Power Industry: Coal Price Going Down

As macroeconomic growth enters a downward path, changes in coal prices are expected to change the operating environment of thermal power companies. Judging from the past laws, in the macroeconomic downturn cycle, the high level of coal prices fluctuates or decreases slightly, and the gross profit rate of power companies will rebound. Therefore, the profitability of the power sector has a counter-cyclical nature. In 2012, the investment opportunities in the power sector will shift from price-driven to coal-driven. Since 2005, the overall defensiveness of the industry has weakened. In the first half of 2011, investment opportunities came from electricity price adjustments. The opportunity for 2012 is expected to come from coal price adjustments.

There are two main investment opportunities in the spring: first, companies whose performance is highly flexible with respect to electricity prices and coal price adjustments, and those whose performance has rebounded in the first quarter; second, macroeconomic recovery is worse than market expectations, and the time is later than the end of the first quarter as the market generally expects. At the beginning of the quarter, coal prices fell more than expected due to weaker economic growth and weakened demand, and the expected increase in the expected increase in profitability of thermal power companies was a further opportunity for restoration. Based on the above clues, we recommend Huaneng Power International, Guodian Power, Inner Mongolia Huadian, Jingneng Thermal Power, ST Jinma, and SDIC Power.

This year's power supply and demand showed a weak balance. The recent annual work conference convened by the State Electricity Regulatory Commission revealed that the entire society used 4.7 trillion kWh of electricity in 2011, an increase of 11.7% year-on-year. As China's macro economy enters structural transformation and China's energy structure is further optimized, the elasticity coefficient of electricity consumption will gradually decrease, and the growth rate of electricity demand in 2012 is expected to be 8%-9%.

From January to November 2011, the country's newly installed capacity was 66.27 million kw, a year-on-year growth of 6.89%. It is expected that the growth rate of installed capacity in 2012 will be 9.5%. Under the expectation that the industry demand will drop to around 8.5%, the industry supply gap will decrease. In 2012, the overall supply growth and demand growth of the industry will be basically balanced. However, the growth rate of power generation of thermal power industry in 2011 was 14.07%, and the growth rate of installed capacity was 8.83%. The gap between supply and demand was more obvious, and supply and demand were tight for three consecutive years.

In the fourth quarter of 2011, the NDRC issued a notice to implement interim price interventions for coal for power generation nationwide and to adjust electricity prices appropriately.

Since December 2011, the market price of thermal coal has continued to decline. The comprehensive average price of thermal coal in the 5,500-kilometer Bohai-Langang six-port market has been 792 yuan/ton, which has dropped for nine consecutive weeks and the cumulative decline has reached 61 yuan/ton, exceeding expectations. As the operation of thermal power companies is highly sensitive to coal prices, the rapid decline in thermal coal prices is expected to improve the profitability of the thermal power industry.

The turning point of profitability in the industry is expected to be the key drivers of the power industry in 2012, especially the thermal power industry. Power generation utilization hours, coal prices, and electricity prices tend to be good. Industry earnings are expected to rebound significantly in 2012. It is estimated that the growth rate of power equipment utilization hours in 2012 will be 3%.

As macroeconomic growth enters a downward path, changes in coal prices are expected to change the operating environment of thermal power companies. Looking forward to 2012, assuming a growth rate of around 8.5%, it is expected that the probability of high thermal coal price volatility will be relatively high. Even if the economy picks up in the second half of the year, the increase in coal prices is expected to be within 3%.

We tested the seven leading influential companies in the industry. Assuming that the price of electricity rose by 1%, the price of coal rose by 1%, and the number of hours of use of electricity for electricity rose by 1%, we can see the effect of electricity price adjustment on the net profit of thermal power companies. The largest was followed by changes in coal prices, with the smallest impact being the number of hours of power generation. Therefore, during the period of declining macroeconomic growth, the sluggish demand caused by the decline in coal prices will have a positive impact on the cost reduction of thermal power companies, which will be greater than the negative impact of a drop in power generation hours. The net profits of thermal power companies will increase.

Resource tax reform may have a boost effect. In 2011, the excess return of the power industry was reflected in two phases. One phase was the 3.95% excess return of the power sector from April 1st to May 31st; the second phase was November 1st. From December 31 to December 31, the power sector gained 3.66% of the excess return.

We found that in the first phase, the fund had a significant increase in the allocation of the power industry and a quick lightening process. Before the time node was revamped by the NDRC in April 2011, it was clear that the investment opportunities came from policy incentives for the increase in electricity prices. In the second phase, the fund has also added to the power sector before November 2011, when the NDRC re-introduced the power price again. However, unlike the first stage, after the introduction of the price increase policy, the fund not only did not lighten up, but instead Continuing signs of jiacang, the current position has exceeded the industry standard configuration. Obviously, this time the fund institution's interpretation of market opportunities is not only an increase in electricity prices, but we think it is a good expectation to restore the valuation of the power sector.

The price reforms of resource products such as electricity and natural gas that are of great concern are expected to materialize during the “Twelfth Five-Year Plan” period, and the reform of electricity prices is expected to go ahead. Electricity prices have been raised as expected in the market in early 2011. In December 2011, the National Development and Reform Commission (NDRC) issued another pilot project to reform natural gas price formation mechanisms in parts of Guangdong and Guangxi, and gradually promoted it to the entire country. With the deepening of the price reform of national resource products, the frequency and magnitude of tariff adjustments are expected to increase.

Under the background of the deceleration of macroeconomic growth, the probability of sharp rises in coal prices has decreased, the overall supply and demand of the power industry has been weakly balanced, and the profit turning point of power companies has emerged. After experiencing a sustained low allocation of funds for two years, we believe that the activity of the sector may increase. Obviously improved.