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CSCI-Utilities-China Power & Coal Monthly：Coal prices under pressure amid easing supply and weak demand - 20181119

Coal prices under pressure amid easing supply and weak demand  

Power consumption growth decelerated on economic slowdown. China’s social power consumption growth decelerated to +6.7% YoY (-4.6% MoM) in October from +8% YoY (-11.9% MoM) in September, given the lowest YTD PMI reading of 50.2% in October as well as weak power consumption during late-Autumn/early-Winter. Looking forward, with the winter heating period having commenced in mid-November, we anticipate power consumption growth to gather pace on a MoM basis, but the growth rates on a YoY basis are likely to continue to trend down amid a lacklustre economic outlook.

Coal supply sped up unexpectedly on release of new capacity. China’s total coal supply recorded solid growth of +7.7% YoY (-0.9% MoM), amounting to 328.2mnt in October, supported by solid domestic output growth of 8% YoY (-0.3% MoM) and +8.5% (-8.2% MoM) YoY growth in coal imports. Looking forward, we foresee total coal supply to be flat in November from the October level, as the rising domestic coal mining capacity will be partially offset by the coal import restrictions.

Coal price is likely to recover modestly on the rising consumption and coal import restrictions. The QHD5,550k coal price fell to RMB625/t on 16 November from the peak of RMB670/t on 18 October. We expect a modest recovery in the coal price from the current trough in the coming months. With the winter heating period having commenced in mid-November, we expect coal consumption will start to pick up in mid/late November after hitting bottom in October. In addition, the NDRC has implemented coal import restrictions for the remainder of 2018, in order to maintain the total imported coal volume at a steady level in 2018 versus that of 2017. Nonetheless, the high inventory level of major IPPs, as well as a warm winter forecast, seemingly remain an overhang for a strong rebound in the coal price in the winter of 2018/19, in our view.

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 potential 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 accumulate Shenhua (1088.HK, HOLD, TP: HKD21.00) on the potential coal price rebound from mid-November 2018 onwards through February 2019.