Most Attractive Buy List: 991 and 836  

Posted by Book Eater in

Theme Plays:-a function of intermarkets analysis report for short term momentum plays.

A pocket of US dollar strength, naturally places downward pressure on USD-based commodity prices, particularly energy (Oil). Also, commodity prices index (look at crossmarketstrader analysis on the CRB index) are correcting currently.

Beneficiaries: Datang Power and China Resources Power

Share Price Performance

CR-Power and Datang have been the top performers in the power sector, outperforming the H-share index by 82% and 11% over the past 12 months.

In comparison, Huaneng, Huadian, GD-Power and CYPC have under-performed their respective local indices by 65%, 47%, 39% and 1% over the past 12 months.

Comments: 836 and 991’s technical charts look to be in a consolidation move for a possible breakout. 902, 1071 have all risen. I believe this is because their share prices have been bogged down massively that’s why they were first to rise. GD power and GYPC are Shanghai listed stocks.

Main Drivers

The main drivers will remain the same in 2008, including continued coal cost hike (less impact on CR-Power and Datang), flat utilization, and further asset acquisitions (Huadian, CR-Power and GD Electric Power likely to benefit).

Comments: Commodities charts have formed double tops which are beneficial for power producers (lower oil prices will be good for them as they will have lower fuel costs.) I think it has something to do with how the prices in the charts are acting. One has to notice that most energy plays such as 1898(China Coal) has also fallen, 1088(China Shenhua) has also fallen. If one were to bet on what these charts are telling us, the power sector looks to be quite good.



Summary: The best coal cost control. CR-Power has the lowest break-even utilization level and hence relatively lower earnings sensitivity ratios. CRP’s participation in the upstream coal market is just another example of management’s excellence of their long term vision that differentiates them from the rest of the pack.

Key company-specific catalysts going forward

are (1) further development of the Inner Mongolia coal project and (2) further M&A.

Minimal utilization decline in 2H07

The company’s utilization dropped by just 2.5% Y/Y on a same plant from Jul-07 to Nov-07, compared to a >7% Y/Y decline for the whole China (thermal only) over the same time period.

JPM expects a capacity growth of 19% CAGR from 2007-10E and a 12% CAGR from 2007-15E

Downside risk to our PT exists from higher coal prices, and lower than expected tariff hike in FY08E and beyond

Comment (since higher coal prices are not seen within the short term, this risk is less of a concern today.)

JPM View: The coal-to-liquid business will become much bigger part of Datang's business in the future; apart from Duolun, Datang is reportedly looking for 2 more mega projects in
Fujian and Liaoning. Upside potential to our Dec-08 PT exists from Datang’s coal-toliquid investment. Assuming project IRR of 15-25% on Duolun and 9% WACC, maximum DCF upside is HK$0.41-1.18 / share.

Nix Remarks: My comments on their technicals are inside the charts. Take a look. Thanks. I agree with Oliver (from that power plays in HK market are bullish.

Disclosures: I don't have any of these stocks yet. I plan to buy them Friday. I have 2777 though in my portfolio.


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