China Yangtze Power, which operates the Three Gorges hydroelectric dam alongside its state-owned parent China Three Gorges Project Corp, saw its full year net profit rise 9.9% to US$417.51 million in 2005, and 2006 looks to be brighter still. The company generated 8.85% more electricity in the first three months of 2006 than a year earlier, with its Three Gorges share yielding 3.378 million megawatt-hours (MWh) and its wholly owned Gezhouba Dam an additional 2.392 million MWh.
As China's most valuable power firm, the company enjoys favorable support from the government in respect to energy policy and taxation. In addition to this, there are valuable distribution agreement with local governments in its major service areas, namely economically buoyant central, eastern and southern China.
Yangtze Power has embarked on an aggressive acquisition effort to further cement its competitive edge in the market.
It plans to acquire its parent company's remaining Three Gorges generators by 2015 – it currently owns six of the 13 operational generators, with a further 13 expected to come online by 2009 – boosting total installed capacity to 20,915 megawatts (MW), up from 6,915MW last year.
Expansion is expected to lead to mounting debt pressure in the long term, but with cheap and abundant water resources and average gross margins exceeding 70%, Yangtze Power is considerably more profitable than both coal-fired power and other domestic hydroelectric providers. Thanks to strong earnings ability and rising economies of scale, it can be expected to maintain its strong operating cash flow.
Growing hydropower demand, government favor, expanding generation capacity and a strong financial profile mean the company is in a position of power.
Shanghai Automotive 600104.SH
Like its domestic counterparts, Shanghai Automotive's parent company Shanghai Automotive Industry Corporation (SAIC) has grand plans of cracking the global auto market.
Earlier this year, SAIC announced it would develop its own brand of vehicles to compete directly with offerings from its joint venture partners General Motors and Volkswagen AG in China, and to develop fresh markets offshore.
The first exports to Europe are expected in 2007 and the company wants to be able to produce 300,000 vehicles a year under its own brand by 2010. At least 50,000 of these are earmarked for export markets including North America.
The announcement is timely for the company's listed arm, Shanghai Automotive, one of the largest domestically-listed auto parts manufacturers in China.
The auto parts producer depends on its parent's joint ventures Shanghai VW and Shanghai GM for over 60% of its sales, exposing it to market volatility. With lower-than-expected demand growth and domestic overcapacity, the company's earnings are at risk, particularly as the two JV auto-makers face increasing domestic competition from the likes of Hyundai and Toyota.
Ultimately, Shanghai Automotive's success could be tightly linked to demand for its parent's home-grown models, with potential export sales providing some respite from domestic volatility.
The company certainly has its eye on export, with plans to offer between one and three billion new shares in order to raise cash to buy into SAIC's stake in Shanghai GM. The company also stands to gain a share in SAIC's commercial vehicle tie-up with GM in south China, and its 50% share in a car venture with Volkswagen AG.
There are still unanswered questions about whether China has the know-how, and deep enough pockets, to successfully develop an auto export market. But with the full weight of the Chinese government behind domestic auto manufacturers, the prognosis is good.