China Coal Power Utilities_ How to Position amid Declines in Power Tariffs and Coal Prices

Summary of Conference Call on China Coal Power Utilities Industry Overview - The conference call focused on the China Coal Power Utilities sector, particularly the performance and outlook of Independent Power Producers (IPPs) amid declining power tariffs and coal prices [1][6]. Key Points and Arguments 1. Earnings Expectations and Market Positioning - Sharp declines in coal prices are raising earnings expectations for coal IPPs, with Huaneng Power (HNP) being better positioned due to more market coal and fewer tariff declines. However, China Resources Power (CRP) shows more upside potential due to healthy dividend yields [1][5]. 2. Power Tariff Declines - The de-rating of China IPP stocks since October 2024 was primarily due to concerns over annual declines in power tariffs. It is believed that these declines are now priced in, with limited uncertainty on tariffs for coal IPPs in 2025. CRP is expected to experience a year-over-year (YoY) decline in coal power tariffs of 3.3 cents, while HNP is projected to see a decline of 2.4 cents [2][22]. 3. Coal Price Impact - Recent sharp drops in spot coal prices to approximately Rmb700/t are expected to boost expectations for coal IPPs. If coal prices remain stable, coal IPPs could see fuel cost savings of 2-3 cents/kWh, which may offset the negative impact of tariff declines [3][35]. 4. Concerns for New Energy Tariffs - There are ongoing concerns regarding power tariffs for new energy sources after full market participation. The introduction of a "mechanism tariff" aims to protect these tariffs, but the expectation is that new project volumes will accelerate tariff declines for new energy [4][68]. 5. Dividend Yield Analysis - The average yield for H-share coal power companies has risen to over 7%, making the sector an attractive defensive yield play amid lower interest rates. HNP is expected to yield 7.4%, while CRP is projected to maintain at least a 5% yield in 2025, even with a decline in coal costs [5][12]. 6. Earnings Forecast Adjustments - Earnings forecasts for CR Power have been cut by 4-19% for 2024-2026, while Huaneng's forecasts have seen minor adjustments of 0.5-2%. This is attributed to CR Power's greater exposure to tariff declines and less fuel cost savings compared to Huaneng [10][11]. 7. Tariff Changes by Province - Significant tariff declines are noted in provinces such as Guangxi (down 10 cents), Guangdong (down 7 cents), Jiangsu (down 4 cents), and Zhejiang (down 5 cents). Other provinces generally saw declines of 1-2 cents [19][20]. 8. Fuel Cost Dynamics - The percentage of long-term coal contracts is expected to decline slightly, allowing for more market pricing. Companies with fewer long-term contracts may benefit more from fuel cost declines. HNP is expected to see a unit fuel cost decline of Rmb2.7 cents/kWh, while CRP is estimated to have a slightly lower saving of Rmb2.3 cents/kWh [31][34]. 9. Operational Efficiency and Profitability - CRP has consistently ranked top in operational efficiency from 2019 to 2023. However, HNP's unit gross profit has been below peers since 2022, indicating varying profitability across companies [58][63]. 10. Renewable Energy Market Impact - The entry of renewable energy into market trading is expected to pressure market tariffs, with 100% participation anticipated in 2025. This could lead to accelerated tariff decline trends [69][70]. Additional Important Insights - The coal power sector is expected to account for over 70% of power volume for listed power companies on average, despite the push for renewable energy [57]. - The sensitivity of dividend yields to coal prices indicates that HNP's yield could vary significantly based on coal price fluctuations, while CRP maintains a more stable yield [45][49]. This summary encapsulates the critical insights and projections discussed during the conference call, providing a comprehensive overview of the current state and future outlook of the China Coal Power Utilities sector.