11 March 2011 Nomura 1 Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 108 to 112. Power | CHINA POWER AND UTILITIES Ivan Lee, CFA +852 2252 6213 [email protected]Joseph Lam, CFA +852 2252 2106 [email protected]Action We are negative on fundamentals due to the lack of fuel cost pass-through, but the distressed valuations (below book and close to share price lows in 2008) suggest limited downside. Our expected 5% tariff hike in July 2011 could provide a trading buy opportunity. Amid rising coal prices, we prefer IPPs with more non-thermal power and ability to invest in hydro or nuclear: BUY CPID. Maintain sector Neutral. Catalysts Tariff hike; Higher-than-expected coal price and interest rate hikes; Investment in coal, nuclear or hydropower assets; Introduction of fuel cost pass-through. Anchor themes Despite solid power demand backed by strong GDP growth, a surge in coal price, with heavily regulated power tariffs and rising interest rates, has eroded IPPs’ profit margins. Negative on fundamentals but remain Neutral given undemanding valuations. A sector re-rating is contingent on tariff reform, likely in 2014-15F. Weighed down by coal … again Gain from power demand offset by high coal price and interest We think the solid GDP growth acts as a double-edged sword for the IPPs due to lack of fuel cost pass-through. IPPs gain from power demand growth, but simultaneously are hurt by rising coal prices and interest rates. In 2011, we expect power demand to grow 9.8%; however, the benefits to the IPPs will be fully offset by rising coal prices (8.1% spot and 3% blended contract) and interest rates (1%), in our view, given that IPPs are more sensitive to these than power demand. Tariff hike of 5% in July 2011 could provide a trading opportunity Despite high inflation, the significant drop in the tariff-fuel spread and increasing number of money-losing IPPs has resulted in the IPPs calling for the “coal-power tariff linkage” system. We expect execution of a RMB20/MWh (5%) on-grid tariff hike in July 2011. This should provide a short-term trading buy opportunity, with Huadian having the greatest upside. Because non-key contract coal prices are expected to rise afterward, this could take down IPP margins again. Maintain sector as Neutral, due to undemanding valuations Despite weak fundamentals due to a lack of a fuel cost pass-through mechanism, we maintain our Neutral view, as the worst case may already be priced in and valuations look undemanding (0.6-1.4x book;18%-21% below replacement cost; stripping out coal assets, Datang’s power assets are sold for “free”). Despite such bargains, we cannot find any positive fundamental catalysts, unless tariff reform (or power pooling) is unveiled, but that isn’t likely before 2014-15F, we believe. Prefer plays with more non-thermal power and coal assets With the rising coal price as the major hurdle, our stock picks focus on companies with more non-thermal power assets and those less impacted by surging coal prices (ie, having internal coal assets). We expect Datang to have 26% coal self-sufficiency in 2011, followed by CRP (20%) and Huadian (11%). We upgrade CPID to BUY given its large hydropower portfolio, and potential parent’s injection or cooperation on hydro/ nuclear projects. Due to a lack of catalysts, we downgrade CRP and Huaneng to NEUTRAL, and maintain Datang and Huadian as NEUTRAL, despite liking CRP’s coal assets. We also highlight the risk of an environmental tax to IPPs. NOMURA INTERNATIONAL (HK) LIMITED Stocks for action Amid the rising coal price and interest rate environment, we prefer CPID and CRP, which have better cost management, more non-thermal power generation and coal assets, in our view. Stock Rating Local price (10 Mar) Price target China Power Int’l (2380 HK) BUY1.59 2.00* China Resources Power (836 HK) NEUTRAL13.40 14.94# Datang Power (991 HK) NEUTRAL 2.70 2.79# Huaneng Power (902 HK) NEUTRAL4.42 4.78# Huadian Power (1071 HK) NEUTRAL 1.55 1.62# Upgrading from Neutral; downgrading from Buy * PT upgraded; # PT downgraded Analysts Ivan Lee, CFA +852 2252 6213 [email protected]Joseph Lam, CFA +852 2252 2106 j [email protected]RUNNING THEME
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11 March 2011 Nomura 1
Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 108 to 112.
Action We are negative on fundamentals due to the lack of fuel cost pass-through, but the
distressed valuations (below book and close to share price lows in 2008) suggest limited downside. Our expected 5% tariff hike in July 2011 could provide a trading buy opportunity. Amid rising coal prices, we prefer IPPs with more non-thermal power and ability to invest in hydro or nuclear: BUY CPID. Maintain sector Neutral.
Catalysts Tariff hike; Higher-than-expected coal price and interest rate hikes; Investment in
coal, nuclear or hydropower assets; Introduction of fuel cost pass-through.
Anchor themes
Despite solid power demand backed by strong GDP growth, a surge in coal price, with heavily regulated power tariffs and rising interest rates, has eroded IPPs’ profit margins. Negative on fundamentals but remain Neutral given undemanding valuations. A sector re-rating is contingent on tariff reform, likely in 2014-15F.
Weighed down by coal … again Gain from power demand offset by high coal price and interest
We think the solid GDP growth acts as a double-edged sword for the IPPs due to lack of fuel cost pass-through. IPPs gain from power demand growth, but simultaneously are hurt by rising coal prices and interest rates. In 2011, we expect power demand to grow 9.8%; however, the benefits to the IPPs will be fully offset by rising coal prices (8.1% spot and 3% blended contract) and interest rates (1%), in our view, given that IPPs are more sensitive to these than power demand.
Tariff hike of 5% in July 2011 could provide a trading opportunity Despite high inflation, the significant drop in the tariff-fuel spread and increasing number of money-losing IPPs has resulted in the IPPs calling for the “coal-power tariff linkage” system. We expect execution of a RMB20/MWh (5%) on-grid tariff hike in July 2011. This should provide a short-term trading buy opportunity, with Huadian having the greatest upside. Because non-key contract coal prices are expected to rise afterward, this could take down IPP margins again.
Maintain sector as Neutral, due to undemanding valuations Despite weak fundamentals due to a lack of a fuel cost pass-through mechanism, we maintain our Neutral view, as the worst case may already be priced in and valuations look undemanding (0.6-1.4x book;18%-21% below replacement cost; stripping out coal assets, Datang’s power assets are sold for “free”). Despite such bargains, we cannot find any positive fundamental catalysts, unless tariff reform (or power pooling) is unveiled, but that isn’t likely before 2014-15F, we believe.
Prefer plays with more non-thermal power and coal assets With the rising coal price as the major hurdle, our stock picks focus on companies with more non-thermal power assets and those less impacted by surging coal prices (ie, having internal coal assets). We expect Datang to have 26% coal self-sufficiency in 2011, followed by CRP (20%) and Huadian (11%). We upgrade CPID to BUY given its large hydropower portfolio, and potential parent’s injection or cooperation on hydro/ nuclear projects. Due to a lack of catalysts, we downgrade CRP and Huaneng to NEUTRAL, and maintain Datang and Huadian as NEUTRAL, despite liking CRP’s coal assets. We also highlight the risk of an environmental tax to IPPs.
N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D
Stocks for action Amid the rising coal price and interest rate environment, we prefer CPID and CRP, which have better cost management, more non-thermal power generation and coal assets, in our view.
Weak fundamental outlook priced in, but lack of catalysts; maintain Neutral 4
Poor fundamentals due to lack of fuel cost pass-through 4 A tariff hike should be viewed as a trading buy, but not a catalyst to turn bullish 4 Tariff reform is key for a long-term re-rating 4
Who shines the brightest in the dark? 6 Close to the 2008 low 6 Black spread suggests a rebound 6 What if there is no tariff hike? 7 IPPs’ coal investment – Datang and CRP are most advanced 7 Environmental Tax – A huge risk to IPPs? 8 Upgrade CPID to BUY; NEUTRAL on the others 8 Trading strategy 9 Sensitivity analysis 10 Change of assumptions 10
Key assumptions 12
Company comparisons 13
Valuation comparison 18
P/E and P/B comparison 19
Tariff reform (power pooling) — KEY for a re-rating 21 Tariff hike unlikely in 1H11 given stiff CPI inflation 21 Expect a 5% tariff hike each in July 2011 and July 2012 22 Latest discussion on power tariff adjustment 23 View reiterated: limited downside risk in on-grid power tariff 25 Power tariff reform (power pooling) 27
Coal price to remain strong in FY11-12F 30 Our coal price assumptions for 2011-12F 30 Contract coal price 31 Spot price: strong with seasonal fluctuation 33 Domestic thermal coal price update 35 Global thermal coal price update 38 Weekly coal inventory update 39 Monthly output update on coal and downstream industries 40 Fuel cost trend of IPPs under coverage 41
IPPs’ coal mine investments 43 Coal investment updates on IPPs 43 Backward integration into coal is value-accretive; Datang is the most advanced 45
Power | China Ivan Lee, CFA
11 March 2011 Nomura 3
Solid demand growth supported by GDP 48 Forecast strong power demand growth, but at a reduced rate 48 Power output update in 2010 49 Power rationing 51 More supply to be sourced from clean energy 52 Utilization trend of IPPs under coverage 56
Other factors 58 Interest rate hikes in 2011F look negative for IPPs, but not a concern for capex funding 58 Listed IPPs continue to grow market share 60 Implications of depreciation policies 60 Limited benefits from RMB appreciation 60
12th Five Year Plan – development map for power sector 61 Target to reduce carbon by 40-45% by 2020 (vs 2005 level) and energy intensity by another 16% during 2011-2015 61
Environmental tax– A huge risk to IPPs? 62
Tariff reform the only solution to regain investor interest in the sector 64
So, what is power pooling? 65 Power pooling: a win-win tactic for power generator and users 65 But certain criteria have to be met before any power pooling… 66 How about the status in China? 66 Which IPPs stand out from power pooling implementation? 66
Sector valuation 67
Valuation methodology and key risks 70
Latest company views
China Power International 74
China Resources Power 80
Datang International Power 85
Huadian Power International 95
Huaneng Power International 101
Also see our Anchor Report: China Coal — Always room for dessert (18 January, 2011)
Weak fundamental outlook priced in, but lack of catalysts; maintain Neutral Poor fundamentals due to lack of fuel cost pass-through Backed by strong GDP growth, we expect IPPs (independent power producers) to enjoy solid power demand growth over the next couple of years. However, without a proper fuel cost pass-through mechanism in place (and an unchanged tariff amid a high inflation environment), the benefits from utilisation gains are likely to be overwhelmed by rising coal prices and interest rates in 2011-12F. Any tariff hike will only happen when power supply is threatened by the deterioration of IPPs’ financials, in our view.
As such, we downgraded the sector to Neutral on 27 November, 2009 (please refer to our Anchor report “weighed down by coal!” dated 27 Nov 2009). The sector has underperformed the market — share prices of big-cap IPPs fell 15.3-23.8%, versus a 7.0% gain in the Hang Seng Index since 1 January 2010. We believe the poor fundamentals may have already been priced in and valuations are attractive. In this context, we see limited downside.
Yet we cannot find any catalyst to turn fundamentally positive, unless tariff reform (or power pooling) is unveiled, but this seems unlikely before 2014-15F, in our view. Therefore, despite almost six years of P/E de-rating, we remain fundamentally cautious and maintain our Neutral rating on the China IPP sector.
A tariff hike should be viewed as a trading buy, but not a catalyst to turn bullish Even if the tariff is lifted, coal should be an ultimate winner, as a steeper contract price increase should follow given the prevailing deep discount to spot, in our view. Thus, the expected 5% on-grid tariff hike in July 2011 should be viewed as a trading buy, but not a catalyst to turn positive. This is because we expect the non-key contract coal price will rise afterward (in 3Q11, post the on-grid tariff hike), and this would likely take down IPP margins again.
Tariff reform is key for a long-term re-rating Fundamentally, we will likely only turn bullish when tariff reform (eg power pooling, etc) or fuel cost pass-through are revealed, as these should secure IPPs’ margins in the long run. Prior to that, any movement of the tariff or coal price should be viewed as short-term trading buy or sell opportunities, in our view.
Without fuel cost pass-through, four key factors affecting China IPPs are:
Regulated on-grid power tariff — An unchanged tariff due to prevailing high inflation –> Negative
Utilisation — Improving utilisation backed by strong GDP growth –> Positive Awaiting, in the long run…
Tariff reform (e.g. power pooling) or fuel cost pass-through, likely after 2014-15F, which may prompt a sector re-rating.
Rising coal prices and interest rates offset the benefits from utilization gains
Power | China Ivan Lee, CFA
11 March 2011 Nomura 5
Exhibit 1. Key drivers affecting earnings of IPPs
Tariff
Coal price
Utilization
2006-08 2009
IPP margins
Earningssensitivity
Interest rate
2010
FY06-08 Power demand up 14.6%-5.6%
Capacity up 22.3%-10.3%
FY09 Power demand up 6.2%
Capacity up 10.2%
FY10 Power demand up 13.8%
Capacity up 10.1%
2011/12E
FY11E Power demand up 9.8%
Capacity up 9.9%
Tariff
Coal price
Utilization
2006-08 2009
IPP margins
Earningssensitivity
Interest rate
2010
FY06-08 Power demand up 14.6%-5.6%
Capacity up 22.3%-10.3%
FY09 Power demand up 6.2%
Capacity up 10.2%
FY10 Power demand up 13.8%
Capacity up 10.1%
2011/12E
FY11E Power demand up 9.8%
Capacity up 9.9%
Source: Nomura research
Exhibit 2. A re-rating is contingent on a “power pooling”
Source: Nomura research
Although utilization is expected to rise, a fundamental P/E Re-rating will happen ONLY IF a tariff reform (like power pooling) is implemented, likely in 2014-15F
P/E de-ratingP/E
Re-ra
ting
Pla
nt
uti
lisa
tio
nra
te (
%)
35
40
45
50
55
60
65
70
75
1993
1994
1995
1996
1997
199
8
1999
200
0
2001
2002
2003
2004
2005
200
6
2007
2008
2009
201
0F
2011
F
201
2F
National average Thermal Hydro(%)
Although utilization is expected to rise, a fundamental P/E Re-rating will happen ONLY IF a tariff reform (like power pooling) is implemented, likely in 2014-15F
P/E de-ratingP/E
Re-ra
ting
Pla
nt
uti
lisa
tio
nra
te (
%)
35
40
45
50
55
60
65
70
75
1993
1994
1995
1996
1997
199
8
1999
200
0
2001
2002
2003
2004
2005
200
6
2007
2008
2009
201
0F
2011
F
201
2F
National average Thermal Hydro(%)
Power | China Ivan Lee, CFA
11 March 2011 Nomura 6
Stock picks and assumption changes
Who shines the brightest in the dark? Close to the 2008 low The outlook for the next 12 months is not favourable; however, the poor fundamentals are well recognised in the market and have already been priced in, in our view. The current low IPP stock valuations suggest limited downside — trading at an arguably distressed 0.6-1.4x P/B, with CPID, Huaneng and Huadian trading at 18-21% below replacement cost. On our figures, stripping out the IPPs’ appraised coal asset values, Datang’s power assets are sold for “free”, while CRP’s and Huadian’s power assets are sold at only 9.2x P/E (1.1x P/B) and 0.3x P/B on our FY11F estimates, respectively.
Exhibit 3. IPPs – EV/MW vs. Replacement cost
EV Coal asset Power asset MW EV/MW Replacement cost Discount to replacement cost(Rmb mn) (Rmb mn) (Rmb mn) (Rmb mn) (Rmb mn)
As shown in the exhibit below, comparing the factors affecting the IPPs in both 2008 and now, all factors are not as bad as in 2008 (there was also the US financial turmoil at the end of 2008), and thus the IPPs should not deserve to trade as low as the 2008 level, in our view.
Exhibit 4. Comparison of share performance in 2008 and current
Company Ticker Share price P/E P/B Share price P/E P/B
China Power International 2380 HK 1.16 na 0.5 1.55 11.2 0.6
China Resources Power 836 HK 11.49 28.2 1.8 13.08 10.2 1.4
Datang Power 991 HK 2.26 39.5 1.0 2.70 17.5 1.0
Huaneng Power 902 HK 3.25 na 0.8 4.48 14.3 1.1
Huadian Power 1071 HK 1.10 na 0.4 1.57 573.2 0.6
Note: * This price is based on Shanxi 5,500 kal/kg coal
Share price in 2008 represents the lowest price between September and December 2008;Current price is stated at 4 March 2011 closing
Source: Nomura research
Black spread suggests a rebound We think IPPs’ share prices are positively correlated to the tariff-fuel spread (black spread), but negatively correlated to inflation. We think the current low black spread compared with 2004-07 and 2009 levels suggests that a tariff hike is likely this year. This could enlarge the black spread and prompt an IPP share price rally, in our view. Therefore, we have assumed a 5% tariff hike in July 2011. However, this may not be enough to bring the black spread back to the FY09 level, implying that continual margin pressure or additional on-grid tariff hike is required. We do not rule out the chance that two tariff hikes may happen in 2H this year if coal price get stronger and
Power | China Ivan Lee, CFA
11 March 2011 Nomura 7
more IPPs report losses later in the year, as in 2008. Currently, 43% of coal-fired IPPs in China reported losses in the first 11 months of 2010, vs 52% in 2008.
Exhibit 5. Consumer Price Index
(2)
0
2
4
6
8
10
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Actual Forecasted(%)
Source: CEIC, Nomura research
Exhibit 6. Spread (tariff and unit fuel cost) vs Weighted average share price change
20
40
60
80
100
120
140
Jan-
07A
pr-0
7Ju
l-07
Oct
-07
Jan-
08A
pr-0
8Ju
l-08
Oct
-08
Jan-
09A
pr-0
9Ju
l-09
Oct
-09
Jan-
10A
pr-1
0Ju
l-10
Oct
-10
Jan-
11A
pr-1
1Ju
l-11
Oct
-11
Jan-
12
0
2
4
6
8
10
12
14
Average IPPs' tariff and unit fuel cost spread (LHS)
Weighted average IPPS share price change (RHS)
(RMB/MWH) (HK$)
Source: CEIC, Nomura research
What if there is no tariff hike? Currently in our model, we have factored in 5% tariff hikes effective July 2011 and July 2012. However, if there is no change in the tariff, the profitability of the IPPs could be impacted significantly. Despite our view that in FY11F most of the IPPs (except for Huadian) could still maintain a profit position, most of the IPPs (except for CRP) would be at a loss position starting from FY12F.
Exhibit 7. Sensitivity analysis of tariff hike
With tariff hike Without tariff hike Changes (%)
Scenario One - No tariff hike FY11F FY12F FY11F FY12F FY11F FY12F
CPID (RMBmn) 706 748 402 (382) (43.1) (151.1)
CR Power (HK$mn) 6,062 8,003 5,107 4,985 (15.8) (37.7)
Datang (RMBmn) 1,898 2,494 961 (457) (49.4) (118.3)
IPPs’ coal investment – Datang and CRP are most advanced To mitigate the sensitivity of coal price fluctuation on profit margin, IPPs have started investing in or partnering with coal mines. We believe Datang is more advanced than CRP and Huadian in terms of backward integration in coal, on its larger coal portfolio and earlier starting of production (from 2007 vs China Resources Power in 2009). We expect Datang to achieve 26% coal self-sufficient ratio in 2011 followed by CRP at 19.3%, Huadian at 11.1%, and Huaneng at less than 2%. Ultimately, both Datang and CRP are targeted to raise their coal self-sufficiency to 50% by 2015F. However, CRP may have a better chance to achieve it given its proven execution track record.
Exhibit 8. IPPs’ coal self-sufficiency ratio (%)
Company 09 10F 11F 12F 13F
CPID na na na 2.0 5.0
CR Power 5.9 14.9 19.3 29.4 36.7
Datang 19.9 27.0 26.0 32.6 37.1
Huaneng na <1.0 <2.0 <3.0 <3.0
Huadian 0.4 4.5 11.1 16.4 20.6
Source: Company data, Nomura research
Power | China Ivan Lee, CFA
11 March 2011 Nomura 8
We estimate that the potential value to Datang, CRP and Huadian from their coal investments could be worth HK$3.7, HK$5.1 and HK$0.80 per share, respectively, based on the EV/tonne of coal reserves and the P/Es of comparable coal companies.
(Please see detailed calculations later in this report.)
Environmental Tax – A huge risk to IPPs? The implement of Environmental Tax (or the resources tax) is still being discussed. The China ministries proposed in May 2010 that a CO2 tax could be imposed as soon as 2012. However, so far there has been no update on this Environmental Tax. Given prevailing high inflation, the uncertainty on the continuity of the Kyoto protocol (or the implementation of a local carbon trading scheme) and uncertainty on how IPPs can pass on the CO2 tax, we believe there will be some more time needed.
From our analysis, based on their current coal-fired capacity and a Rmb10/ton CO2 tax charge, Huaneng could be expected to be hit the most, followed by Datang, CRP, Huadian and CPID, with impact of almost 19.8-59.8% of IPPs’ FY11F earnings (excluding Huadian). We understand the actual impact could be much less, as this could be offset by some of the levies in the existing Pollutant Emission Charges, and some of the taxes could be passed on to end-users/coal suppliers, but we also understand that the CO2 tax per ton will also increase over time. According to a study by the Ministry of Environmental Protection, based on a Rmb10/ton CO2 tax charge, the CO2 tax would equivalent to a tax rate of Rmb5.5/ton of coal and Rmb8.5/ton of oil. That said, if Beijing agrees that coal companies should bear CO2 costs and decides to implement resources tax reform on the coal sector – changing from the current Rmb3-5/ton to 5% on sales (Rmb15/ton), this would more than offset the CO2 tax charge. Thus, we believe IPPs should experience minimal impact.
Upgrade CPID to BUY; NEUTRAL on the others In our view, despite the unfavourable industry structure of the IPP sector and lack of near-term catalysts, CPID is our top pick, given: 1) the company possesses the lowest expected unit fuel cost rise due to its high contract coal portion and high fulfilment rate; 2) it has the largest hydropower portion among the IPPs, which should result in the least impact from any coal price surge, in our view; 3) we see the possibility of a parental asset injection or cooperation for any hydropower or nuclear power investment in the future; and 4) undemanding valuation at FY11F P/B trough of 0.6x. Therefore, we upgrade CPID to BUY from Neutral. For the other IPPs, given the lack of catalysts but undemanding valuation, we downgrade CRP and Huaneng to NEUTRAL from Buy and maintain Huadian and Datang as NEUTRAL.
CPID: upgrade to BUY as our top pick for the sector
We prefer CPID as a significant hydropower player in the market, which provides it the advantage over its peers of being less vulnerable to a coal price surge. Potential parental asset injection also paves the way for the company to enjoy more hydropower or nuclear power exposure in our view. Currently, hydropower accounts for ~70% of its total profit. Valuation looks attractive, as it is trading at its P/B trough of 0.6x, vs 1.8x for a pure hydropower play.
CRP: downgrade to NEUTRAL given lack of near-term catalysts
CRP targets to raise its wind portfolio by 800MW every year, and invest in more coal assets to raise its self-sufficiency ratio. CRP targeted to have 30% (50%) coal self-sufficient by 2012F (2015F). We value its coal assets at HK$5.1 per share. This implies its power portfolio is at a bargain of 9.9x P/E and 1.1x P/B on our FY11F estimates, respectively. For CRP we expect to see a more balanced and diversified portfolio of power assets, and see its ROE spread increasing against peers. However, given the lack of identifiable near-term catalysts, we downgrade CRP to NEUTRAL.
Upgrade CPID to BUY
Downgrade CRP to NEUTRAL
Power | China Ivan Lee, CFA
11 March 2011 Nomura 9
Datang: maintain NEUTRAL; more visibility on coal-chemical needed
The Duolun coal-chemical project has been delayed further, which raises uncertainty on Datang’s potential earnings growth from the non-power business. However, the recently approved A-share issuance should assist Datang with financing of new projects and also lower gearing, in our view. We value its coal assets at HK$3.7 per share; this implies its power portfolio is sold for “free” in our view. Datang is expected to have the largest coal production and coal self-sufficiency in 2011F among the listed IPPs. However, given its less proven execution track record, we reiterate our NEUTRAL rating pending more visibility on the coal-chemical projects.
Huadian: most leveraged to coal and interest rates
We foresee weak operating performance for Huadian for FY10-12F, given its high leverage to rising coal prices and interest rate hikes. Having said that, we see limited downside potential, as we believe the negative parameters are already reflected in the price (historical low P/B of 0.6x FY11F). Also, its coal assets alone are worth HK$0.8 per share, according to our calculation. We maintain our NEUTRAL rating.
Huaneng: downgrade to NEUTRAL given no near-term catalysts
We think Huaneng is the traditional power provider with the least exposure to non-coal-fired power generation and coal resources, which we believe results in the company being vulnerable to coal price hikes. The recent share issuance could help to pare gearing. Downgrade to NEUTRAL given fair valuation with no identifiable near-term catalysts.
For detailed views, change of assumptions and forecasts, refer to the individual company sections toward the end of this report.
Exhibit 9. Valuation comparison of the covered IPPs
Note: Share prices as of 4 March 2011; Weighted-average number of shares was used in these valuations (i.e. P/E, dividend yield, P/B).
Enterprise values presented in this table assume all outstanding shares are based on H-share price in the Hong Kong market.
Source: Nomura estimates
Trading strategy We think value investors with a longer investment horizon (three to five years) could accumulate undervalued players (those below book value, such as CPID and Huadian) and await a sector re-rating upon announcement of tariff reform, potentially in 2014-15F — which could secure IPPs’ margins and profitability in the longer term.
However, we think growth-driven investors with a shorter investment horizon could buy into quality plays (eg, CPID and CRP) and use this as the vehicle to ride out the expected market turbulence (like rising coal prices and interest rates) we expect to see this year. We think they could also buy into newsflow (eg, tariff hike, coal price decline, etc) and select those plays that are most sensitive to tariff and coal price changes (ie, Huadian) for short-term trading profits.
Maintain NEUTRAL rating for Datang pending more visibility of the coal-chemical projects
Tariff hike 5% each for July 2011 and July 2012 flat for two years
Coal price - contract +3% in 2011 and +8% in 2012 +8% in 2011 and +0% in 2012
- spot +8% in 2011 and +5% in 2012 +8% in 2011 and +0% in 2012
Interest rate hike 1% hike in 2011 and 0.75% hike in 2012 0.8% hike in 2011 and 1.1% hike in 2012
IPPs' average utilisation hour 5,026 hours (+9.6% y-y) in 2011 and 5,026 (+4.3% y-y) in 2012
5,520 hours (+5% y-y) in 2011 and 5,520 (+0% y-y) in 2012
China's total installed capacity at year-end
1,053GW at end 2011 (+9.5% y-y) and 1,144GW (+8.6% y-y) at end-2012
994GW at end 2011 (+6.4% y-y) and 1,054GW (+6.0% y-y) at end 2012
China's power demand growth 9.8% in 2011 and 9.5% in 2012 8.0% in 2011 and 8.0% in 2012
Source: Nomura research
Exhibit 14. Valuation methodology and risks
Company Ticker Valuation methodology Risks
China Power Intl 2380 HK Our revised price target HK$2.00 is based on DCF valuation, assuming 1% terminal growth, and a WACC of 7.4%
Our price target is subject to growth assumptions in power demand, tariffs and capex. Delays in revising electricity tariffs and lower-than-expected power demand may result in key changes in our forecasts, and hence our price target.
