Fundamental Assumptions Remain Relevant


BMI View: Our risk/reward (R/R) ratings for the Asian power sector remain relatively unchanged, with the average power rating score remaining stable at around 54.2. In the previous quarter, we had expected macroeconomic conditions throughout Asia to worsen over time, and this bearish outlook continues to play out this quarter. We expect China, India, and Australia to continue to lead the regional ratings, as the demographics and economics in these countries remain favourable. Malaysia also stands out in the regional ratings, and has closed the gap between it self and Australia marginally .

The key themes and trends identified within Asia's Power R/R ratings can be summarised as follows:

• Economic activity continues to soften across Asia, especially for countries dependent on exports to the US and EU. We continue to expect electricity consumption in these countries to remain weak, and see upside potential should an economic recovery take place.

• Inflation has ticked up in several parts of Asia, due mainly to higher food prices. This has dragged the country reward scores down for several countries, such as Taiwan and India.

• China maintains its considerable lead in the regional ratings, owing to its unrivalled market size (in terms of capacity, generation and consumption) and its substantial growth prospects. However, we highlight that the rebalancing of China's economy and a slowdown in export growth presents a pertinent downside risk to our forecast and ratings.

• Malaysia improved its ratings substantially as a result of better-than-expected economic performance.

Clear Leaders In The Asia Power Sector
Asia Power Risk/Reward Ratings, Scores Out of 100

Macroeconomic Slowdown Already Incorporated Into Ratings

Our Q1 2013 R/R ratings remain relatively unchanged from the previous quarter, as our Country Risks team maintain a relatively stable economic outlook of the region from the previous quarter. We had previously incorporated our expectations of worsening macroeconomic conditions throughout Asia in Q412, and the majority of these assumptions will remain relevant in 2013.

In terms of notable changes, we highlight that Hong Kong has dropped a spot to reach 13th place. Hong Kong was previously 12th in the Q412 ratings, but a decline in country risks scores has acted as a drag to the overall score. We attribute this decline to the growing risks facing the city's short-term political stability and policy continuity. Over the last three months, a number of demonstrations to protest pro-Beijing regulations have taken place, including a protest against the controversial 'National Education Curriculum' backed by China. The electorate is also increasingly polarised between pro-Beijing and anti-Beijing camps, which is affecting the country's political stability.

On the other hand, we highlight that the ratings for Malaysia and Australia have improved from the previous quarter. Malaysia's overall rating increased by 1.7 points, which is due to a marginal improvement in the country's economic outlook. We attribute this to our expectation of a mild recovery in external demand for Malaysian exports in 2013, and the government's New Economic Model and Economic Transformation Programme. Australia's Q113 rating is also up a point, as Q2 2012 economic data released by the country reveals a moderate picture of the country's economic situation.

Clear Decline In Hong Kong Ratings
Asia Power Risk/Reward Ratings, Scores Out of 100

Big Three Still Dominate

China, India and Australia continue to head the group, despite being exposed to global macroeconomic slowdown. While all three countries are dependent on the US and Eurozone economies, we highlight that the demographics of these countries continues to be a major selling point for their power sectors. Our ratings also highlight how these countries owe their position to different dynamics and strengths. The combination of large industry size, expectations of high electricity consumption growth and positive macro fundamentals underpin China and India's scores in the industry rewards category, reflecting the lucrative rewards on offer.

Strong Country Rewards Among Top Four, But China And Australia Outperform
Asia Power Risk/Reward Ratings, Scores Out of 100

Both power-hungry countries have presented highly ambitious capacity expansion programmes, aimed at meeting their fast-growing demand for electricity and increasing their energy security through diversification. A massive population coupled with low per-capita electricity consumption are important factors that have allowed China and India to lead the industry reward ratings by a wide margin. Yet, our industry risks indicator illustrates how the two giants still leave much to be desired in terms of power market liberalisation, as well as in terms of clear and homogeneous support for renewable energy technologies. In India, an opaque business environment also represents a downside risk, while corruption remains widespread.

Australia does well- not only because of its sound business environments and low levels of industry risk- but also because of strong population growth in the country. The Australian Bureau of Statistics has several population forecast scenarios, and the most conservative scenario expects the country's population to increase by 47% from 2007 to 2056. The moderate scenario projects an increase of 61%, while the high-case projection reflects a doubling of the country's population. As such, we expect demand for electricity consumption in the country to be driven by the growing population. We also highlight that Australia's low levels of industry and country risks make it attractive for investors.

TABLE: ASIA POWER RISK/REWARD RATINGS
Industry Rewards Country Rewards Rewards Industry Risks* Country Risks* Risks* Power R/R Ratings Rank
*Higher score = Lower risks; Scores Out Of 100. Source: BMI
China 92.00 56.40 78.31 50.47 64.40 56.44 70.65 1
India 76.25 56.20 68.54 53.59 58.62 55.74 64.06 2
Australia 50.00 59.60 53.69 78.30 82.96 80.29 63.00 3
Malaysia 51.50 71.20 59.08 61.79 65.78 63.50 60.62 4
Indonesia 65.00 58.20 62.38 43.49 60.84 50.92 58.37 5
South Korea 61.75 42.80 54.46 56.48 76.92 65.24 58.23 6
Vietnam 67.50 59.20 64.31 40.22 47.52 43.35 56.97 7
Singapore 36.00 44.80 39.38 74.65 83.90 78.61 53.11 8
Taiwan 55.50 40.00 49.54 57.25 58.45 57.76 52.42 9
Thailand 55.50 44.40 51.23 48.68 55.28 51.51 51.33 10
Philippines 40.25 54.80 45.85 48.32 54.47 50.96 47.63 11
Sri Lanka 41.50 62.00 49.38 35.43 52.28 42.65 47.03 12
Hong Kong 28.75 39.20 32.77 65.40 71.30 67.93 45.08 13
Cambodia 44.50 56.80 49.23 26.73 38.81 31.91 43.17 14
Pakistan 39.00 52.00 44.00 37.37 32.44 35.26 40.94 15
Regional Average 53.67 53.17 53.48 51.88 60.26 55.47 54.17 8

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