Chinese power generation market has been occupied by the mega state-owned enterprises. We have explained in a previous piece the three-tier hierarchy structure of these power generation players:
- tier-1 players: the five largest power conglomerates. Each of these “Big-5” cover almost all power generation sectors—with nuclear power an exception. The “Big-5” have been expanding vertically in the past decade, owning coal mines that cover part of the raw materials needed for coal-fired power production. And some of the five have invested in the “downstream” heavy power users—such as aluminium production plants, rendering them controls over the value chain.
- tier-2: smaller power generators which come from a more specialized background (focused initially on nuclear, hydro, or coal) but also central government-owned. The industry refers to four of these players—Huarun, CGN, the former Shenhua (Guohua), and SDIC—as the “Four Powerhouses.” But there are more than just four tier-2 players.
- tier-3: the regional powerhouses who are backed by the local government. Historically, the regional power generation companies were mostly coal-fired power players and as financial investors in various power generation projects. But as local government become increasingly interested in new energy, some of the local power utilities have become more prominent in the renewable market—especially area like offshore wind where local governments have a decisive role.
The investment strategy and trend of the top-tiers, the big-five, remain to be a parameter of the market development. Here is an update of the performance and the new strategy of the big-5 utilities.
Chinese Power Utilities’ Energy Portfolio
The “Big-Five” remain the most dominant players in the Chinese market in terms of their “size”— both of their power installed capacity and power production volume.
The three players to look into are:
- CEIC: largest in size
- SPIC: the fastest growth and a reformist
- China Datang: business under-challenged
China Energy Investment Corp (CEIC) has been sitting on top among the five since 2017. By the end of 2019, the firm’s cumulative installed capacity reached 246.4GW by the end of 2019.
It is followed by China Huaneng (182GW), China Huadian (153GW), and State Power Investment (151GW).
In fact, CEIC has become much larger compared to its peers, mostly due to 2017 merger between China Guodian and China Shenhua, which give birth to the gigantic firm.
Guodian previously had been a smaller player among the “Big Five,” while Shenhua’s power asset granted it a spot among the tier-2 players. (Shenhua is also China’s largest coal mining firm. )
The consolidation of the dup, thus, created the world’s largest power generation conglomerate in size, overtaking the former No.1 Huaneng in China and surpassing EDF of France from a global scale.
However, whether the merger leads to efficient improvement across CEIC’s assets is another question. Energy Iceberg notices, in the past two years, some of China Guodian’s subsidiaries show signs of slow-down in development. [China Longyuan and Guodian United Power—the wind power and turbine making subsidiaries of the firms are two examples.]
Among the five, State Power Investment Corp (SPIC) stands out with the highest growth for its power asset and the production yields.
The firm reported a 7.6% capacity growth and over 11% generation increase, while its peers mostly saw capacity climbed 3% and generation up 2-4%. Moreover, SPIC also harvested double-digit generation growth in 2018.
SPIC shows some unique progress in the past two years since its current chairman Qian Zhimin was appointed and relocated from nuclear firm CNNC.
The result reflects SPIC’s reformative strategies under Qian, including new internal management measures and a greater emphasis on renewable power development. The internal reform may help to increase production yields, while a higher renewable power portfolio is an advantage now as Beijing inclines to limit coal power consumption.
We have yet to obtain the data of the cumulative power capacity of China Datang. But its reported power generation data shows some minor decrease compared to 2018 figure.
The firm is known to face many challenges in terms of its business development, due to poor performance (even bankruptcies) of several coal-fired power assets.
Utility Companies’ Renewable Power Portion
Overall the five are in a collective and slow transition to embrace a higher renewable penetration in their power mix.
The most recent data of the percentages of clean power in the “big five’s” total power mix:
- CEIC: 24.9%, up 0.5%
- Huaneng: 34%, with 61GW installed capacity
- Huadian: 40.4%
- SPIC: 50.5%
- China Datang: 35.57% (2019 Q1 data)
Clearly, SPIC is way ahead of its peers, as the first among its peers o achieve over 50% of its power capacity mix from clean power sources—hydro, nuclear, and renewable.
