ASIA Regional utilities and coal - One earthquake = Four energy themes - MACQUARIE RESEARCH

Event
§ We believe there are four major themes arising from the Japan earthquake and tsunami on the regional utilities and coal sector: 1) Higher “thermal” fuel prices; 2) Nuclear demand (assuming no health pandemic) will bounce back medium term; 3) Increased demand for clean energy (gas and renewable like wind/geothermal); 4) Potential for regulatory change. In this context, we are positive on the gas and wind sector (and see value in nuclear plays); we advise caution on those companies with a poor regulatory environment given the potential for rising energy prices ( China , Korea and Malaysia ), but continue to like those companies with strong upstream exposure.

Impact
§ Theme 1: Higher fuel prices as Japan switches fuel mix towards gas/oil and eventually coal. We see the potential for increased LNG/oil demand in the short term via increasing utilisations from ~50% to ~80%, to substitute the damaged nuclear (~10GW) and coal (~7.5GW) capacity. Due to the substitutable nature of coal and gas in Europe , this could lead to a tightening of the European coal market (when combined with 7GW German nuclear plant shutdown). On a 12-month view, we see this Japanese coal demand rebounding as ~5GW of capacity comes back on line and existing plants increase utilisations from ~75% up to ~90%. We continue to like those companies that have upstream exposure (eg, Tata Power and Origin), vs utilities that have less transparent regulatory environments (Chinese IPPs, Tenaga, and KEPCO) (although we note potential for change in KEPCO).
§ Theme 2: Don't write off nuclear demand medium term (assuming no pandemic health issues). Whilst the recent disaster has highlighted safety concerns, this needs to be put in context of a country's energy reserves/fuel diversification, carbon intensity, impact of power costs on inflation, advancement in technology, and political power (ie, a democratic coalition government may struggle to push through new power plants). In this context, we believe HK/China's nuclear policy is likely to push ahead and we see value in CLP/Power Assets Holdings (HKE) and the Chinese equipment plays.
§ Theme 3: Clean and green. Whilst we continue to believe that nuclear will be an important fuel mix within certain countries (as noted above), we do see a strong role for other low carbon solutions (eg, wind, geothermal, solar).
§ Theme 4: Potential for regulatory change given Japanese IPPs earn < 5% ROE; regulators may eventually determine that returns are insufficient. Outlook
§ Theme 1 Beneficiaries: Tata Power, Origin Energy; ASEAN coal; Concerns: Chinese and Indian IPPs (ex Tata) and Tenaga
§ Theme 2: Beneficiaries: CLP, PAH/HKE, Dongfang, Shanghai Electric & Harbin Power, EDC
§ Theme 3: Beneficiaries: Longyuan, Suntien, Towngas China , ENN, EDC
§ Theme 4: Long-term beneficiaries: KEPCO, Chinese IPPs, Tenaga