Singapore Utilities

Credit Suisse, April 11

FOLLOWING the completion of Singapore's LNG terminal in Q2 2013 which will increase gas supply into the country, power generation capacity is expected to increase by 3.0 gigawatts or 30 per cent in 2013-14.

Based on the Credit Suisse demand-supply model, we expect reserve margin to increase to 47 per cent in 2013 from 37 per cent in 2011, and will return to the 2012 level only in 2020.

The increase in capacity has led to a 23 per cent fall in the pool price in Q1 2013, relative to a 13 per cent fall in fuel costs.

Vesting prices for contracts which commit gencos to sell a specified amount of electricity were also revised down in January 2013.

However, we expect downside support to be provided by rational pricing behaviour given high acquisition price of generation assets, retail contracts locked in, and contribution from non-electricity sale.

We downgrade Sembcorp Industries to "neutral" (from "outperform"; lower target price or TP to S$5.10 from S$5.90), as we believe market earnings expectations for 2013 do not factor in any potential decline in profit from industry capacity additions.

Within China utilities, we switch our top sector pick from Huaneng Power (raise TP to HK$9.00 from HK$7.00) to China Resources Power, given the risks of a fall in Singapore tariffs and higher capacity adds in China Resources Power versus Huaneng Power.

We maintain our "underperform" rating on YTL Power (lower TP to RM1.40 from RM1.82).