J.P. Morgan China Power Utilities: Removal of the Thermal Tariff Floor Poses Downside Earnings Risks; Downgrade CR Power to Neutral
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J.P. Morgan has turned cautious on China's thermal power utilities, downgrading CR Power to Neutral from Overweight. The removal of the thermal tariff floor—previously set at a 20% discount to the benchmark—is expected to trigger further tariff declines starting in 2027, compressing margins across covered companies. While the government also signaled plans to improve the capacity charge mechanism, it remains uncertain whether these payments can fully offset declining base tariffs. Consequently, the earnings outlook is unfavorable, with both profit and dividend forecasts facing meaningful downside risks. The firm maintains its Underweight rating on Huaneng Power International.
Signed thermal power contracts in coastal provinces like Guangdong and Zhejiang are already experiencing tariff cuts exceeding 10%. With the floor removed, downward pressure will likely intensify due to weak industrial demand, surging renewable energy capacity, and a government intent on lowering electricity costs. J.P. Morgan now models base thermal tariff declines of over 7% in 2026 and over 5% in 2027.
These revised assumptions translate to average earnings reductions of more than 20% for both CR Power and Huaneng Power across 2026 to 2027. CR Power's target price is cut to HK$17.0 (Dec 2026) from HK$21.5, while Huaneng Power's target drops to HK$4.5 (Dec 2026) from HK$4.85. The market currently implies a 6-7% dividend yield for covered names, but payouts appear unsustainable given ongoing renewable investments and potential thermal asset impairments.