China Resources Power 836 HK Our revised price target HK$14.94 is based on DCF valuation, assuming 1% terminal growth, and a WACC of 7.9%
Upside risk to our price target includes: higher than expected output growth in coal production. Downside risk includes 1) delays in revising electricity tariff; and 2) lower-than-expected power plant utilisation
Datang Intl 991 HK Our revised price target HK$2.79 is based on DCF valuation, assuming 1% terminal growth, and a WACC of 7.4%. We have not incorporated coal assets, coal-to-gas and coal-to-chemical businesses valued at HK$3.92 due to low visibility.
Any contribution from the coal-to-chemical and coal-to-gas projects will likely provide upside to our estimates. Downside risks include: 1) delays in revising electricity tariff; and 2) lower-than-expected power plant utilisation
Huaneng Power Intl 902 HK Our revised price target HK$4.78 is based on DCF valuation, assuming 1% terminal growth, and a WACC of 7.9%
Upside risk to our price target includes: Any coal investment or injection from parent would be a catalyst for the company. Downside risks include: 1) delays in revising electricity tariff; and 2) lower-than-expected power plant utilisation
Huadian Power Intl 1071 HK Our revised price target HK$1.62 is based on DCF valuation, assuming 1% terminal growth, and a WACC of 7.9%
Upside risk to our price target includes: Huadian expects to enjoy the fastest rebound in terms of financial performance upon any sector recovery, given it is highly sensitive to coal prices and interest rates. Downside risks include: 1) delays in revising electricity tariff; and 2) lower-than-expected power plant utilisation
Source: Nomura estimates
Power | China Ivan Lee, CFA
11 March 2011 Nomura 12
Key operational assumptions
Key assumptions
Exhibit 15. Key statistics and operational assumptions
FY09 FY10F FY11F FY12F FY09 FY10F FY11F FY12F
COAL TARIFF
Average coal price (RMB/t) On-grid tariff, net of VAT (RMB/kWh)
National (raw coal at 5,500kcal/kg) National average 338 339 348 368
Note: Market capitalisation of five IPPs only take into account of H shares
Source: Nomura estimates
Power | China Ivan Lee, CFA
11 March 2011 Nomura 19
P/E and P/B comparison
P/E and P/B comparison
Exhibit 19. CPID forward P/E
2.5x
5.0x
7.5x10.0x
12.5x
(3)
(1)
1
3
5
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
Source: Bloomberg, Nomura estimates
Exhibit 20. CRP forward P/E
5x
10x
15x
20x
25x
0
10
20
30
40
50
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
Source: Bloomberg, Nomura estimates
Exhibit 21. Datang forward P/E
10x
20x
40x
50x
30x
60x
0
2
4
6
8
10
12
14
16
18
20
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
Source: Bloomberg, Nomura estimates
Exhibit 22. Huadian forward P/E
10x
20x30x
50x60x
(15)
(10)
(5)
0
5
10
15
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
40x
Source: Bloomberg, Nomura estimates
Exhibit 23. Huaneng forward P/E
5x
10x
15x
20x
1x
(8)
(4)
0
4
8
12
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
Source: Bloomberg, Nomura estimates
Power | China Ivan Lee, CFA
11 March 2011 Nomura 20
Exhibit 24. CPID forward P/B
1.25x
1.50x
1.75x
1.00x
0.75x
0.50x
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
Avg: 0.9x
Source: Bloomberg, Nomura estimates
Exhibit 25. CRP forward P/B
1.5x
2.0x
2.5x
3.0x
1.0x
5
10
15
20
25
30
35
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
Avg: 2.0x
3.5
Source: Bloomberg, Nomura estimates
Exhibit 26. Datang forward P/B
1.5x
2.0x
2.5x
3.0x
2
4
6
8
10
12
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
Avg: 1.6x
1.0x
Source: Bloomberg, Nomura estimates
Exhibit 27. Huadian forward P/B
1.25x
1.50x
1.75x
0.75x
0.50x
1.00x
1
2
3
4
5
6
7
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
Avg: 0.9x
Source: Bloomberg, Nomura estimates
Exhibit 28. Huaneng forward P/B
1.25x
1.50x
1.75x
2.00x
2.25x
1.00x
3
4
5
6
7
8
9
10
11
12
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
Avg: 1.4x
Source: Bloomberg, Nomura estimates
Power | China Ivan Lee, CFA
11 March 2011 Nomura 21
Power tariff trend
Tariff reform (power pooling) — KEY for a re-rating Tariff hike unlikely in 1H11 given stiff CPI inflation Electricity tariff has been frozen for more than two years, both for on-grid and end-users. The last on-grid tariff hike was in August 2008. With increasing coal prices, talk about an on-grid tariff hike reheated in 2010.
In 3Q10, the government issued a proposal for a progressive end-user tariff system for the residential sector, as well as a discussion for on-grid tariff hike for seven “power business loss-making” provinces in China, in an effort to relieve power industry pressure. However, CPI inflation started to pick up in 2H10 and reached 4.9% y-y in January 2011, up from 4.6% in December 2010. Given inflation concerns, any discussions on tariff adjustment were halted.
Exhibit 29. On-grid power tariff trend since 2005
RMB37.8¢/kWh
RMB35.9¢/kWh
RMB34.1¢/kWh
RMB31.4¢/kWh
RMB33.0¢/kWh
30
32
34
36
38
40
42
44
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13
Tariff hike in Aug 2008(5.3%)
(RMB¢/kWh)
1st coal-power tariff linkage in May 2005
(5%)
2nd coal-power tariff linkage in June 2006
(3.3%)
Tariff hike in July 2008(5.4%)
On 19 Nov 2009, China announced a Rmb28/MWh retail power tariff hike (excl. residential power users), and a rebalancing of on-grid thermal power tariff with a Rmb2-15/MWh increase in Shaanxi and 9 other western provinces, and a Rmb3-9/MWh cut in Zhejiang and 6 other south-eastern provinces
Forecast
Assumed tariff hike in Jul 2011 & Jul 2012
(5%) each)
Note: Excluding allowance for flue-gas desulphurization of RMB1.5¢ /kwh
Source: China Electricity Council; Nomura research
Our China economists, Tomo Kinoshita and Chi Sun, stated in the report dated 4 March 2011 that with the rising input costs of raw materials and wages, excess liquidity and reduced overcapacity due to strengthening consumption, CPI will average 4.9% in 2011 and 5.2% in 2012. As a result, we believe Beijing will maintain its price control policy and hold off on any end-user or on-grid power tariff hike at least for a few more months so as to stabilise inflation pressure.
However, with continuous margin squeeze amid rising coal prices and unchanged tariffs since August 2008, the financing capability of the IPPs has deteriorated. In the first 11 months of 2010, 25.7% of China’s IPPs (43.2% of coal-fired IPPs) have suffered losses (source: CEIC). Also, all IPPs in China have already geared to the utmost at 300%-plus, with little room for further borrowing. This may finally threaten new capacity investments for the power industry and result in power shortages.
Assuming modest 5% tariff hikes to be effective in 2H11 and 2H12
Power | China Ivan Lee, CFA
11 March 2011 Nomura 22
Exhibit 30. On-grid power tariff hikes during 3Q08
On 30 June 2008Hike on
1 July 2008Hike on 20 Aug
2008Effect after tariff
hike Collective tariff
hike in 3Q08
Province Grid (RMBcents/kWh) (RMBcents/kWh) (RMBcents/kWh) (RMBcents/kWh) (%)
Note: Excludes the RMB1.5cents/kWh allowance for power plants with flue-gas desulphurization
Source: NDRC; Nomura International (Hong Kong) Limited
Expect a 5% tariff hike each in July 2011 and July 2012 We therefore believe Beijing will finally allow for a modest on-grid tariff hike in mid-2011 and another one in mid-2012. This is backed by the prevailing low RMB96/MWh spread (“black spread”) between average tariff (net of VAT) and unit fuel cost, compared with an average of RMB132/MWh during 2003-07 and RMB132/MWh post the two on-grid tariff hikes in 2H08.
This is similar to the case in 2008, when CPI was high at 5.9%, but the National Development and Reform Commission (NDRC) raised the on-grid power tariff twice (in July and August) by 5% each given 33% of China’s IPPs (or 52% of coal-fired IPPs) made losses during the year and the black spread fell to RMB94/MWh (from RMB120/MWh in 2007). After the two tariff hikes in 2008, the average black spread recovered to RMB132/MWh in 2009, but has since fallen to RMB96/MWh lately given the escalating coal price.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 23
In addition, to alleviate the inflationary pressure, Beijing could raise the on-grid tariff and keep end user tariffs unchanged (or lift commercial and industrial prices while freezing residential prices). This is possible, in our view, given 88% of power grids remain money-making and all of them are state-owned anyway.
In our model, we assume a 5% tariff hike each to be effective in July 2011 and July 2012. However, despite this, we don’t believe they will be enough to bring the black spread back to the FY09 level, implying continual margin pressure or the necessity of additional on-grid tariff hikes. Indeed, the current “coal and power prices linkage system” would suggest the former, given the rule only allows IPPs to get compensation on 70% of a coal cost increase if the coal price has risen by more than 5% in a year. However, we do not rule out the chance that two tariff hikes may happen in 2H this year if the coal price goes up and more IPPs report losses later in the year, as in 2008.
Exhibit 31. Consumer Price Index
(2)
0
2
4
6
8
10
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12 Actual Forecasted(%)
Source: CEIC, Nomura research
Exhibit 32. Producer Price Index
(8)
(6)
(4)
(2)
0
2
4
6
8
10
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
(%)
Source: CEIC, Nomura research
Exhibit 33. IPPs’ tariff (net of VAT) and unit fuel cost spread since FY03
60
80
100
120
140
160
180
200
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11F
FY
12F
FY
13F
CPID DatangHuadian HuanengCRP
(RMB/MWh)
Source: CEIC, Nomura research
Exhibit 34. Average IPPs’ tariff (net of VAT) and unit fuel cost spread since FY03
60
80
100
120
140
160
180
200
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11F
FY
12F
FY
13F
Average of 5 IPPs
(RMB/MWh)
Source: CEIC, Nomura research
Latest discussion on power tariff adjustment As mentioned above, rising coal prices have resulted in discussions on tariff adjustments. Two plans have been discussed so far: 1) implementation of a progressive end-user tariff system for the residential sector; and 2) an on-grid tariff hike in seven provinces.
Progressive end-user tariff system – On 8 October 2010, the NDRC released a proposal for a progressive end-user tariff system for the residential sector for consultation. The proposed system is based on users’ monthly consumption levels,
Even a 5% tariff hike each in 2H11 and 2H12 would not be enough to bring the black spread back to the FY09 level, in our view
Power | China Ivan Lee, CFA
11 March 2011 Nomura 24
instead of the current uniform tariff. The purposes of the proposed system are to discourage “above-normal” power consumption and reduce energy intensity.
The proposal consisted of two plans. Under one plan, a household with monthly electricity usage <110kWh (~70% of households) will be charged the current tariff; there would be a hike of >RMB0.05/kWh for usage between 110-210kWh (~90% of households); and a hike of >RMB0.2/kWh for usage >210kWh. Under another plan, the range of electricity usage is different, with 140kWh instead of 110kWh and 270kWh instead of 210kWh.
This is the first time China has proposed introducing a progressive end-user tariff for residential users. Per the NDRC, the additional revenue from the progressive end-user tariff would be used to cover additional costs for desulfurisation, replacement of households’ power meters and to recover increasing fuel costs. Although we expect it should have minimal impact to CPI as residential only accounts for 15% of power consumption in China, the prevailing high inflationary environment resulted in the proposal being aborted. We believe this proposal will be revisited when inflation pressure ceases.
Exhibit 35. Proposed progressive tariff system for residential sectors
Total City Rural Usage (kWh) Total City Rural Usage (kWh) Total (%) Usage (kWh)
Plan I 70 51 79 110 90 82 95 210 100 >210
Plan II 80 65 88 140 95 90 98 270 100 >270
Tariff hike Nil >RMB0.05/kWh >RMB0.2/kWh
Source: NDRC, Nomura Research
On-grid tariff hike for seven provinces – In mid-September 2010, the NDRC met with five IPPs to discuss a potential on-grid power tariff hike for provinces with 1) >57% coal-fired power generation; 2) utilisation hours >5,000 hours; and 3) >70% of the coal-fired power plants are in loss positions. With these criteria, seven provinces are shortlisted, including Hebei, Shandong, Shanxi, Shaanxi, Qinghai, Gansu and Hainan. However, this proposal was not widely agreed upon by the IPPs given the unfair treatment, and the proposal was finally shelved.
Reiterating the “coal-power tariff linkage” during the NPC meeting in March 2011. On 3 March 2011 china5e.com reported that five large IPPs’ representative members of NPC and CPPCC 2011 planned to re-propose “coal-power tariff linkage” in the forthcoming conference. Before this, due to the continuing rise in coal price in January and key contact coal fulfilment rate falling below 70%, five large IPPs had reported to NDRC regarding the situation and suggested to reinitiate the “coal-power tariff linkage mechanism.” We believe the NDRC will eventually allow on-grid tariff to rise (we expect a 5% increase in July 2011); however, it may be applied to the said seven provinces as previously discussed. According to our analysis, if only the seven provinces are subjected to a 5% tariff hike, Huadian will be the major beneficiary, followed by Datang, Huaneng, CRP and CPID.
The IPPs planned to re-propose the “coal-power tariff linkage” mechanism given their loss situation
Power | China Ivan Lee, CFA
11 March 2011 Nomura 25
Exhibit 36. Breakdown of attributable capacity with impact from selective tariff hike (in 7 provinces)
Huaneng Datang CRP Huadian CPI
Amount % of total Amount % of total Amount % of total Amount % of total Amount % of total
(MW) (%) (MW) (%) (MW) (%) (MW) (%) (MW) (%)
Beijing, Tianjin, Tangshan & Hebei 1,006 2.1 1,500 6.0 77 0.4 na na na na
Hebei 3,028 6.4 6,717 26.7 1,766 8.5 2,623 11.7 na na
Anhui na na na na 704 3.4 2,262 10.1 2,510 21.3
Henan 1,440 3.1 na na 2,495 12.1 1,638 7.3 2,470 20.9
Hubei na na na na 600 2.9 na na 1,190 10.1
Hunan 729 1.5 na na 600 2.9 na na 1,969 16.7
Inner Mongolia 49 0.1 3,036 12.1 500 2.4 300 1.3 na na
Ningxia na na 540 2.1 na na 1,218 5.5 na na
Gansu 1,609 3.4 330 1.3 na na na na na na
Qinghai na na 152 0.6 na na na na na na
Liaoning 4,600 9.8 699 2.8 925 4.5 na na na na
Shandong 6,562 13.9 na na 137 0.7 10,433 46.7 na na
View reiterated: limited downside risk in on-grid power tariff Despite the tariff reform being aborted and the recent high CPI environment in China, as well as the requirement to boost investment in the power grid, we continue to see limited risk of any on-grid tariff cut, due to:
China’s IPPs have gone through six years of de-rating on stagnant tariff and rising coal prices. In the first 11 months of 2010, 25.7% of China’s IPPs (43.2% of coal-fired IPPs) made losses, per CEIC. We believe the government is unlikely to redirect profit to power grids (by cutting on-grid tariff), as this may result in financial difficulties for IPPs to make further investment in new capacity.
Again, we do not expect a tariff cut at the national level
Power | China Ivan Lee, CFA
11 March 2011 Nomura 26
Exhibit 37. Number of loss-making IPPs in China
Number of IPPs under statistics
Number of loss-making IPPs
All combined losses
(RMBbn)
Net earnings for the sector
(RMBbn)
All-IPPs
12M08 3,545 1,189 (69.6) 16.3
12M09 3,685 1,059 (26.5) 103.5
11M10 3,893 1,001 (35.9) 82.7
Coal fired IPPs
12M08 1,296 679 (65.1) (26.7)
12M09 1,221 413 (21.7) 59.9
11M10 1,239 535 (32.9) 28.0
Power grids
12M08 1,688 359 (15.7) 37.9
12M09 1,596 390 (24.5) 27.6
11M10 1,627 210 (2.1) 59.2
Source: CEIC; Nomura research
The NDRC, State Electricity Regulatory Commission (SERC) and the National Energy Administration collectively issued a notice on 16 October 2009 mandating strict adherence to the current pricing mechanism set out by the government, including on-grid tariffs, inter-provincial tariffs and tariff for desulfurised power plants. This notice specifically disallowed local governments from adjusting the power tariff voluntarily by using “direct-power purchase” as a reason, for the sake of stimulating industrial demand.
Despite electricity accounting for a higher percentage of production costs of heavy industries, production volume is generally driven by demand. As such, lowering production costs through power tariff cuts may not be effective in stimulating these industries. In addition, with the government’s effort to conserve resources and protect the environment (including reducing carbon emissions), any tariff cut could run counter to the government’s intention to allocate resources more efficiently.
China IPPs were earning around 2.8-4.8% ROE in 2010, per CEIC data, which was lower than the government’s targeted long-term return (ie, 8%) during the reform of the power industry in 2002 to avoid a structural power shortage from a potential sharp slowdown in capacity investments.
The National Energy Administration has stated that the government maintains its goal to liberalise the energy prices in China (including the power tariff) to adhere to the international benchmark. Given that China’s residential electricity tariff is only around 40% of the international average and industrial electricity is slightly below the international average, any tariff cut would be against the government’s goal to promote energy efficiency, in our view.
Exhibit 39. Residential tariff comparison
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
Den
mar
kG
erm
any
Bel
gium Ita
lyN
orw
ayIr
elan
dS
wed
enLu
xem
bour
gN
ethe
rland
sS
pain
Por
tuga
lJa
pan
Ave
rage
Chi
leS
inga
pore
Sol
veni
aU
nite
d K
ingd
omB
razi
lC
zech
Rep
ublic
Fin
land
Fra
nce
Pol
and
Tur
key
Cro
atia
Gre
ece
US
AB
ulga
riaT
haila
ndC
hina
(US$/kwh)
Note: Price is taken from the latest available data, CEIC for China (2010), Eurostat for European countries (2010), and EIA data for the rest (2007-09)
Source: CEIC, Eurostat, EIA, Nomura research
Exhibit 40. Industrial tariff comparison
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
Italy
Spa
inC
hile
Irel
and
Ger
man
yB
elgi
umS
inga
pore
Uni
ted
Sol
veni
aP
olan
dN
orw
ayN
ethe
rland
sLu
xem
bour
gC
zech
Ave
rage
Bra
zil
Tur
key
Por
tuga
lG
reec
eD
enm
ark
Cro
atia
Japa
nC
hina
Sw
eden
Fra
nce
Fin
land
Bul
garia
Tha
iland
US
A
(US$/kwh)
Note: Price is taken from the latest available data, CEIC for China (2010), Eurostat for European countries (2010), and EIA data for the rest (2007-09)
Source: CEIC, Eurostat, EIA, Nomura research
Exhibit 41. T&D Price in 2009 (China)
0
50
100
150
200
250
300
Hai
nan
Xin
jiang
Sha
ngha
iLi
aoni
ngB
eijin
gC
hong
qing
Gua
ngdo
ngH
ubei
Jilin
gJi
angx
iS
ichu
anH
eilo
ngjia
nG
uizh
ouT
ianj
in
Hun
anS
haan
xiG
uang
xiZ
hejia
ngJi
angs
uN
ingx
iaA
nhui
Sha
ndon
gG
ansu
Yun
nan
Fuj
ian
Sha
nxi
Qin
ghai
Heb
eiIn
ner
Hen
an
(RMB/Mwh)
Source: State Electricity Regulatory Commission, Nomura research
Power tariff reform (power pooling)
Possible, but not in near term; may happen in 2014-15F
Structural reform of power tariff to promote power pooling has been discussed among government officials for more than a decade, but progress has lagged due to political and social concerns. However, the discussion has recently been re-heated with the expectation of concrete terms soon to be determined by the government.
According to the Shanghai Securities Journal, the NDRC and SERC have been circulating a proposal among industry leaders to accelerate power tariff reform, and such policy reform will focus on:
On-grid tariff liberalisation – Encourage competitive bidding (i.e., power pooling – details to be discussed in later section) at the on-grid level to allow fuel cost pass-through by linking on-grid power tariff with retail and bidding tariffs (derived through
Power | China Ivan Lee, CFA
11 March 2011 Nomura 28
competitive bidding). Industrial and commercial tariffs are encouraged to be restated every six months, while agricultural and residential tariffs can be restated not more than once a year. To avoid an uncontrollable surge in power tariffs, price ceilings would be imposed on the IPPs.
T&D tariff reform – Regulators are looking to reform transmission and distribution (T&D) power tariff to a cost-plus basis, in order to increase transparency of how T&D prices are determined (since the power grids are state-owned monopolies) and to allow the power grids to earn a regulated return. State Grid Corp (state-owned, unlisted) and Southern Grid (state-owned, unlisted) would each select a provincial power grid to run pilot tests, while T&D costs would be determined on their corresponding voltages on the grid, in addition to construction and other cost factors.
Tariff for new power plants – For qualified locations, new power plants coming on-stream on and after 2010 are allowed to negotiate generation volume and power tariffs directly with end-users. At the initial stage, the T&D tariff would be 20% lower than that being currently used in “direct power purchase”, and gradually phased into a cost-plus basis when relevant policies emerge to reform T&D nationwide.
However, we believe power tariff reform is still a thought, though it has been mentioned by the government for more than 10 years. We see slim opportunities in the short term to formalise this into policy owing to the lack of one (of the three) pre-conditions — insufficient inter-grid connection. This may take 3-4 years to complete. Prevailing unstable coal prices, high inflation, and concerns over political and social unrest point to delay. Tariff reform may be more possible post the Hu-Wen administration (2011/12), which in our view is more likely to happen in 2014-15F at the earliest.
Potential tariff reform: positive for listed IPPs
With an effective pass-through of fuel costs upon tariff reform (eg, power pooling), we believe IPPs’ margins and earnings should be secured, and on-grid tariffs may not necessarily fall, for the reasons we set out below:
We believe ruinous competition — ie, price wars — are unlikely to take place nationally since we expect China’s reserve margin is still low, probably at 1% in 2012-13E, versus the required 20-30% as in developed economies where power pooling has been proven effective. As capacity growth has already slowed to 10.1% p.a., from 22.3%-10.2% during FY06-09, we believe a moderate power demand growth going forward would secure plant utilisation and limit reserve margin from rising sharply.
Given the provincial benchmark for on-grid tariffs is determined on an 8-10% ROE assumption, versus 15-20% for international peers on regulated returns, substantial discounts over bidding prices would discourage future investments in this sector.
We understand a price ceiling is set for retail power tariffs, to which on-grid tariff is linked, capping the potential upside from the earnings which the IPPs could make while no floor price stands to protect losses. With the continued increase in coal price, we doubt all increased costs can be effectively passed-through by the IPPs.
Two case scenarios may happen upon power tariff reform:
Best-case scenario - Under a best-case scenario, we may see on-grid tariffs rise as a result of power pooling, and this may expand margin, mainly attributable to: 1) a strong pick-up in power demand over a low / negative reserve margin, leading to a spike in on-grid tariffs due to excess demand; similar to what we had seen in the pilot run tests in the north-eastern power grid during FY02-03; and 2) the central government’s intention to allow power tariffs to rise to reflect the carbon costs of coal-fired power generation, as well as to justify better investment returns for renewable energy.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 29
Worst-case scenario - If reserve margins are inflated to 30-50% owing to strong capacity growth, we may expect the IPPs to enter into ruinous competition to sacrifice pricing for volume – resulting in lower on-grid tariffs and margins. However, with only a 1% reserve margin expected in FY12-13F, we see only a remote likelihood of this scenario happening in the near term.
In any case, lower-cost operators — hence the listed-IPPs — should prevail as winners and should continue to gain market share (utilisation) from this reform, owing to their larger and more efficient capacity compared with industry peers. Losses from any marginal cut in on-grid tariffs, if any, as a result of power pooling, can also be compensated for by cutting non-fuel expenses and larger gains in utilisation. We highlight Huadian as a major beneficiary of tariff reform, since non-fuel expenses account for 29.7% of its revenue, followed by Huaneng (31.0%), CR Power (32.8%), CPID (35.4%), and Datang (44.1%).
Exhibit 42. Non-fuel expenses of the covered IPPs in 1H10
Non-fuel expenses as a % of revenue 32.8 35.4 29.7 31.0 44.1
Note: For power generation business only
Source: Company data, Nomura International (Hong Kong) Limited
Fuel-cost pass-through would stabilise earnings and add defensiveness to the listed-IPPs against coal price volatility. If this is the case, valuations could look attractive at 0.6-1.4x FY11F P/B, versus 1.5-2.0x among the Hong Kong and global utilities operating with regulated returns.
Listed IPPs are likely to gain market share from any tariff reform, with Huadian as the major beneficiary, given its effective cost management
Power | China Ivan Lee, CFA
11 March 2011 Nomura 30
Input cost — coal
Coal price to remain strong in FY11-12F Despite the near-term coal price being clouded by the NDRC’s policy intervention (more details below), we expect domestic thermal coal price to stay strong in FY11-12F, given the structurally tight supply and demand outlook, lingering transportation bottlenecks and rising production costs. For details about our analysis on the China coal market, see our Anchor Report, China Coal Sector: Always room for dessert, 18 January, 2011.
Exhibit 43. China: coal industry supply / demand forecast
Given the inflationary pressure, the frozen power tariff since 2009 and strong appeals from power companies, NDRC decided to freeze the 2011 “key” contract coal price to power companies. The contract prices, production volume and railway capacity for coal transportation were discussed at the “2011 national coal production and transportation volume meeting” (the annual coal meeting) held in late December 2010. According to the China Coal Transport and Distribution Association (CCTD), it was agreed to keep key contract price for power companies to stay unchanged from 2010 level (RMB570/ton).
However, the above coal price cap only applies to “key” contract sales to power companies rather than to all contract sales. Although NDRC has not defined “key contracts,” we believe they include annual contract quotas allocated to coal companies in the government-controlled part of economy, to be signed at the annual meeting, which have secured railway capacity.
Contracted coal usually accounts of 50% of an IPP’s annual coal requirement, with the rest to be fulfilled by spot market. Transportation capacity is allocated to contracted coal by NDRC during the annual coal meeting. Among the contracted coal, roughly 40% of the volume is regarded as key contract and the remaining is non-key contract. Key contract price and volume are set once a year (under NDRC guidance) during the annual coal meeting. Non-key contract volume is set similarly but the price is not fixed and subject to market forces on delivery. Usually, the non-key contract price is in between spot and key-contract prices and varies between companies.
QHD thermal coal spot price stayed flat w-w at RMB765/tonne as of 7 March 2011, down 23.1% from the peak of RMB995/tonne in July 2008
The 2011 “key” contract price to power companies is frozen
Power | China Ivan Lee, CFA
11 March 2011 Nomura 32
Limited benefits to IPPs on “key” contract price cap
Overall, we believe the benefits to IPPs for the “key” contract coal price cap are limited, given:
The price control only applies to the key contract sales (~20% of IPP’s annual coal requirement);
The coal companies will likely cut the contract coal portion and raise spot sales;
The coal companies are likely to reduce the contract fulfilment rates or provide lower quality coal for the key contract sales; and
Despite the “key contract” price staying unchanged, China has not intervened on non-key contracts this year, though their railway capacity is not guaranteed nor allocated during the annual meeting.
