Profit from China’s Insatiable Thirst for Power

Most traders are aware that China’s ravenous appetite for resources such as steel and oil has been a primary driver of the global economy. Whether the construction side of that equation is sustainable is a topic of hot debate. But traders who bet on China’s thirst for energy in all its forms are on much firmer ground.

Last week’s GDP numbers indicate that China is burning a record 9.64 million barrels of oil a day — a robust 6% more than it needed last year. And with the country also consuming one out of every two tons of coal mined around the world, it’s evident that Chinese power plants are still working overtime to keep all the lights on.

China’s Southern Power Grid, one of its two state-owned power distributors, expects to see “severe” power-supply shortages in 2012, with the worst of the shortfalls ranging from 8 million kilowatts (kW) to 14 million kW from March through May.

With that in mind, traders can start their drill down into the sector near the top, with China National Offshore Oil Corporation (NYSE:CEO).

This company, commonly known as Cnooc (pronounced See-nook), owned the equivalent of roughly 2.99 billion barrels of oil at the end of 2010 and is on track to report 2012 earnings of $10.9 billion. Its P/E is well under 9, and the dividend yield is decent at 2.90%.

Where Cnooc shines among global energy and power competitors is the sweet exploration deal that Beijing engineered for its state-owned oil enterprise — and, indirectly, the Hong Kong affiliate that Westerners can actually trade. When foreign oil companies find oil off China’s shores, Cnooc earns a share of the profit while carrying none of the financial risk.

Cnooc’s biggest customer is Sinopec (NYSE:SNP), China’s leading integrated oil refiner. Let’s skip that company for now because margins on refining are especially terrible in China, where consumer fuel prices are capped at levels that make it almost impossible for a provider such as Sinopec to deliver a sustainable profit.

Rounding out the Big Three of Chinese oil, you have PetroChina Company Limited (NYSE:PTR), the biggest company in the world by market cap. PTR seems fairly valued, with a PEG of 1.39 and a P/E of just under 12 — roughly in line with industry averages.

The last few weeks have been spectacular for PTR as the stock reversed a long technical downtrend and is now well above all near-term resistance. We just broke the July high of $147.28 and are now looking back to the post-recession peak of $153.09.

In Chinese electricity, Huaneng Power International (NYSE:HNP) is the main name to track. While other electric utilities are available through ADRs, their range and the liquidity are limited.

Unfortunately, HNP currently looks expensive — its P/E is north of 17, well above the global utility industry median of 13.6 — and there are strong indications that its superficially attractive yield may be unsustainable.

HNP has paid out more in dividends than it earned over the past 12 months. This cannot continue, and given the dividend’s starring role in any utility-sector play, this is not a great sign. Throw in the company’s massive debt load, and investors should steer clear.

But China needs juice, and that means Yanzhou Coal Mining (NYSE:YZC) has room to move despite Beijing’s promise to keep thermal-coal prices below 800 yuan ($126) for the foreseeable future.

While term-contract coal prices can’t be hiked by more than 5%, YZC should be able to benefit from both the much-needed increase in production of electrical power as coal-fired plants shovel much more coal to meet demand, and anticipation that the government will lift its price controls after the second quarter.

Beijing capped thermal-coal prices once before, in 2008, and prices rebounded after the regulation was lifted.

Meanwhile, YZC looks cheap even by coal standards, with a P/E of 5.5 and an impressive 41% operating margin. The stock seems to have found extremely firm footing above the multiyear support level of $16.70, providing traders with possible entry points.

Exercise caution when trading YZC, however, because liquidity is far less than most traders are used to — roughly 225,000 shares a day — and ask and bid spreads are wide. Options are available, but liquidity here is also low. Traders should use limit orders for both stock and option orders to remove the risk of price slippage.

Article printed from InvestorPlace Media,

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