Key Takeaways:
Citigroup downgraded three of China’s largest coal-fired power producers to ‘Sell’, forecasting that rising coal costs will squeeze profitability despite a recent surge in the companies' stock prices.
"The bank expects investors to focus more on the fundamentals of companies in the sector, forecasting that margins will narrow due to higher coal costs," Citigroup analysts said in a research report.
The new 'Sell' ratings apply to Huaneng Power International (00902.HK), China Resources Power Holdings (00836.HK), and Huadian Power International (01071.HK). The downgrade follows a 20 percent climb in the shares over the last three months, a move Citi attributes to factors like tariff hikes and speculative fund inflows rather than fundamental strength.
The bearish call from a major investment bank could trigger a sell-off and reverse recent gains, as investors re-evaluate the sector's near-term earnings potential. Citi noted that the upcoming ex-dividend period in July is also likely to contribute to weaker stock performance.
According to the report, the recent share price rally was driven by a combination of regional tariff increases, spillover effects from gains in US utilities, and fund inflows related to the artificial intelligence investment theme. However, the bank believes the core business of these independent power producers (IPPs) faces significant headwinds.
The downgrades signal that the recent rally may have been overdone and is disconnected from the operational realities of rising input costs. Investors will now closely watch coal price indexes and the companies' upcoming quarterly results for any confirmation of margin compression.
This article is for informational purposes only and does not constitute investment advice.
