Even Capitalist Roaders need a break – we’ve decided against any action this week. Although Anhui Conch (600585.SH) has fallen 29% since we bought it on June 3, we’re not planning to unload it just yet. Both it and ICBC (601398.SH), currently down 1.6% from since June 18, were meant as longer-term buys.
And although the SCI ended Thursday at 2,901.85 points, 5% up from Monday’s close, we’re not really in a buying mood either. However, and perhaps surprisingly given this earlier post, we’re adding a new company to our watch list: Huaneng Power (600011.SH).
The major news for power producers like Huaneng this month was, of course, the announcement that the government would hike retail tariffs by just under 5% (4.7%, to be exact). In the earlier blog post, I argued the effect of this on power producers like Huaneng would be small, based largely on the grid’s historical reluctance to increase on-grid tariffs.
However, a new report by China Merchants Securities notes that the on-grid tariff will in fact be increased by RMB 0.02/ kilowatt-hours (kWh). Given Huaneng’s planned power generation in 2008 of 200 billion kWh, that means a potential increase in revenue of RMB2 billion (US$290 million), about 3% of the company’s predicted 2008 revenues. As a result, China Merchants Securities is maintaining its rating of “prudently recommended.”
Furthermore, Huaneng isn’t putting all its eggs in the China basket, and even within China it’s hedging against future coal-price increases. A recent purchase of Singaporean power producer Tuas was followed by an acquisition of another Singaporean power firm, SinoSing. And the company has also invested RMB1.4 billion (US$204 million) in a Chongqing coal mine, with total recoverable reserves 125.13 million tons, to ensure a reliable supply of coal for its plants.
While we’re not quite ready to jump in yet, we think that Huaneng is one to watch.