15 February 2019

Tariff cut likely just a short-term drag on power plays

Power plays weakened Thursday on reports that Chinese authorities are planning to slash thermal power on-grid electricity tariffs in different provinces, including Guizhou, Tianjin, Fujian and Jiangsu. The cut will range from 0.9 fen to 2.5 fen per kilowatt-hour, according to Economic Information Daily.

Securities firm Shenyin Wanguo (00218.HK) said the extent of tariff slash would be larger in coastal provinces than in inland regions, so the policy will have more negative effect on power firms along the coastal areas.

Thursday’s worst performer was Huadian Power International (01071.HK), which closed 2.5 percent percent lower, while China Resources Power (00836.HK) declined 2.2 percent for the day. But power plays experienced mild rebounds on Friday morning, with Huaneng Power International (00902.HK), China Resources Power and China Power International Development (02380.HK) all climbing over 1 percent.

Following a deep correction that started in May, the power sector has shown a mixed performance amid talk of tariff reduction.

Analysts estimate power plants’ profit as a whole will shrink by nearly 50 billion yuan (US$8.1 billion) because of the policy change. However, some industry insiders expect power producers will try to make up for the shortfall by squeezing coal miners to lower fuel costs.

Thermal coal prices dropped significantly in the first half of this year, and they are expected to stay soft till the end of the year due to slow demand, according to a China Securities Journal report.

In fact, the market has already expected thermal tariffs will be cut amid the coal price slump based on the current government pricing regime, but if the cut is smaller than expected, power plays may experience a quite powerful rebound.

In the year to date, China Power International Development has been the best performer with a 21 percent increase in its stock price, while China Resources Power has slipped 1.31 percent, the only major power play recording a year-to-date decline.

– Contact the writer at [email protected]




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