China Yangtze Power Co Ltd, owner of the world's largest hydropower plant, agreed to pay about 1 billion yuan (US$125 million) to increase its stake in a local power firm based in South China's Guangdong Province.

Yangtze Power will buy 230.4 million shares in Guangzhou Development Industry (Holdings) Co for 4.6 yuan (57.5 US cents) each from Guangzhou Development Group Co, boosting its holding in the company from 0.049 per cent to 11.238 per cent, Yangtze Power and Guangzhou Development Industry said in separate announcements to the Shanghai Stock Exchange yesterday.

The purchase will make Yangtze Power the second largest shareholder in Guangzhou Development Industry after the group company, and highlights Yangtze Power's intensified efforts to consolidate its portfolio by acquiring local power assets, both companies said in the statements.

"The acquisition fits in well with the company's (Yangtze Power's) development blueprint for 2005 to 2010, and will further improve its competitiveness in China's electricity market," Yangtze Power said.

The purchasing price that Yangtze Power paid is 1.3 per cent less than Guangzhou Development Industry's closing share price of 4.66 yuan (58.3 US cents) yesterday in Shanghai.

Yangtze Power shares climbed 2.54 per cent to 6.87 yuan (86 US cents) on the Shanghai Stock Exchange yesterday.

Operating the world's biggest hydro electricity plant the Three Gorges dam based in Central China's Hubei Province Yangtze Power now has a total generating capacity of 6,915 MW (megawatts), the company said on its website. It announced in August that its first-half profit dropped 6.8 per cent to 1.3 billion yuan (US$162.5 million) after sales dipped 1 per cent.

Guangzhou Development has power generation as its core business, with a total capacity of 1,200 MW, while its portfolio also includes the coal, oil products and renewable energy development sectors. Its net income for the first six months of 2006 rose 5.4 per cent to 300 million yuan (US$37.5 million).

In an earlier interview with China Daily, Cao Guangjing, vice-president of Yangtze Power's parent company, said that the firm is seeking suitable power assets around the country for acquisitions in order to boost its portfolio and improve profitability.

"We are looking at anything that we think make good profit," Cao said.

Commenting on the current surge of power majors taking over local power assets, some industry analysts say it is more driven by a possible policy change in China's power industry that encourages consolidation, rather than economic concerns.

Many signs have shown that the government is about to further reform the nation's power industry to further consolidate its electricity majors, a senior power analyst told China Daily, declining to be named.

Good market opportunities will not come for takeovers for a couple of years when there is a possible supply surplus in China's electricity industry, she explained.

However, there are those who view the rash of acquisitions differently believing power conglomerates are buying up local power facilities ahead of an estimated market change.

The National Development and Reform Commission has said that electricity production may outpace local needs in certain areas from next year, after the country has suffered four straight years of electricity shortfalls.

"The market change (from shortage to over-supply) will bring about very good opportunities to buy local assets which might depreciate by then, and the big power firms are taking action beforehand to establish footholds in local regions," Zhao Jiujing, a senior analyst at the Beijing-based State Power Economic Research Centre, said last month.

The nation's biggest electricity producer, China Huaneng Group, recently announced takeovers of two local electricity firms based in East China's Shandong Province and southern China's Guangdong Province.

The announcements followed the Beijing-based conglomerate increasing its stake in Inner Mongolia-based North United Power Co Ltd last year.