27 October 2016
Reform in the power sector is being implemented at a faster pace than market expected. Photo: Bloomberg
Reform in the power sector is being implemented at a faster pace than market expected. Photo: Bloomberg

Supportive measures to underpin China coal and power plays

The coal and power sectors led the market rally on Tuesday. Coal plays were driven by news that the National Energy Administration intends to set up a consolidation fund.

The market was also abuzz with a rumor about the merger of China Shenhua Group and China National Coal Group Corp.

China Shenhua Energy Co. (601088.CN) and China Coal Energy Co. (601898.CN) hit the daily up-limit, although both companies dismissed the market rumor.

Huolinhe Opencut Coal Industry Co. of Inner Mongolia (002128.CN), Shaanxi Coal Industry Co. (601225.CN) and Shanxi Lu’an Environmental Energy Development Co. (601699.CN) all soared more than 4 percent.

The government’s pro-growth policy stance and efforts to optimize supply will offer some cushion for the coal sector.

Heavyweights like Shenhua and China Coal are capable of market consolidation, in line with Beijing’s goal of reforming central state-owned enterprises.

Also, the market has under-estimated the value of Shenhua’s non-coal business.

Meanwhile, reform in the power sector is being implemented at a faster pace than the market expected.

China intends to allow private companies to invest in the power distribution system and retail sales channels in an orderly way. The pilot program is expected to kick off in two or three provinces this year or in 2016.

Guangxi Guiguan Electric Power Co. (600236.CN) hit the daily up-limit on Tuesday, after reporting that its net earnings surged 163 percent to 593 million yuan (US$95.58 million) last year. It returned to black in the fourth quarter of last year, posting a net profit of 65 million yuan.

Profit for the first quarter of this year reached 218 million yuan amid rapid growth in hydro power generation.

The company is expected to post a 19 percent jump in full-year profit this year. However, its price-earnings ratio has reached 41 times.

China National Nuclear Power Co. (CNNPC) was expected to surge on its trading debut in Shanghai on Wednesday, triggering a rally of other stocks in the sector.

Zhejiang Zheneng Electric Power Co. (600023.CN), which participates in nuclear projects, saw its shares hit the daily up-limit on Tuesday.

China First Heavy Industries Co. (601106.CN), a supplier of nuclear power facilities, also soared to its daily limit. The company reported its nuclear equipment contributed 15 percent to its sales last year.

However, the company reported a net loss of 289 million yuan for the first quarter, after the deficit reached 676 million yuan last year.

The market has linked the public listing of CNNPC to that of PetroChina Co. (601857.CN) in 2007 when the Shanghai Composite Index hit a peak of 6,124 points.

It also reminded investors of the listing of China State Construction Engineering Corp. (601668.CN) in 2009 when the benchmark touched 3,478 points.

But investors are wary of the high valuations of A shares.

The 5,000-point level could be a turning point for the bull market, which could take a pause after the massive influx of capital pushed the benchmark to 3,000 and then 4,000 within a short period.

Currently, most stocks are already overvalued and some bubble can be seen in small-cap plays. That could hold back new investors who want to join the market. Also, Beijing might step in if the Shanghai Composite continues to surge, driven by blue-chip stocks.

The growth enterprise market edged up modestly on Tuesday with many shareholders booking their profits in light of the high valuations.

This indicates the risk is building up. Major shareholders in some 200 companies listed on the second-board market have reportedly taken profit amounting to 42.7 billion yuan since April.

This article appeared in the Hong Kong Economic Journal on June 10.

Translation by Julie Zhu

[Chinese version中文版]

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Department of Investment Analysis at HKEJ

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