China Resources Power Holdings Co. is Credit Suisse Group AG’s top pick among Hong Kong-listed electricity producers including Huaneng Power International Inc. after China raised tariffs and the company’s coal reserves grew.
The unit of state-controlled China Resources Holdings Co. will benefit from the tariff increase announced yesterday while being able to cushion against higher coal prices because of its rising fuel self-sufficiency, Hong Kong-based Credit Suisse analysts Edwin Pang and Yang Song wrote in a research note today.
China, fighting its worst electricity shortage in seven years, raised power prices paid by nonresidential users for the first time in more than a year to rein in demand. The National Development and Reform Commission, the top economic planner, also increased tariffs that grids pay power plants, including Datang International Power Generation Co., and allowed some adjustments to be backdated to April this year and January 2010.
“China Resources Power is our sector pick,” the analysts said. “It enjoys part of the upside to tariff hike while protecting against the risk of coal price increases. This is due to its rising exposure to coal mining.”
The power producer’s coal output may climb to about 18.8 million metric tons in 2011 from 9.6 million tons last year, they said. China Resources Power may be able to meet 42 percent of its demand from its mines in 2012, compared with 35 percent this year and 22 percent in 2010, according to the analysts.
The company, whose shares have fallen 3.7 percent in Hong Kong trading in the past year, dropped 0.3 percent to HK$15.04 as of the midday break. In a survey of 27 analysts compiled by Bloomberg, 22 rate the stock a “buy,” while five recommend holding the shares. The Hang Seng Index declined 0.3 percent.
Huaneng rose 0.9 percent to HK$4.54. Twelve analysts recommend buying the shares, while 14 rate the stock a “hold.” Datang was unchanged at HK$2.87. Eighteen analysts rate the stock a “hold,” while seven recommend buying the shares.
The retroactive Jan. 1, 2010, price increase was already approved by the government last year, the analysts wrote. Implementation of the tariff change may boost Huaneng and Datang’s 2010 earnings by 7 to 8 percent, they said.
The two companies have yet to decide whether to adjust their 2010 earnings or book the additional profit in their 2011 accounts, according to the analysts.