Non-key contract price to stay flat in 1Q11…
In 1Q11, we expect the non-key contract price to stay unchanged from the 2010 level, given:
Coal companies hope to secure railway capacity through signing the key and non-key contracts (in “2011 railway capacity allocation framework”, some railway capacity has not specifically allocated to certain coal producers); and
The government might watch the non-key contract prices during the expected peak in inflation in early 2011.
…but rise in 2Q-4Q11, by 7% y-y
However, given that we expect the spot price to climb by 8.1% in 2011 and the high correlation between spot and contract prices, we believe the price of non-key contracts (many of which are signed on quarterly or monthly basis) will rise in 2Q-4Q11, narrowing the difference with the spot price.
Given the prevailing 34% contract-spot-price spread, we believe contract fulfilment rates should fall substantially from 2Q onward and many non-key contracts are likely to be renegotiated when CPI inflation retreats. We expect non-key contracts to rise by 7% y-y, starting from 2Q11, resulting in a yearly weighted average non-key contract coal price increase of 5% y-y. This implies the blended contract price to rise by 3% in FY11F.
2012F contract price to increase by 7% y-y
On the assumption of no government intervention on 2012 contract price, we believe the contract price will catch up and increase by a bigger 7% y-y or RMB40/ton given:
Coal companies will pass on the new resources tax, if implemented, to customers given it is a sellers’ market in our view and strong pricing power over the IPPs. We have factored in RMB15/ton (3-5% on the ex-mine price) of resources tax in 2012 contract price; and
Based on the current spot price of RMB765/ton (as at 7 March, 2011), the spot-to-contract price spread is RMB195/ton, 81% higher than the historical average of RMB105/ton. With spot price further strengthening in 4Q11F while the key contract price remains unchanged from the FY10F level, the gap will be widened at end-2011, leaving enough room for contracts to be hiked in 2012, in our opinion.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 33
Spot price: strong with seasonal fluctuation
Big price jump in FY10
Due to the two price caps imposed by the government in 2008 and the global financial crisis, the spot coal price at Qinhuangdao port for 5,500kcal/kg bottomed at RMB451/ton in December 2008 (source: CCTD). With the economic recovery spurring strong coal demand growth, the spot coal price has rebounded.
In 2010, the average spot coal price rose significantly to RMB744/ton (up 24% y-y). The demand for winter warming, intensified by the bottleneck on truck transportation due to snow blocking roads in the north, further pushed the price up in 4Q10 and 1Q11, leading to the latest QHD spot price of RMB765/ton (7 March 2011).
After a strong run in FY10, we expect the spot price to stay strong, with fast growth of 8% in FY11F to RMB804/ton and a further 5% in FY12F to RMB844/ton, given:
Tight supply outlook for the next two years — On the back of fast-growing demand and limited supply growth due to depleting coal mines at the east, small mines’ consolidation, transportation bottlenecks and stringent government restriction on production and safety, we see upside for spot price in the next two years.
Strong international coal price in the next two years — Our international metal and mining team (Paul Cliff in the report on Thermal and Coking Coal dated 9 January ,2011) forecasts the Australian thermal coal price to rise 43% to US$140/ton (around RMB930/ton) in 2011F.
... but weaker spot price in 2Q- 3Q11 due to seasonal effect
Although we expect the average spot coal price to rise 8% y-y to RMB804/ton for 2011F, given the current coal price at RMB765/ton (as at 7 March 2011), the price is likely to move between RMB760-855/ton for the rest of the year, with seasonal weakness (strength) in February-May (July-August) and September-October (November-January).
Power | China Ivan Lee, CFA
11 March 2011 Nomura 34
Exhibit 48. Projected price trend in 2011-12F Ja
n-11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
Feb
-12
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Spot Key contract Non-key contract
FY11F avg. spot RMB804/t (+8% y-y)
FY12F avg. spot RMB844/t (+5% y-y)
RMB570/t (unchanged)RMB610/t (+7% y-y)
7% rise from Q211
7% rise in 2012FKey contract
Non-key contract
Spot price
Source: Nomura estimates
We do not expect spot price to be significantly stronger during the year, or anywhere close to RMB900-1,000/ton, given the prevailing high coal inventory days (15.3 days as of 7 March, 2011) at direct-supply power plants. This compares with an average of 15.4 days since July 2007 and the 10 days on 23 July 2008, when spot coal price hit a peak of RMB995/ton.
Exhibit 49. Coal inventory at direct supply power plant
China crude coal output was 265mnt in November 2010, down 1.7% y-y
Thermal power output was 304.1bn KWh in Dec 2010, up 0.4% y-y
National coal inventory was 209.5mnt at Nov 2010 +15.2% y-y and -0.5% m-m
Power | China Ivan Lee, CFA
11 March 2011 Nomura 41
Fuel cost trend of IPPs under coverage
Exhibit 64. CPID’s unit fuel cost
154 155
193208 214 214
235
0
50
100
150
200
250
300
350
1H07 2007 1H08 2008 1H09 2009 1H10
(RMB/MWh)
Source: Company data
Exhibit 65. CPID’s standard coal cost
391 395
569618 638 644
717
0
100
200
300
400
500
600
700
800
900
1,000
1H07 2007 1H08 2008 1H09 2009 1H10
(RMB/tonne)
Source: Company data
Exhibit 66. CRP’s unit fuel cost
171
208
239
203 208
243
0
50
100
150
200
250
300
350
2007 1H08 2008 1H09 2009 1H10
(RMB/MWh)
Source: Company data
Exhibit 67. CRP’s standard coal cost
506
616697
602 605
718
0
100
200
300
400
500
600
700
800
900
1,000
2007 1H08 2008 1H09 2009 1H10
(RMB/tonne)
Source: Company data
Exhibit 68. Datang’s unit fuel cost
133
254
193172 175
195 206
0
50
100
150
200
250
300
350
2007 3Q08 2008 1H09 2009 1H10 3Q10
(RMB/MWh)
Source: Company data
Exhibit 69. Datang’s standard coal cost
394
557 563525 539
601 631
0
100
200
300
400
500
600
700
800
900
1,000
2007 3Q08 2008 1H09 2009 1H10 3Q10
(RMB/tonne)
Source: Company data
Power | China Ivan Lee, CFA
11 March 2011 Nomura 42
Exhibit 70. Huaneng’s unit fuel cost
173
227
253
221 215239
252
0
50
100
150
200
250
300
2007 3Q08 2008 1H09 2009 1H10 3Q10
(RMB/MWh)
Source: Company data
Exhibit 71. Huaneng’s standard coal cost
509
774 778
683 674
756 779
0
100
200
300
400
500
600
700
800
900
2007 3Q08 2008 1H09 2009 1H10 3Q10
(RMB/tonne)
Source: Company data
Exhibit 72. Huadian’s unit fuel cost
172
226 216 221250 258 269
0
50
100
150
200
250
300
350
2007 2008 1H09 2009 1Q10 1H10 3Q10
(RMB/MWh)
Source: Company data
Exhibit 73. Huadian’s standard coal cost
501
726
639 655
784 785 788
0
100
200
300
400
500
600
700
800
900
2007 2008 1H09 2009 1Q10 1H10 3Q10
(RMB/tonne)
Source: Company data Note: Standard coal cost for Huaneng and Huadian are ex-tax; those for Datang, CRP and CPID are tax-inclusive.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 43
Diversification strategy – coal investment
IPPs’ coal mine investments To mitigate the sensitivity of coal price fluctuation on the profit margin, IPPs have started investing in or partnering with coal mines. As evidence, we cite China Shenhua’s higher PBT margin of 32% in 1H10 compared with China Coal’s 17%, partially due to the former’s vertical integration in both coal and power, in our view. In 2010, with the rapid increase in coal price, IPPs’ coalmine investments accelerated.
Coal investment updates on IPPs
Datang’s coal self-sufficient ratio to be improved
Datang has been a pioneer in coal-mine investments since FY06; so far, it has invested in seven coal mines with total attributable reserves of 12.6bn tons and annual production of 24-40mn ton during 2010-11F, based on our estimates. The development of Tashan, Shengli, Yuzhou and Baoli coal mines are well on track, and we expect these coal mines can meet 27.0-26.0% of its internal coal requirements by 2010-11F. As production from other coal-mines (eg, Changtan, Kongduigou and Wujianfang) starts to be commissioned in 2013F and the company may be involved in further coal asset acquisitions, the company targets to reach a 40% self-sufficiency ratio by FY13F.
Note: We estimate 50% of Datang’s annual coal production are used for thermal power generation, the rest are used for coal-chemical.
Source: Company data; Nomura estimates
We believe Datang’s strategy of turning itself into a self-sufficient energy company, such as Shenhua, provides an attractive long-term story, particularly for hedging against coal cost fluctuations. In comparison, Datang has 23.6GW of attributable capacity (Shenhua: 27GW), 13.2bn tons of recoverable coal reserves (Shenhua: 11.6bn ton), two coal-to-chemical projects in the pipeline (Shenhua: coal-to-oil and chemical projects owned by its parent group) and investment in railway and shipping. Still, Datang’s 1.0x FY11F P/B is at a substantial discount to Shenhua’s 2.4x.
CRP: Shanxi Lvliang coal-mine has begun operation; no timeline for Wujianfang’s commission
CRP has four coal mines under operation, with three small mines in Jiangsu, Hunan and Henan, as well as the Lvliang mine, which recently commenced operation. Given no production in the Taiyuan coal mine and volatile production in Lvliang, CRP missed its previous coal production guidance of 16mn tons in 2010, with actual production of only 11.42mn tons.
Datang intends to continue to improve coal self-sufficiency
Power | China Ivan Lee, CFA
11 March 2011 Nomura 44
With the commencement of Taiyuan coal mines and the ramping up of Lvliang, we expect 2011F coal production to be around 15mn tons, slightly lower than the company’s guidance of 16-20mn tons. The company targets spending one-third of its annual capex on coal assets; together with the ramping up of existing coal mines and potential consolidation of the coal mines in Shanxi, CRP targets to achieve 50% coal self-sufficiency ratio by 2015F.
For Wujianfang coal mine, there is no timeline for the commencement of operations. Currently, CRP has proposed to construct new power plants close to the coal mines to use Wujianfang coal resources. However, this plan must be approved by the NDRC. Given the uncertain time frame for the commencement of the coal mines, we have not factored Wujianfang into our forecasts.
3 small mines Jiangsu 100.0 na na na - 2.7 2.5 2.7 2.7 2.7 2.7
Hunan 100.0 na na na - 0.4 0.1 0.4 0.4 0.4 0.4
Henan 49.0 na na na - 1.4 1.1 1.4 1.4 1.4 1.4
5,275 4,020 81.2 3.7 10.9 15.4 24.4 31.4
Self Sufficiency Ratio (%)
5.9 14.9 19.3 29.4 36.7
Note: 2010 coal production of 11.42mn ton, which represented 10.9mn ton as stated above, and 0.52mn ton related to Henan Yonghua produced in the construction and technical upgrade of the coal mines.
Source: Company data; Nomura estimates
Huadian is catching up on coal integration
From 2008 onward, Huadian started to bid for coal mine assets. In 2010, Huadian acquired several coal assets, including a 20% interest in the Manghatu coal mine, a 35% interest in the Heiliang coal mine, and 35% interests in the Shazhangtu coal mine and the Bailu coal mine. So far, Huadian has only acquired those smaller coal mines. Similar to CRP, Huadian targeted to spend one-third of its annual capex on coal asset investment and targeted to raise the coal self-sufficiency ratio from around 4.5% in 2010 to 30% in 2013F.
Among the IPPs, Huadian is the most sensitive to any fluctuation in coal prices, in our view. With its vertical integration into coal investment, this should relieve part of the pressure of the coal price surge. However, most of the coal mine assets are minority owned by Huadian, and the coal mines are relatively small in size. In addition, as advised by Huadian, there are not many chances to acquire coal assets in the market. As such, we believe the scale of the vertical integration is not sufficient enough to have significant benefits for Huadian.
Positive on vertical integration at Huadian, but limited hedging benefits
* This includes 3 coal mines which are all under restructuring for safety and security reasons as part of small-mines consolidation in Shanxi province. According to the management, this site will resume production in FY11.
Source: Company data; Nomura estimates
CPID: late starter in coal assets investment
CPID is the late starter in coal asset investment. Currently CPID does not own any coal mines. It has only started some coal asset investments through the formation of joint ventures. In 2009, CPID entered into a joint venture with Sichuan Guangwang Energy Development (Group) Limited for the development of Chuanjing coal project in Junlian Mining Area in Yibin, Sichuan Province. This project is CPID's first coal project and is intended to secure a stable long-term coal supply for Fuxi Power Plant. Both power plant and the coal mine are under construction, with the coal mine targeted to start operations in 2012F.
In December 2010, CPID formed another JV with 35% ownership, together with Yong Chang Mei Dian (63%) and Provincial Investment Co (2%) for the construction and operation of the Digua coal mine, which is planned to supply thermal coal for Pu’an Power Plant (under construction). Management expects the Digua coal mine to commence production by 2012-13F.
Huaneng has limited exposure to coal
Among IPPs, Huaneng is the only IPP without any significant coal asset investments. Overall, Huaneng has only managed to achieve a small amount (representing less than 1% of total coal consumption in FY10F) of controllable coal resources through minority stakes in various joint-venture companies in Shanxi. Besides limited self-sufficient coal resources, Huaneng can receive some coal supply (representing less than 20% of total coal consumption in FY10F) from its parent company, Huaneng Group, which currently owns 19 coal mines. However, Huaneng Group does not intend to inject any valuable coal assets to Huaneng. In total, the minority stakes in the coal mine, together with parent’s supply, should provide partial relief in the case of a surge in the price of coal, despite the coal from Huaneng Group being sourced at market price without any discount but with volume guaranteed.
Backward integration into coal is value-accretive; Datang is the most advanced We believe Datang is more advanced than both China Resources Power and Huadian in terms of backward integration in coal, owing to its larger coal portfolio and earlier production (2007 for Datang, versus CRP’s commencement of Shanxi coalmines
Power | China Ivan Lee, CFA
11 March 2011 Nomura 46
production in FY09; Huadian gained through acquisition), yet its 1.1x FY11F P/B is at a discount to CRP’s 1.4x but at a premium to Huadian’s 0.6x. In addition, Datang’s development of coal transportation infrastructure has been one of the most aggressive among its peers. It is investing in three railway lines (minority stakes) to secure delivery capacity for its self-owned coal mines, two 100%-owned railway lines for its coal-to-chemical and gas projects, shipping vessels and ports.
We estimate that the potential value to Datang, CRP and Huadian from their coal investments could be HK$3.7, HK$5.1 and HK$0.8 per share, respectively, based on the EV/tonne of coal reserves and the P/E of comparable coal companies.
Exhibit 77. Valuations of comparable coal companies
Avg 6 Avg 332 Source: Company data; Nomura estimates
Exhibit 78. Coal asset valuation of CRP, Datang and Huadian
Valuation (by EV/ton) CRP Datang Huadian
Average EV/ton reserve (US$) - adjusted by heat content 6.2 4.4 5.1
Average EV/ton output (US$) - adjusted by heat content 332 236 271
Estimated attributable EV (RMBmn)
Based on reserve (assume 50% by international standard) 96,627 215,857 24,792
Based on annual production at full capacity 144,088 196,215 17,167
Estimated equity value (30:70)
Based on reserve 28,988 64,757 7,438
Based on annual production at full capacity 43,226 58,864 5,150
Average 36,107 61,811 6,294
Per share value (HK$)
Based on reserve 6.14 5.26 1.10
Based on annual production 9.16 4.78 0.76
Average 7.65 5.02 0.93
Valuation (by P/E) CRP Datang Huadian
Average contract price in 2010 (RMB/ton) - adjusted by heat content 570 406 467
Effective coal purchase price in 2011F (RMB/ton) 801 765 844
EBIT margins (%) 30.0 30.0 30.0
Net Margins (%) 20.0 20.0 20.0
Profit (RMBmn) 893 2,122 344
Average sector 2011F P/E 10.73 10.73 10.73
NAV 11,936 28,364 4,605
NAV per share (based on contract price) 2.53 2.30 0.68
Average between EV/ton and P/E approaches (HK$) 5.10 3.70 0.80
Source: Nomura estimates
Compared with the current share prices of Datang, CRP and Huadian, this implies Datang’s power assets are sold for “free”, while CRP’s and Huadian’s power assets are sold at only 9.2x P/E (1.1x P/B) and 0.3x P/B (on our 2011F estimates), respectively (based on power assets’ derived book and earnings; please see details in the below exhibit).
Power | China Ivan Lee, CFA
11 March 2011 Nomura 47
Exhibit 79. Coal asset valuation of CRP, Datang and Huadian
Datang CRP Huadian
Current share price (HK$) 2.70 13.08 1.57
Share price attributable to power (HK$) (1.00) 7.38 0.77
Share price attributable to coal (HK$) 3.70 5.10 0.80
Assuming:
Coal industry average:
- 2011F P/E (x) 10.73 10.73 10.73
- 2011F P/B (x) 2.04 2.04 2.04
EPS (HK$) from:
- Power (0.16) 0.80 (0.07)
- Coal 0.34 0.48 0.07
Total 0.19 1.28 -
BPS (HK$) from:
- Power 1.43 7.04 2.65
- Coal 1.81 2.50 0.39
Total 3.24 9.54 3.04
2011F P/E for power assets (x) NA 9.17 NA
2011F P/B for power assets (x) NA 1.05 0.29 Source: Nomura estimates
Power | China Ivan Lee, CFA
11 March 2011 Nomura 48
Demand-supply dynamics
Solid demand growth supported by GDP Forecast strong power demand growth, but at a reduced rate The China Electricity Council (CEC) released a report in which it predicted that power consumption will slow to 12% in 2011. While we share the same thoughts as the CEC, in that we see a growth slowdown in 2011, we have a more conservative forecast for power consumption growth in 2011. With the expected easing of power rationing in 2011 after China cut energy intensity by 19.1% during 2006-10 and a target of 16% for 2011-15F (16.6% for 2016-20F), we believe the electricity beta (ie, demand growth / real GDP growth) should fall to 1.0x in 2011F from 1.3x achieved in 2010. We forecast power demand growth at 9.8% in 2011F (14.9% in 2010), on 9.8% GDP growth (per our economics team). Overall, the strong power demand growth looks positive for the IPPs, but we see the impact as limited, given that the IPPs’ earnings are more sensitive to coal prices and tariff adjustments than utilisation, in our view.
Note: 13.8% y-y power output growth computed using 2009 re-stated data from CEIC.
Data in the table above is not re-stated. * Only wind power capacity in operation and connected to the power grids (since 2007)
Source: China Statistical Yearbook; China Electricity Council; CEIC; Nomura estimates
Power | China Ivan Lee, CFA
11 March 2011 Nomura 49
Power output update in 2010
Power output up 13.8% y-y in 2010, vs 6.2% in 2009
Statistics from the CEC / CEIC show that the national power output rose 13.8% y-y in 2010, higher than 6.2% growth in 2009. Power output for December 2010 was up 5.1% y-y, according to the National Bureau of Statistics. Power consumption was up 14.6% y-y in 2010, versus 6.0% y-y in 2009.
The largest gains in 2010’s power output were recorded in the following regions: Tianjin (+34.3%), Tibet (+27.6%), Ningxia (+27.2%), Gansu (+25.9%) and Jiangxi (+24.6%). Among the IPPs under our coverage, CPI has the greatest exposure to these regions.
Growth in Guizhou (-1.5%), Shandong (+8%), Heilongjiang (+9%) lagged the national average. Huadian is likely to be the most affected among peers, given these regions account for 46.7% of attributable capacity.
Power demand growth slowed in 2H10 as a result of power rationing
Growth in power output was +13.8% y-y in 2010, recording a slight slowdown from +14.7% y-y in 11M10 and 15.5% y-y in 10M10, due mainly to power rationing. For 2010, power consumption from secondary industry rose by 15.4%, following a 17.2% increase y-y in 11M10 and an 18.3%increase y-y in 10M10.
Exhibit 81. China’s power output growth (2008-10)
(20)
(10)
0
10
20
30
40
50
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2008
2009
2010
(%)
Source: Wind, CEC, CEIC, NBS; Nomura research
Exhibit 82. China’s monthly power output growth (1995-2010)
Source: Wind; China Electricity Council; Nomura research
Power generation in FY10 rose by 13.8%, versus +6.2% in FY09
Power | China Ivan Lee, CFA
11 March 2011 Nomura 50
Exhibit 83. China’s power demand by industry
FY10
Industries Output
(mn MWh)y-y change
(%) % to national
demand
All industries:
Primary 98 4.7 2.3
Secondary 3,132 15.4 74.7
-Light industries 519 11.9 12.4
-Heavy industries 2,570 16.2 61.3
Tertiary 450 14.0 10.7
Residential 512 12.0 12.2
Total 4,192 14.6 Source: China Electricity Council; Nomura research
Exhibit 84. China’s power & industrial output growth
(15)
(10)
(5)
0
5
10
15
20
25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
(%)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
(x)
GDP growth (LHS)
Power output growth - 3 month running (LHS)
Industrial output growth - 3 month average (LHS)
Beta - "power output growth/GDP growth" (RHS)
Source: National Bureau of Statistics; CEIC; Nomura research
Utilisation rose 2.5% y-y in 2010 (11M10: +3.2%)
On the supply front, power output from thermal power plants increased by 13.4% y-y in 2010, from +13.2% y-y in 11M10, compared with the national average output growth rate of +13.8%.
Plant utilisation rose 2.5% y-y in 2010 (hydropower: 3.0%, thermal power: +3.4%), following 3.2% growth in 11M10 (hydropower: 1.4%, thermal power: +4.7%). As industrial demand recovers in the central and western regions, where water intake is scarce, we see stronger output from thermal power plants. Based on our forecasts for the covered IPPs, we have factored in a 5% annual rise for thermal power in 2011F.
Exhibit 85. China’s power output by generation type
FY10 FY09 y-y
(mn MWh) (mn MWh) (%)
Thermal 3,415 3,012 13.4
Hydro power 686 572 20.0
National 4,228 3,681 14.9 Source: China Electricity Council; Nomura research
Exhibit 86. China’s power plant utilization
2010 (hrs) 2009 (hrs) y-y (%)
National average 4,660 4,546 2.5
Utilization rate (%) 53.2 51.9 1.3
Thermal 5,031 4,865 3.4
Hydropower 3,429 3,328 3.0 Source: China Electricity Council; Nomura research
Exhibit 87. National and IPPs net power generation
#13.8% y-y power output growth computed using 2009 re-stated data from CEIC. Data in the table above is not re-stated. *Gross generation for Huaneng
Source: Company data, China Electricity Council; CEIC; Nomura research
Listed IPPs could outperform nation in terms of utilisation
Based on our forecasts for the covered IPPs, we have already factored in a 5% annual rise in 2011F utilisation hours. We believe the listed IPPs will outperform the national average in terms of utilisation, given their stronger financial position, and more efficient power asset portfolios should benefit from China’s policy to priority dispatch to cleaner energy resources. Our channel checks indicate that small-scale and loss-making IPPs have scaled back or shut down production to avoid deficiency, and the left-over power output quotas have been awarded to larger state-owned IPPs (including the Hong Kong-listed IPPs) in respective regions. This is because EBITDA is positive at the listed IPPs, which should welcome higher output and operating cash inflow to meet working capital and capex. Another reason is that the listed IPPs, which are mainly state-owned, have the social responsibility of providing uninterrupted electricity supply.
Utilisation hours increased by 2.5% y-y in FY10 (11M10: +3.2%). New power capacity during FY10 came in at 91.3GW
Power | China Ivan Lee, CFA
11 March 2011 Nomura 51
Power rationing
Emergency measures used to meet energy intensity target in 2010
Pursuant to China’s 11th Five-Year Plan (2006-10), China targeted to reduce energy intensity (total energy consumption per GDP) by 20% by the end of 2010. During the first four years of the 11th FYP (2006-09), China made progress toward this goal, with energy intensity falling by 16.6% (2006: -2.74%, 2007: -5.04%, 2008:-5.2%, 2009: -3.61%). To achieve the set 20% target, China had to reduce its energy intensity by 3.4% in 2010 (the last year of the 11th FYP).
However, to cope with the global economic downturn in late 2008, some regions relaxed controls on pollution and high energy intensity industries. The closing down of inefficient production capacity also slowed. As a consequence, energy intensity went up again in 1H10 by 0.09% (energy consumption +11.2%; GDP+11.1%). In order to meet the target, power rationings were imposed as an immediate solution.
Since late July 2010, Anhui, Zhejiang, Fujian, Jiangsu, Hebei and Shanxi have applied power rationing to high-energy-intensive industries including cement, steel and non-ferrous metals. Zhejiang forced the entire cement industry to close down for nine days and other industries to cease production periodically (source: chinanews.com.cn). Anping (Hebei) announced power supply suspension for the entire region for any use, including residential use, on 27 August 2010. Tangshan in Hebei, which represented 10% of total steel production in China, started power rationing in early September, with 30 steel and 26 coking plants asked to limit production during September-December. The forced shutdown was to meet China’s target of reducing energy intensity.
Exhibit 88. China’s historical power demand growth (2010)
Source: China Electricity Council; Nomura research
Power rationing likely to ease in 2011
Despite power rationing being widely used as a measure by local governments in 2H10 to achieve the energy intensity target, we see a trend of power rationing to be eased gradually. The power rationing was started in August 2010 in many regions across China and applied most rigorously between September and October. However, starting from November, we see power rationing being eased. Taking Zhejiang Province as an example, between September and October, power cuts were applied to ~70% of total local business enterprises to a different extent, but starting from November the percentage was reduced to ~30%.
With power rationing and the slowdown of power consumption in 2H10, Premier Wen Jiabao announced that China had achieved 19.1% energy intensity reduction by 2010. Given that, we believe power rationing will likely be eased starting from January 2011, as the implementation of power rationing is not due to insufficient resources as in 2004, and some Chinese local governments (eg, in western China) are concerned about the impact on regional economic growth.
