China Power (02380.HK) by KGI October 11, 2013

1Q-3Q13 power output up 5.9% YoY, weighted
average on-grid tariff down Rmb12.59/MWh

What’s new
China Power has announced power output growth of 5.9% YoY for 1Q-3Q13, 2% higher
than our forecast. The weighted average on-grid tariff for coal-fired power has been cut by
Rmb12.59/MWh, effective September 25.

Implications
Power output growth in 1Q-3Q13 was driven mainly by increased power consumption
nationwide and commercial operation of new facilities. Coal-fired plants accelerated 
production in 3Q13, boosting output growth to 29% YoY, against a decline of 7.2% YoY in 
1H13, as hydropower generation slowed while power consumption rose given the warmer 
weather. Although total power output in 1Q-3Q13 was only 2% higher than our forecast,
coal-fired power output hit 31mn MWh, around 3.8% higher than our forecast and up
3.6% YoY.

Hydropower output dropped 40% YoY in 3Q13 on poor water intake versus abundant
water in the same period last year; 1H13 saw 47% YoY growth. Hydropower output of
11.2mn MWh in 1Q-3Q13 was up 12.6% YoY, and was 2.5% below our forecast.
Hydropower stations are mainly located in Hunan Province, where rains are concentrated in
April-May and August-September. However, water levels in the past two months have been
low, so with fourth quarter the traditional low-water season, we forecast the hydropower
output decline to be steeper than usual.

The tariff for coal-fired power has been cut by 2.9%, or a weighted average of
Rmb12.59/MWh, effective September 25. The reduction is in line with our expectation. The
company’s coal-fired power plants are located in five inland provinces, so the average
reduction of the tariff is below that of the national average level of around Rmb20/MWh.

Valuation & action
Since power output growth in 1Q-3Q13 was only slightly higher than we forecast, we
maintain our power output forecast of 54mn MWh for 2013, up 4% YoY. We also maintain
our EPS forecasts of Rmb0.46 for 2013 and Rmb0.43 for 2014. The shares trading are at a
2014 PB of 0.8x and 2014 PE of 5.5x, the lowest in the sector. As the net income weighting
of coal-fired power is lower than peers’, any power charge cuts in 2014 would hurt China
Power’s earnings less than peers’. We forecast ROE of 14% in 2014. We maintain our
12-month target price of HK$3.8 for China Power, based on 1.0x 2014 PB, and reiterate our
Outperform rating.

Risks
An economic hard landing in China could drag down power demand; a sharp rise in coal
prices; poor water intake.