China IPPs:Coal in the stocking

In our December 18 IPP Reform school pain note, we reduced targetprices on a widely expected tariff cut. On December 23, the State Councilconfirmed a cut in the coal-fired on-grid tariff by Rmb0.03 (3 fen) perkWh on average, in line with our expectations and effective from 1st Jan2016. Normal industrial electricity usage price will be cut by the sameamount. The cut will also be used to support the retrofit of ultra-lowemission and the development of renewable energy. BUY China Powerand CR Power, SELL Datang and Huaneng, with Huadian Power an U-PF.

The near-term outlook remains dire

The power plant managers and coal mine managers that CRR tracks see noturnaround in the Macro Materials report (17 December 2015).

This view gels with the November power consumption growth of 0.6% YoYannounced earlier, but not with the +40% YoY capacity growth through Nov.

We earlier tweaked only slightly our utilization assumptions for the coal IPPs aftermultiple cuts over the past year, but see further downside risk to outer years.

Could the coal fairy keep on givingq

We cut our coal price assumptions by another 5% for 2015 to reflect priceweakness in 4Q15. Our 2016 coal price assumption is at current spot price.

Coal producers, importers and power suppliers that CRR tracks, on average,predicted that the spot will fall to Rmb345/t by June 2016 from Rmb365/t.

q Expectations range as low as Rmb310/t over the next six months.

Tariff cuts and power reformq

Our assumption for a 3 fen / kWh tariff cut in 1Q16, was in line with local mediaspeculation and sensibly reflecting a coal price collapse. The State Councilannouncement means that cut is official and will be implemented from Jan 1, 2016.q。

The longer-term trend is a one-way road, as power reform drives up direct powersales and (ultimately) competitive bidding into crowded wholesale markets.BUY CRP, CPI; SELL Datang and Huaneng; Huadian an U-PF

We earlier raised 15-16CL earnings estimates for CPI, Huadian and Huaneng. Whilefor CRP, we revised up 15CL net profit forecasts but cut 16CL by 0.4%. For DatangPower, we cut earnings.

After Huadian Power’s share price fall of 28% since August 2015, our earlier revisedTP implying slight upside warranted an upgrade to U-PF.

q We also reduced long-term expected ROEs across the group by – mostly – c.2 %points to reflect the impact of power sector reform.0