China said to mull 3 mega power firms in 5.9t yuan remix

[HONG KONG] China is considering plans to create three power giants through mergers of eight generators with combined assets of almost 5.9 trillion yuan (S$1.2 trillion), according to people with knowledge of the plan. Shares of the coal-fired generators surged.

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 finalised and is subject to change, said the people, who asked not to be identified as the information isn't public. The mergers are proposed for the unlisted parent companies, not units traded in Hong Kong and Shanghai, the people said.

The three planned power giants would be created through the following combinations: China Huadian Corp 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 Corp, 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 Group, 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."

Listed units of the coal-fired power generators gained on Tuesday. Datang International Power Generation Co rose as much as 13 per cent in Hong Kong to HK$2.54, the biggest intraday gain since July 2014. Shares in Shanghai rose 10 per cent, hitting the daily limit.

Huadian Power International Corp added as much as 8.9 per cent, while Huaneng Power International Inc added as much as 6.7 per cent. The benchmark Hang Seng Index added as much as 0.5 per cent.

OVERCAPACITY, DEBT

China Huadian declined to comment, 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 Mr 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 Mr Xi and Premier Li Keqiang's goal of rebalancing the US$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."

BLOOMBERG