The Chinese government is planning to use other measures such as environmental tax, resources tax, etc. to redirect power consumption and reduce energy emissions, which should reduce the possibility to apply power rationing in future, we believe.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 52
Exhibit 89. Progress in Energy-Intensity Cut in Chinese Regions (%)
Region Cumulative cut
(2005-09) (%) Percentage of cut
attained by 2009 (%)Energy intensity change
in 1H10 (y-y %)
China 15.6 78.0 0.1
Coastal Regions
Beijing 23.3 119.1 (2.4)
Tianjin 20.1 100.4 (1.0)
Hebei 17.2 84.6 (1.4)
Shanghai 17.1 84.1 (0.5)
Jiangsu 17.5 86.3 0.1
Zhejiang 17.4 85.4 (1.0)
Fujian 13.2 81.3 (2.4)
Shandong 18.5 82.4 (1.6)
Guangdong 13.8 85.0 (2.2)
Liaoning 16.6 81.6 0.3
Central Regions
Jilin 17.5 77.3 (5.6)
Heilongjiang 16.4 80.2 (3.0)
Anhui 16.1 78.8 (3.6)
Jiangxi 16.7 81.8 (1.6)
Henan 17.0 83.7 (0.9)
Hubei 18.5 91.4 (1.7)
Hunan 18.2 90.0 (0.7)
Hainan 7.1 57.8 (3.2)
Chongqing 17.1 84.2 (3.4)
Sichuan 16.4 80.1 (4.1)
Western Regions
Guangxi 13.5 89.1 3.6
Shanxi 18.3 81.2 (2.4)
Inner Mongolia 18.8 83.9 (2.1)
Guizhou 15.0 72.8 (1.0)
Yunnan 14.1 81.6 (2.6)
Tibet 9.6 79.0 NA
Shaanxi 17.2 84.8 0.9
Gansu 17.3 85.2 (1.1)
Qinghai 12.5 71.8 7.5
Ningxia 16.4 80.0 7.2
Xinjiang 8.6 40.1 3.1
Source: NDRC, Nomura research
More supply to be sourced from clean energy
Installed capacity continues to grow; more on clean energy
According to CEC, new power capacity during 2010 came in at 91.3GW (10.4% of the power generating capacity at the end of 2009). Netting out the shut-down of small power units, power generating capacity was 962GW by end-2010. We believe China will continue to invest heavily in the power sector over the next five years to meet growing power demand resulting from economic development. We expected total installed capacity will grow to 1,437GW in 2015F, implying a CAGR of 8% over 2011-15F, and further to 1,885GW by 2020F. With the promotion of clean energy usage by the Chinese government to combat climate change, we believe more power supply will come from cleaner energies such as wind and hydro. Despite coal remaining the main source of fuel for power generation, we believe the portion will fall from 80.8% in 2010 to 76.3% by 2015.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 53
Exhibit 90. Installed capacity by fuel mix (2010)
Thermal 73.4%
Winds3.2% Others
0.0%
Nuclear1.1%
Hydro22.2%
Source: NDRC, Nomura research
Exhibit 91. Installed capacity by fuel mix (2015F)
Thermal , 67.0%
Winds, 7.8%
Hydro, 21.6%
Nuclear, 3.3%
Others, 0.3%
Source: NDRC, Nomura research
Exhibit 92. Electricity supply by fuel mix (2010)
Thermal , 80.8%
Winds, 1.2%
Nuclear, 1.8%
Hydro, 16.2%
Others, 0.0%
Source: NDRC, Nomura research
Exhibit 93. Electricity supply by fuel mix (2015F)
Source: China Electricity Council; Nomura estimates
Exhibit 96. Provincial plant utilization during 2010
All plants (hrs) Thermal (hrs) Hydro (hrs)
Ningxia 5,842 6,214 4,245
Jiangsu 5,573 5,647 1,160
Tianjin 5,237 5,239 -
Hebei 5,091 5,462 382
Anhui 5,085 5,235 1,935
Shanxi 5,060 5,211 2,120
Shandong 5,041 5,178 -
Zhejiang 4,894 5,203 2,120
Xinjiang 4,862 5,326 3,953
Henan 4,856 5,071 2,287
Guangdong 4,833 4,967 2,237
Shanghai 4,812 4,829 -
National 4,660 5,031 3,429
Liaoning 4,639 4,916 3,990
Shaanxi 4,583 4,700 3,317
Qinghai 4,501 5,615 4,244
Chongqing 4,423 5,051 3,351
Gansu 4,410 4,665 4,376
Hubei 4,289 4,507 4,167
Beijing 4,261 5,055 413
Sichuan 4,258 4,506 4,137
Fujian 4,253 4,352 4,079
Hainan 4,235 4,670 2,763
Inner Mongolia 4,202 4,559 2,360
Yunnan 4,197 4,774 3,889
Guangxi 4,168 5,347 3,266
Guizhou 4,133 5,560 2,388
Jiangxi 4,129 4,392 2,756
Heilongjiang 4,086 4,385 2,232
Hunan 3,972 4,577 3,150
Jilin 3,776 4,514 2,466
Tibet 3,246 2,337 3,452
Source: China Electricity Council; Nomura estimates
Power | China Ivan Lee, CFA
11 March 2011 Nomura 55
Exhibit 97. China total energy consumption breakdown
Note: 1KWh = 350g standard coal
Source: National Development and Reform Commission, China Electricity Council, BP Statistic Review, Nomura International (Hong Kong) Ltd
Ch
ina
tota
l en
erg
y c
on
sum
pti
on
bre
akd
ow
n20
0320
0420
0520
0620
07
200
820
09
2010
F20
1120
122
013
201
42
015
201
620
1720
1820
192
020F
To
tal E
ner
gy
Co
ns
um
pti
on
(M
illio
n T
OC
E)
1,69
8
2,01
1
2,26
2
2,46
6
2,70
7
2,91
4
3,06
0
3,25
0
3,49
5
3,74
0
3,98
5
4,2
30
4,4
75
4,
720
4,9
65
5,21
0
5,4
55
5,7
00
En
erg
y C
om
po
siti
on
(%
)O
il23
.422
.321
.120
.619
.718
.818
.618
.41
8.1
17.
71
7.4
17.
016
.716
.416
.015
.715
.315
.0N
atu
ral g
as
2.5
2.5
2.7
2.9
3.3
3.6
3.7
3.6
4.2
4.9
5.5
6.2
6.8
7.4
8.1
8.7
9.4
10.0
Co
al67
.969
.069
.670
.270
.470
.270
.670
.46
6.6
65.
66
4.6
63.
662
.662
.061
.360
.860
.259
.6H
ydro
5.4
5.4
5.8
5.6
5.9
6.6
6.4
6.2
7.4
7.5
7.5
7.6
7.6
7.6
7.6
7.5
7.4
7.3
Nu
clea
r0.
80.
80.
80.
70.
80
.80
.70
.91
.21.
62.
02.
52.
93.
13.
33.
53.
63.
8O
ther
s [i
ncl
. Win
d,
sola
r, e
tc]
(doe
sn't
acco
unt
for
03-0
9 du
e to
imm
ater
ialit
y)N
/AN
/AN
/AN
/AN
/AN
/AN
/A0
.52
.42.
72.
93.
23.
43.
63.
73.
94.
14.
210
0.0
100.
010
0.0
100.
010
0.0
100
.010
0.0
100
.010
0.0
100.
010
0.0
100.
01
00.0
100
.01
00.0
100.
010
0.0
100.
0P
ow
er
Co
nsu
mp
tio
n (
excl
udin
g oi
l, na
tura
l gas
, eth
ano
l, bi
odie
sel,
biog
as)
Sm
all h
ydro
(M
W)
- <
50M
W/u
nit
30,
000
38,
655
39,
200
39,7
0040
,260
51,0
0052
,000
55,1
20
57,1
08
59
,09
6
61,0
84
63
,07
2
65,0
60
67,0
48
69,0
36
71,0
24
73,0
12
75,0
00
Util
isat
ion
hour
3,20
02,
858
3,26
03,
330
3,68
83,
506
3,32
83,
429
3,
417
3,
404
3,
378
3,
345
3,
289
3,2
52
3,
262
3,23
9
3
,232
3
,234
Gen
era
tion
(mill
ion
kWh)
96,
000
110,
476
126,
895
131
,352
147
,428
160
,000
171
,392
183,
657
191,
728
197,
797
202,
972
207,
647
210,
736
214,
795
221,
927
226,
804
232,
757
239
,324
Mill
ion
TO
CE
3439
4446
5256
6064
6
7
69
7
1
73
74
75
78
79
81
84
Win
d E
ner
gy
(MW
)56
776
41,
264
2,58
85,
600
11,8
4616
,130
31,0
7046
,00
061
,00
078
,00
095
,00
011
2,0
0012
7,7
8214
4,6
0016
2,0
7618
0,54
220
0,0
00U
tilis
atio
n ho
ur1,
400
1,40
01,
400
1,40
21,
368
1,46
71,
500
1,
612
1,79
61,
707
1,67
61,
674
1,6
901,
670
1,6
751,
663
1,6
571
,655
Gen
era
tion
(mill
ion
kWh)
725
932
1,42
02,
700
5,60
012
,800
25,9
8050
,097
69
,20
8
91,3
32
11
6,50
2
14
4,79
5
17
4,9
35
20
0,2
51
22
8,0
63
25
4,9
36
28
3,86
4
31
4,9
80
M
illio
n T
OC
E0
00
12
49
182
43
24
15
161
7080
8999
110
Bio
mas
s E
ner
gy
(MW
)2,
000
2,00
02,
000
2,20
02,
500
3,00
03,
200
5,50
0
6950
8400
985
011
300
1275
01
4200
156
501
7100
185
5020
,000
U
tilis
atio
n ho
ur2,
500
2,59
02,
590
2,60
02,
600
2,60
02,
600
2,60
0
2620
2640
266
02
680
270
02
720
2740
2760
2780
2,8
00
G
ene
ratio
n (m
illio
n kW
h)5,
000
5,18
05,
180
5,46
06,
110
7,15
09,
200
12,6
7518
,20
9
22,1
76
26
,20
1
30,2
84
34
,425
38
,624
42
,881
47
,196
51
,569
56
,000
M
illio
n T
OC
E2
22
22
33
4
6
8
9
11
12
14
15
17
18
20
Lan
dfi
ll G
as (
bill
ion
cu
bic
met
re)
55
89
1112
1519
22
2427
2932
3437
3942
44
Mill
ion
TO
CE
44
55
67
911
1
2
14
1
5
17
18
20
21
23
24
25
So
lar
wat
er h
eati
ng
(th
ou
san
d s
q m
)5
2,00
06
5,00
08
0,00
090
,000
110
,000
125
,000
135
,000
145,
000
160,
500
176,
000
191,
500
207,
000
222,
500
238,
000
253,
500
269,
000
284,
500
300
,000
Mill
ion
TO
CE
68
1416
2022
2426
2
9
32
3
4
37
40
43
45
48
51
54
So
lar
Ph
oto
vo
ltai
c (M
W)
5565
7075
8212
215
024
0
800
1,
200
1,
880
3,
000
3,
900
6,5
64
9,
519
12,7
35
16,2
29
20,0
00
Util
isat
ion
hour
1,00
01,
000
1,00
01,
000
1,00
01,
000
1,00
01,
100
1,
100
1,
100
1,
100
1,
100
1,
100
1,1
00
1,
100
1,10
0
1
,100
1
,100
Gen
era
tion
(mill
ion
kWh)
5560
6873
7910
213
621
557
2
1,10
0
1,69
4
2,6
84
3,7
95
5,
755
8,8
46
12
,240
15
,930
19
,926
M
illio
n T
OC
E0.
020.
020.
020.
030.
030.
040.
050.
08
0.
20
0.3
9
0.
59
0.9
4
1.
33
2
.01
3.1
0
4
.28
5.5
8
6.
97
Geo
ther
mal
, tid
al, b
iom
ass
gas
ific
atio
nO
ther
s (M
illio
n T
OC
E)
33
515
1315
1512
1
3
15
1
6
17
19
20
21
22
24
25
(A)
Ren
ewab
le E
ne
rgy
(Mill
ion
TO
CE
) [E
xcl.
La
rge
Hyd
ro &
nu
clea
r]48
5571
8595
107
120
135
152
169
187
206
225
243
263
283
303
325
% o
f to
tal e
ner
gy
con
sum
pti
on
2.8%
2.7%
3.1%
3.5%
3.5%
3.7%
3.9%
4.2%
4.4%
4.5%
4.7%
4.9
%5.
0%
5.1
%5.
3%
5.4%
5.6
%5
.7%
Lar
ge
hyd
ro (
MW
) -
>50
MW
/un
it6
4,89
67
0,01
97
7,32
088
,870
105
,000
120
,520
144
,790
158,
280
173,
892
190,
904
208,
916
226,
928
244,
940
258,
476
271,
491
283,
158
294,
328
305
,000
Util
isat
ion
hour
3,20
03,
159
3,64
23,
434
3,50
03,
577
3,01
83,
317
3,31
53,
305
3,28
33,
259
3,2
113,
196
3,2
103,
194
3,1
913
,196
Gen
era
tion
(mill
ion
kWh)
207,
668
213,
077
268,
305
285
,348
339
,273
403
,300
400
,290
502,
650
550,
637
602,
828
656,
341
710,
204
757,
652
804,
372
850,
574
885,
781
921,
290
957
,602
Mill
ion
TO
CE
7375
9410
011
914
114
017
6
193
21
1
230
2
49
2
65
282
2
98
310
32
2
33
5
(B)
= (
A)
+ L
arg
e h
ydro
(M
illio
n T
OC
E)
121
130
165
185
213
249
260
311
345
380
417
455
490
524
561
593
626
660
7.1%
6.5%
7.3%
7.5%
7.9%
8.5%
8.5%
9.6%
9.9%
10.2
%10
.5%
10.7
%11
.0%
11.1
%11
.3%
11.4
%11
.5%
11.6
%
Nu
clea
r (M
W)
06,
846
6,85
06,
850
8,85
08,
850
9,08
010
,820
11,9
00
13,6
30
19,7
30
32,9
30
48,1
0053
,922
60,0
7466
,400
73,0
4280
,000
Util
isat
ion
hour
7,31
81
4,63
67,
637
7,92
77,
975
7,72
97,
814
7,72
010
,64
413
,51
013
,88
611
,34
39,
156
8,1
778,
205
8,15
38
,132
8,1
30G
ene
ratio
n (m
illio
n kW
h)4
3,70
05
0,10
05
2,30
054
,300
62,6
0068
,400
70,0
5076
,817
120,
917
172,
451
231,
622
298,
670
370
,945
417
,138
467
,680
515
,554
566,
947
622,
086
Mill
ion
TO
CE
1518
1819
2224
2527
4260
8110
513
014
616
418
019
821
8
(C)
= (
B)
+ N
ucl
ear
(M
illio
n T
OC
E)
136
147
183
204
236
272
285
338
387
441
498
559
620
670
725
773
824
878
% o
f to
tal e
ner
gy
con
sum
pti
on
8.0%
7.3%
8.1%
8.3%
8.7%
9.4%
9.3%
10.4
%11
.1%
11.8
%12
.5%
13.2
%13
.9%
14.2
%14
.6%
14.8
%15
.1%
15.4
%
Th
erm
al (
MW
)28
5,60
032
6,14
438
4,13
04
84,0
505
54,4
206
01,3
206
50,4
9970
6,63
0
76
3,47
0
818,
340
869,
560
917,
240
963,
170
1,01
4,57
0
1,06
4,7
36
1,11
1,0
68
1,15
6,2
19
1,20
0,1
90
Util
isat
ion
hour
5,76
75,
988
5,68
25,
430
5,19
64,
810
4,81
24,
923
4,93
5
4,96
7
5,01
6
5,0
83
5,1
18
5,
125
5,1
33
5,
092
5,0
73
5,0
66
G
ene
ratio
n (m
illio
n kW
h)1,
647,
055
1,80
7,30
02,
018,
000
2,3
57,3
002,
698
,000
2,7
79,3
003,
011
,687
3,34
0,81
0
3,6
27,7
72
3
,928
,13
1
4,2
33,3
99
4
,540
,87
2
4,81
1,6
77
5,06
7,5
60
5,33
6,5
86
5,54
0,1
01
5,75
0,85
9
5,96
9,0
84
Mill
ion
TO
CE
576
633
706
825
944
973
1,05
41,
169
1,
270
1,
375
1,
482
1,
589
1,
684
1,7
74
1,
868
1,93
9
2
,013
2
,089
Tot
al e
nerg
y co
nsum
ptio
n by
pow
er g
ener
atio
n (M
illio
n T
OC
E)
713
780
889
1,02
91,
180
1,24
51,
339
1,50
71,
657
1,81
61,
980
2,1
482,
304
2,4
442,
592
2,71
22
,837
2,9
67
Power | China Ivan Lee, CFA
11 March 2011 Nomura 56
Utilization trend of IPPs under coverage
Exhibit 98. CPID’s utilization rate
2,370 2,3702,703
2,378
3,033
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1H08 2H08 1H09 2H09 1H10
0
10
20
30
40
50
60
70
80 Hours (LHS)
Utilisation rate (RHS)
(%)
Source: Company data, Nomura research
Exhibit 99. CRP’s utilization rate
2,644 2,613
2,947 2,9353,080
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
3,200
1H08 2H08 1H09 2H09 1H10
54
56
58
60
62
64
66
68
70
72 Hours (LHS)
Utilisation rate (RHS)
(%)
Source: Company data, Nomura research
Exhibit 100. Datang’s utilization rate
2,7642,238
3,512
2,3042,622
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1H08 2H08 1H09 2H09 1H10
0
10
20
30
40
50
60
70
80
90
Hours (LHS)
Utilisation rate
(%)
Source: Company data, Nomura research
Exhibit 101. Huaneng’s utilization rate
2,5442,263
2,9572,6002,702
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1H08 2H08 1H09 2H09 1H10
0
10
20
30
40
50
60
70
80
Hours (LHS)
Utilisation rate
(%)
Source: Company data, Nomura research
Exhibit 102. Huadian’s utilization rate
2,5972,252
2,702 2,7602,430
0
500
1,000
1,500
2,000
2,500
3,000
1H08 2H08 1H09 2H09 1H10
0
10
20
30
40
50
60
70 Hours (LHS)
Utilisation rate
(%)
Source: Company data, Nomura research
Power | China Ivan Lee, CFA
11 March 2011 Nomura 57
Exhibit 103. Provincial power output and demand
Power output (ranked by total power output growth in Dec10)
Dec-10 y-y 2010 y-y
(mn MWh) (%) (mn MWh) (%)
Gansu 16.8 99.3 87.5 25.9
Shanghai 14.5 99.0 94.4 23.9
Chongqing 7.8 86.3 49.3 15.8
Jilin 11.3 67.2 65.8 20.1
Sichuan 17.4 65.4 170.4 18.9
Inner Mongolia 32.4 61.0 260.5 17.0
Shaanxi 5.5 45.4 103.2 23.2
Hebei 25.1 38.2 206.3 17.9
Jiangxi 8.1 37.9 63.9 24.6
Henan 29.6 35.7 228.4 10.8
Guangxi 11.3 34.1 103.3 17.6
Anhui 15.4 33.1 146.3 11.8
Guangdong 32.6 31.3 316.2 18.6
Ningxia 5.4 26.7 59.7 27.2
National 453.6 21.8 4,228.00 15.4
Shanxi 22.4 21.4 215.1 15.6
Hainan 2.3 15.4 16 18.5
Shandong 30.7 15.2 309.1 8.0
Heilongjiang 9.2 12.1 79.1 9.0
Fujian 12.2 8.7 136 16.2
Liaoning 16.1 7.5 134 11.6
Zhejiang 29.8 6.6 256.7 13.7
Jiangsu 44 5.1 349.9 17.2
Tibet 0.2 NA 2 27.6
Guizhou 7.3 (2.1) 131.7 (1.5)
Beijing 3.1 (3.7) 27 10.7
Xinjiang 5.6 (5.8) 64.8 17.3
Qinghai 5 (9.7) 47.2 23.9
Hubei 11.2 (13.6) 201.7 12.4
Yunnan 15.5 (15.1) 136.3 15.9
Hunan 3.5 (47.3) 110.5 16.0
Tianjin 2.3 (55.7) 55.6 34.3
Power demand (ranked by growth in Dec10)
Dec-10 y-y 2010 y-y
(mn MWh) (%) (mn MWh) (%)
Chongqing 5.4 42.1 62.6 19.9
Guangxi 11 35.8 99.3 19.6
Sichuan 12.6 29.9 155 18.8
Hainan 1.3 18.2 15.8 18.8
Hubei 11.4 16.3 132.5 17.6
Fujian 11.1 14.4 131.6 16.0
Jiangsu 34.1 14.4 385.6 17.2
Gansu 7.3 12.3 80.3 14.6
Tianjin 5.9 11.3 64.3 17.3
Hebei 24.6 9.8 269.2 14.7
Shanghai 10.5 9.4 129 13.2
Guizhou 8.3 9.2 83.6 9.0
Anhui 9.7 9.0 107.6 13.4
Yunnan 8.7 8.7 100 13.0
Shanxi 12.2 8.0 145 16.0
Guangdong 32.5 7.6 406 12.8
National 362.5 5.4 4,192.30 15.1
Qinghai 3.9 5.4 46.5 38.0
Zhejiang 25.1 5.0 282.5 14.2
Heilongjiang 6.6 3.1 74 8.3
Hunan 10.7 2.9 117.7 16.1
Shandong 28.8 2.9 330 12.5
Liaoning 14.8 1.4 171.7 15.5
Jilin 4.9 0.0 57.2 11.3
Jiangxi 6 0.0 70 14.8
Tibet 2 NA 2 11.1
Henan 20.2 (1.9) 235.5 13.2
Beijing 7 (5.4) 80 8.7
Shaanxi 7.2 (8.9) 85.3 15.3
Inner Mongolia 10.5 (14.6) 153 20.0
Ningxia 3.4 (22.7) 54.7 19.2
Xinjiang 5.1 (49.0) 64.8 18.9 Source: Wind; China Electricity Council; Nomura research
Power | China Ivan Lee, CFA
11 March 2011 Nomura 58
Financial issues
Other factors Interest rate hikes in 2011F look negative for IPPs, but not a concern for capex funding
Threats from potential interest rate hikes
In general, any interest rate hike in China has a negative impact on IPPs, given their high gearing ratios due to capacity expansion every year to fulfil power demand. Based on our analysis, we see the listed IPPs had net debt exposure to interest rate movements (ie, domestic loans subject to floating interest rate) accounting for 66.4-104.8% of their net debt positions by the end of 1H10. We believe Huadian and Datang’s FY11F earnings to be the most sensitive to interest rate changes, due to their high net gearing ratios (518% and 517%, respectively, in FY11F), followed by CPID, Huaneng and CRP (refer to our sensitivity analysis for details).
Exhibit 104. Comparison of IPPs’ FY11F net gearing (net debt to equity)
518 517
305
235
165
0
100
200
300
400
500
600
Huadian Datang CPID Huaneng CR Power
(%)
Note: Before considering any future equity issuance
Source: Nomura estimate
More interest rate hikes in FY11F
On 20 October 2010, the People’s Bank of China raised the one-year leading rate by 25bps to 5.56%. This is the first time that the central bank had raised interest rates since December 2008. Following this, the one-year leading rate was raised again by 25bps to 5.81% in December 2010 and a further 25bps to 6.06% in February 2011. Interest rate adjustment is seen as a way to deal with inflationary pressure. In line with the forecast set out by our economics team, we already assume interest rate hikes of 1% in FY11F and 0.75% in FY12F.
Exhibit 105. Summary of historical interest rate hikes
% of RMB floating rate loans to net debt (%) 66.4 104.8 82.9 86.8 89.5
% of foreign currency loans to total debt (%) 16.7 0.7 1.8 7.0 21.7
Source: Company data; Nomura estimates
Listed IPPs have no pressure for funding
Despite net debt-to-equity ratios reaching 131-385% based on the latest June 2010 data, we believe funding capability should not be an issue, considering the IPPs can: 1) continue to obtain preferential loans (5-10% discount to market) from domestic banks; 2) issue long- / short-term corporate bonds and other financial instruments; and 3) exercise share placements on the preferential A-share market (48-189%) premium over H-share counterparts). We also see government support for IPPs, given we believe the infrastructure and utilities sectors will be strongly supported by the Chinese government to stimulate the economic growth and the state-owned IPPs. In addition, with the government’s support, the IPPs are essentially exempt from any bankruptcy risk, in our view.
A-share placements underway
To alleviate rising gearing, the two most highly geared companies turned to A-share placement. Huadian placed 750mn shares and raised RMB3.5bn at end-2009. Datang is also going to place <1bn A-shares, according to its recent announcement. The placement has recently been approved by the China Securities Regulatory Commission, and it will be through a non-public offering with floor price set at RMB6.74/share (196% premium over H-share counterpart). Per Datang, the fund will be used to fund the two
Power | China Ivan Lee, CFA
11 March 2011 Nomura 60
coal-to-gas projects, Ningde nuclear power project, and for the loans repayment. Overall, we view this as positive to the H-share holders given the discounted cost of capital.
Listed IPPs continue to grow market share Despite slowing industry capacity growth to a 9.0% CAGR over 2010-12F, from 12% over 2006-09, the listed IPPs have largely maintained their long-term capacity targets to either sustain or grow market share over the next few years. We assume the IPPs will grow at the same pace as the broader industry to maintain market share
Implications of depreciation policies We note that the IPPs adopt different estimates in their depreciation policies. Huadian’s and Huaneng’s earnings may have been understated by 50% and 20%, respectively, due to aggressive depreciation policies (ie, shortened depreciation periods).
Exhibit 108. Depreciation policies of listed IPPs under coverage
Depreciation Electric utility Transportation and
method Dam Buildings plant in service transmission facilities Mining structure Others
Datang Straight-line 45 years 20-50 years 12-45 years 4-10 years NA N/A
Huaneng Straight-line 45-55 years 8-35years 5-35 years 6-14 years N/A 3-18 years
Huadian Straight-line N/A 20-45 years 5-20 years N/A N/A 5-10 years
CR Power Straight-line N/A 18-20 years 15-18 years N/A 10-20 years 3-10 years
CPID Straight-line 30-45 8-45 years 9-28 years 13-30 years N/A 2-18 years Source: Company data, Nomura estimates
Limited benefits from RMB appreciation Over the past 12 months, the renminbi spot rate has risen by 3.7% to RMB6.56:US$1 currently. Our economist expects to see continued renminbi appreciation, with a spot rate of RMB6.22:US$1 by end-2011F – a further appreciation of 5.2% in 2011F.
We consider the steady appreciation of the renminbi as mildly positive for China IPPs, since it spells translation gains on loan amounts denominated in foreign currencies and the IPPs report financial statements in renminbi.
Based on the most recent data (June 2010), for every 1% change in the renminbi, we would expect FY11F earnings to climb by 5.1% for Huaneng, 1.9% for CRP, 71% for Huadian (due to its low base of earnings) and 3.3% for CPID. For Datang, given its borrowings are mainly from domestic banks and renminbi-denominated, we would expect an immaterial impact (around 0.5%) for Datang from any foreign currency fluctuation.
In addition, in real terms, any renminbi appreciation could reduce demand for Chinese coal exports, which would compete less favourably for coal from Australia and Indonesia in USD terms. This would, in turn, affect domestic spot coal prices, thereby benefiting power companies. Overall, we believe renminbi appreciation would have a limited impact on the listed IPPs.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 61
12th Five Year Plan – policy direction preview
12th Five Year Plan – development map for power sector Target to reduce carbon by 40-45% by 2020 (vs 2005 level) and energy intensity by another 16% during 2011-2015 To realise a “low carbon” economy, China has three major targets for energy and the environment:
To increase the use of non-fossil energy to 11.4%/15% of primary energy consumption by 2015/2020, and to reduce carbon emissions by 40-45% from the 2005 level by 2020;
To reduce carbon intensity (CO2 emission per unit of GDP) by 17% during 2011-15, versus 20% cut during 2006-10; and
To reduce energy intensity (total energy consumption per GDP) by 20% and pollution by 10% by end-2010, and by another 16% and 8-10%, respectively, during 2011-2015.
In the five years to 2010, China achieved a 19.1% decrease in energy consumption per unit of GDP declared by Premier Wen Jiabao, close to the target of a 20% cut.
China is setting up its 12th Five Year Plan, which will be announced in March 2011. We expect a significant part of the energy policies to focus on achieving the above targets.
Based on recent research on the 12th FYP for the electricity sector, published by the China Electricity Council, the nation’s total installed power generation capacity is expected to increase at a CAGR of 8.4% to 1,437GW in 2015, with the non-fossil fuel power capacity accounting for 33% (up 6.6% from 26.5% in 2010).
