THE ENERGY INDUSTRY TIMES - NOVEMBER 2017
Industry Perspective 13
China continues global expansion
China’s influence on the global
power generation landscape
continues to grow. Motivated
by government policy and support,
earnings diversification and financing
capability, the country’s electric
companies’ hunt for mergers and acquisitions
looks set to accelerate over
the next few quarters.
While there will be some M&A at
home, most activity will be abroad.
At home, authorities are seeking to
combine some of the power related
groups to make them strong, large
companies. There have already been
two significant government-mandated
mergers. One is State Power Investment
Corp. formed in 2015 by
the merger of China Power Investment
Corp. and State Nuclear Power
Technology Corp. The other is China
Energy Investment Corp., which was
created in 2017 through the merger
of Shenhua Group Corp., China’s
largest coal miner, and China Guodian
Corp., one of the nation’s largest
power producers. More of such
mergers are likely to be executed in
the next few quarters.
In terms of international investments
and acquisitions, a primary resolve
has been to encourage Chinese
electric power companies investing
abroad to purchase assets, knowledge
and technologies – with some
enterprises actually seeking new
markets to deploy their own technologies.
Notable companies include the
network giant State Grid Corp. of
China and waste-to-energy focused
China Everbright International.
Investing abroad also allows China’s
power companies to diversify
earnings in the face of a harsh sector
backdrop at home, which is creating
challenges to earnings that are unlikely
to dissipate for at least the next
four years.
New electricity supply in China
rose 60 per cent faster than the rate
of consumption in 2016, continuing
the 2015 trend. Although demand rebounded
in 2017, supply is still rising
faster. The imbalance has created
a massive glut that will take several
years to absorb.
The oversupply situation has had a
deep financial impact on the largest
power generation groups, which
have asset portfolios chiefly made
up of coal fired power plants that
have been facing historically low
utilisation rates. At the same time
high domestic thermal coal costs are
also cutting their margins. Apart
from low utilisation rates and high
social costs, the average realised
electricity unit-sale prices from coal
plants are also weaker. This is partly
Year to 31/12/16 Datang Guodian Huadian Huaneng SPIC
Sales (Billion, Yuan) n.a. 183.6 189.3 243.9 195.9
Year-on-year (%) n.a. n.a. -4.0 9.1 1.8
Profit (Billion, Yuan) 10.75 13.10 13.12 13.57 13.21
Net margin (%) n.a. 7.1 6.9 5.6 6.7
Output (TWh) 470.0 505.2 491.9 621.6 369.9
Capacity (GW) 130.2 142.6 142.8 165.5 116.6
Low carbon (%) 31.9 30.3 37.0 29.0 42.9
Coal/kWh (grams) 306.9 304.6 303.1 302.3 304.9
Year-on-year (%) -0.8 -0.6 -1.1 -1.1 -0.8
Source: China Electric Power News Network, February 20, 2017
China’s leading electric power groups
due to additional lower-priced power
sold directly as a percentage of the
total as the nation progressively liberalises
its power market.
The tough domestic market has resulted
in poorer financial results for
all of the key nationwide power generation
groups. Looking at the listed
companies that offer some financial
transparency, broadly speaking, the
return on equity (ROE) has been declining
in the past few quarters. This
decline is an incentive for these companies
to seek returns abroad through
acquisitions and greenfield projects.
The companies’ median ROE had
previously outpaced that of other
Asian peers, partly thanks to tariff
hikes. They have fallen since 2015
due to lower unit-sales prices and
higher unit-fuel costs and should falter
more in the next few quarters.
The third factor facilitating an acceleration
of M&A by Chinese companies
is their strong financing capabilities.
On the debt front, despite
poor bottom line earnings in the
past few quarters, the median netdebt
to-equity level of listed Chinese
electric power companies has
dropped from its 256 per cent high,
recorded in 2H11, and still provides
them with significant financial muscle
for M&A.
The higher cash flows were caused
by low coal prices while cuts in power
tariffs, which reflected the low
fuel price, were delayed. The ratio
edged higher in 1H after a sharp rise
in coal costs and a lag to tariff changes
but it should start declining again
from 2018 following a mild income
recovery.
