HONG KONG: Investment banks are optimistic about the prospects of mainland-based power plants after Credit Suisse and BNP Paribas yesterday raised their rating son Huaneng Power and Huadian Power, respectively, citing less-than-expected increases in coal prices on the mainland.

Credit Suisse upgraded Huaneng Power to "outperform" from "neutral" and raised its price target to HK$6.5 from HK$5.6. It raised the company's forecast earnings per share by 35 percent in 2009 and 311 percent in 2010.

Huaneng posted a 127 percent rise in first-quarter earnings, with a net profit of 550 million yuan. The company also announced last month a plan to buy stakes in two thermal power plants.

Meanwhile, BNP Paribas upgraded Huadian Power to "buy" from "hold" and raised its price estimate to HK$2.8 from HK$1.95.

The upgrades came after power producers - Huaneng and Huadian, together with three other key power generators - signed contracts with coal suppliers in Shandong Province to buy coal at a certain price throughout 2009, a move seen as ending a five-month deadlock between coal miners and power producers.

The price, which is only 4 percent more than last year's, beats market expectation and reduces future uncertainty, according to analysts.

"Coal demand is still slim owing to the slow recovery in related industries in spite of the predictable thirst for electricity in July and August," said Anna Yu, energy specialist at Taifook Securities, adding that electricity consumption, a major gauge of industrial activity, recorded a drop in April, which was even sharper than March.

The mainland produces 80 percent of its electricity from coal.

Meanwhile, domestic power production in May fell 3.5 percent from a year earlier, while power consumption was about 4 percent lower in the first five months this year, according to government statistics.

"Domestic coal price is heading downward despite the recent surge in global coal prices," Yu said, adding that she expects the mainland's coal price to remain flat in the coming months.

Coal import, which has risen over 50 percent in the first four months, only accounts for 3 percent of coal usage in China, indicating that the fluctuation of global coal prices would have limited impact on the domestic coal market, the energy specialist said.

Huaneng Power shares rose 2.7 percent to HK$5.81 yesterday while Huadian Power gained 3.3 percent to HK$2.51, bucking the downtrend of the Hang Seng Index, which dropped 2.3 percent.

(HK Edition 06/09/2009 page4)