It cut Zhejiang IPPs' tariffs by at most 5%.
The share prices of five Hong Kong-listed coal-fired IPPs from China fell 2-8%, or an average 4%, on 10 August, owing to on-grid tariff cuts for coal-fired plants in Zhejiang estimated at not more than 5%, Citi said.
According to a research note, Zhejiang will be the second place in China with on-grid coal-fired tariff cut recently, with the first in Yulin, Shaanxi. The tariffs have already been approved in principle by the National Development and Reform Commission (NDRC).
“Based on our discussion with NDRC, it regards the tariff cut in Zhejiang as a special case and does not expect enough room for a similar cut nationwide,” Citi said. For every 1% tariff cut, 2018 net profit of IPPs in China will average -7.6%.”
Coal-fired plants represent the most (4.6%) attributable capacity of China Resources (CR Power) amongst IPPs, followed by Datang (3.5%), Huaneng (1.4%), Huadian (0.2%) & China Power International (nil).
The rationale of these cuts are mostly related to (i) reduction of social electricity usage cost; (ii) giving room to subsidy renewable energy power plants; and/or (iii) excessive return of coal-fired plants.
Also read: China coal prices retreat amidst peak season
Zhejiang ranked seventh in terms of on-grid coal-fired tariff amongst the 30 provinces in China, higher than such neighbouring provinces as Jiangsu, Fujian, Anhui and Jiangxi. “The tariff cut in Zhejiang will narrow the gap of tariffs between Zhejiang and its neighbouring provinces,” Citi said.
Likewise, when the Chinese economy was weak after the Asian financial crisis, on-grid coal-fired tariffs were also trimmed in some regions proposed by local governments. China’s economic growth has declined and as a result, coal consumption growth of the six large coastal coal-fired power generating companies dropped by 7.8ppt from +18.7% YoY in May to +10.9% YoY in June and by 3.6ppt to +7.3% YoY in July.
China Coal Transportation and Logistics Association’s (CCTD) comprehensive coal price (5,500kcal/kg) was -1.4% to RMB568 per tonne on 6 August and -3.6% in the last seven weeks.
“We expect [China’s] thermal coal price to keep dropping in 2H2018E considering the weakened PRC economic and power demand growth,” Citi said. “For every 1% unit coal cost cut, PRC IPPs’ 2018 net profit will average +5.1%.”
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