TheChek News Flow

Energy group warns of €24bn hit to full-year core profits from output problems

EDF has posted a €5.3bn first-half loss, weeks before the French utility is due to be renationalised and after outages at some of its nuclear plants sent its electricity production plummeting.

The company on Thursday warned its core profits for the whole of 2022 would take a deeper hit than previously flagged of €24bn from its output problems, compared with a previous forecast of €18.5bn.

EDF, which is 84 per cent controlled by the French state and which operates France’s 56 nuclear reactors, has been struggling with corrosion issues at some plants that have forced it to carry out checks and closures. The group was also made to foot the bill for the government’s bid to cap electricity prices for households.

EDF said its first-half sales had risen 67 per cent year-on-year to €66.2bn. However, the group has been forced to buy supply on expensive wholesale markets, and its earnings before interest, taxes, debt and amortisation fell to €2.7bn, down almost 75 per cent from the first half last year.

On top of falling core profits, EDF said it had also recorded a negative change in the value of financial instruments of €3.8bn.

It recorded negative cash flow of nearly €4bn, a deterioration from the minus €240mn of a year earlier.

EDF, which has long been lumbered with a large debt pile, is due to return to government hands by around October through a tender offer of close to €10bn to buy out minority shareholders and convertible bonds.

The French government has said it wants to take full control of EDF again to be in a better position to face looming investments in new nuclear reactors, and to be able to move faster on some projects.

EDF’s deepening financial problems had also precipitated matters, analysts and people close to the group said, adding that the company would probably require further capital increases.

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* Akzo Nobel Cut to Hold at HSBC; PT 72 euros

* Aramis Cut to Neutral at Exane; PT 4 euros

* Daimler Truck Cut to Hold at HSBC; PT 28 euros

* Enersense Cut to Sell at Inderes; PT 5 euros

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* Traton Cut to Neutral at Citi

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* Acciona Energia Results Strong, Eyes on Windfall Tax Risk: RBC

* Aramis Cut to Neutral at Citi on Weakening Demand, Supply Issues

* Carrefour’s ‘Unexciting’ 1H Unlikely to Move Consensus Much: JPM

* Gucci 2Q May be Viewed ‘Cautiously’ Even as Kering Beats: RBC

* Moncler 1H Reassuring But All Eyes on Current Trading: Bernstein

* Teleperformance Delivers Strong Operational Growth, Citi Says

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Macro :

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Greater London Authority warns developers that upgrade might take more than a decade

Developers in west London face a potential ban on new housing projects until 2035 because the electricity grid has run out of capacity to support new homes, jeopardising house building targets in the capital.

The Greater London Authority wrote to developers this week warning them that it might take more than a decade to bulk up grid capacity and get developments under way again in three west London boroughs — Hillingdon, Ealing and Hounslow.

In those boroughs, “major new applicants to the distribution network . . . including housing developments, commercial premises and industrial activities will have to wait several years to receive new electricity connections,” according to the GLA’s note, which has been seen by the Financial Times.

A recent applicant to the distribution network was told that there is not “sufficient electrical capacity for a new connection” until up to 2035, according to the note.

The three boroughs accounted for almost 5,000 homes in 2019-20, equivalent to 11 per cent of London’s housing supply. Stalling new projects would exacerbate a chronic housing shortage in a city which already routinely undershoots its delivery targets.

But new projects are being rejected because the electricity network in the area has hit capacity, according to the GLA.

In its note, the GLA said pressure on the grid in west London has been particularly acute because a number of data centres have been built nearby in recent years, taking advantage of fibre optic cables that run along the M4 corridor, before crossing the Atlantic.

According to the GLA, “data centres use large quantities of electricity, the equivalent of towns or small cities, to power servers and ensure resilience in service”.

SSEN and National Grid are working on upgrading their networks to cope with more electricity demand, but that work could take years.

Developers are “still getting their heads round this, but our basic understanding is that developments of 25 units or more will be affected. Our understanding is that you just can’t build them,” said David O’Leary, policy director at the Home Builders Federation, a trade body.

He said that the GLA’s note had already prompted one HBF member to reconsider the purchase of a plot of land for development in Ealing.

In London, the issue is particularly acute because high land values make adding power supply a challenge.

But the problem is likely to become more widespread, according to O’Leary, because of new rules which mean that new homes must support low-carbon technologies such as heat pumps and electric vehicles, which will place additional strain on the grid.