Exhibit 109. Targeted installed capacity in 2015F
2010 (GW) % as of total capacity 2015 Target (GW) % as of total capacity Growth (%)
Thermal 707 73.4 964 67.0 36.4
Hydro 213 22.2 324 22.5 51.8
Nuclear 11 1.1 45 3.1 313.1
Wind 31 3.2 101 7.0 225.1
Solar 0 0.0 4 0.3 1,525.0
Others 0 0.0 0 0.0 0.0
Total 962 100.0 1,437 100.0 49.4
Total non-fossil fuel 256 26.6 474 33.0 85.3
Source: Company data, Nomura estimates
Under the above targets, the government expects to spend RMB5.3tn for the power sector (52% for power generation and the rest for power grids) under the 12th FYP, a 68% increase from power sector spending during the 11th FYP period. Across the fuel mix, non-fossil fuels (including solar, nuclear and wind) will likely account for the highest growth, due to the lower base. Despite thermal only experiencing 36.4% capacity growth, it is still likely to contribute the largest portion of the fuel mix, down 6.4% to 67% in 2015.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 62
Environmental tax
Environmental tax– A huge risk to IPPs? The implement of Environmental Tax (環境稅) (or the resources tax) is still being
discussed. It was reported in the 21st Century Economic Journal on 10 December, 2010 that the framework of the Environmental Tax, which was drafted by the Ministry of Finance, State Administration of Taxation and the Environmental Department, would soon be unveiled.
Pollutants involved
The proposed taxed items include:
i) Sulphur Dioxide, proposed tax rate: Rmb2/kg
ii) Sewage water, proposed tax rate: Rmb1/tn
iii) Solid waste, proposed tax rate: Rmb2/kg
iv) Carbon Dioxide (CO2), proposed tax rate: Rmb10-20/tn (it was said that the tax rate would rise to Rmb50/tn in 2020)
Tax-base
The computation of Environmental Tax, apart from CO2, would be based on the pollutant emission calculated from the taxpayers’ production capacity, actual volume produced and other production indexes; while for that of the CO2, the emission would be based on the carbon intensity in coal, petroleum, natural gas and other fossil fuels being consumed during production processes.
Differences between “Pollutant Emission Charges”
Currently, “Pollutant Emission Charges (排污费)” are already being imposed on most
of the pollutants, including CO2 and SO2. The proposed Environmental Tax policy will then take out SO2 and CO2 from the “Pollutant Emission Charges” and replace them in a tax form. The detailed calculation of the Pollutant Emission Charges for SO2 and CO2 can be found at:
Apart from the three government departments mentioned previously, the Environmental Tax also relates to the NDRC, Ministry of Water, Ministry of Housing and Urban-Rural Development and others. The responsibilities among these departments are not yet clearly set, and they also have different views of how the tax would work.
The China ministries proposed in May 2010 that a CO2 tax could be imposed as soon as 2012. However, so far there has been no update on this Environmental Tax. Given the prevailing high inflation, the uncertainty on the continuity of Kyoto protocol (or the implement of a local carbon trading scheme) and uncertainty on how IPPs can pass on the CO2 tax, we believe there will be some more time needed.
Anyhow, we have done an impact analysis on the impact on IPPs of the potential implementation of environmental tax based on their current coal-fired capacity and a Rmb10/tn CO2 tax charge. We have not calculated the SO2 tax given that the majority of the IPPs’ coal-fired power plants have already installed the flue-gas desulphurization facilities and expected the impact to the IPPs should be minimal. From our analysis for the CO2 tax, Huaneng is expected to be hit the most, with a potential environmental tax liability of Rmb2,177mn pa, followed by Datang (Rmb1,136mn), CRP (Rmb962mn), Huadian (Rmb942mn) and CPID (Rmb384mn). These account for almost 19.8-59.8% of IPPs’ FY11F earnings (excluding Huadian), and thus the impact would be significant. We understand the actual impact could be much less, as it could be offset by some of the levies in the existing Pollutant Emission Charges and some of the taxes can be
Power | China Ivan Lee, CFA
11 March 2011 Nomura 63
passed on to end-users/coal suppliers, but we also understand that the CO2 tax per ton will also increase over time.
Exhibit 110. Analysis of CO2 tax effect on IPPs
Coal-fired power generation
(Attributable) CO2 emissions Potential CO2 tax cost
Company (mn kwh) (Ton) (RMBmn)
CPID 38,561 38,445,317 384
CRP 96,451 96,161,647 962
Datang 113,895 113,553,315 1,136
Huadian 94,532 94,248,404 942
Huaneng 218,392 217,736,824 2,177
Source: Nomura estimates
According to a study by the Ministry of Environmental Protection, based on a Rmb10/ton CO2 tax charge, the CO2 tax would equivalent to a tax rate of Rmb5.5/ton of coal and Rmb8.5/ton of oil. That said, if Beijing agrees coal companies should bear CO2 costs and decides to implement resources tax reform on the coal sector – changing it from the current Rmb3-5/ton to a 5% on sales price (Rmb15/ton), this would more than to offset the CO2 tax charge. In such a case, IPPs should feel minimal impact, in our view.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 64
Tariff reform – power pooling
Tariff reform the only solution to regain investor interest in the sector Throughout this research report, we highlight the lack of investor interest in the IPP sector, mainly due to the imbalanced market structure (a regulated tariff with an unregulated fuel cost structure) since the opening up of the coal market in 2003. This has led to a substantial margin squeeze suffered by the IPPs over the past five years, given the stagnant tariff but rising coal prices and interest rates. Although Beijing had introduced a “coal-power tariff linkage” system in 2005, so far the on-grid tariff hikes have been insufficient and unpredictable.
The “coal-power tariff linkage” system is not perfect, in the sense that it only allows the on-grid tariff to rise when the coal price has risen by more than 5% over the past year, and IPPs can only pass on 70% of the coal cost hike. That means IPPs would have to suffer for a whole year before any compensation and IPPs have to digest 30% of the cost increase internally through efficiency improvement. Further complicating the issue is that the NDRC has final say on on-grid tariff hikes, which depend on the affordability of the users, inflation and profitability of the IPPs. The handicapped cost pass-through system has driven a sector de-rating to 0.6-1.4x P/BV and 0.1-14.1% ROE currently, from 1.1-1.8x P/BV and 10.8-18.1% ROE pre-2003.
Thus, in order for the sector to be re-rated, tariff reform (eg, power pooling) must be contingent, which should allow “100%” fuel cost pass through without any delay and additional conditions.
We believe a power tariff reform programme is required to: 1) allow price liberation and fuel-cost pass through for better allocation of resources; 2) increase transparency for T&D pricing to discourage monopoly and inefficiency among the unlisted power grids; and 3) allow competition between IPPs and power grids to enable more market-driven pricing for end-users. This would also support Beijing targets to reduce energy intensity and CO2 intensity.
Exhibit 111. A re-rating is contingent on “power pooling”
Source: Nomura research
Although utilization is expected to rise, a fundamental P/E Re-rating will happen ONLY IF a tariff reform (like power pooling) is implemented, likely in 2014-15F
P/E de-ratingP/E
Re-ra
ting
Pla
nt
uti
lisa
tio
nra
te (
%)
35
40
45
50
55
60
65
70
75
1993
1994
1995
1996
1997
199
8
1999
200
0
2001
2002
2003
2004
2005
200
6
2007
2008
2009
201
0F
2011
F
201
2F
National average Thermal Hydro(%)
Although utilization is expected to rise, a fundamental P/E Re-rating will happen ONLY IF a tariff reform (like power pooling) is implemented, likely in 2014-15F
P/E de-ratingP/E
Re-ra
ting
Pla
nt
uti
lisa
tio
nra
te (
%)
35
40
45
50
55
60
65
70
75
1993
1994
1995
1996
1997
199
8
1999
200
0
2001
2002
2003
2004
2005
200
6
2007
2008
2009
201
0F
2011
F
201
2F
National average Thermal Hydro(%)
Power | China Ivan Lee, CFA
11 March 2011 Nomura 65
So, what is power pooling? Power pooling can be referred to as two or more power utilities tied together by coordination arrangements for the transmission and generation of electricity to form a single system. Such a power pool arrangement allows two or more power utilities to plan and operate the power supply in a more reliable and economical manner.
Exhibit 112. Mechanism of power pooling
IPP APower supply: 250MWh
Tariff submitted: Rmb300/MWh
IPP APower supply: 250MWh
Tariff submitted: Rmb300/MWh
Power GridPower demand: 1,000MWh
Power GridPower demand: 1,000MWh
IPP BPower supply: 200MWh
Tariff submitted: Rmb330/MWh
IPP BPower supply: 200MWh
Tariff submitted: Rmb330/MWh
IPP CPower supply: 200MWh
Tariff submitted: Rmb350/MWh
IPP CPower supply: 200MWh
Tariff submitted: Rmb350/MWh
IPP DPower supply: 200MWh
Tariff submitted: Rmb380/MWh
IPP DPower supply: 200MWh
Tariff submitted: Rmb380/MWh
IPP EPower supply: 200MWh
Tariff submitted: Rmb400/MWh
IPP EPower supply: 200MWh
Tariff submitted: Rmb400/MWh
IPP FPower supply: 100MWh
Tariff submitted: Rmb450/MWh
IPP FPower supply: 100MWh
Tariff submitted: Rmb450/MWh
1
2
3
4
5
6
According to the above, the highest power tariff which can dispatch the power is Rmb400/MWh. As such, the power tariff is set at Rmb400/MWh. This power tariff setting can be done at any time interval, e.g. in 30-min or 1 hr, etc.
Power supply (MWh) Tariff (Rmb/MWh) Remarks
1 IPP A 250 400 All 250MWh can be dispatched at tariff of Rmb400/MWh, depsite tariff submitted is Rmb300/MWh
2 IPP B 200 400 All 200MWh can be dispatched at tariff of Rmb400/MWh, depsite tariff submitted is Rmb330/MWh
3 IPP C 200 400 All 200MWh can be dispatched at tariff of Rmb400/MWh, depsite tariff submitted is Rmb350/MWh
4 IPP D 200 400 All 200MWh can be dispatched at tariff of Rmb400/MWh, depsite tariff submitted is Rmb380/MWh
5 IPP E 150 400 Only 150MWh can be dispatched at tariff of Rmb400/MWh
6 IPP F - NA No power can be dispatched given high tariff submitted
Total 1,000 400
Source: Nomura research
Power pooling: a win-win tactic for power generator and users The main objective of power pooling is to enhance the cost savings in the power industry. Generally, a power pooling system not only benefits the power generators, but also the power users.
On power generators:
Lower operating costs through economies of scale, given the interconnected arrangement will be on a national level, instead of on a regional level. For example, larger power generation units with lower unit costs will be considered on a national level, but not on a regional level;
Lower operating costs can also be achieved through the utilization of more hydro or wind power, given the integration of the power system on a national level to smooth the demand fluctuation; and
Power | China Ivan Lee, CFA
11 March 2011 Nomura 66
Lower capital investment by the IPPs, given the sharing of the reserves and installed capacity through the interconnected power system will minimize additional investments in generation facilities. For example, the reserve margin requirement can be reduced, as the responsibility for providing the reserve margin can be shared on a national level, instead of each region to fulfil the reserve margin requirement.
On power users:
The power pooling allows for a competitive bidding among IPPs in the power supply and the least cost producers will be able to dispatch the power. This motivates the IPPs to actively lower their operating costs and in turn a more competitive tariff for the power users; and
Power pooling also provides higher reliability and security of power supply by sharing the reserve margin and smoothing any uneven power demand fluctuation.
But certain criteria have to be met before any power pooling… So far, power pooling is commonly adopted in European countries, the US, Australia and Singapore. However, it is still not the mainstream of market structure in other parts of the world, given certain criteria have to be met in order to implement the power pooling, including:
Power supply has to be higher than the demand, such that the IPPs can submit their supply prices into a competitive pool for power dispatch bidding;
Interconnected power transmission lines among the IPPs for energy transfer; and
A central agent to coordinate and monitor the operation among the IPPs and the power pooling system.
How about the status in China? In China, the coal price is based on the market-driven structure; whereas the tariff is regulated by the government. The government realized the market structure imbalance and had commenced some simulation works or trial run of power pooling in the north-eastern regional power market in January 2004. In 2009, the NDRC also proposed a power pooling mechanism in China. Despite the power pooling still being in the research and discussion stage, with no concrete plan decided so far, we believe China will be ready for tariff reform, given the existing power supply is greater than demand and there is a ready organization structure, with National Energy Administration as the central agent. However, overall, we expect any nationwide implementation of a power pooling mechanism in China will only happen in 2014-15 at the earliest, once a new administration is in place post Hu-Wen (FY11-12)
Which IPPs stand out from power pooling implementation? A market-driven tariff will be the mechanism once a power pooling system is fully implemented. Under the mechanism, the IPPs with the lowest quote can bid for the power dispatch. This means that the lowest-cost producers will be the winners with the implementation of power pooling.
Given that, we believe the power pooling will be positive for all five covered IPPs, given their economies of scale and better cost management than the small private IPPs. Particularly, we expect CRP to benefit the most from this mechanism, given its more effective cost management than other listed IPPs. However, again, we believe that any implementation of power pooling will only happen in 2014-15 at the earliest, and any benefits to IPPs will only materialise in the long term.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 67
Sector valuation
Sector valuation
Exhibit 113. Asia ex-Japan utilities stocks valuation summary (1/3) Reporting Share Free Price target Price Market cap
Company Type Ticker currency o/s (mn) float Rating Local ($) Local ($) (US$mn) 09 10F 11F 09 10F 11F 09 10F 11F
Taiwan solar average 993.31 (5.66) 5.08 7.66 1.75 1.00 1.00 (1,153.38) 2,081.93 2,700.14
Indonesia
Perusahaan Gas Negara Gas PGAS IJ IDR 23,782.02 43.04 Buy 5,100.00 3,575.00 9,857.07 221.39 268.61 305.21 43.54 130.96 137.71 5,265.09 6,388.19 7,258.61
EPS (local $) DPS (local $) Net profit (local $ m)
Note: Ratings and Price Targets are as of the date of the most recently published report rather than the date of this document. Priced on 04 Mar, 11 market close. Market cap est. using H-Shares price alone, may have minor variance with other est. presented in this report Source: Bloomberg, Nomura estimates
Power | China Ivan Lee, CFA
11 March 2011 Nomura 68
Exhibit 113. Asia ex-Japan utilities stocks valuation summary (2/3)
China power average 154.45 (8.80) (20.07) 82.87 (9.61) (18.33) 162.39 2.62 (18.55) 322.80 320.65 348.08 5.12 4.96 4.76 12.22 14.24 125.28 3.14 2.84 2.64
China Shenhua Energy 19.01 19.85 19.97 15.21 19.85 19.97 19.01 19.85 19.97 6.00 1.16 net cash NA NA NA 18.24 14.68 11.49 1.82 2.27 2.89
China Coal Energy 3.71 34.23 10.26 147.56 34.23 10.26 9.86 34.23 10.26 net cash 13.61 21.94 NA NA NA 16.90 12.14 10.35 1.54 2.15 2.52
Yanzhou Coal Mining (36.55) 81.16 23.20 135.29 12.84 23.20 (36.55) 81.17 23.20 47.98 53.53 50.54 NA NA NA 25.45 13.55 10.33 1.88 2.20 2.88
China coal average (4.61) 45.08 17.81 99.36 22.31 17.81 (2.56) 45.08 17.81 26.99 22.77 36.24 NA NA NA 20.20 13.46 10.73 1.75 2.20 2.76
Suntech (62.39) 75.62 18.64 NA NA NA (56.26) 75.62 18.64 38.93 59.83 51.77 NA NA NA 19.60 11.16 9.41 - - -
Canadian Solar (26.17) 210.55 4.79 NA NA NA (3.29) 210.55 4.79 26.13 65.82 79.70 NA NA NA 27.12 8.73 8.33 - - -
Trina Solar 41.50 101.11 (13.12) NA NA NA 54.11 151.20 (13.12) 15.80 net cash net cash NA NA NA 13.69 6.67 7.68 - - -
Yingli Green (163.55) NA 0.93 NA NA NA (170.24) NA 3.89 13.33 31.56 51.79 NA NA NA NA 8.13 7.83 - - -
LDK Solar (356.68) NA (13.20) NA NA NA (417.81) NA (13.20) 157.13 182.39 263.36 NA NA NA NA 6.28 7.24 - - -
JA Solar (125.95) NA (22.15) NA NA NA (127.15) NA (21.92) net cash 5.21 16.50 NA NA NA NA 4.50 5.81 - - -
Solargiga (147.32) NA 18.49 (100.00) NA NA (148.26) NA 13.11 9.09 net cash 13.98 NA NA NA NA 8.78 7.41 - - -
GCL Poly (180.39) NA 48.38 NA NA NA (109.28) NA 48.38 28.08 63.27 49.92 NA NA NA NA 18.93 12.76 - - -
China solar average (127.62) 129.09 5.35 NA NA NA (122.27) 145.79 5.07 41.21 68.02 75.29 NA NA NA 20.14 9.15 8.31 - - -
China Everbright Intl 18.52 50.58 28.09 29.16 59.47 28.09 28.05 61.58 28.09 23.55 41.00 60.77 NA NA NA 37.08 24.42 18.92 0.52 0.83 1.07
Guangdong Investment (0.08) 15.93 6.23 10.00 14.18 6.20 0.81 16.59 6.57 23.31 15.84 7.27 NA NA NA 12.87 11.04 10.36 2.68 3.06 3.25
China Water Affairs (42.72) 441.80 33.94 NA 67.04 5.00 (43.22) 461.26 40.33 53.41 71.55 74.88 NA NA NA 143.62 28.15 21.43 1.00 1.68 1.76
Beijing Enterprises Water 38.01 57.77 21.88 NA NA NA 436.38 101.39 88.18 88.34 121.91 40.63 NA NA NA 39.18 26.60 21.82 - - -
Hyflux Limited 26.76 (2.33) 26.94 80.79 (13.47) 49.78 27.10 1.99 31.81 63.95 136.35 166.28 NA NA NA 13.06 13.41 10.81 1.86 1.61 2.42
Sound Global Ltd 32.72 15.05 27.60 4.11 (100.00) NA 37.75 15.05 32.32 net cash net cash net cash NA NA NA 18.25 15.86 12.43 0.93 - -
Tianjin Capital 5.16 19.14 (23.05) 100.00 19.14 (23.05) 5.16 19.14 (23.05) 78.07 40.76 36.31 NA NA NA 14.54 12.20 15.86 3.23 3.85 2.96
China water average 11.20 85.42 17.38 44.81 7.73 13.21 70.29 96.71 29.18 55.11 71.23 64.36 NA NA NA 39.80 18.81 15.95 1.46 1.58 1.64
ENN Energy 24.38 24.52 17.55 22.06 26.96 17.55 26.94 26.96 17.55 61.45 49.89 28.97 NA NA NA 29.56 22.90 18.60 0.85 1.13 1.39
Towngas China 31.03 18.15 20.20 99.99 44.11 33.44 31.05 32.83 33.44 27.99 20.59 18.29 NA NA NA 29.44 25.30 21.02 0.50 0.72 0.97
China Resources Gas (49.57) 46.02 31.39 NA 35.28 48.26 49.37 67.53 48.26 48.94 net cash net cash NA NA NA 32.27 22.10 16.82 0.59 0.80 1.19
China Gas (29.23) 741.87 (26.05) 3.50 15.75 20.00 (26.50) 744.56 (14.64) 256.39 229.05 69.18 NA NA NA 95.20 13.72 19.41 0.43 0.50 0.60
Beijing Enterprises 5.21 26.34 16.76 0.01 26.31 11.84 5.13 26.34 16.76 4.91 8.38 3.47 NA NA NA 21.69 17.48 14.97 1.46 1.84 2.06
China gas average (3.63) 171.38 11.97 31.39 29.68 26.22 17.20 179.64 20.27 79.94 76.98 29.97 NA NA NA 41.63 20.30 18.16 0.77 1.00 1.24
China High Speed 39.56 31.32 30.47 20.00 15.83 30.47 39.57 45.04 30.47 78.40 0.81 16.79 NA NA NA 12.95 10.06 7.54 2.64 3.16 4.22
China Longyuan 119.09 70.54 37.89 NA NA NA 165.00 110.48 37.89 76.73 140.02 182.23 NA NA NA 41.31 23.90 16.82 - - -
China wind average 79.33 50.93 34.18 20.00 15.83 30.47 102.29 77.76 34.18 77.56 70.42 99.51 NA NA NA 27.13 16.98 12.18 1.32 1.58 2.11
China Yangtze Power 38.90 24.33 0.57 40.18 39.43 0.57 44.76 39.43 0.57 148.40 127.30 124.31 NA NA NA 15.14 10.86 10.80 3.86 5.39 5.42
Korea Electric Power NA NA NA NA NA NA NA NA NA 78.88 80.16 77.49 NA NA NA NA NA 19.42 - - 1.66
Korea Gas (28.06) (14.27) 37.72 (15.95) (14.27) 37.72 (28.06) (14.27) 37.72 403.35 510.39 543.02 NA NA NA 11.18 13.04 9.47 2.68 2.30 3.17
Korea utilities average (28.06) (14.27) 37.72 (15.95) (14.27) 37.72 (28.06) (14.27) 37.72 241.12 295.27 310.25 NA NA NA 11.18 13.04 14.44 1.34 1.15 2.41
E-Ton Solar Tech (196.62) NA NA (100.00) NA NA (292.84) NA NA 87.79 82.79 82.20 NA NA NA NA NA 19.78 - - -
Motech Industries (98.80) 10,912.01 8.74 (33.37) - - (98.55) 13,666.50 8.74 24.82 net cash net cash NA NA NA 1,143.28 10.38 9.55 1.59 1.59 1.59
Taiwan solar average (147.71) 10,912.01 8.74 (66.69) - - (195.69) 13,666.50 8.74 56.30 82.79 82.20 NA NA NA 1,143.28 10.38 14.66 0.79 0.79 0.79
Indonesia
Perusahaan Gas Negara 39.29 21.33 13.63 200.78 5.15 12.93 44.35 21.33 13.63 38.27 6.49 net cash NA NA NA 16.15 13.31 11.71 3.66 3.85 4.35
Glow (2.34) 39.33 3.01 5.01 5.00 5.00 (2.28) 36.99 3.01 131.25 184.11 197.57 NA NA NA 15.63 11.22 10.89 4.62 4.85 5.09
Electricity Generating 0.21 (6.95) (4.77) - 1.00 1.00 0.21 (6.95) (4.77) 9.61 1.41 net cash NA NA NA 6.80 7.31 7.68 5.15 5.21 5.26
Ratchaburi Generating 3.20 (14.46) 1.15 1.80 1.50 1.50 3.20 (14.46) 1.15 35.63 25.65 17.95 NA NA NA 8.13 9.51 9.40 5.96 6.05 6.14
Thai power average 0.35 5.98 (0.20) 2.27 2.50 2.50 0.38 5.19 (0.20) 58.83 70.39 107.76 NA NA NA 10.19 9.35 9.32 5.24 5.37 5.50
Tenaga Nasional (15.77) 17.82 (17.89) (10.72) 46.90 (6.90) (15.73) 18.02 (17.69) 73.71 54.98 44.72 NA NA NA 15.88 13.51 16.41 1.68 2.47 2.30
YTLP (43.24) 56.71 5.22 15.05 (11.17) 1.50 (37.76) 74.21 12.23 277.77 206.23 202.96 NA NA NA 28.21 16.14 14.62 5.58 4.95 5.03
Malaysia utilities average (29.50) 37.26 (6.33) 2.16 17.87 (2.70) (26.75) 46.12 (2.73) 175.74 130.61 123.84 NA NA NA 22.05 14.82 15.51 3.63 3.71 3.67
Energy Development Corp 26.21 13.10 4.61 (64.75) 11.63 25.53 26.49 13.10 4.61 125.84 81.68 69.80 NA NA NA 14.81 13.10 12.52 1.71 1.91 2.40
Meralco (19.18) 549.92 24.39 40.82 59.87 45.12 (18.86) 561.45 24.39 51.96 53.40 30.34 NA NA NA 112.17 17.26 13.88 1.09 1.74 2.52
Philippines utilities average 3.51 281.51 14.50 (11.96) 35.75 35.32 3.82 287.27 14.50 88.90 67.54 50.07 NA NA NA 63.49 15.18 13.20 1.40 1.82 2.46
Suzlon (15.62) (82.71) 329.60 (100.00) NA NA (13.88) (82.12) 337.87 137.25 105.38 112.95 NA NA NA 6.52 37.84 8.64 - - -
NTPC NA 29.60 7.63 NA 5.50 5.06 NA 29.60 7.63 net cash 34.23 43.30 NA NA NA 24.00 18.52 17.20 2.35 2.48 2.60
JSW Energy NA (10.21) 61.54 NA NA (100.00) NA 169.43 61.54 net cash 126.27 118.81 NA NA NA 14.79 16.47 10.19 - 1.17 -
Adani Power NA NA 389.46 NA NA NA NA NA 389.46 net cash 162.77 293.10 NA NA NA NA 141.42 28.89 - - -
Power Grid NA 21.37 19.32 NA 24.72 19.87 NA 21.37 23.27 net cash 195.37 152.34 NA NA NA 23.66 19.50 16.34 1.42 1.77 2.12
Reliance Power NA 179.70 6.35 NA NA NA NA 179.70 13.35 net cash net cash 16.42 NA NA NA 118.76 42.46 39.92 - - -
Lanco Infratech NA 62.24 57.61 NA NA NA NA 63.56 69.28 net cash 197.92 360.74 NA NA NA 29.23 18.23 11.43 - - -
India average (15.62) 34.08 143.98 (100.00) 24.72 (40.07) (13.88) 70.39 149.13 137.25 157.54 175.72 NA NA NA 38.59 45.99 19.24 0.24 0.49 0.35
AustraliaAGL ENERGY LTD 4.12 12.47 0.35 1.89 9.26 (1.69) 6.55 13.23 2.02 8.50 7.25 11.01 NA NA NA 17.28 15.37 15.32 3.68 4.02 3.95
Note: Ratings and Price Targets are as of the date of the most recently published report rather than the date of this document. Priced on 04 Mar, 11 market close. Market cap est. using H-Shares price alone, may have minor variance with other est. presented in this report Source: Bloomberg, Nomura estimates
Power | China Ivan Lee, CFA
11 March 2011 Nomura 69
Exhibit 113. Asia ex-Japan utilities stocks valuation summary (3/3)
Note: Ratings and Price Targets are as of the date of the most recently published report rather than the date of this document. Priced on 04 Mar, 11 market close. Market cap est. using H-Shares price alone, may have minor variance with other est. presented in this report
Source: Bloomberg, Nomura estimates
Power | China Ivan Lee, CFA
11 March 2011 Nomura 70
Valuation and Risk
Valuation methodology and key risks
Exhibit 114. Valuation methodology and key risks
Company Ticker Valuation methodology Risks
Adani Power ADANI IN We deploy FCFE-based methodology to value operational / under-construction / reasonable likelihood power generation projects of the company. To capture the risk of a power project from conception to commissioning, we adjust the FCFE value of the projects for ‘milestone discounts’ (risk weights assigned to the non-achievement of six key milestones we identify for various types of projects). The key assumption of our FCFE model is 13% cost of equity.
