Chinese Power-Grid Suppliers
Give Stock Investors a Warm Glow
February 22, 2008
SHANGHAI, China -- The freakish storms that ravaged much of China late last month had a silver lining for at least one group of companies: those that make power-transmission equipment.
These companies are likely to get a short-term boost as China repairs hefty damage to its electricity grid. And longer term, analysts say, the business should benefit from tens of billions of dollars in planned government spending to upgrade the grid to handle the booming Chinese economy.
Some of the sector's biggest companies are multinationals, though two Chinese suppliers are gaining market share. Tebian Electric Apparatus, based in the western territory of Xinjiang, was already the world's third-largest producer by output of electric transformers after ABB of Switzerland and Siemens of Germany in 2005, the latest year for which data could be obtained. Baoding Tianwei Baobian Electric, based in Hebei province, is also a big producer of transformers -- critical parts of a power grid that perform tasks such as adjusting voltage.
Both Tebian Electric and Baoding Tianwei have Class A shares, mainly for domestic investors, on the Shanghai stock exchange -- and these skyrocketed during 2007. But many analysts say they could be good buys for long-term investors, especially if share prices dip.
Zhan Wenhui , an industry analyst at Haitong Securities in Shanghai, says Tebian Electric "will surely be the largest company" in the business in China this year, overtaking ABB. She forecasts that the company's share price will reach 50 yuan (seven U.S. cents) by year end. Thursday, the stock fell 3.4% to 31.85 yuan, which left the stock 1.5% below where it started the year. Thanks to a recent plunge, the Shanghai composite Index is down 14% so far in 2008.
In 2007, Tebian Electric strongly outperformed the benchmark Shanghai Composite Index. While the index nearly doubled, the stock more than quadrupled.
Shares of Baoding Tianwei did even better last year, rising more than sixfold. But so far this year, they have retreated with the index, falling 14%.
January's storms damaged more than 39,000 power lines and nearly 2,000 electric substations, causing about 18 billion yuan, or $2.5 billion, in damage to China's power grid, according to the State Electricity Regulatory Commission. The government has vowed to complete repairs by the end of March. The repair work brings "a great short-term opportunity" to Tebian Electric and Baoding Tianwei, says Ding Chaoyu, a strategist at Great Wall Securities in Shenzhen.
Still, he thinks the valuations of both companies' stocks are too high right now, and investors should wait for the price to come down before buying.
It is easy to see why many analysts believe the power-transmission industry has a promising future. China has been building scores of power plants in recent years to supply energy to its industries and increasingly affluent urban citizens. Yet grid development has progressed more slowly, creating bottlenecks that have contributed to periodic power shortages.
The government, which runs the grid through its companies State Grid Corp. of China and China Southern Power Grid Co., is eager to fix that. Total investment in the power grid jumped 17% in 2007 to 245.14 billion yuan. This year, it is expected to rise about 30% to nearly 320 billion yuan, according to the China Electricity Council.
"The demand for power-transmission equipment will keep increasing in future repair programs," Yang Jun, an analyst at Shenzhen-based United Securities, wrote in a Jan. 30 report. He recommended that investors increase holdings in Tebian Electric.
Both Tebian Electric and Baoding Tianwei are major equipment providers for the West-to-East electric-power-transmission program and the Three Gorges Dam -- two of China's biggest grid projects. ABB took top spot in China's transformer-equipment market in 2007, receiving 22% of all spending in the country, according to State Grid Corp. Tebian Electric ranked second with 20%.
Competition from foreign players is intense. ABB has invested more than $800 million in China, which accounted for about 10% its total global business in 2007. ABB spokesman Thomas Schmidt says the company expects China to overtake the U.S. as its biggest market. Siemens and Japan's Toshiba also are big players in the sector.
Tebian Electric, meanwhile, has been seeking to expand overseas. It has been selling transformers to U.S. power-grid operators and has cooperated with the U.K.'s BP to develop solar-energy technology. For the first nine months of 2007, Tebian Electric reported that net profit rose 96% from a year earlier to 301.34 million yuan.
For investors in Tebian Electric, there is a lingering uncertainty. The company has said it wants to raise about one billion yuan by selling new stock, but its plan so far has failed to win approval from the China Securities Regulatory Commission. It is unclear if the plan could be revived, and if so, how it might affect existing shareholders. Tebian Electric declined to comment.
Some analysts also like that Baoding Tianwei has some solar-power and wind-power business, so the company isn't fully dependent on transmission work. For the first three quarters of 2007, Baoding Tianwei said it had net profit of 270.31 million yuan, which was 85% higher than the year-earlier period.
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