M&A Analysis and Research Report on Electric Power Industry of P.R.C in 2007

Abstract:

More investment has been put into the power industry in recent years. However, the expanding economy and great appetite for power have drive electricity supply to its limits and blackout has occurred in some areas. With number of new units put into work at the last four months in 2005, the electricity supply has witnessed a legendary turnaround by reducing electric shortfall in targeted area where, unfortunately, the power strain remained.
Change trend of China 's annual power generation from 2003 to Oct. 2006
Unit： 100millionKW

Structure of power generation with different manners from Jan. to Oct. 2006


Increased power generation has been gearing up with fast economic growth and more state capital allocated into plant construction. Thanks to augmented macro-economic impact trickled in, there was a growth in electric generation between 2004 and 2005. However, the increase has been losing two percentages slightly.
China's electric output among regional grids from Jan. to Oct. in 2006 Unit: Billion KW/h

The China's electric power industry is looking up in general though, there exited host of shortcomings evidenced by a mind-boggling number of companies dabbling in this sector totaled 2000 or more but few of them hailed as giants. What was happening in this area is narrow window open to outside over the past two years, in which state-owed plants set the predominant role in this sector. However, many companies from foreign counterparts along with Hong Kong and Macao have been playing an important role in this territory following the national policy looking outside. It's worth noting that the foreign participations have been on their way out of China 's market from 2003. The analysis materials show that the excessive concentration of state-owed company chocked the foreign ones out of breath, which is the major reason behind this phenomena while M&A remains the patent of state-owed forms.
During the 11 Th Five-Year Plan, the Chinese Government set the higher expectation for this sector where the power industry will be pushing forward with more capacity installation and electric generation scaling up. At the same time, the dynamics of electric power industry will experience a great change. On the other hand, there is expected no big change in fire-power and hydropower years to come while nuclear power will be in large demand.

1. The driving forces behind M&A of electric power industry in China

The reshuffle and golden opportunity for this sector comes as the critical juncture when the systematic reform has been going on during the period of the 11 Th Five-Year Plan.  The power companies have grown strongly under the driving policy of breaking down monopoly, introducing competitive culture to boost efficiency while holding down cost. The big five state-owned groups in power industry have managed to integrate and control the resources through listing on the stock market as to sharpen their edge to compete. The local power companies, moreover, have stayed focused on acquisition to stir their core competitiveness with expanding market share.
The analysis materials cast the light on inter and outer dynamics for ongoing surge in M&A among power firms.
First, the internal factors. There is a decentralized market share among more than 2000 power companies even the capacity installation and electric generation in the Big Five failed to move their share beyond 10%. The total market share of state-owned firms reached 97% or so while controllable capacity installation among private and foreign power sectors stands at 3%. The state has put a firm handle on power industry that is not open and the market is non-economical and free from centralized competition which deserves to harness all the available uses in this industry.
The operational performance being part of the problem. The big power companies want to land their feet firmly on this territory through M&A. Among other things, the China Huaneng Group's take-over towards North United Power made it forerunning its rivalries in this sector. Many medium-small companies want to grow stronger by M&A. Their improved management, open-ended opportunities, enlarged business scale and sharpened ability to compete have been achieved by bringing venture capital to solve financial insecurity and partnering with the companies with best performance.

2. Tendency analysis in M&A of power industry in China

Following economic expansion and large demand for power, the electric power industry has stepped in an accelerated phase of M&A. According to the analysis, number of things deserves attention. First, what has happened in the current market is that the major role was played by state-owned companies while private and foreign sectors share less than 20%. The other scenario is that the private and foreign sectors sought more roles as monopoly loosen from the state-owned firms. Second, the power industry tends to centralized as foregone conclusion extrapolated by 75% of companies are medium-small firms while predominant state-owned companies shot less than 10% of their capacity installation and electric generation among five big groups especially. In terms of future development, the total number of medium-small firms will reduce and the market share among state-owned firms will be expanded due to their strongpoint in financing seeking, project approval and laudable operation in five big companies. Many state-owned companies are engaging M&A in number of coal-mining industry by the privilege in hydropower and fire-power industry. By doing so, the operational cost will be trimmed down and help stabilize the price of raw materials, boost efficiency and transcend limits haunted current coal transportation industry. Third, the possibility is real in down-stream industry buying up-stream industry as to put brake on cost.
In the near turn, the M&A among power firms will be unfolding gradually. The drama is going on in wide array of forms among others, the take-over of central government towards local power firms, the consolidation among local companies, and the acquisition of foreign capital to private sectors and from private sectors towards state-assets. The host of experienced companies with strong financial backup will stand a chance for industrial expansion. At that time, the electric power industry will enjoy a long-term development in a physically sound way.