Large swathes of China are sweltering as temperatures high new highs. The thermostat in Beijing logged its hottest June day, coming in at a record 41.1 degrees Celsius. Extreme heat also hit nearby Hebei province and Tianjin City. According to the national weather services, the temperature is close to resetting the capital’s 1999 all-time high of 41.9 degrees Celsius.
China Needs More Electricity to Combat the Heat
Even as authorities warn citizens to stay indoors, away from the heat, this will likely drive-up power consumption. Chokwai Lee, senior equity analyst at Morningstar, says this may partly explain why shares in power-generating companies are off to a good start this week.
Plus, he adds that cheaper commodity prices are benefitting coal-fired plants. For example, China Resources Power (00836) stock is up 5.8% this week, against a Hang Seng Index gain of 1.4%. Thermal power plants account for 67.7% of China Resources’ total capacity.
“In China, coal prices have been retreating from their 2022 highs. This is because of a combination of two factors – an increase in domestic supply, and weak demand due to the country’s weaker-than-expected economic recovery,” Lee explained. However, while coal is cheaper than it was last year, prices remain well above pre-COVID prices, he adds.
While investors might be tempted to look favourably on all power production stocks, Lee emphasizes the need to consider nuances such as the source of energy for electricity generation, as well as the fundamentals of the stocks.
Renewables Ride High on Government Net-Zero Targets
While China’s ambitious renewable targets of peaking carbon emission by 2030 and achieving carbon neutrality by 2060 imply an urgent need to ramp up clean electricity output, the sector is riding on a secular tailwind. Power producers that engage in generating power from clean sources dominate the list of companies that could benefit.
However, at this point, there are some potential execution pitfalls to be monitored.
One of them is a shortfall in the government’s renewable energy fund, which has led to delays in subsidy collections and a hit on renewable companies’ cash levels. Also, elevated interest rate levels are negative for companies with a high or rising gearing level, such as Suntien and Xinyi, according to Lee. Being short of funds will restrict their acquisition and capacity expansion plans.
6 Chinese Power Producer Stocks That are Undervalued
Six of the companies Lee covers in the space make his pick list. Here they are:
CGN Power (01816)
CGN Power is the larger of two major nuclear power producers in China, operating 26 nuclear generation units. The shares are trading at around 14% below Lee’s fair value estimate. The company also has a 5% dividend yield for 2023.
“CGN aims to maintain a reasonable increase in the dividend payout ratio through 2025 based on the level of 42.25%. We think this is achievable, underpinned by the robust cash flow generated from its nuclear power projects,” Lee says.
Additionally, CGN has plans to add another six more units by 2027 and the capacity addition pipeline will increase CGN’s earnings visibility for the long term.
China Datang Corp Renewable Power Company (01798)
Datang Renewable is one of China’s leading wind power operators, producing around 3.5% of the country’s wind power capacity. Shares in Datang Renewable are trading at a 21% discount to our fair value estimate.
Higher power output and lower finance expenses lifted the company’s first-quarter net profit. Solar power output outpaced that of wind power. “However, despite total power generation rising 24.7% year on year, revenue only grew 13.9% year on year, implying a drop in average tariff,” Lee says.
“There is still upside for Datang Renewable. But, a higher margin of safety is warranted, given its aggressive expansion plan, which could stretch its financial position,” Lee adds.
China Longyuan Power Group (00916)
Wind farm operator Longyuan closed on Jun. 26 at HK$ 7.92 and has an upside of 75% to Morningstar’s fair value estimate of HK$ 14. With more than 400 wind farms across China, the company represents about 7% of the country’s wind power capacity. As Longyuan’s renewable energy capacity grows robustly, Lee thinks the company is attractive as the current share price largely reflects the weak financial results in 2022 and subsidy audit concerns.
China Resources Power (00836)
CR Power is undervalued, with its share price trading 22% below Morningstar’s fair value estimates.
Lee believes the outlook is positive for CR Power given that the company was able to secure long-term lower-priced coal contracts amid falling prices. “The continued recovery in profitability and the pending listing of its renewable energy segment are likely to support share price performance,” he says.
China Suntien Green Energy (00956)
Suntien operates in two business segments – the natural gas segment as well as wind and solar power segment. The former is the core revenue source.
Lee expects the Chinese government to continue to support renewable energy producers to bridge the coal-reliant economy with the nation’s ambitious target to peak carbon emissions by 2030 and achieve carbon neutrality before 2060.
Xinyi Energy (03868)
A spinoff from solar glass manufacturer Xinyi Solar, Xinyi Energy owns a portfolio of utility-scale ground-mounted solar farm projects. The stock is undervalued, about 23% below Morningstar’s fair value estimate of HK$ 3.12.
Xinyi Energy is ambitious in acquisitions, for example buying new solar energy projects. It’s worth noting that, the company is also positioned itself as a high dividend payer. Xinyi Energy is expected to pay shareholders a dividend of 6.2% in 2023.
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