摩根士丹利-亚太地区-煤电公用事业行业-中国煤电能源：煤炭价格疲软的买入机会-2019.4.25-57页.pdf

Simon.LEva.HValena.HAttractiveMORGAN STANLEY ASIA LIMITED+Simon H.Y.Lee,CFAEQUITY ANALYST+852 2848-1985Eva HouEQUITY ANALYST+852 2848-6964Valena HsuRESEARCH ASSOCIATE+852 2239-7687China UtilitiesAsia PacificIndustryViewChina Coal Power UtilitiesChina Coal Power Utilities|Asia Pacific Asia PacificBuying opportunity on coal priceweaknessStrong rainfall/hydropower in southeastern China is driving10%yoy coastal coal price weakness creating a buyingopportunity at trough valuations.WHATSCHANGED China Resources Power(0836.HK)FromToPrice TargetHK$17.62HK$15.00Huaneng Power(0902.HK)RatingEqual-weight OverweightPrice TargetHK$5.79HK$5.90Huadian Power Intl(1071.HK)Price TargetHK$3.81HK$3.66Datang Intl Power(0991.HK)Price TargetHK$2.30HK$2.13Huaneng Power(600011.SS)RatingUnderweight Equal-weightPrice TargetRmb4.75Rmb7.02Huadian Power Intl(600027.SS)Price TargetRmb3.12Rmb4.35Datang Intl Power(601991.SS)Price TargetRmb2.64Rmb3.44Seasonal and structural coal demand weakness;coastal coal price fell 10%yoyin 1Q19:We expect coastal Chinas coal power demand growth to slow,due toenergy-intensive industries migrating,more power imports and air pollution/coalconsumption control.The China Meteorological Administration(CMA)expectsrainfall to be stronger than normal in summer 2019,due to El Nio rainfall in1Q19 was 17%higher than normal.We expect weak coal power demand insouthern and eastern China,and cheap coal imports,resulting in weak coalprices.We note that the CCCI fell 8.5%yoy in March 2019,and the seaborne coalprice fell 5-10%yoy more than inland.Expect no tariff cut;power grid to bear the cost:China has announced anotherannual cut in General C&I tariff,by 10%,for 2019,which we expect to amount toRmb70-80b.We expect the bulk of these savings to come through power gridsVAT reductions(Rmb41b),removal of surcharges(Rmb21.4b),and further cutsfrom cost audits at power grids,with no impact on coal power tariffs.Similar to2018,only six provinces have announced slight cuts in coal IPP tariffs.We notethat recently the market power tariff has rebounded,with the Guangdong tariffdiscount now at a 3-year low.(contd on next page)Exhibit 1:Whats ChangedH-shareRatingH-share PTA-shareRatingA-share PTNet Profit2019E2020E2021E2019E2020E2021E(HKD)(Rmb)CRP(HK$m)(HK$m)(HK$m)(HKD)(HKD)(HKD)NewOW15.00N/AN/A7,1418,8489,5561.481.841.99OldOW17.62N/AN/A9,47711,42012,0701.972.372.51%from old-14.9%-24.6%-22.5%-20.8%-24.7%-22.5%-20.8%Huaneng(Rmb m)(Rmb m)(Rmb m)(Rmb)(Rmb)(Rmb)NewOW5.90EW7.026,0406,4916,9230.380.410.44OldEW5.79UW4.755,7166,4637,7150.380.430.51%from old1.9%47.8%5.7%0.4%-10.3%2.3%-2.7%-13.1%Huadian(Rmb)(Rmb)(Rmb)NewEW3.66UW4.353,0733,3563,6560.310.340.37OldEW3.81UW3.123,3833,5323,6790.340.360.37%from old-4.0%39.5%-9.2%-5.0%-0.6%-9.2%-5.0%-0.6%Datang(Rmb)(Rmb)(Rmb)NewEW2.13UW3.443,5974,0654,5110.190.220.24OldEW2.30UW2.644,2564,4264,8970.230.240.26%from old-7.3%30.4%-15.5%-8.1%N/A-15.5%-8.1%-7.9%EPSSource:Morgan Stanley Research(E)estimatesMorgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research.As aresult,investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research.Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of thisreport.