Guangdong Energy Group Co. Ltd.

We believe GEG's active development of clean energy will help solidify its stronghold in Guangdong's power market and reduce concentration to coal-power. The company expects to increase clean power (i.e. non coal-power) to 60% of its controlled installed capacity by 2025, compared with 32% as of end-2020. To meet the goal we expect GEG's investment focus to be on gas power and offshore wind in the province. The stable outlook on GEG reflects our expectation that the company will maintain its stable operations and financial standing over the next 24 months. This is despite the likelihood of rising fuel costs and accelerating capex. GEG's ratio of FFO to debt should maintain adequate headroom for the rating the next 12-18 months.

...Guangdong Energy Group (GEG)'s profits will likely decline owing to high fuel costs. We expect the company's EBITDA to decline by 10% to Chinese renminbi (RMB) 13.6 billion in 2021, from RMB15.2 billion in 2020, owing to increased fuel costs. Though economic recovery has lead to strong growth in power demand (we expect high single digit growth for Guangdong in the year) hikes in commodity price tend to dent profitability of thermal power. We expect coal supply to be tight in 2021 out of environmental and safety considerations, and gas prices will likely rise alongside the rebound in oil prices. We assume 8% and 12% spike in coal and natural gas costs, which cannot be effectively passed through. GEG's EBITDA will likely recover to RMB15.8 billion in 2022, about 2020's level, from easing coal costs and capacity addition of renewables. The company continues to receive no dividend from its intra-provincial gas transmission associate....

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