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Power industry: continue to benefit from a moderate coal price environment

  • Categories:Industry News
  • Author:
  • Origin:
  • Time of issue:2014-12-12 11:19
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(Summary description)Attractive valuation + good fundamentals We reiterate our positive views on the Chinese power industry. We believe that under the moderate coal price environment and reasonable electricity price mechanism, the fundamentals of the industry will remain good, and potential asset injection is a catalyst for stock prices. We believe that the current valuation of the industry is still attractive. The current stock price corresponds to the average PE of 2011, the PB 1.6 times, the ROE16%, and the dividend yield of 3.4%.

Power industry: continue to benefit from a moderate coal price environment

(Summary description)Attractive valuation + good fundamentals

We reiterate our positive views on the Chinese power industry. We believe that under the moderate coal price environment and reasonable electricity price mechanism, the fundamentals of the industry will remain good, and potential asset injection is a catalyst for stock prices. We believe that the current valuation of the industry is still attractive. The current stock price corresponds to the average PE of 2011, the PB 1.6 times, the ROE16%, and the dividend yield of 3.4%.

  • Categories:Industry News
  • Author:
  • Origin:
  • Time of issue:2014-12-12 11:19
  • Views:
Information
Attractive valuation + good fundamentals
 
We reiterate our positive views on the Chinese power industry. We believe that under the moderate coal price environment and reasonable electricity price mechanism, the fundamentals of the industry will remain good, and potential asset injection is a catalyst for stock prices. We believe that the current valuation of the industry is still attractive. The current stock price corresponds to the average PE of 2011, the PB 1.6 times, the ROE16%, and the dividend yield of 3.4%.
 
UBS coal team lowered coal price forecast
 
The UBS coal team maintained a cautious attitude towards the prospects of domestic coal prices and lowered the coal price forecast for Qinhuangdao 5,500 kcal in 2015/16 to 495 yuan/ton and 490 yuan/ton respectively (previously forecast at 550 yuan/ton). The coal team believes that coal will continue to supply more than demand, new capacity will continue to be put into operation, and the new railway line will ease the transportation bottleneck.
 
Raise earnings forecasts and target prices
 
We followed the coal team to lower the coal price assumption and assumed that the on-grid tariff for tax-included tariffs will be lowered by 0.01 yuan/kWh (equivalent to a 2% reduction) from September 1, 2015. In the long run, we assume that any coal price changes are Will be offset by the price adjustment (lag). As a result, we slightly adjusted our 2014 earnings forecasts, but raised our 2015 and 16 earnings forecasts by 5-15% and 3-21%, respectively. We expect dividends in 2015 to be more attractive, as there is a time lag between the decline in coal prices and the reduction in electricity prices. We also raised our target price based on the DCF valuation method. Since the risk-free rate has dropped and we refer to Wind for the updated beta value, we have lowered the WACC assumption and raised the target price by 10-49%.
 
Thermal power company preferred Huaneng, the most attractive valuation
 
The most recommended thermal power company in the A-share market is Huaneng. The company's power assets are of high quality and its profitability is at the leading level in the industry. We expect ROE to be 17.8% in 2015, the current share price is only 7.9 times and 1.3 times for 2015 PE and PB, and the dividend yield is 5.7%.

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