The financing of projects is crucial
and China’s financial institutions, including
the largest state banks and
policy lenders, have been keen to support
Huaneng Power, Longyuan and
other developers. Policy support includes,
but is not limited to, the Belt
and Road initiative. State-funded or
state-owned policy banks include the
Export-Import Bank of China and the
China Development Bank.
While there are numerous examples
of power groups investing
overseas, there is no clear trend in
terms of the sources of energy or regions
the Chinese are probably interested
in. They have chiefly been
opportunistic.
If we were to take the nation’s nuclear
developers as an example, the
primary aim is to export homegrown
technology and experience.
They are likely to be attracted by
any geography that is open to having
Chinese investment in their nuclear
industry – something not many
nations are open to.
Bloomberg Intelligence channel
checks indicate that all of the major
groups are looking at opportunities
abroad and many are conducting indepth
feasibility studies. They have
so far invested anywhere from Brazil
(Three Gorges) to Greece (State
Grid) to South Africa (Longyuan),
encompassing all forms of energy
sources. Also they have not been
shy to invest jointly with other
groups. For example JinkoSolar
joined Japan’s Marubeni to build a
solar power plant in the United Arab
Emirates.
Australia has been a key focus
for Chinese energy groups and this
will continue in the coming years
as M&A activity by Chinese power
companies increases. Australian
energy markets remain open, the
country has low sovereign risk and
Chinese companies have accumulated
relevant knowledge. Australia
has been the source of 21 deals based
on data scrutinised by Bloomberg
Intelligence.
Of these, 17 are pending or completed
while four were cancelled or
terminated. Only the deal value of 13
of the 17 is public information. They
amounted to $4.1 billion. State Grid
Corp. of China is still interested in
Australian transmission and distribution
assets, even after its bid for a
network last year was blocked. CGN
and other nuclear companies focus
on uranium assets. Others, including
wind-operator Longyuan, have been
looking for investments.
Although the interest is high, there
are of course hurdles the companies
have to face but most are surmountable.
These include understanding
country risk, the volatility of some
geo-political relations and currency
fluctuations. Chinese companies
have gained much experience in the
past decade and now have a better
understanding on how to address
these. Recent examples include investments
by nuclear developer CGN
in Malaysia, Shanghai Electric in
Pakistan and coal-giant Shenhua Energy
in Indonesia.
On the currency risk front recent
investments show that currency worries
may be overdone as short-term
fluctuations are less of a concern given
the long-term nature of projects.
Consensus also forecasts a stable
Chinese yuan vs. the dollar.
The companies have located investments
that meet their hurdle rates,
and have succeeded in competitive
bids against experienced rivals. The
rates sought for overseas investments
for companies such as Huaneng and
Longyuan are generally a return on
equity of at least 10 per cent.
In the coming years acquisitions and
investments by Chinese power groups
abroad should steadily increase, although
they will of course continue to
compete with other foreign investors.
In Asia for example Chinese companies
compete with Japanese and Korean
ones as these companies too are
trying to diversify earnings.
Nevertheless, it is most likely that
China will become the leading electricity
foreign investor globally. The
trend has already started and the motivation
for the companies is high.
Joseph Jacobelli is Senior Analyst,
Asia Utilities & Asia Content,
Bloomberg Intelligence.
China looks set to
become the leading
electricity foreign
investor globally. The
trend has already
started and the
motivation for their
power companies
is high.
Joseph Jacobelli
Jacobelli: It is unlikely that
companies will focus on
a certain region or energy
source; the approach will
remain opportunistic
China power companies
return on equity. The decline
in return on equity in recent
quarters is an incentive to
seek returns abroad.
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
Asia Pacific Electric Utilities Peer Group Return on Equity (%)
China Median Return on Equity (%)
Asia Pacific Electric Utilities Ex China Return on Equity (%)
2H07 2H08 2H09 2H10 2H11 2H12 2H13 2H14 2H15 2H16
Source: Bloomberg. Note: Peer group of Asia’s 50 largest utilities by market value