Upside risks: 1) increase in tariff or delayed commencement of the 1000MW PPA with GUVNL; and 2) milestone achievements, especially related to fuel security and off-take arrangement. Downside risks: 1) lower-than-expected merchant tariff realisation; and 2) lower GCV/higher price of imported coal from Adani Enterprises Ltd (AEL).
AGL Energy AGK AU DCF methodology utilising a WACC of 9.3%, a long-term growth rate of 3.5%, target debt to equity of 20% and a risk free rate of 5.5%.
Competition and customer loss, electricity & gas supply and price, weather dependent, environmental concerns, emissions trading scheme or carbon tax, potential source of funding.
BEH 392 HK Our PT is based on a sum-of-the-parts (SOTP) valuation, which takes into account the different business nature and risk profile of BJE’s investments. We divided BJE into five parts. 1) Piped gas operation - we value the piped gas operation business using a DCF model, which assumes 1% terminal growth and a WACC of 7.7%. 2) Brewery - we value the brewery business using the current market value of 56.48%-owned Yanjing Beer. 3) Water treatment - we value the water business by using our DCF price target of BJ Enterprises Water at HK$3.3 (assuming WACC of 10.5% and terminal growth rate of 2%), which is subject to growth assumptions in treatment volumes, tariffs, capacity and capex. 4) Expressway & toll road - we value the toll road business using a DCF model, assuming 0% terminal growth and a WACC of 7.7%. 5) Other - we value the other businesses using EV/EBITDA and market value approaches.
Risks to our positive view include: 1) slower-than-expected sales growth for the gas, water and brewery businesses; 2) unfavourable regulatory changes to these three segments; and 3) value-destructive asset acquisitions.
Beijing Enterprises Water 371 HK Our valuation methodology is based on DCF, assuming a WACC of 10.5% and a terminal growth rate of 2%.
Our PT is subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our price target.
Canadian Solar CSIQ US We value the company using the YTD average FY11F P/E of the module peer group, to which we assign a 10% discount to reflect market concerns about slowing growth.
Upside risks: 1) margin expansion ahead of our expectations on faster cost reductions; and 2) faster sales diversification enabling market share gains. Downside risks: 1) execution delays at its upstream integration into wafers; and 2) faster-than-expected subsidy reductions in European markets resulting in our worst-case demand scenario.
China Coal 1898 HK Our PT is based on SOTP valuation, with a WACC of 11.6% and terminal growth rate of 2.5% for coal business DCF, while employing 9.4% WACC and 1% growth rate for equipment operation; 11.6% WACC and 1% terminal growth rate for coking operation
Upside risk includes: 1) bigger-than-expected output growth; and 2) higher-than expected contract price. Downside risk includes: 1) lower-than-expected spot price increase; 2) weaker coal demand due to weaker-than-expected economic growth in China; and 3) higher-than-expected cost hike due to resource tax and inflation.
China Everbright Intl 257 HK Our price target is derived using DCF, with a WACC of 10.0% and a 2% terminal growth rate.
Our PT is subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our PT.
China Gas 384 HK Our price target is based on DCF valuation, assuming 0% terminal growth and a WACC of 7.6%. We do not incorporate any unapproved or unannounced development projects or future acquisitions, or any projects without specified commencement date.
Upside risks: 1) higher than-expected gas volume sales to higher margin C&I and vehicle users; 2) value constructive acquisition; 3) continuous picking up for the LPG business margin and volume; and 4) possibility of being an acquisition target amid industry consolidation in the long term.
China High Speed 658 HK Based on DCF valuation, with a WACC of 9.5% and terminal growth of 1% after FY2020F.
Uncertainty of government policies for wind power; tightening global credit market; development of direct-drive wind turbine technology; the company's failure to improve technology to compete with foreign competitors; severe shortage of raw materials; delay in capacity expansion.
China Power Intl 2380 HK Our revised price target HK$2.00 is based on DCF valuation, assuming 1% terminal growth, and a WACC of 7.4%
Our price target is subject to growth assumptions in power demand, tariffs and capex. Delays in revising electricity tariffs and lower than expected power demand may result in key changes in our forecasts, and hence our price target.
China Resources Gas 1193 HK Our price target of HK$14.8 is based on a sum-of-the-parts (SOTP) valuation, of which HK$12.29 comes from the existing 41 projects and HK$2.50 from to-be-injected projects. For the to-be-injected projects, we assign a 50% discount to DCF value to reflect uncertainty over the timing and consideration.
We have a positive view on the company’s overall operation, but are wary of a macro slowdown and the implications on commercial and industrial (C&I) demand. Meanwhile, the value from future asset injections would be hurt by higher-than-expected considerations, in our view.
China Resources Power 836 HK Our revised price target HK$14.94 is based on DCF valuation, assuming 1% terminal growth, and a WACC of 7.9%
Upside risks include higher-than-expected output growth in coal production. Downside risks include: 1) delays in revising electricity tariffs; and 2) lower-than-expected power plant utilisation.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 71
Exhibit 114. Valuation methodology and key risks (cont’d)
Company Ticker Valuation methodology Risks
China Shenhua 1088 HK Our PT is based on SOTP valuation, with a WACC of 11.4% and terminal growth rate of 2.5% for coal segment DCF valuation, while employing 10.0% WACC and 1% terminal growth rate for non-coal segments.
Upside risks include higher-than-expected coal prices, while downside risks include weaker-than-expected economic recovery, higher-than-expected cost hike, and higher coal imports on unexpected RMB appreciation.
China Water Affairs 855 HK Our PT is based on a sum-of-the-parts valuation methodology. We value the core business from water and infrastructure to deliver a DCF value of HK$3.10/share by employing a WACC of 10.5% with a 2% terminal growth rate (up from 0%). Our price target factors in value from CWA’s landbank at HK$1.0/share.
Our PT is subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our PT.
China Yangtze Power 600900 CH
Sum-of-the-parts valuation, in which we value the hydropower business and holding securities at RMB15.23 and RMB1.28, respectively, based on the number of shares post private placement to the parent, concluded on 29 September 2009.
Risks: 1) fluctuation in utilisation hours; 2) the pace and magnitude of potential tariff hikes; 3) A-share market trends; and 4) potential interest rate hikes.
CKI 1038 HK Our valuation is based on sum-of-the-parts methodology, using an 8% cost of equity for assets in Australia, Canada, New Zealand and the UK businesses, and 9% cost of equity for its China and HK materials businesses.
Downside risks: strengthening of the US dollar and the yen, lower-than-expected SOC capex spent during FY08-13F, poor operating performance at overseas projects. Upside risks: possible new acquisitions and a weaker US dollar.
CLP Holdings 2 HK DCF based on a WACC of 7.3% and a terminal growth rate of 1.5%.
Upside risks: listing of its Indian or Australian assets; better-than-expected performance of its overseas business. Downside risks: Lower SOC capex in Hong Kong, poor operating results from overseas investments, potential write-down on its Yallourn plant, and earnings risks from the carbon trading scheme in Australia.
Datang Intl 991 HK Our revised price target HK$2.79 is based on DCF valuation, assuming 1% terminal growth, and a WACC of 7.4%. We have not incorporated coal assets, coal-to-gas and coal-to-chemical businesses valued at HK$3.92 due to low visibility.
Any contribution from the coal-to-chemical and coal-to-gas projects could provide upside to our estimates. Downside risks include delays in revising electricity tariffs and lower-than-expected power plant utilisation.
EDC EDC PM FCFF with WACC = 9.9% and terminal growth assumption of 2.0%
A significant pullback on global risk appetite, and at an operational level, complications surrounding the rehabilitation of plants recently acquired from government.
Electricity Generating EGCO TB We value EGCO using DCF with WACC = 7.5% and terminal growth assumption of 1.5%.
Political unrest and uncertainty surrounding PPA extension, although we have assumed that neither REGCO nor KEGCO’s PPAs are lengthened.
ENN Energy 2688 HK Our price target is based on DCF valuation, assuming 0% terminal growth, a one-year forward FX rate of HK$1.25:RMB1 and a WACC of 8.3%. We do not incorporate any unapproved or unannounced development projects or future acquisitions, or any projects without a specified commencement date (such as the Vietnam project).
Downside risks: 1) slower-than-expected new connection and gas sales growth; and 2) margin squeeze by cost pass-through delay. Upside risks: 1) higher-than-expected gas volume sales to higher-margin commercial and industrial customers and vehicle users; 2) value-constructive asset injection / acquisition; and 3) possibility of being an acquisition target amid industry consolidation in the long term.
E-Ton 3452 TT We use the industry average P/BV and apply a 20% discount to reflect the company's stretched balance sheet.
Upside risks: 1) E-Ton’s raising additional funding at attractive rates; and 2) a faster-than-expected ramp-up of new R&D projects helping improve cost structure meaningfully.
GCL Poly 3800 HK We peg GCL's target FY11F P/BV at the peer average ROE-adjusted FY11FP/BV [average P/BV(x) / ROE(%)].
Downside risks: 1) oversupply conditions in 2H11 - while GCL remains on track to gain market share in oversupply conditions given its lower costs, a steep oversupply could impact ASPs and thus margins; and 2) subsidy environment which could also result in weakening ASPs.
Glow GLOW TB We value Glow Energy using a FCFE valuation methodology with a COE of 10.8% and a terminal growth rate assumption of 1.5%.
Key downside risks: weaker-than-anticipated industrial demand, and project delays and sentiment-related sell-downs stemming from Thailand’s political unrest, which we believe will distract government from addressing construction delays in the MTP Industrial Estate, where essentially all of Glow’s operations are concentrated.
Guangdong Investment 270 HK Our PT is derived from DCF using a WACC of 9.5% and a 2% terminal growth rate.
Our PT is subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our PT.
Hong Kong & China Gas 3 HK SOTP valuation, which implies 22x FY10F P/E (3.1x book) for the Hong Kong Towngas business, 32x FY10F P/E (2.1x book) for the China business and no NAV discount for the property portfolio.
Upside risks include acquisitions of more projects in China and share buy-backs. Other risks include regulatory risks, larger-than-expected mark-to-market loss of investment securities and investment property write-down.
Hongkong Electric 6 HK DCF based on WACC of 6.7% and 1.0% terminal growth rate. Strengthening of the US dollar, lower-than-expected SOC capex spent during FY09-13F and poor operating performance at overseas projects.
Huadian Power Intl 1071 HK Our revised price target HK$1.62 is based on DCF valuation, assuming 1% terminal growth, and a WACC of 7.9%
Upside risk to our price target includes: Huadian expects to enjoy the fastest rebound in terms of financial performance upon any sector recovery, given its highly sensitive to coal price and interest rate characteristics.
Huaneng Power Intl 902 HK Our revised price target HK$4.78 is based on DCF valuation, assuming 1% terminal growth, and a WACC of 7.9%
Upside risks include any coal investment or injection from the parent. Downside risks include: 1) delays in revising electricity tariffs; and 2) lower-than-expected power plant utilisation.
Hyflux Limited HYF SP Our price target is based on a DCF valuation, with a WACC of 7.8% and a terminal growth rate of 2%.
Our target price is subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our target price.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 72
Exhibit 114. Valuation methodology and key risks (cont’d)
Company Ticker Valuation methodology Risks
JA Solar JASO US We use the average forward P/E of cell peers in YTD-FY10 to value the company and give JA Solar a 10% discount to reflect concerns on slowing end-market demand in 2H11F
Upside risks include: JA Solar expanding margins ahead of our expectations as it increases its module business. Downside risks: 1) slower market share gains in new regions; and 2) demand at new growth centres being unable to offset lower demand from Germany.
JSW Energy JSW IN We deploy a FCFE-based methodology to value operational / under-construction /reasonable likelihood power generation projects of the company. We adjust the FCFE value of the projects for ‘milestone discounts’ (risk weights assigned to the non-achievement of six key milestones we identify for various types of projects). The key assumption of our FCFE model is a 14% cost of equity.
Upside risks: 1) the company manages to address near-term exposure to imported spot coal; 2) a fall in spot prices of imported coal. Downside risks: 1) lower-than-expected merchant tariff realization; 2) further delays in capacity additions at the Ratnagiri-I and RWPL-I facilities; and 3) a shortfall in anticipated fuel supply from Sungai Belati (Indonesia).
Korea Electric Power 015760 KS Our PT is based on an EV/MW target (valuation methodology unchanged) of US$850,000, near the median of KEPCO’s post-IPO 20-year EV/MW capacity range. With the impending fuel cost escalation scheme (implementation in July 2011), we think this new positive tariff scheme will exert more impact on KEPCO’s share price than short-term earnings disappointments such as that expected in FY10F. Our valuation method and price target are not affected by FY10F earnings, as those are not earnings-based measures.
Risks: 1) essentially all of KEPCO’s earnings are denominated in won, while almost all of its fuel costs are in US dollars, exposing earnings to the volatility of the forex and energy markets; and 2) changes in the government’s electricity tariff policy and the macro backdrop can also have a large impact on KEPCO’s earnings. Further, earnings are highly leveraged to revenue growth, which poses a direct risk if the street cuts the sales forecasts.
Korea Gas 036460 KS SOTP methodology based on NAV estimate of W52,091 per share, which comprises W26,267 for the core NG business, W24,071 for its E&P projects and W1,753 for its affiliates. Each of the first two parts is separately calculated using a discounted cashflow (DCF) methodology, while the last part is calculated based on 1x of book value.
Risks: 1) essentially all of Kepco’s earnings are denominated in won, while almost all of its fuel costs are in US dollars, exposing earnings to the volatility of the forex and energy markets; and 2) changes in the government’s electricity tariff policy and the macro backdrop can also have a large impact on Kepco’s earnings. Further, earnings are highly leveraged to revenue growth, which poses a direct risk if the street cuts the sales forecasts.
Lanco Infratech LANCI IN We use a sum-of-the-parts (SOTP) valuation methodology for Lanco. We value the EPC/construction business at 8x FY12F P/E, the power business using a milestone-adjusted FCFE valuation at 14% cost of equity, the power trading business at 9x FY12F P/E, the real estate business at a 30% discount to NAV calculated using 20% WACC, and toll roads using DCF at 15% cost of equity. Thereafter, we apply 15% holding company discount to our SOTP value to arrive at our PT.
Key risks: 1) interlinked business lines entail ‘cascading risk’ to earnings; 2) lower coal supplies under already signed FSAs/LoAs; and 3) potential equity dilution to fund 10.6GW under-development project pipeline.
LDK LDK US We use the average forward P/E of wafer peers’ YTD-FY10 to value the company and assign a 10% discount to reflect market concerns about slowing growth.
Downside risks: 1) execution risks and cost over-runs for LDK's polysilicon production plant and expansion into the downstream segment; 2) negative surprises from government policy changes; and 3) earnings dilution from any equity offering. Upside risks: 1) stake sale in polysilicon plant which could help reduce balance sheet issues; and 2) faster-than-expected cost reduction in their downstream operations.
Longyuan 916 HK DCF with a WACC of 11.8% and a terminal growth assumption of 1% after FY2019F
Downside risks: 1) registration risks concerning CER (Certified Emission Reduction) and VER (Voluntary Emission Reduction) credits; 2) interest rate increases in China; 3) rising raw material costs; 4) grid connection bottlenecks in China; 5) the short product quality track records of Chinese wind turbine manufacturers; and 6) potential for fund raising to support rapid capacity growth and maintain the wind resource portfolio.
Meralco MER PM DCF with WACC= 9.1% and terminal growth assumption of 1.5%
Further inflated bids for Meralco's shares
Motech 6244 TT We use the average forward P/E of cell peers in YTD-FY10 to value the company and give Motech a 25% premium, due to its strong balance sheet and stake-holding by TSMC.
Upside risks: Motech being able to expand margins ahead of our expectations on the back of faster cost reductions and stronger ASPs in FY11F. Downside risks: 1) slower market share gains in new regions; and 2) demand at new growth centers being unable to offset lower demand from Germany.
NTPC NATP IN We use a residual income model to value the company. Key assumptions of our model are 1) Cost of equity - 12%; 2) Terminal RoE - 20%; and 3) terminal growth rate - 2%.
Risks: 1) Project execution delays; 2) lower coal supplies under already signed FSAs/LoAs; 3) reinvestment risk; and 4) adverse regulatory changes.
Perusahaan Gas Negara
PGAS IJ We value PGN using a DCF methodology with WACC at 9.5% and a 3% terminal growth assumption.
The gas supply bottleneck; derivative revaluation losses; the 4% stake to be unwound Investment risks: Key downside risks to our view include a continued strengthening of the Rp relative to the US$, weaker-than-anticipated realised gas distribution flows and an inability to pass on what we expect will be a marked rise in future gas costs to customers.
Power Grid PWGR IN We use residual income model to value the company. Key assumptions of our model are: 1) cost of equity - 12%; 2) terminal RoE - 17%; and 3) terminal growth rate - 3%.
Risks: 1) slippage in capex / capitalisation rate; 2) adverse regulatory changes; 3) competitive bidding regime could push returns, growth outlook lower; and 4) payment security / cashflow risk.
Ratchaburi Generating RATCH TB We value Ratchaburi electric using a DCF methodology with WACC = 7.0% and terminal growth assumption of 1.5%.
Political unrest, problems with the execution of Ratch’s growth pipeline in Laos.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 73
Exhibit 114. Valuation methodology and key risks (cont’d)
Company Ticker Valuation methodology Risks
Reliance Power RPWR IN FCFE-based valuation methodology with 15% cost of equity (Rf =8%, Rm=6%, Beta=1.17)
1) Unadjusted for milestone discounts, of Rs186/share; ceteris paribus, our PT could rise as projects achieve milestones. 2) We factor feasible capacity of 25.7GW in our earnings forecasts, greater visibility on planned capacity addition of around 17GW could merit its inclusion in our earnings forecast, potentially lifting our PT. 3) We assume no third-party sale of ‘surplus’ coal from RPWR’s domestic captive coal mines or from coal concessions in Indonesia.
Solargiga 757 HK We use the average FY10 and FY11F P/BV of global peers to value the company.
Upside risks to our price target: 1) Margin expansion ahead of our expectations on the back of faster cost reductions; and 2) earnings upside from the Qinghai Chenguang investment.
Sound Global 967 HK Our PT is based on a sum-of-the-parts valuation, valuing the EPC division using a 15x P/E (historical average since 2006) over FY11F EPS, and the BOT division based on NAV assuming a replacement cost of RMB1,500 per m3 of daily capacity.
Our price target is subject to growth assumptions in treatment volumes (including tapwater supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex.Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our price target .
Suntech Power STP US We value the company using the YTD average FY11F P/E of the module peer group, to which we assign a 10% discount to reflect market concerns about slowing growth.
Downside risks to our price target: 1) slower market share gains in new regions; and 2) demand at new growth centres being unable to offset lower demand from Germany.
Suzlon SUEL IN One-year forward P/E multiple of 16xFY11F earnings. Uncertainty from government’s policy supports, failure in migrating technology forward, higher-than-expected product liability provisions, delay in recovery of WTG demand, and failure in enhancing cashflow and balance sheet quality.
Tenaga Nasional TNB MK We value TNB using a 14.5x forward P/E multiple applied to our FY12F normalised EPS estimate (methodology and multiple unchanged).
We believe the key downside risks to our view include weaker than-anticipated volumes and higher-than-expected coal costs without an upward adjustment to Tenaga’s tariffs. On the upside, an automatic pricing mechanism and or base tariff review should support a strong re-rating of this name.
Tianjin Capital 1065 HK DCF with a WACC of 12.0% and no terminal growth rate. Our PT is subject to growth assumptions in treatment volumes (including tap water supply, wastewater treatment, and waste-to-energy), tariffs, capacity and capex. Changes in the macro landscape and government regulations over the water industry may result in key changes in our forecasts, and hence our PT.
Towngas China 1083 HK Our PT is based on DCF valuation, assuming 0% terminal growth, and a WACC of 6.4%. We do not incorporate any unapproved or unannounced development projects or future acquisitions, or any projects without specified commencement date.
Downside risks include: 1) slower than-expected new connection and gas sales growth; 2) margin squeeze due to cost pass-through delay Upside risks include: 1) higher-than-expected gas volume sales to higher margin C&I and vehicle users; and 2) value-constructive asset injection / acquisition.
Trina Solar TSL US We value the company using the YTD average FY11F P/E of the module peer group, to which we assign a 10% discount to reflect market concerns about slowing growth.
Downside risks to our price target: 1) slower market share gains in new regions; and 2) demand at new growth centres being unable to offset lower demand from Germany.
Yanzhou Coal 1171 HK Our PT is based on SOTP valuation, with a WACC of 10.9% and terminal growth of 2.5% for coal segment DCF, while employing 9.2% WACC and 1.0% terminal growth rate for non-coal segments.
Key risk includes: 1) lower than expected spot price increase, 2) weaker coal demand due to weaker than expected China economy growth, and 3) higher than expected cost hike due to resources tax, smaller than expected cost cutting in Felix and Zhaolou and inflation risk, and 4) FX risk.
Yingli Green YGE US We value the company using the YTD average FY11F P/E of the module peer group, to which we assign a 10% discount to reflect market concerns about slowing growth.
Downside risks to our price target: 1) slower market share gains in new regions, and; 2) demand at new growth centres being unable to offset lower demand from Germany.
YTL Power International YTLP MK We value YTLP using a SOTP valuation based on COE of 9.0% for Malaysia, and 17% for Indonesia. We value Wessex Water at 1.08x FY11F RAB and PowerSeraya at 11.5x EV/EBITDA.
Key risks include the Malaysian regulatory environment; exchange rate risk, specifically relating to YTLP's Wessex Water in the UK.
Potential cooperation with parent — play on hydro / nuclear
Diversification into hydro mitigates coal price fluctuation uncertainty
Striking a different message to traditional IPPs, CPID has managed to raise hydropower to 21% of its attributable capacity; hydropower contributed ~70% of CPID’s FY10F earnings, per CPID. Its hydropower exposure, which is the largest among its peers, minimises the impact of coal price fluctuations and hands it power dispatch priority.
High portion from contract coal and honouring rate
Per CPID, the company has managed to secure 100% of its FY11F coal requirement through contracts. With a track record of high honouring rate of >90%, CPID expects its FY11F unit fuel cost will be ~5% higher than in FY10F, and in line with our assumption. CPID also mitigates the impact of future coal price fluctuations through investing in a JV for Chuanjing Coal Mine project and Digua Coal project (though any contribution will come in FY12-13F, at the earliest). Overall, only one coal-fired power plant in Hubei was at a loss in FY10F.
Parent asset injections may pave the way
The parent of CPID, CPI Corp had 16.2GW of hydropower assets and 1,350MW nuclear power as of FY09. Any parent asset injection or cooperation for hydro or nuclear power will shorten the long lead time for capacity growth, and further consolidate its hydro/clean energy play position among the IPPs.
Attractive valuation; upgrade to BUY
At HK$1.55, CPID is trading at 11.2x P/E and 0.6x P/B (vs peers of 0.6-1.4x) on our FY11 estimates, and a 21% below replacement cost. This also compares favourably with a pure hydropower play (Yangtze Power) at 14.4x P/E and 1.8x P/B. Despite it having the smallest market cap among peers, valuation is attractive (trading at P/B trough) given its high hydropower exposure and potential cooperation with parent. Upgrade to BUY with a revised PT of HK$2.00.
Key financials & valuations31 Dec (RMBmn) FY09 FY10F FY11F FY12F
Revenue 10,937 14,314 17,848 22,323
Reported net profit 519 613 706 748
Normalised net profit 519 613 706 748
Normalised EPS (RMB) 0.142 0.120 0.138 0.146
Norm. EPS growth (%) na (15.2) 15.2 5.8
Norm. P/E (x) 11.0 12.9 11.2 10.6
EV/EBITDA (x) 17.0 10.8 9.8 9.1
Price/book (x) 0.6 0.6 0.6 0.6
Dividend yield (%) 2.9 3.1 3.6 3.8
ROE (%) 5.1 4.9 5.4 5.6
Net debt/equity (%) 261.1 281.7 305.0 327.0
Earnings revisions
Previous norm. net profit 466 643 942
Change from previous (%) 31.5 9.8 (20.6)
Previous norm. EPS (RMB) 0.092 0.127 0.185
Source: Company, Nomura estimates
Share price relative to MSCI China
1m 3m 6m (3.1) (4.9) (6.6)
(3.2) (5.2) (6.8)
(2.8) (3.6) (13.8)
Easy
Source: Company, Nomura estimates
52-week range (HK$)
3-mth avg daily turnover (US$mn)
China Power International Holding
Stock borrowability
29.9
Major shareholders (%)
China Power Development 39.1
Absolute (HK$)
Absolute (US$)
Relative to Index
Estimated free float (%)
Market cap (US$mn) 1,016
31.0
1.94/1.51
0.59
1.4
1.5
1.6
1.7
1.8
1.9
2.0
Mar
10
Ap
r10
Ma
y10
Jun
10
Jul1
0
Au
g10
Se
p10
Oct
10
No
v10
Dec
10
Jan
11
Feb
11
707580859095100105
Price
Rel MSCI China(HK$)
Closing price on 4 Mar HK$1.55
Price target HK$2.00(from HK$1.70)
Upside/downside 29.2%Difference from consensus 10.6%
FY11F net profit (RMBmn) 706Difference from consensus 15.3%Source: Nomura
Nomura vs consensus We see the potential for a parent asset injection of hydro or nuclear assets, which we think the market has not looked at yet.
From Neutral
BUY
N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D
Action Being a significant hydropower player in the market with an advantage over its
peers (as it is less vulnerable to a coal price surge), we prefer CPID. Potential parent asset injections also pave the way for more hydropower or nuclear power exposure. Valuation looks attractive, trading at its P/B trough of 0.6x vs. pure hydro play of 1.8x. We upgrade to BUY on a revised PT of HK$2.00.
Catalysts Potential parent asset injections, including hydropower, and even nuclear power,
should provide the company a growth opportunity.
Anchor themes
Despite solid power demand backed by strong GDP growth, a surge in coal price, with heavily regulated power tariff and rising interest rates, has eroded IPPs’ profit margin. Negative on fundamentals but remain Neutral given undemanding valuations. A sector re-rating is contingent on a tariff reform, likely in 2014-15F.
Exhibit 116. China Power Investment Corp’s FY09 installed capacity mix
Thermal, 71%
Hydro, 25%
Nuclear1,350MW
2%
Wind, 885MW,
1%
16,235MW
45.571MW
Source: Company Data, Nomura research
China Power International Ivan Lee, CFA
11 March 2011 Nomura 76
Events calendar Month Major events
Jun 2010 On 11 June, 2010, CPID (51%) and Sichuan Provincial Investment Group (49%) agreed to increase the total investment amount and the registered capital on their joint venture company, Fuxi Power Plant, from US$29.8mn (some HK$232.4mn) to RMB968mn (approximately HK$1.11bn).
July 2010 On 28 July, 2010, CPID terminated the asset acquisition agreement entered with Qinghe Company involving the acquisition of the power plant under construction situated in Qinghe District, Tieling City, Liaoning.
December 2010 On 14 December, 2010, CPID announced the proposed issue of 3.2% RMB-denominated bonds (RMB800mn).
On 27 December, 2010, CPID (35%) formed a JV with Yong Chang Mei Dian (63%) and Provincial Investment Co (2%) to establish Digua Coal Industry to run the No.1 Digua Project.
On 27 December, 2010, CPID (76%) formed a JV with Yong Chang Mei Dian (15%) and Provincial Investment Co (9%) to establish Pu’an Power.