The GLA, SSEN and the National Grid are working on a solution to unblock development. Options include reviewing the needs of individual customers, incentivising electricity usage at low-demand times of day, revising regulations governing the number of possible connections and installing cables to connect to less-constrained grids nearby.

The GLA did not immediately respond to a request for comment.

Heavily indebted sector to receive new loans to complete unfinished apartments owed to angry homebuyers

Beijing is seeking to mobilise up to Rmb1tn ($148bn) of loans for stalled property developments, in its most ambitious attempt to revive the debt-stricken sector and mollify home buyers who are boycotting mortgage repayments after lengthy construction delays.

China’s property sector accounts for about one-third of total output in the world’s second-largest economy. The industry’s prolonged downturn was a significant reason, alongside rolling Covid-19 lockdowns across the country, that growth slowed to just 0.4 per cent year on year in the second quarter.

The People’s Bank of China will initially issue about Rmb200bn of low-interest loans, charging about 1.75 per cent a year, to state commercial banks, according to people involved in the discussions.

Under the plan, recently approved by China’s State Council, or cabinet, the banks will use the PBoC loans along with their own funds, lent at market rates, to refinance stalled real estate projects.

The government hopes the banks will be able to leverage its initial fund by up to five times to raise a total of about Rmb1tn and partially fill the funding gap needed to complete unfinished projects, the people said. But bank executives and analysts have warned that the PBoC may struggle to raise its targeted amount given the difficulties banks will face in making a return on distressed real estate projects.

Overleveraged developers have had to suspend the construction of millions of apartments nationwide over the past year, raising concerns of financial and social turmoil if increasing numbers of home buyers withhold mortgage payments or take to the streets.

Multiple developers in China have defaulted on domestic and foreign debts after Beijing implemented tighter credit controls, undermining one of the most important engines of the country’s economy and leaving millions of home buyers in limbo.

Analysts, however, warned that the PBoC’s refinancing scheme would only work if the targeted developments could generate enough cash flow from sales or rentals of unsold apartments to repay the new loans.

“A lot of unfinished residential projects have already been sold out or are located in under-developed cities where home purchase and housing rentals are weak,” said Dan Wang, chief economist at Hang Seng Bank China. “That limits the number of developments the bailout fund can invest in without suffering a loss.”

Housing transactions in smaller “third-tier” cities, where most unfinished developments are located, fell more than a third this month from a year ago even after local authorities rolled out numerous support measures to boost buyer demand, ranging from interest rate cuts to subsidies on purchases.

Affected buyers are also sceptical about the central bank’s new fund.

“I can’t see any hope,” said James Lu, a sales clerk in the central city of Zhengzhou who borrowed Rmb650,000 to buy a Rmb910,000 flat. “The developer has run out of money and it doesn’t make economic sense to bail the project out.”

Lu is one of more than 4,900 home buyers at the development, Kangqiao Nayunxi, who stopped paying their mortgages nine months after construction stopped. Lu’s monthly mortgage payment of Rmb4,000 eats up two-thirds of his family’s household income.

According to estimates by Beijing-based Everbright Bank, Chinese developers have suspended construction work on as many as 8mn homes that will require an additional Rmb2tn to complete.

The delays have prompted impatient home buyers at more than 300 half-built developments — up from 200 two weeks earlier — to announce on social media that they will suspend their mortgage payments until construction resumes.

Government advisers said the scale and pace of backlash caught Beijing’s financial regulators off guard after they initially delegated responsibility for resolving the funding impasse to developers and local governments.

“Construction delay isn’t new,” one adviser said. “What is unexpected is the runaway spread of the problem.”

“It’s really a tricky situation for the central authorities to manage because they don’t want too many moral hazards — or local authorities taking many property debts,” said Rory Green, chief China economist at TS Lombard in London. “On the other hand, there are social stability issues.”

Another challenge for the bailout program is the high level of debt already incurred by stalled developments. Many distressed developers, led by China Evergrande Group, had already defaulted on payments to creditors and contractors before putting construction on hold. That could complicate the revival of construction work as existing creditors demand repayment, analysts said.

“Many unfinished projects have zero or negative value after taking into account their existing debts,” said an executive at a state lender that has been asked by the PBoC to join the bailout fund.

“We are not going to touch such projects even if it is politically correct to do so,” added the banker, who asked not to be identified because they were not authorised to speak to foreign media.

Contractors are also routinely demanding payment up front. “We have paid a steep price for extending credit in the real estate sector,” said an executive at Asia Cuanon, a building insulation materials maker based in Shanghai. “We will only start working with developers once we are fully paid.”

The PBoC did not reply to an emailed request for comment.