM) to 293.3mnt, China’s total coal supply in April had still dropped slightly by 1.3mnt to 315.6mnt from March, based on our estimates. Nonetheless, given that the import restriction will unlikely be cancelled in the near term, and coupled with the slow ramp-up of domestic output, we expect China’s coal supply growth rate will be constrained to a low single-digit range in May.