February 2011 The National Association of Financial Market Institutional Investors has approved Wu Ling Power’s application for the proposed issue of debentures totalling RMB1bn and will divided into two tranches.
Source: Company data
China Power International Ivan Lee, CFA
11 March 2011 Nomura 77
Company profile
Company profile Net profit trend (FY09-12F) Installed capacity (FY09-12F)
China Power International Development Limited (CPID)
was incorporated in Hong Kong in 2004 and is principally
engaged in investment holdings, the generation and sales
of electricity, and the development of power plants in
China. As of 30 June, 2010, CPID’s total attributable
installed capacity amounted to 11,777MW, of which the
hydropower installed capacity is approximately 2,497MW,
accounting for 21.2% of all attributable installed capacity,
resulting CPID with the highest percentage of hydro-
power installed capacity among China IPPs.
748
519
613706
0
200
400
600
800
1,000
2009 2010F 2011F 2012F
(200)
(150)
(100)
(50)
0
50
Net profit (LHS)
Growth (RHS)(RMBmn) (y-y %)
14,95816,458
17,45819,258
3,395
4,086
5,114
5,534
12,000
14,000
16,000
18,000
20,000
22,000
24,000
2009 2010F 2011F 2012F
Coal-fired hydro(MW)
Note: include capacity of associates
EBITDA margin vs Recurring net profit margin Forward P/B chart
0
10
20
30
40
2009 2010F 2011F 2012F
EBITDA margin
Recurring net profit margin
(y-y %)
1.25x
1.50x
1.75x
1.00x
0.75x
0.50x
1.01.52.02.53.03.54.04.55.05.56.0
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
Avg: 0.9x
SWOT analysis Attributable capacity by location (FY10E)
Location (MW) (%) Location (MW) (%)
Anhui 2,510 21.3 Hunan 1,969 16.7
Guizhou 688 5.8 Jiangsu 645 5.5
Henan 2,470 20.9 Shanxi 800 6.8
Hubei 1,190 10.1 Sichuan 23 0.2
Shanghai 1,514 12.8
Total 11,810
Geographical presence (based on total installed capacity)
Strength
- Among major IPPs, CPID has the highest exposure to
hydro power, which is immune to coal price fluctuation.
- CPID’s contract coal honoring rate is one of the highest
among peers, which allows CPID to minimise the
exposure to the spot coal market.
Weakness
- Geographic presence of CPID’s power plants in China is
limited with no significant presence in more economic
developed eastern coastal areas, which can enjoy higher
tariff.
Opportunity
- With the rising coal price, CPID will gain more
advantages over its IPP peers, who are weighed down by
their over reliance on coal-fired power.
- Any potential assets injections from parent will be an
opportunity for the company.
Threats
- Potential interest hikes, stagnant tariff with rising coal
price will squeeze the margin of the company.
> 5.0GW 1.0-5.0GW < 1.0GW
Province and Municipality covered: Anhui, Henan, Shanxi, Jiangsu, Hubei, Hunan, Shanghai
Quality play waiting for catalysts Coal costs under control
In FY10F, given only a 5-10% contract honour rate (with coal price, quality and volume staying the same as contracted), we estimate an 18.5% rise in unit fuel costs. Overall, only three power plants in Henan, Hunan and Jiangsu were at loss positions. FY11F unit fuel cost should be under control (up 5.6% before considering self-sufficient coal production), since 50mn tonnes (of annual coal consumption of 65mn tonnes) have been sourced under contract (key: 40mn tonnes and non-key: 10mn tonnes). In addition, with the ramp-up in coal production from Lvliang and Taiyuan, we expect CRP can produce 15-24mn tonnes, ie a 20-30% self-sufficiency ratio in FY11-12F. By FY15F, CRP targets reaching a 50% coal self-sufficiency ratio.
Rising wind power in the generation mix
Apart from coal asset investment, CRP targets spending RMB4.8-6.5bn to add 800MW of wind power capacity every year to minimise exposure to coal price fluctuation. Management targets achieving at least an ROE of 12% for its wind power assets.
Capacity expansion on comfortable gearing
CRP targets some RMB15-18bn for FY11F capex, with one-third each to coal assets, renewable energy and thermal power. Despite the substantial capex to be incurred, net gearing is expected to stay at a comfortable level of 150-160%, vs the peer average of 348%.
Valuation undemanding; but lacks catalyst
CRP trades at 10.2x P/E and 1.4x P/B on our FY11F estimate (vs the sector range of 10.2-17.5x (ex-Huadian) and 0.6-1.4x, respectively). We value its coal assets at HK$5.10/share. This implies its power portfolio is a very low 9.9x P/E and 1.1x P/B on FY11F. Despite undemanding valuation amid superior ROE, the stock lacks near-term catalysts, in our view; we downgrade to NEUTRAL on a PT of HK$14.94.
Key financials & valuations31 Dec (HK$mn) FY09 FY10F FY11F FY12F
Revenue 33,214 47,182 62,533 76,736
Reported net profit 5,317 5,037 6,062 8,003
Normalised net profit 5,317 5,037 6,062 8,003
Normalised EPS (HK$) 1.19 1.07 1.28 1.70
Norm. EPS growth (%) 194.3 (10.2) 19.9 32.0
Norm. P/E (x) 11.2 12.3 10.2 7.7
EV/EBITDA (x) 9.7 9.3 8.0 6.7
Price/book (x) 1.6 1.5 1.4 1.2
Dividend yield (%) 2.9 2.7 3.3 4.3
ROE (%) 16.4 12.8 14.1 16.8
Net debt/equity (%) 133.6 150.4 165.4 172.9
Earnings revisions
Previous norm. net profit 4,604 5,466 5,625
Change from previous (%) 9.4 10.9 42.3
Previous norm. EPS (HK$) 0.98 1.17 1.20
Source: Company, Nomura estimates
Share price relative to MSCI China
1m 3m 6m (4.8) (8.4) (23.4)
(4.8) (8.7) (23.6)
(4.5) (7.1) (30.5)
Hard
Source: Company, Nomura estimates
7,926
35.6
17.76/12.52
11.51
Absolute (HK$)
Absolute (US$)
Relative to Index
Estimated free float (%)
Market cap (US$mn)
2.1
Major shareholders (%)
Finetex International Ltd 64.1
52-week range (HK$)
3-mth avg daily turnover (US$mn)
First State Investments
Stock borrowability
111213141516171819
Mar
10
Apr
10
May
10
Jun
10
Jul1
0
Aug
10
Sep
10
Oct
10
Nov
10
De
c10
Jan1
1
Feb
11
60
70
80
90
100
110
120
Price
R el MSCI China(HK$)
Closing price on 4 Mar HK$13.08
Price target HK$14.94(f rom HK$18.90)
Upside/downside 14.3%Difference from consensus -17.3%
FY11F net profit (HK$mn) 6,062Difference from consensus 1.5%Source: Nomura
Nomura vs consensus We are conservative in that we factor in a lower self-coal production than management’s target.
From Buy
NEUTRAL
N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D
Action CRP targets raising its wind portfolio by 800MW every year, and investing in more
coal assets to raise its self-sufficiency ratio. We expect to see a more balanced and diversified portfolio of power assets for CRP, and see its ROE spread against peers increasing. However, given the lack of near-term catalysts, we downgrade CRP to NEUTRAL, with a revised PT of HK$14.94, or upside potential of 14.3%.
Catalysts Ramp-up of coal production volume in Shanxi once production licences are
granted.
Anchor themes
Despite solid power demand backed by strong GDP growth, a surge in coal price, with heavily regulated power tariff and rising interest rates has eroded IPPs’ profit margin. Negative on fundamentals but remain Neutral given undemanding valuations. A sector re-rating is contingent on a tariff reform, likely in 2014-15F.
China Resources Power Ivan Lee, CFA
11 March 2011 Nomura 81
Drilling down
Events calendar Month Major events
January 2010 From 8-14 January, 2010, China Resources Power Investment Co Ltd, a wholly-owned subsidiary of CR Power, completed a RMB3.8bn up to 10-year corporate bond issue, proceeds of which will be used to invest in power projects, repay debts and supplement working capital.
On 21 January, 2010, the first 600MW coal-fired heat and power co-generation unit of CR Nanjing Thermal Plant passed a 168-hour full-load pilot run and commenced commercial operation. CR Power wholly owns the plant.
Twelve units of 2MW wind turbine generators in Shandong Penglai Xujiaji Wind Farm commenced commercial operation. CR Power owns a 95% equity interest.
February 2010
China Resources Power Investment entered into an Acquisition Agreement with Jiaozuo Electricity Group Co Ltd. in relation to an acquisition of a 40% equity interest in Jiaozuo Thermal Plant, for a consideration of RMB58,018,500 (approximately HK$65,930,114). The acquisition enables CR Power to increase its shareholding in Jiaozuo Thermal Plant to 100%.
CR Huilai Guanshan Wind Farm commenced commercial operation with an installed capacity of 49.6MW. The wind farm comprises 23 units of 2MW and 2 units of 1.8MW wind turbine generators. CR Power wholly owns the wind farm.
April 2010 On 9 April, 2010, CR Power Logistics, a non-wholly owned subsidiary of CR Power, has entered into a Master Coal Supply Agreement with CR Cement Investments, a wholly-owned subsidiary of China Resources Cement Holdings Limited. Pursuant to the Master Coal Supply Agreement, CR Power Logistics has agreed to supply coal to CR Cement Investments (on behalf of certain subsidiaries of CR Cement which are engaged in the production of clinker in the PRC) on a continuing basis for a term from 9 April, 2010, to 31 December, 2012.
May 2010 Shenzhen Nanguo Energy Co Ltd, a wholly owned subsidiary of CR Power, has entered into an Acquisition Agreement with Liulin Liansheng Energy Investment Co Ltd on 11 May, 2010. Pursuant to the Acquisition Agreement, Shenzhen Nanguo has agreed to acquire from Liulin Liansheng an 8% equity interest in Shanxi CR Liansheng for a consideration of RMB354mn. CR Liansheng is a joint venture company currently owned by Shenzhen Ruihua Energy Investment Co Ltd. (a 74.14%-owned subsidiary of Shenzhen Nanguo) as to 58% and by Liulin Liansheng as to 42%.
Four units of 2MW and 7 units of 1.8MW wind turbine generators in Shandong Penglai Xujiaji Wind Farm commenced commercial operation. CR Power owns a 95% equity interest.
June 2010 On 22 June, 2010, the first 1,000MW ultra super critical coal-fired generation unit of Xuzhou Power Plant Phase III has successfully passed a 168-hour full load pilot run, and commenced commercial operation. The plant is fully equipped with environmental facilities, including desulphurization and denitration facilities. CR Power owns an effective 59.86% equity interest.
CR Bayinxile Wind Farm commenced commercial operation. It has a total installed capacity of 49.5MW and comprises 33 units of 1.5MW wind turbine generators. CR Power wholly owns the wind farm.
CR Yangxi Longgaoshan Wind Farm, CR Penglai Daliuhang Wind Farm phase I and CR Weihai Economic and Technical Development Zone (“ETD Zone”) Wind Farm phase I obtained approval for construction. The three wind farms have total installed capacity of 49.3MW, 49.8MW and 49.8MW, respectively. CR Power wholly-owns the three wind farms.
July 2010 CR Power successfully priced its inaugural international US$ senior notes offering with an aggregate principal amount of US$500mn which will mature after 5 years. The Notes are rated Baa3 (stable) and BBB (stable) by Moody’s and S&P, respectively. The Notes will pay an annual fixed rate coupon of 3.75% and will be listed on the Hong Kong Stock Exchange.
August 2010 On 26 August, 2010, CRM (Wuxi), a wholly-owned subsidiary of CR Microelectronics entered into the Direct Power Supply Agreement with CRP (Changshu), a wholly-owned subsidiary of CR Power, pursuant to which CRP (Changshu) agreed to supply and CRM (Wuxi) agreed to purchase electricity on a continuing basis for a period of one year from 1 October, 2010, to 30 September, 2011.
November 2010 On 16 November, 2010, CR Power successfully issued RMB2bn in offshore corporate bonds. Issuance is divided into two tranches: 3-year and 5-year, each with issue size of RMB1bn, and coupon rates fixed at 2.9% and 3.75%, respectively. Proceeds will be used to invest in the development and expansion of power generation projects and supplement general working capital.
Source: Company data
China Resources Power Ivan Lee, CFA
11 March 2011 Nomura 82
Company profile
Company profile Net profit trend (FY09-12F) Installed capacity (FY09-12F)
China Resources Power (CR Power) is a fast-growing
independent power producer that invests, develops,
operates and manages power plants and invests,
operates and manages coal mine projects in the more
affluent regions with abundant coal resources in China.
As at November 2010, CR Power had 48 power plants in
commercial operation. The total attributable operational
generation capacity of CR Power is 18,962 MW, with 44%
located in Eastern China, 19% located in Southern China,
20% located in Central China, 12% located in Northern
China, and 5% located in Northeastern China.
5,3176,062
8,003
5,037
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2009 2010F 2011F 2012F
(50)
0
50
100
150
200
250
(% y-y)Net profit (LHS)
Growth (RHS)
(RMBmn)
26,885
32,55034,804
30,085
470
470
210
210
1,765
965
636
255
20,000
23,000
26,000
29,000
32,000
35,000
38,000
2009 2010F 2011F 2012F
Coal Fired Hydro
Wind
(MW)
EBITDA margin vs Recurring net profit margin Forward P/B chart
0
10
20
30
40
2009 2010F 2011F 2012F
EBITDA margin
Recurring net profit margin
(% y-y)
1.5x
2.0x
2.5x
3.0x
1.0x
5
10
15
20
25
30
35Ja
n-07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
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0
Jan-
11
Price (HK$)
Avg: 2.0x
3.5x
SWOT analysis Attributable capacity by location (FY10E)
Location (MW) (%) Location (MW) (%)
Jiangsu 8,592 41.5 Hubei 600 2.9
Guangdong 3,906 18.9 Anhui 704 3.4
Henan 2,495 12.1 Yunnan 147 0.7
Liaoning 925 4.5 Beijing 77 0.4
Hebei 1,766 8.5 Hunan 600 2.9
Shandong 137 0.7 Zhejiang 240 1.2
Inner Mongolia 500 2.4
Total 20,689
Geographical presence (based on total installed capacity)
Strength
– Strong balance sheet with relatively lower gearing ratio
among the IPPs.
– Strategic focus on high-growth provinces, which allows
the company to enjoy solid longer-term growth in line with
China’s economic development.
– Good management team with effective cost control.
Weakness
– Traditional power provider with coal-fired generation
orientated, margin subject to coal price fluctuation.
Opportunity
– Further investments in clean and renewable energy
projects as well as coal mine investments could help to
optimise the fuel mix structure and make the company
less vulnerable to coal price fluctuation.
Threats
– Potential interest hikes, stagnant tariff with rising coal
price could squeeze the company’s margins.
> 5.0GW 1.0-5.0GW < 1.0GW
Provinces and Municipality covered: Jiangsu, Guangdong, Henan, Hebei, Liaoning, Shandong, Inner Mongolia, Hunan, Hubei, Anhui, Yunnan, Beijing and Zhejiang.
With rising coal prices in 2010, ~one-third of Datang’s power plants have started making losses, especially those located in inner Western areas of China, such as Shanxi and Jiangxi Provinces, etc. This situation will likely continue, given our expectation of rising coal prices. With Datang’s contract/spot mix of ~50%/50%, we estimate a 5.7% increase in FY11F unit fuel cost for the company, reflecting our expectation of higher total costs.
Delay in coal-chemical project
The Duolun coal-to-chemical project has been delayed; it is currently in the final trial stage, with the commencement date yet to be confirmed. Management is still positive on the profitability of the project, given the current PRC polypropylene price of RMB12,160/ tonne, vs the company’s estimated production cost of RMB7,000/ tonne. Currently, all pre-operating expenses (eg, interest, labour etc) and capex of the coal-to-chemical project are capitalised into “Construction in progress”. The risk is if the project commences operation, these items, including depreciation, would be expensed during the year. Thus, we expect the project would report losses for the first two years of operation, which would drag down Datang’s overall earnings. We have not factored this into our forecast, owing to uncertain timelines for production and the execution risks involved.
Datang’s A-share issue has been approved
CSRC has granted approval for Datang to issue <1bn A-shares, with a floor price of RMB6.74/share. The proceeds will mainly be used to fund two coal-to-gas projects, Ningde nuclear and for loan repayment. The potential A-share issuance will relieve part of Datang’s high gearing pressure amid a rising interest rate environment.
Key financials & valuations31 Dec (RMBmn) FY09 FY10F FY11F FY12F
Revenue 47,943 61,711 72,324 81,664
Reported net profit 1,612 2,551 1,898 2,494
Normalised net profit 1,612 2,551 1,898 2,494
Normalised EPS (RMB) 0.14 0.21 0.15 0.20
Norm. EPS growth (%) 114.6 54.8 (27.2) 31.4
Norm. P/E (x) 19.7 12.7 17.5 13.3
EV/EBITDA (x) 11.2 10.1 10.6 9.4
Price/book (x) 1.2 1.1 1.0 1.0
Dividend yield (%) 2.7 3.5 2.6 3.4
ROE (%) 6.1 8.9 6.0 7.6
Net debt/equity (%) 499.6 484.6 516.9 542.8
Earnings revisions
Previous norm. net profit 1,560 2,045 1,801
Change from previous (%) 63.5 (7.2) 38.5
Previous norm. EPS (RMB) 0.132 0.164 0.144
Source: Company, Nomura estimates
Share price relative to MSCI China
1m 3m 6m (2.2) (8.5) (15.6)
(2.2) (8.8) (15.8)
(1.9) (7.1) (22.8)
Hard
Source: Company, Nomura estimates
4,267
85.5
3.72/2.59
3.66
Absolute (HK$)
Absolute (US$)
Relative to Index
Estimated free float (%)
Market cap (US$mn)
Major shareholders (%)
China Datang Overseas Investment 14.5
52-week range (HK$)
3-mth avg daily turnover (US$mn)
Stock borrowability
2.42.62.83.03.23.43.63.8
Mar
10
Ap
r10
Ma
y10
Jun
10
Jul1
0
Au
g10
Se
p10
Oct
10
No
v10
Dec
10
Jan
11
Feb
11
60
70
80
90
100
110
Price
Rel MSCI China(HK$)
Closing price on 4 Mar HK$2.70
Price target HK$2.79(from HK$3.10)
Upside/downside 3.5%Difference from consensus -11.0%
FY11F net profit (RMBmn) 1,898Difference from consensus -20.9%Source: Nomura
Nomura vs consensus We have not factored in the earnings impact of the coal-chemical projects, pending further details from the company.
Maintained
NEUTRAL
N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D
Action The Duolun coal-chemical project has been delayed again, lifting uncertainty over
potential earnings growth from the non-power business. However, the A-share issuance recently approved by CSRC will aid in the financing of new projects and lower gearing. We reiterate our NEUTRAL rating pending greater visibility on the coal-chemical projects and cut our PT to HK$2.79 on the lack of catalysts.
Catalysts Any contribution from the coal-chemical and coal-to-gas projects will provide upside
to our estimates.
Anchor themes
Despite solid power demand backed by strong GDP growth, a surge in coal price, with heavily regulated power tariff and rising interest rates has eroded IPPs’ profit margin. Negative on fundamentals but remain Neutral given undemanding valuations. A sector re-rating is contingent on a tariff reform, likely in 2014-15F.
Datang International Power Ivan Lee, CFA
11 March 2011 Nomura 86
Maintain NEUTRAL, pending catalysts
We value Datang’s coal assets at HK$3.7 per share; this implies its power portfolio is sold for
“free”, in our view. Datang is expected to have the highest coal production (45mn tonnes) and coal self-sufficiency (26%) in 2011F among listed IPPs. It also aims to increase its coal self-sufficiency to 50% by 2015F. However, given its less-than-proven execution track record, we reiterate our NEUTRAL rating pending greater visibility on the coal-
chemical projects.
Datang International Power Ivan Lee, CFA
11 March 2011 Nomura 87
Drilling down
Diversification into emerging industry Datang Power has pioneered the diversification into the emerging industries of “coal-to-chemical” and “coal-to-gas” on: 1) China’s abundant coal reserves; 2) high international oil prices, and; 3) strong governmental support for cleaner energy use. In our current valuation of the company, we have not factored in these chemical-transformation projects due to uncertain timelines for full-scale production and the execution risks involved. We await more operating data to reveal the actual performance and profitability, but we identify strong growth and upside potential in the long term with these projects under development.
Coal-to-chemical: when can it start contributing?
Delay of Duolun coal-to-chemical project
The Duolun coal-to-chemical project was originally scheduled to begin trial production by end-FY09, with commercial operation to begin by end-FY10. According to Datang, the project is only in the final trial stage and the actual commencement date of the project remains undecided. Once the project starts commercial operation and achieves 100% plant utilisation, it will achieve an annual production capacity of 460,000 tonnes of polypropylene with coal consumption of ~8mn tonnes pa, based on Datang’s estimates.
Management remains positive on the profitability of the project, given the current PRC polypropylene price of RMB12,160/tonne, vs the company’s estimated production cost of RMB7,000/tonne, which we estimate will comfortably yield a net profit margin of about 30% in the long term. However, we think the project could still be subject to further delays and execution risks and uncertainty over product pricing in the future.
Coal-chemical project: a potential new profit catalyst
Based on our conservative assumptions (including polypropylene sold at RMB10,500/tonne and long-term production costs of RMB7,000/tonne), we derive an NPV of HK$0.32 for the Duolun project.
We see possible upside to this estimate, since:
We only assume a polypropylene ASP of RMB10,500/tonne during FY11-21F (versus the current RMB12,160/tonne in China) for the Duolun project (production capacity of 460,000 tonne pa). We expect rising crude oil prices will potentially prompt a further increase in polypropylene prices in the coming years, since historical data show that polypropylene prices are strongly correlated with crude oil prices (+0.66 for 2005-10). With our oil & gas team’s Tatufumi Okoshi forecasting that WTI price will reach US$99/bbl in 2012F (up 37% from 2010), we believe polypropylene prices in China could reflect at least a moderate increase from the current level of RMB12,160/tonne when production is fully ramped up in the next few years.
We assume that by-products naphtha and LPG account for only 50% of the designed output; management guided for full output of 180,000 tonne for naphtha and 38,000 tonne for LPG pa.
However, we have not factored this project into our estimate, given that the timeline for full-scale production is still uncertain, and Datang does not have a track record and expertise in running such projects, which raises the execution risks for the project.
Datang leveraged into cleaner fuel, but concerns remain over execution due to various delays on projects
Exhibit 119. Polypropylene prices in China Exhibit 120. Crude Oil Price (WTI Spot Price)
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Jan-
06
Jul-0
6
Jan-
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9
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(RMB/ton)
Currently at RMB12,160/ton
20
40
60
80
100
120
140
Jan-
06
Jul-0
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Jan-
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8
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09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
(US$/bbl)Currently at
US$102.23/bbl
Source: CEIC, Nomura research Source: EIA and Bloomberg, Nomura research
Sensitivity analysis
We have performed sensitivity analysis of the Duolun project’s NPV to changes in the selling price of polypropylene, plant utilisation, cost of capital and terminal growth rate.
Exhibit 121. Duolun project’s NPV over (1) polypropylene prices and (2) plant utilisation
Long-term average selling price of polypropylene in China starting FY12F (RMB/tonne)
Coal-to-gas projects are under construction Currently, only seven coal-to-gas projects have been approved by the NDRC in China, two of which are obtained by Datang Power. Both Datang’s Keshiketeng coal-to-gas project (transforming coal to natural gas for Beijing, in a joint venture with Beijing Enterprises Holdings), and the Fuxin coal-to-gas project (which obtained NDRC approval in March 2010) are currently under construction and the company expects Phase I of both projects to commence operation by 2013.
At present, the gas price is still under discussion. Given the limited progress on these two projects and the risks associated with execution, we have not factored them into our current forecasts. Based on our preliminary calculation, we estimate the NPV of Datang’s coal-to-gas projects at HK$0.39/share. Again, as in the case of the coal-to-chemical project, we have not factored the coal-to-gas project into our estimate, given the timeline for full-scale production is still uncertain, and Datang does not have any track record and expertise in running the projects, which raises execution risks for the project.
Exhibit 123. Datang’s coal-to-gas projects
Projects Investment
(RMBbn) Raw coal
requirement (mn ton) Natural gas
output (bcm)Est. start of
operationStake
(%) Pipeline (km)
Keshiketeng 25.7 20.0 4.0 2013F 51 359km to Beijing
Fuxin 24.6 20.0 4.0 2013F 100 334km to Shenyang, Tieling, Fushun, Benxi and Fuxin
50.3 28.0 8.0
Source: Nomura research
Short-term pressure on earnings; depreciation charge will kick in after project commencement
Although we expect long-term earnings contribution from the coal-to-chemical and coal-to-gas projects, we expect a short-term negative impact on the company’s earnings once the projects commence operations, given depreciation charges will kick in with little revenue contribution at the start of the projects. We expect to see pressure on Datang’s earnings once the projects commence operation, in approximately FY13F.
Datang International Power Ivan Lee, CFA
11 March 2011 Nomura 91
Events calendar Month Major events
January 2010 On 31 December, 2009, Datang Power agreed to acquire 100% equity interest in Yuneng Group for a total consideration of RMB1,345mn.
March 2010 On 23 March, 2010, Datang Power completed the non-public issue of 530mn A-shares at an issue price of RMB6.23 per share.
On 26 March, 2010, the NDRC approved the Fuxin coal-based natural gas project and approved Datang Energy and Chemical Co Ltd, a wholly-owned subsidiary of Datang Power, investing a controlling interest in the construction of the Fuxin coal-based natural gas project involving a total investment of RMB24.57bn, of which RMB7.37bn is the capital of the project.
April 2010 On 30 April, 2010, Datang Power changed its depreciation accounting policy with changes made to the estimated useful lives and estimated net salvage values of fixed assets.
May 2010 Datang Power proposed to issue <1bn A-shares by way of a non-public issue on 25 May, 2010. The shares will be issued to no more than 10 qualified investors at the issue price of no less than RMB6.81.
June 2010 By 21 June, 2010, China Datang Corporation had completed a “share purchase plan” and increased its holdings in Datang Power by 1.998%.
November 2010 The Sichuan Daduhe Changheba Hydropower Station Project, which is controlled, organised and constructed by Datang Power, was approved by the NDRC. The station is designed to be equipped with 4x650MW radial-axial flow hydroturbine units with a total capacity of 2,600MW.
December 2010 Datang Power received approval from the CSRC for the non-public offering of <1bn new shares.
January 2011 Phase I of Liaoning Xudabao Nuclear Power Project, in which Datang International Power Generation Co Ltd has a 20% investment interest, was approved by the NDRC for commencement of preliminary work.
The company issued an announcement, with estimated profit to increase by more than 50% as compared to 2009, due to the decrease in fixed costs from changes in accounting estimates of fixed assets, an increase in installed capacity, an improvement in power generation structure and increase in the non-power businesses of the company.