+=Analysts employed by non-U.S.affiliates are not registered withFINRA,may not be associated persons of the member and may notbe subject to NASD/NYSE restrictions on communications with asubject company,public appearances and trading securities held bya research analyst account.1April 25,2019 11:23 PM GMT Seasonality explained the strong 2Q performance:We expect strong earnings reboundin 1Q19 for coal IPPs,due to a 7-10%fall in coal prices.In the past 19 years,coal IPPshare prices have appreciated on average by 8-12%,with share price gains in 2Q in 15 ofthe 19 years,due to seasonality(hydropower,coal supply resumption,and reduction inwinter coal demand).Historically,2Q has also been the best quarter to own coal IPPsfor 3-6 months.Prefer coastal coal IPPs;upgrade Huaneng to OW:Coal IPPs are trading at 0.6-0.7x PB,one of the trough points since 2015.We upgrade Huaneng Power,as the seaborne coalprice has fallen more than inland,and Huaneng has one of the greater contribution ofcoastal coal power plants and the change in top management last year may havedistorted earnings in 2018.We remain OW on China Resources Power(CRP)but apply avaluation discount after the breach of its dividend commitment in 2018,despite itgenerating the highest ROE and its valuation being the most attractive among peers.Webelieve it will take months for it to regain investor confidence.2 Investment thesisWhere we differ from the market:Prefer southern and eastern coastal China coalpower plants,due to strong hydropower and weak coal prices;expect strong 1Q19results:We expect trough stock valuations and seasonal weakness in coal prices,drivenby strong hydropower output and resumption of coal production,to lead to a largedecline in the seaborne coal price,which should help coastal IPPs such as HuanengPower and CR Power.We also expect strong 1Q19 results,as we note that parentgroups and other coal IPPs guided strong growth.SOE power groups announced strong 1Q19 results due to falling coal prices:On April17,2019,China Huaneng Group reported strong operating results,with China powergeneration reaching 173.8b kWh(HPI 103.8b kWh),revenue growth of 9.6%toRmb74.29b,and net profit growth of 65%yoy,along with gearing declines.EVAincreased by Rmb2.23b and net profit by Rmb1.33b.Another group,China Energy Group,also reported a 56%yoy increase in coal IPP segment profit to Rmb5.19b from Rmb3.33b,and among its 163 coal power plants,the number of plants in loss was down 20%,from82 to 48.Another group,State Power Investment,also reported large growth in netprofit in 1Q19.A-share listed coal IPPS also announced strong earnings previews e.g.,Guangdong Electric was up 1466-1988%,and Hebei Energy was up 56.1%.Strong hydropower due to El Nio:The CMA has said that,due to the El Nio impactsince September 2018,it expects rainfall during the flood season(summer 2019)to bestrong in southern China but weak in northern China.YTD(Jan 1 to March 25 2019)rainfall was 17%higher than normal.We also note that precipitation was up 12%yoy in1Q19.The rainy season in southern China has begun 26 days earlier than normal(i.e.,from March 6 vs.the start of April in normal years),and we note that in the dry season,typically from October to April in northern,northeast and northwest China,precipitation was 49%,33%and 24%lower than in normal years.We expect stronghydropower in southern and eastern China to push down coal power utilization andcoal demand.Exhibit 2:Summary of 1Q19 Results PreviewCompanyTicker1Q19 profitpreview(Rmb mn)1Q19 profit%yoychange previewAnhui Wenergy Company Limited000543.SZ114-17032.93%-98.22%Guodian Changyuan Electric Power Co.,Ltd000966.SZ217-232.5313.55%-343.09%Jointo Energy Investment Co.,Ltd.Hebei.000600.SZ31356.09%Jiangxi Ganneng Co.,Ltd000899.SZ73.66-97.99225.76%-333.35%Shanxi Zhangze Electric Power Co.,Ltd000767.SZ8.77-10.77102.56%-103.14%Guangdong Baolihua New Energy Stock Co.,Ltd000690.SZ200-250211.71%-289.63%Guangzhou Hengyun Enterprises Holding Ltd000531.SZ76.5-80.3900%-950%Guangdong Electric Power Development Co.,Ltd000539.SZ90-1201466%-1988%Henan Yuneng Holdings Co.,Ltd.001896.SZ40-58119.87%-128.81%Jiangsu Guoxin Corp.Ltd002608.SZ1,050-1,150136%-158%Datang Power(MS Estimate)991.HK74037%Source:Company data,Morgan Staley Research.