China Mulls 3 Mega Power Firms in $855 Billion Reshuffle

Shares of Chinese coal-fired power generators surged on Tuesday as the country was said to be considering plans to create three energy giants through mergers of eight companies with combined assets of almost 5.9 trillion yuan ($855 billion).

The proposal, which is only one option being considered as the government of President Xi Jinping seeks to restructure the state-run power sector, hasn’t been finalized and is subject to change, according to people with knowledge of the plan. The mergers are proposed for the unlisted parent companies, not the units traded in Hong Kong and Shanghai, said the people said, who asked not to be identified as the information isn’t public.

Datang International Power Generation Co., the listed unit of China Datang Corp., jumped as much as 17 percent in Hong Kong to HK$2.63, the biggest intraday increase since July 2014. Shares in Shanghai rose 10 percent, hitting the daily limit.

China Huadian Corp.’s listed unit, Huadian Power International Corp., rose as much as 8.9 percent, while China Huaneng Group’s Huaneng Power International Inc. added as much as 6.7 percent. Gains on the benchmark Hang Seng Index were capped at 0.6 percent.

The three planned power giants would be created through the following combinations:

China Huadian and China Guodian Corp., two of the biggest coal-fired power generators, may merge with China National Nuclear Corp., the second-biggest nuclear power operator in China. The combined company would have 297 gigawatts of capacity and 2.04 trillion yuan in assets, according to data published on company and regulator websites, as well as annual reports.
China Datang, one of the five biggest coal-fired generators, may merge with China General Nuclear Power Corp., the largest nuclear power operator, and Shenhua Group Corp., the country’s biggest coal miner, as well as a major rail operator and power producer. The combined company would have 241 gigawatts of capacity and 2.09 trillion yuan in assets.
China Huaneng, the country’s biggest coal-fired power producer, may merge with State Power Investment Corp., a coal-fired power company that also owns State Nuclear Power Technology Corp., the unit building the country’s Westinghouse-designed AP1000 third-generation nuclear reactors. The combined company would have about 262 gigawatts of capacity and assets of 1.75 trillion yuan.

“The central government is trying to create some even bigger giants in the industry, with more efficiency through consolidation of coal-fired assets, and compensate the loss of coal-fired assets with nuclear and coal assets that offer better profitability,” Dennis Ip, an analyst at Daiwa Securities Group Inc., wrote in a client note. “These potential mergers, if confirmed, would be more positive for and possibly lead to re-ratings for the coal-fired IPPs, which are currently having a difficult time breaking even.”

Overcapacity, Debt

China Huadian declined to comment when contacted on Monday, while a spokesman for China Shenhua wasn’t able to respond. The remaining companies didn’t respond to requests for comment sent by phone, fax and email.

Nobody responded to faxed requests for comment sent to the State-owned Assets Supervision and Administration Commission, which regulates state-owned companies; the National Development and Reform Commission, the country’s chief economic planner; and the National Energy Administration.

“The newly created companies could become ‘too big to fail’ almost overnight, and how to effectively prevent them from becoming new market monopolies will be a hard task to deal with,” said Shi Yan, a Shanghai-based utilities analyst at UOB Kay Hian Holdings Ltd.

An industrywide regroup would build on Xi’s efforts to cut industrial overcapacity, accelerate the overhaul of the bloated state-owned sector and reduce the country’s reliance on coal. Utilization at China’s power generation facilities last year averaged 3,785 hours, the lowest since 1964, according to the National Energy Administration.

Reforming the state-owned sector is also key to Xi and Premier Li Keqiang’s goal of rebalancing the $11 trillion economy away from an over-reliance on debt-fueled infrastructure investment and exports to one powered more by services and consumer spending. The country will deepen consolidation of state-owned enterprises this year, Xiao Yaqing, chairman of Sasac said in March.

“The driver for this idea is probably not just overcapacity, but levels of debt in the parent companies,” said Simon Powell, head of Asian utilities research at UBS Group AG in Hong Kong. “By merging good cash flow companies with not-so-good, then perhaps the debt burden gets eased. Given that the proposed changes are at the parent company level and the listed companies remain as are for now, then not much changes for shareholders in the short term.”

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