Source: Company data
Datang International Power Ivan Lee, CFA
11 March 2011 Nomura 92
Company profile
Company profile Net profit trend (2009-12F) Installed capacity (2009-12F)
Datang International Power Generation Co Ltd (Datang
Power) is dual-listed in HK (991HK) and China (601991
CH). It develops and operates power plants, and is
engaged in the sale of electricity and thermal power. At
present, Datang Power manages over 50 power
generation companies (including those it wholly owns or
in which it has a controlling interest). Datang Power’s
attributable installed capacity was about 25,627MW by
end-FY10. Besides power generation, Datang Power has
also expanded into coal-to-chemical and coal-to-gas
projects.
1,612
2,551
1,898
2,494
0
500
1,000
1,500
2,000
2,500
3,000
2009
2010
F
2011
F
2012
F
(40)
(20)
0
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40
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80
100
120
140
(% y-y )Net profit (LHS)
Growth (RHS)
(RMBmn)
37,88135,594
32,01027,070
3,985
3,855
3,382
3,855
601
435
290
435
1,000
25,000
28,000
31,000
34,000
37,000
40,000
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46,000
2009 2010F 2011F 2012F
Coal-fired Hydro
Wind Nuclear(M W)
EBITDA margin vs Recurring net profit margin Forward P/B chart
0
10
20
30
40
2009 2010F 2011F 2012F
EBITDA margin
Recurring net profit
(% y-y)
1.5x
2.0x
2.5x
3.0x
2
4
6
8
10
12Ja
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7
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08
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11
Price (HK$)
Avg: 1.6x
1.0x
SWOT analysis Attributable capacity by location (FY10F)
Location (MW) (%) Location (MW) (%)
Beijing 600 2.4 Zhejiang 1,224 4.9
Tianjin 900 3.6 Jiangxi 440 1.8
Hebei 6,717 26.7 Guangdong 2,400 9.6
Shanxi 2,699 10.7 Yunnan 1,530 6.1
Inner Mongolia 3,036 12.1 Gansu 330 1.3
Ningxia 540 2.1 Chongqing 1,021 4.1
Liaoning 699 2.8 Jiangsu 1,452 5.8
Fujian 1,387 5.5 Qinghai 152 0.6
Total 25,127
Geographical presence (based on total installed capacity)
Strength
- Relatively high coal self-sufficiency ratio when compared
to peers since Datang Power has been pioneering coal-
mine investments since FY06.
Weakness
- High gearing.
- No track record in running coal-chemical / coal-gas
projects.
Opportunity
- The development and construction of Duolun Coal
Chemical Project will be a new profit growth point.
- Pioneering coal-to-gas projects may offer a competitive
advantage. Only seven coal-to-gas projects were
approved by NDRC nationwide in China so far and two of
them were obtained by Datang Power.
Threats
- Potential interest hikes, stagnant tariff with rising coal
price will squeeze the company’s margin.
- Further delays in coal-chemical project.
- Further potential issuance of <1 bn A-shares in FY11F.
In spite of a reducing gearing ratio and interest burden,
the issuance gives potential EPS dilution impact.
> 5.0GW
1.0-5.0GW
< 1.0GW
Provinces and Municipality covered: Beijing, Chongqing, Fujian, Gansu, Guangdong, Hebei, Inner Mongolia, Jiangsu, Jiangxi, Liaoning , Ningxia, Qinghai, Shanxi, Tianjin, Yunan and Zhejiang
Source: Company data, Nomura research
Datang International Power Ivan Lee, CFA
11 March 2011 Nomura 93
Financial statements
Earnings expected to increase by more than 50% compared to prior year, released by the company as a preliminary estimate
Distressed valuation warranted with weak fundamentals
Profit warning of >50% earnings decline in FY10F
Huadian announced a profit warning of >50% earnings decline in FY10F, mainly due to a significant increase in fuel costs. This announced estimate actually is better than consensus, which is looking for a loss of RMB290mn for FY10F. However, we continue to expect a profit mainly due to some one-off items, including a ~RMB463mn gain from the disposal of Huadian Coal and Fuxin Energy during end-2010. From a recurring profit perspective, we still expect a weak performance for the company in FY10F. The company stated that the power plants in Anhui, Henan and Shandong, which account for >50% of its total attributable capacity, are loss-making at present. As for FY11F, we maintain our bearish view on the company’s fundamentals, as benefits from higher utilisation will likely be more than offset by rising coal prices (we factor in a 7.1% unit fuel cost increase) and a 1% interest rate hike.
Limited benefits on coal price cap; expect more on coal assets contribution
Despite the key contract price cap announced by the NDRC, we see limited benefits for Huadian. According to the company, it has already contracted 80% of its FY11 coal requirement. However, only 20% of the contract coal represented an annual contract, whereas the remaining is linked to the spot market, on which prices are reset monthly / quarterly. In addition, given the main geographical locations of Huadian’s power plants (Shandong, Anhui and Henan), which source coal either from local mines or Shanxi, the coal price is normally higher than the national average. With a target to hedge against coal price fluctuation, the company is actively seeking upstream coal investments, which includes the recent acquisition of three coal mines in Shanxi at end-2010. Management targets to improve its coal self-sufficiency ratio from only 5% in FY10 to 30% in FY13F.
Key financials & valuations31 Dec (RMBmn) FY09 FY10F FY11F FY12F
Revenue 36,450 44,781 53,317 61,982
Reported net profit 1,157 545 19 550
Normalised net profit 1,157 545 19 550
Normalised EPS (RMB) 0.192 0.081 0.003 0.081
Norm. EPS growth (%) na (58.1) (96.6) 2,863.0
Norm. P/E (x) 8.2 19.5 573.2 19.3
EV/EBITDA (x) 9.2 11.5 10.5 8.7
Price/book (x) 0.7 0.6 0.6 0.6
Dividend yield (%) 2.5 1.1 0.1 1.6
ROE (%) 8.4 3.3 0.1 3.3
Net debt/equity (%) 426.0 466.8 518.4 544.3
Earnings revisions
Previous norm. net profit 683 709 437
Change from previous (%) (20.1) (97.4) 25.8
Previous norm. EPS (RMB) 0.107 0.105 0.064
Source: Company, Nomura estimates
Share price relative to MSCI China
1m 3m 6m (3.7) (4.8) (15.1)
(3.7) (5.1) (15.3)
(3.4) (3.5) (22.3)
Hard
Source: Company, Nomura estimates
52-week range (HK$)
3-mth avg daily turnover (US$mn)
Deutshe Bank AG
Stock borrowability
4.9
Major shareholders (%)
China Huadian Corp 6.0
Absolute (HK$)
Absolute (US$)
Relative to Index
Estimated free float (%)
Market cap (US$mn) 1,365
94.0
2.22/1.46
1.05
1.3
1.5
1.7
1.9
2.1
2.3
Mar
10
Ap
r10
Ma
y10
Jun
10
Jul1
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Au
g10
Se
p10
Oct
10
No
v10
Dec
10
Jan
11
Feb
11
50
60
70
80
90
100
110
Price
Rel MSCI China(HK$)
Closing price on 4 Mar HK$1.57
Price target HK$1.62(from HK$1.80)
Upside/downside 2.9%Difference from consensus -3.9%
FY11F net profit (RMBmn) 18.55Difference from consensus -89.0%Source: Nomura
Nomura vs consensus Despite a profit warning of >50% earnings decline in FY10F, we expect profits owing to some one-off items, but expect to see a weak performance on recurring basis.
Maintained
NEUTRAL
N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D
Action We expect a weak operating performance for FY10-12F, given its high leverage to
rising coal prices and interest rate hikes. Nevertheless, we see limited downside potential given its distressed valuation (trading at an historical low P/B of 0.6x on FY11F). Also, Huadian should see the highest upside from the expected tariff hike in July 2011F. Remain NEUTRAL, but revise our PT to HK$1.62 from HK$1.80.
Catalysts Huadian may enjoy the fastest rebound in the financial performance on a sector
recovery, in our view, given its high sensitivity to coal price and interest rate hikes.
Anchor themes
Despite solid power demand backed by strong GDP growth, a surge in coal price, with heavily regulated power tariff and rising interest rates has eroded IPPs’ profit margin. Negative on fundamentals but we remain Neutral given undemanding valuations. A sector re-rating is contingent on a tariff reform, likely in 2014-15F.
Huadian Power International Ivan Lee, CFA
11 March 2011 Nomura 96
Distressed valuation warranted, in our view
Huadian is trading at an historical low of 0.6x P/B on our FY11F estimates. We believe the distressed valuation is warranted, due to its leverage to rising coal prices and interest rate hikes. Having said that, we see limited downside potential from the current level as we believe the above factors are already reflected in the share price. Also, its coal assets alone are worth HK$0.8/share, according to our calculation. This implies its power asset is trading at 18% below replacement cost (Rmb3.5/MW). In addition, the company is expected to have the highest upside potential from the possible tariff hike, likely in July 2011F. We reaffirm our NEUTRAL stance with a revised DCF price target of HK$1.62 from HK$1.80.
Huadian Power International Ivan Lee, CFA
11 March 2011 Nomura 97
Events calendar
Month Major events
January 2010 The 99 MW wind power generating units of Yihetala Project Phases I & II of Kailu Wind Power Company commenced power generation on 31 January 2010.
The two 1,000MW generating units of Shandong Laizhou Project were approved by the NDRC on 19 January 2010.
March 2010
The 12MW wind power generating units of Phases I & II Expansion Project of Ningdong Wind Power Company commenced power generation on 1 March 2010.
The 49.5MW wind power generating units of Yueliangshan Project in Xiji County, Ningxia were approved on 1 March 2010.
Three 65MW hydroelectric generating units of Za-gunao Hydroelectric Company completed the 72-hour trial operation at full loaded capacity as required by the State on 17 March 2010.
April 2010 The 201MW wind power units out of the 300MW wind power units of Beiqinghe Project of Kailu Wind Power Company in Tongliao commenced power generation as at 1 April 2010.
The 49.5MW wind power generating units of Phase III of Ningdong Wind Power Company were approved on 2 April 2010.
On 28 April 2010, Huadian Power acquired a 84.31% equity interest in Century Power at an adjusted consideration of RMB2,124mn.
May 2010 The 10MW solar power generating units of Shangde solar Company commenced production on 1 May 2010.
The second 300MW heat-power co-generating unit of Luohe Company completed the 168-hour trial operation at full-loaded capacity as required by the State on 29 May 2010.
On 20 May 2010, Huadian Power purchased 100% equity interest in Pingshi Power Company (75% from Haiyue Power and 25% from Jinda Power). The adjusted consideration of the transaction was RMB656mn.
June 2010 On 30 June 2010, the generating units and relevant equipment of Pingshi Power Company were mortgaged to secure its loans amounting to RMB2,067mn.
August 2010 Huadian acquired 20% equity interest in Manghatu Coal Mine and 35% equity interest in Heiliang Coal Mine at a consideration of RMB569.7237mn.
September 2010 Huadian Power (75%) and SITC (25%) agreed to form a joint venture company, located in Laizhou City of Shandong Province, which will be primarily engaged in the investment, construction, operation and management of the 2x1,000MW coal-fired generation units of Shandong Laizhou Project Phase I.
November 2010 The 49.5MW wind power generation unit of the Yuzhou Huanghualiang wind farm invested by Hebei Huarui Energy was approved by the Hebei DRC. Total investment for the project amounted to RMB462mn which involves a planned installation of 33 sets of 1.5MW wind power generation units.
The 49.5MW wind power generation unit of the Zhenjiawan wind farm invested by Hebei Huarui Energy was approved by the Hebei DRC. Total investment for the project amounted to RMB455mn which involves a planned installation of 33 sets of 1.5MW wind power generation units.
On 26 November 2010, Maohua Company, a wholly owned subsidiary of Huadian Power entered into a agreement to acquire the lawful mining rights to the Jinneng Erpu Coal Mine from Jinneng Company at a total consideration of RMB526.5mn
December 2010 On 6 December 2010, Huadian Power announced receipt of approval on several wind power generation projects with an aggregate capacity of 247.5MW.
On 9 December 2010, Maohua Company entered into an agreement with Bailu Company, XijiaZhai Company and Yibanling Company to acquire the lawful mining rights to the Bailu Coal Mine, Yibanling Coal Mine and Xijiazhan at considerations of Rmb550mn, Rmb239mn and Rmb800mn, respectively
On 29 December 2010, Huadian Power disposed of 3.3% and 2.46% equity interests in Huadian Coal and Fuxin Energy for a consideration of RMB462mn and RMB254.61mn, respectively
January 2011 The first unit of the Phase II Project (2×1,000 MW ultra-supercritical air cooling units) of Huadian Ningxia Lingwu Power Generation Company Limited, in which Huadian Power holds 65% equity interest, commenced commercial operations 1 January 2011.
The company issued a profit warning regarding its annual result for the year 2010, looking for a decrease of more than 50% y-y due to the sharp increase in fuel costs as a result of rising coal prices.
February 2011 The 49.5MW wind power project in Phase II of Huadian Ningxia Yueliangshan Wind Power Co Limited and 49.5MW wind power project in Phase I of Haiyuan Wuyuan Wind Power Plant was approved by the Ningxia Development and Reform Commission. The total investment of the projects will not exceed Rmb417.42mn and Rmb480mn, respectively.
Huadian Inner Mongolia Kailu Wind Power Co Ltd. has commenced operation of a 99MW wind power generating unit for its Tongliao Beiqinghe wind power project.
Source: Company data
Huadian Power International Ivan Lee, CFA
11 March 2011 Nomura 98
Company profile
Company profile Net profit trend (2009-12F) Installed capacity (2009-12F)
Huadian Power International Corporation Limited
(Huadian Power) is listed in HK (1071HK) and China
(600027CN). It is primarily engaged in the generation of
electricity and heat.
Huadian Power was incorporated in Jinan, Shandong
Province in 1994. As at June 2010, the company had
attributable installed capacity of 23,225.5MW.
1,157
545
19
550
0
500
1,000
1,500
2009 2010F 2011F 2012F
(400)
(150)
100
(y-y %)Net profit (LHS)
Growth (RHS)(RMBmn)
30,16927,569
25,56925,365
1,568
1,568
480 480
840
741
330 543
35
35
25 35
21,000
23,000
25,000
27,000
29,000
31,000
33,000
35,000
2009 2010F 2011F 2012F
Coal-fired HydroWind Renewable
(MW)
EBITDA margin vs. recurring net profit margin Forward P/B chart
0
10
20
30
40
2009 2010F 2011F 2012F
EBITDA margin
Recurring net profit margin
(y-y %)
1.25x
1.50x
1.75x
0.75x
0.50x
1.00x
1
2
3
4
5
6
7Ja
n-07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
Avg: 0.9x
SWOT analysis Attributable capacity by location (FY10F)
Location (MW) (%) Location (MW) (%)
Shandong 10,433 46.7 Jiangsu 20 0.1
Ningxia 1,218 5.5 Inner Mongolia 300 1.3
Sichuan 2,191 9.8 Zhejiang 918 4.1
Henan 1,638 7.3 Hebei 2,623 11.7
Guangdong 725 3.2 Anhui 2,262 10.1
Total 22,328
Geographical presence (based on total installed capacity)
Strength
– The most sensitive IPP to coal price and interest rate
changes, which can benefit the most from a sector
recovery.
Weaknesses
– High gearing.
– Limited coal self-sufficiency YTD.
– Geographic presence of Huadian Power’s plants in
China (mainly located in Shandong, Anhui and Henan) is
unfavorable owing to higher coal price, combined with
lower tariffs charged in these provinces than the
developed coastal areas.
Opportunity
– Upward integration by increasing coal-mine investments
to hedge against exposure to coal price fluctuations.
Threats
– Potential interest hikes, stagnant tariffs with rising coal
price will squeeze margins.
> 5.0GW 1.0-5.0GW < 1.0GW
Province and Municipality: Shandong, Ningxia, Sichuan, Henan, Anhui, Inner Mongolia, Zhejiang, Hebei, Guangdong and Jiangsu
Minimal coal price hedging Weakness in fuel cost management
Huaneng is the only IPP without its own coal resources, and it has the least exposure to non-coal-fired power generation (~2.3% of attributable capacity). We think the coal sourced from its parent does not alleviate coal price pressure, given only <20% is sourced from its parent and this is at market prices with no discount. Per Huaneng, ~40% of its power plants are now incurring losses. We assume such losses will be ongoing in FY11F if the coal price remains at the current level or trends north without a tariff increase. For Tuas Power, we expect it will contribute ~15% of the company’s earnings in FY10F. For 1Q-3Q10, it generated RMB11.1bn in revenue, with net earnings of RMB494mn.
Share issuance cuts gearing
Huaneng recently completed the non-public issuance of 500mn H-shares and 1,500mn A-shares, raising total capital of RMB10.3bn. We believe the capital raised will be used for capacity expansion (FY11F capex guidance: RMB28.7bn) and debt repayment to cut gearing. Further to the share issuance, we estimate net gearing will fall from 294% in FY09 to 220% in FY10F.
Hainan Nuclear acquisition: long-term benefits
Huaneng recently completed the acquisition of a 30% stake in Hainan Nuclear Power. We believe any benefits to Huaneng will only materialise in the long term, given the two plants (2x650MW) are expected to commence operation in 2014/15.
Downgrading to NEUTRAL, due to lack of catalysts
Huaneng is trading at 14.3x P/E and 1.1x P/B (FY11F), and 20% below replacement cost (Rmb3.5m/MW). We cut our rating to NEUTRAL from Buy due to the company’s high exposure to coal price changes and the lack of an identifiable near-term catalyst.
Key financials & valuations31 Dec (RMBmn) FY09 FY10F FY11F FY12F
Revenue 76,863 99,939 119,884 139,480
Reported net profit 4,929 4,675 4,391 4,612
Normalised net profit 4,929 4,675 4,391 4,612
Normalised EPS (RMB) 0.41 0.36 0.31 0.33
Norm. EPS growth (%) na (12.4) (12.8) 5.0
Norm. P/E (x) 11.0 13.5 14.3 13.7
EV/EBITDA (x) 9.7 8.7 8.4 7.8
Price/book (x) 1.3 1.1 1.1 1.1
Dividend yield (%) 4.7 3.8 3.6 3.8
ROE (%) 12.5 9.7 7.9 7.9
Net debt/equity (%) 294.2 220.2 235.0 247.2
Earnings revisions
Previous norm. net profit 2,975 3,746 5,552
Change from previous (%) 57.2 17.2 (16.9)
Previous norm. EPS (RMB) 0.25 0.31 0.46
Source: Company, Nomura estimates
Share price relative to MSCI China
1m 3m 6m 2.8 3.0 (4.3)
2.7 2.7 (4.5)
3.1 4.3 (11.4)
Easy
Source: Company, Nomura estimates
8,085
85.0
5.04/4.10
6.68
Absolute (HK$)
Absolute (US$)
Relative to Index
Estimated free float (%)
Market cap (US$mn)
4.2
Major shareholders (%)
China Huaneng Group HK Ltd 14.6
52-week range (HK$)
3-mth avg daily turnover (US$mn)
Bank of New York Mellon Corp
Stock borrowability
4.0
4.2
4.4
4.6
4.8
5.0
5.2
Mar
10
Ap
r10
Ma
y10
Jun
10
Jul1
0
Au
g10
Se
p10
Oct
10
No
v10
Dec
10
Jan
11
Feb
11
707580859095100105110
Price
Rel MSCI China(HK$)
Closing price on 4 Mar HK$4.48
Price target HK$4.78(from HK$5.30)
Upside/downside 6.7%Difference from consensus -5.0%
FY11F net profit (RMBmn) 4,391Difference from consensus -3.3%Source: Nomura
Nomura vs consensus A lack of catalysts and coal resources prompt our rating downgrade. Our assumed tariff hike partially relieves the rising coal cost pressure.
From Buy
NEUTRAL
N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D
Action Huaneng is viewed by the industry as a traditional power provider with the least
exposure to non-coal-fired power generation and coal resources. We think the rising coal price will continue to pose a risk to earnings though the recent share issuance should pare gearing. We downgrade our call to NEUTRAL, given a fair valuation, in our view, with no identifiable near-term catalysts.
Catalysts Any coal investment or injection from the parent could be a catalyst for the
company to hedge coal price fluctuations.
Anchor themes
Despite solid power demand backed by strong GDP growth, a surge in coal price with heavily regulated power tariff and rising interest rates has eroded IPPs’ profit margin. Negative on fundamentals but remain Neutral given undemanding valuations. A sector re-rating looks contingent on tariff reform, likely in 2014-15F.
Huaneng Power International Ivan Lee, CFA
11 March 2011 Nomura 102
Events calendar
Month Major events
January 2010 On 4 January 2010, Huaneng Power entered into an equity interest transfer contract with Shandong Power and Luneng Development (the transferors) to acquire certain equity interests of four power companies and five transportation/port services companies from the transferors for an aggregate consideration of RMB8.625bn.
On 7 January 2010, Huaneng Power proposed to issue both New A shares and H shares.
February 2010 600MW domestic supercritical coal-fired air-cooling generation unit (Unit 5) of the Phase II project at Gansu Pingliang Power Plant (65% equity interest by Huaneng Power) completed the 168-hour trial run.
July 2010 Fujian Fuzhou Power Plant Phase III completed the 168-hour trial run.
August 2010 Gas co-generation expansion project of Huaneng Beijing Co-generation Power Plant was approved.
November 2010 The construction of phase I project at Dalian Wafangdian Wind Power Plant, which is 100% owned by Huaneng Power, was approved.
December 2010 Suzhou Port Taicang Terminal Zone Huaneng Coal Pier Construction Project (Huaneng owns 66% equity interest) was approved by the NDRC.
One 1,000MW domestic ultra-supercritical coal-fired generating unit of the Phase III Project at Qinbei Power Plant (65% equity interest by Huaneng Power) was approved by the NDRC.
On 28 December 2010, Huaneng Power completed the non-public issuance of 500mn overseas listed ordinary shares with subscription price of HK$4.73 per share, and completed the non-public issuance of 1,500mn RMB-denominated ordinary shares with a subscription price of RMB5.57.
On 29 December 2010, Huaneng Power completed the acquisition of a 50% equity interest in Time Shipping from Huaneng Energy & Communications for RMB1.058bn in cash, and 50% equity interest in Hainan Nuclear from Huaneng Group for RMB174mn in cash.
January 2011 Huaneng Power agreed to acquire a 100% equity interest in Fushun Suzihe Hydropower for RMB50mn.
On 13 January 2011, Huaneng Power announced the following projects have completed the trial run:
1) 600MW coal-fired generation unit (Unit 5) of the Phase III Project of Hunan Yueyang Power Plant – 55% interest.
2) The Phase I project of Hebei Kangbao Wind-Power Plant with a total generation capacity of 49.5MW – 100% interest.
3) The first stage of the Phase II Project of Jiangsu Qidong Wind Power Plant with a total generation capacity of 50MW – 65% interest.
Huaneng Power closed down two generation units with a total generation capacity of 260MW at Zhejiang Changxing Power Plant which is 100% owned by Huaneng Power.
Huaneng Power completed the issuance of the first tranche of the company’s short-term notes for 2011 on 13 January 2011, under a mandate to issue within the PRC short-term notes of a principal amount not exceeding RMB10bn. The total issuing amount for the first tranche was RMB5bn with a maturity period of 365 days, face value of RMB100 and an interest rate of 3.95%.
February 2011 Huaneng Power’s wholly owned Huaneng Liaoning Changtu Taiping Wind Power Project was approved by Liaoning Provincial Development and Reform Commission of China.
Source: Company data
Huaneng Power International Ivan Lee, CFA
11 March 2011 Nomura 103
Company profile
Company profile Net profit trend (2009-12F) Installed capacity (2009-12F)
Huaneng Power International Inc (Huaneng Power) is
listed in Hong Kong (902 HK), China (600011 CN) and
New York (HNP). It is engaged in developing,
constructing, operating and managing large-scale power
plants throughout China. As at June 2010, Huaneng
Power is one of China’s largest listed power producers
with attributable installed capacity of 46,512MW, and its
domestic power plants are located in 17 provinces,
provincial-level municipalities and autonomous regions.
Huaneng Power also has a wholly owned power plant
(Tuas Power) in Singapore.
4,929
4,675
4,391
4,612
3,700
4,200
4,700
5,200
2009 2010F 2011F 2012F
(8)
(6)
(4)
(2)
0
2
4
6
(y-y %)Net profit (LHS)
Growth (RHS)(RMBmn)
58,363 59,863
66,002
72,142
142142
142
142
2,176
2,176
2,1762,176
50,000
55,000
60,000
65,000
70,000
75,000
2009 2010F 2011F 2012F
Coal-fired Wind
Hydro
(MW)
Note: includes associates’ capacity
EBITDA margin vs. Recurring net profit margin Forward P/B chart
(5)
5
15
25
35
2009 2010F 2011F 2012F
EBITDA margin
Recurring net profit margin
(y-y %)
1.25x
1.50x
1.75x
2.00x
2.25x
1.00x
3456789
101112
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Price (HK$)
Avg: 1.4x
SWOT analysis Attributable capacity by location (FY10F)
Location (MW) (%) Location (MW) (%)
Beijing 346 0.7 Jiangsu 7,527 16.0
Chongqing 1,584 3.4 Jiangxi 1,920 4.1
Fuzhou 2,000 4.2 Liaoning 4,600 9.8
Gansu 1,609 3.4 Shandong 6,562 13.9
Guangdong 2,963 6.3 Shanghai 3,619 7.7
Hebei 3,028 6.4 Shanxi 480 1.0
Henan 1,440 3.1 Tianjin 660 1.4
Hunan 729 1.5 Zhejiang 4,260 9.0
Inner Mongolia 49 0.1 Singapore 2,670 5.7
Sichuan 1,066 2.3
Total 47,112
Geographical presence (based on total installed capacity)
Strength
– Focus on high growth provinces, such as southeast
China which allows the company to enjoy solid longer-
term growth in line with China’s economic development
Weakness
– Relatively high gearing
– Traditional power provider — mainly coal-fired
generation; margin subject to coal price fluctuation
– Limited coal self-sufficiency given Huaneng Power itself
does not own any coal mines
Opportunity
– Newly acquired 30% equity interest in Hainan Nuclear
Power increases Huaneng Power’s exposure to non-coal-
fired generation
Threats
– Potential interest rate hikes; no change in tariff with
rising coal price will likely squeeze margins
> 5.0GW 1.0-5.0GW <1.0GW
Province and Municipality covered: Beijing, Chongqing, Fujian, Gansu, Guangdong, Hebei, Henan, Hunan, Inner Mongolia, Jiangsu, Jiangxi , Liaoning, Shandong, Shanghai, Shanxi, Sichuan, Tianjin and Zhejiang
Any Authors named on this report are Research Analysts unless otherwise indicated
Analyst Certification We, Ivan Lee and Joseph Lam, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Important Disclosures Conflict-of-interest disclosures Important disclosures may be accessed through the following website: http://www.nomura.com/research/pages/disclosures/disclosures.aspx . If you have difficulty with this site or you do not have a password, please contact your Nomura Securities International, Inc. salesperson (1-877-865-5752) or email [email protected] for assistance. Online availability of research and additional conflict-of-interest disclosures Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomura’s Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector. Distribution of ratings (Global) Nomura Global Equity Research has 2027 companies under coverage. 48% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 38% of companies with this rating are investment banking clients of the Nomura Group*. 38% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 48% of companies with this rating are investment banking clients of the Nomura Group*. 12% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 13% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 December 2010. *The Nomura Group as defined in the Disclaimer section at the end of this report.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 109
Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 110
Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector - Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
Power | China Ivan Lee, CFA
11 March 2011 Nomura 111
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