The leading position in renewable mostly thanks to SPIC’s world-class solar capacity—of almost 20GW by the end of 2019. And it is also due to SPIC’s well-rounded clean power portfolio across hydro, wind, and nuclear. Among the “big five”, SPIC is the sole developer owning commercial reactors (in operational phase).
While China Huaneng remains a coal-fired heavyweight, the firm has been trying to catch up in renewable investment and to improve its power asset structure. Notably, its clean power portion in 2019 has leap 7% compared to that in 2018.
In an absolute sense, CEIC remains the most significant renewable developers in terms of cumulative installed capacity. The position is backed by its 38.3GW installed wind capacity (2018 data), which is the largest in the world.
Nevertheless, CEIC has limited solar portfolio and remains the largest coal miner and coal-fired developer. It has the highest thermal power penetration, a legacy of its merger with China Shenhua.
Financial Results of the Chinese Power Companies
There is a clear correlation between the renewable portion of the power utilities and their financial performance in 2019.
Four of the “Big Five” have disclosed their 2019 revenues.
- CEIC: ¥555.6bn, 2.4% YoY growth (profit increased by 6.3%)
- Huaneng: ¥299.1bn, 8.9% YoY
- SPIC: ¥272.5bn, 20.4% (profit increased by 49.2%)
- Huadian: ¥234.7bn, 9.4% (profit increased by 37.1%)
As expected, SPIC shows a stronger momentum than its peers. Its profit margin rose 49.2%, especially, compared to 2018’s result.
China Huadian is another player that registered double-digit profit growth.
The increase is likely related to Beijing’s policy to support renewable consumption and reduce renewable curtailment, which helps SPIC to secure higher power sales.
The gross margin of new energy power has outperformed that of coal-fired power, against a background of rising coal prices. The high raw material cost is positive news to the coal mining business of the “big five” but a heavy blow to their power production units.
A comparison of the five’s revenue and profit growths speak loud and clear the importance for the utilities to diversify into investing in renewable and new energy sectors.
It also explains the struggle of China Datang. Without providing any data of its financial performance yet, the firm is known to struggle due to its massive and less efficient coal-fired plants.
Deleveraging Pressure on Chinese Power Companies Amid Coronavirus Outbreak
In the past years, China’s state-owned asset authority, Sasac, has put the “big 5” on a tighter leash, requiring them to limit their borrowing activities or shelving the inefficient investment. The “deleveraging” pressure from Beijing has result in the contineous decline of the debt to asset ratios of the utilities in China.
As of 2019, CEIC, SPIC and China Huadian announced their new results in terms of reducing leverages:
- CEIC: 59.6% (-1.18%)
- SPIC: 75.61% (-3%)
- Huadian 72.8% (-4.75%)
While Huaneng and Datang have not announced their figures. Energy Iceberg expect similar ranges of debt ratio reductions.
Among the five, CEIC has done well in terms of curbing its debt portion. The merger between China Guodian and China Shenhua, as well as the following asset restructuring, has help CEIC to achieve a substantially lower figure.
SPIC, on the other hand, took a lot of heat from Beijing last year, as the party authority critzed and urged the firm to be more “focused on its key mission”— an political expression pushing for lower debt ratio.
The firm is likely to continue seeking to sell off assets, especially in coal mining and aluminium production businesses in China, to cope with the political pressure. It may also seek external financial investors in its power projects to improve the financial structure.
Beijing’s pressure on the state-owned power players to reduce debt could be good news to oversea investors, who may find more invetment opportunities opened up as the Chinese players seek to sell or become more open for partnerships.
Nevertheless, we believes that Beijing may have already loosened its pressure. And following the Covid-19 coronavirus outbreak, the central government would re-focus on boosting investment activities. That means an ease-up of control over state-owned enterprises’ borrowing activities.