China's power sector downgraded

BROKER CALL - China's power sector downgraded on high costs - Goldman Sachs2008-4-7 11:53:00 a.m. HKT, XFNA

BEIJING (XFN-ASIA) - Goldman Sachs downgraded the Chinese electric power sector to "cautious" from "neutral", saying that China's independent power producers are facing lower margins and increased costs. In a note to investors, the brokerage said that the "worst was yet to come", with shares expected to come under pressure when the companies' first quarter results are announced. China Resources Power (rated "buy") is in the strongest position because it has managed to control its costs more effectively, the note said. However, Huaneng has been put on Goldman Sachs' "sell conviction list" because the market has not fully priced in the company's growing coal costs, as well as its debt burden. Huadian has also been cut to "sell" from "neutral", while Datang has been downgraded to "neutral" from "buy". Overall, Goldman Sachs' 12-month target prices for the companies have been cut by up to 34 pct, and it estimates that earnings per share in 2008-9 will fall by up to 50 pct, again as a result of higher coal costs. The sector is facing growing coal costs -- China's power companies have already raised their estimate for 2008 unit coal price increases to 18 pct from 15 pct -- and any increase in electricity tariffs by government regulators is likely to be delayed until at least the second half of the year, Goldman Sachs said.