*Note list of companies except Datang Power are uncovered companies.3Coal price will likely fall more in coastal regions vs.inland:Lower coastal coal powerdemand a combination of lower demand growth and air pollution controls(i.e.,Battlefor Blue Sky)along with strong hydropower generation in southern and eastern China will likely push down coal power utilization and coal demand in 2019.We note thatbetween January and mid-April 2019,coastal coal prices(QHD down 6%and CIFGuangzhou down 13%)fell more than inland coal prices(Shaanxi up 1%,Shandong down2%,and Inner Mognolia down 3%).We also note that freight charges fell 30%in thesame period.In inland provinces,such as Shaanxi and Inner Mongolia,coal prices havebeen well supported,due to coal-mine-accident-related suspensions.China thermal coalprice index also showed 5-10%more coal price decline in coastal regions in than inlandprovince.Exhibit 3:Hydro power will displace share of coal power on the back of higher rainfall this year;nationwide average precipitation(mm)in China increased 17%over norms and increased 12%yoy05001,0001,5002,0002,5003,0003,500JanFebMarAprMayJunJulAugSepOctNovDec100 mmOverall Average Precipitation in China201420152016201720182019Source:Bloomberg,Morgan Stanley Research4Spot coal price related to coal mine safety inspections,which will end during peakseason:In 1Q19,Chinas power demand growth was 5.5%,with coal power generation up1%and hydropower generation up 22%.As the bulk of hydropower is located insouthern and southeastern China,we believe that the recent weakness in coastal coalprices vs.the recent increases in inland coal prices is due to safety inspections(andrelated production suspensions)and local government administrative controls on coaltransport.We believe safety inspections will gradually be reduced during the summerpeak season;in fact,we note that,in 2017 and 2018,the lowest point for coal pricesactually occurred in peak season(June 2017 and August 2018).We believe that,as weexpect more hydropower generation this summer,the lowest coal price may occur againin the summer.Exhibit 4:Power Coal Price Index(as of March 2019)-25.00%-20.00%-15.00%-10.00%-5.00%0.00%5.00%10.00%15.00%20.00%HainanShanghaiFujianTianjinJiangsuHubeiGuangdongJiangxiHunanGuangxiShandongHenanHebei NorthChinaAnhuiInner Mongolia WestShanxiSichuanHebei SouthZhejiangChongqingShaanxiNingxiaLiaoningJilinGansuXinjiangGuizhouQinghaiInner Mongolia EastHeilongjiangYunnanSource:CCTD,Morgan Stanley ResearchExhibit 5:CRP has the highest%exposure to coastal thermal and SE China coastal thermalHuadianHuanengCRPDatangInstalled Capacity(MW)Installed Capacity(MW)Installed Capacity(MW)Power generated(in bnkWh)2018201820172018Thermal Total45,615103,02040,362214Coastal Thermal Total24,54864,50328,102146Coastal ThermalExposure54%63%70%68%SE China ThermalTotal10,11628,46123,02268SE China ThermalExposure22%28%57%32%Source:Company data,Morgan Stanley Research5April is the time to buy coal IPPs,thanks to seasonality:Owing to its strong seasonality(decline in coal power demand after the winter load,resumption of coal productionafter Chinese New Year,and strong hydropower generation resulting in weak coal price),we note that in 2Q,coal IPPs share prices tend to perform well.In the 19 years since2000,the average stock price return in 2Q has ranged from 8-12%,with as much as an80%chance of positive returns.The return is even better if investors hold coal IPPs forsix months from April to September,with the average return ranging between 8-13%.Wealso compared coal IPPs quarterly share price performance and concluded that 2Q isthe best performing quarter for coal IPPs.Exhibit 6:QHD 5,500 kcal price together with freight rate have fallen along with weaker demand inthe coastal regions030609012015002004006008001,000Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16Jan-17Jul-17Jan-18Jul-18Jan-19QHD-GZ coalfreight rate(Rmb/ton)QHD 5,500kcalprice(Rmb/ton)QHD 5,500kcal pricefreight rate-RHSSource:CCTD,Morgan Stanley ResearchExhibit 7:Inner Mongolia mine-mouth price reached 7-year high level100200300400500600700Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16Jan-17Jul-17Jan-18Jul-18Jan-19Mine-mouth prices-Shanxi vs.Inner MongoliaShanxiInner MongoliaRmb/tonSource:CCTD,Morgan Stanley ResearchExhibit 8:Three-month share performance after April(April to June)63 months%changeCRPHuanengDatangHuadian6/30/2000NA70.0%73.3%40.2%6/29/2001NA12.4%1.9%15.3%6/28/2002NA23.1%21.9%8.8%6/30/2003NA19.5%29.2%30.9%6/30/2004-1.7%-8.6%-11.7%2.9%6/30/200518.5%-1.7%2.6%2.3%6/30/200619.3%-3.7%8.5%6.0%6/29/200753.5%29.6%54.5%36.4%6/30/200819.5%-8.3%13.8%7.3%6/30/20098.1%6.0%29.7%34.8%6/30/20106.9%2.4%-11.2%-3.6%6/30/20111.5%-10.1%-7.4%-1.9%6/29/201212.6%34.4%9.4%27.9%6/28/2013-20.5%-7.2%-8.5%-13.9%6/30/20147.6%14.7%5.9%22.1%6/30/20158.0%13.8%-0.5%29.2%6/30/2016-18.2%-29.2%-6.9%-23.6%6/30/20178.5%2.7%7.3%6.7%6/29/2018-3.5%-1.3%2.1%2.6%Average8.0%8.3%11.3%12.1%Negative4864Positive11111315Total15191919%Positive73%58%68%79%Source:Thomson Reuters,Morgan Stanley ResearchExhibit 9:Coal IPPs show best share performance in 2Q7Trough valuation in P/B in recent years:In the coal IPPs announced FY18 results,wenote that most missed both our and consensus earnings estimates and the share pricescorrected.We expect good 1Q19 results to be announced at the end of April 2019.Onthe other hand,most announced an increase in book value per share.In terms ofvaluation,we see that P/B looks more attractive for example,Huaneng Powers bookvalue increased 8%yoy,and Huadians by 19.3%,while Datangs declined 2%and CRPsfell 7%,due to asset disposals.We also note that Huaneng Power is currently trading atclose to its trough valuation in recent years.1Q share performanceCRPHuanengDatangHuadianAverage return%3.4%1.7%-1.1%0.0%Negative years77812Positive years913128Total years16202020%Positive years56%65%60%40%2Q share performanceCRPHuanengDatangHuadianAverage return%8%8%11%12%Negative years4864Positive years11111315Total years15191919%Positive years73%58%68%79%3Q share performanceCRPHuanengDatangHuadianAverage return%4.6%1.9%1.8%-1.1%Negative years6111110Positive years9889Total years15191919%Positive years60%42%42%47%4Q share performanceCRPHuanengDatangHuadianAverage return%1.9%3.3%1.1%5.2%Negative years881211Positive years71178Total years15191919%Positive years47%58%37%42%Source:Thomson Reuters,Morgan Stanley ResearchExhibit 10:Huaneng Power:Historical P/B0.00.51.01.52.02.53.0Jan-00Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19P/B(X)-NTMChina Huaneng Power InternationalAverage(2003-)+1SD-1SDPeak(PB 2.7)Trough(PB0.3)Source:Thomson Reuters,Morgan Stanley Research8Why we upgrade Huaneng Power;top pick:We like Huanengs exposure to coastalChina,and we expect it will be one of the greatest beneficiaries of the decline in coastalcoal prices.We also note that it has a higher portion of coal imports vs peers.Webelieve Huaneng Powers 2018 earnings were likely distorted due to changes inmanagement,and its ROE was the lowest among SOE peers,despite this having rarelyhappened historically.In fact,its parent,China Huaneng Group,has already announceda 65%yoy increase in profit in 1Q19,the highest among