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Asia Utilities/RenewablesPOWER & UTILITIES
EQUITY RESEARCH
FY11F earnings preview
Best year after us - take profiton defensive; look for recoveryand policy-driven plays
February 27, 2012
Take profit on defensive namesAsia utilities' FY11 results season kicked off last week by ASEANcountries. So far the results were stronger than expectations; however, wesee that a challenging environment remains for 2012F amid a potential
export-driven slowdown. Nevertheless, markets like HK, Indonesia, thePhilippines, Thailand, Australia and New Zealand are defensive plays, inour view, given the attractive regulatory regimes with the fixed return onasset base and immediate fuel cost pass-through. However, the market isgradually taking on risk in anticipation of a recovery in 2H, in our view; thisdoes not provide a positive backdrop for defensive utilities. Thus, potentialunderperformance of HK, Indonesia, the Philippines, Thailand, Australiaand New Zealand utilities is likely for the rest of the year. We recommendthat investors take profits in these markets.
Key themes for 2012: utilities tariff reforms and climate change policyOn the contrary, "utilities tariff reforms" in China and Korea will be a keytopic for 2012 and we expect strong earnings recoveries in China IPP andKepco amid rising tariffs, falling interest rates and lower commodity prices.The other big theme in Asia is "climate change policy"; we believe thosehigh CO2 emission countries (eg, China and India) will strengthen theirefforts to cap CO2 and energy intensities by introducing more favourablepolicies towards clean energy - natural gas and renewables. Therefore, webelieve natural gas distributors, nuclear plays and wind farms shouldbenefit on their moves to diversify from coal, while coal producers shouldface a slowing demand growth. In contrast to the market, we are optimisticon the development of Nuclear and third-generation technology in China.Despite the recent solar rally, we affirm that this sector is likely to takeanother year to consolidate and recover. Thus, we believe now is a goodopportunity for investors to take profits on solar.
Research analysts
AEJ Power & Utilities
Ivan Lee, CFA - NIHK
+852 2252 6213
ASEAN Power & Utilities
Daniel Raats - NIHK
[email protected]+852 2252 2197
India Power & Utilities
Anirudh Gangahar - NFASL
[email protected]+91 22 4037 4516
Australia Power & Utilities
David Fraser - NAL
+61 2 8062 8418
Korea Power & Utilities
Keith Nam - NFIK
[email protected]+82 2 3783 2304
China Power & Utilities
Joseph Lam, CFA - NIHK
[email protected]+852 2252 2106
Alan Hon - NIHK
[email protected]+852 2252 2193
Asia Solar
Nitin Kumar - NSL
[email protected]+65 6433 6967
See Appendix A-1 for analystcertification, importantisclosures and the status of
non-US analysts.
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Stocks for actionFig. 1: Model Portfolio
Note: Ratings and Price targets are as of the date of the most recently published report (http://www.Nomura.com) ratherthan the date of this document. Priced as of 24-Feb-12 market close. Complete record on request. For changes in theportfolio over time, see http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=497004
Source: Bloomberg, Nomura research Note:* PT under review
Company Ticker Rating
Price
target Price
(Local $) (Local $) 10 11F 12F 10 11F 12F 10 11F 12F
Top Buys
China Coal Energy 1898 HK Buy 12.25 10.04 15.2 10.2 8.5 1.5 1.3 1.2 1.8 2.6 3.1
CPID 2380 HK Buy 2.97 1.95 12.5 14.6 6.2 0.7 0.6 0.6 2.7 2.7 6.1
Huaneng Power 902 HK Buy 6.37 4.94 15.7 32.7 8.1 1.1 1.1 0.9 4.7 1.6 6.2
China Resources Gas 1193 HK Buy 14.46 11.20 22.1 18.4 16.0 3.6 3.1 2.7 0.7 1.1 1.2
BJ Enterprises 392 HK Buy 58.60 48.55 21.8 19.3 16.4 1.6 1.5 1.4 1.4 1.6 1.9
Shanghai Electric* 2727 HK Buy 4.70 4.25 16.5 13.3 11.9 1.7 1.5 1.4 1.8 2.3 2.5
Beijing Enterprises Water 371 HK Buy 3.00 2.04 16.0 18.6 14.4 2.4 1.7 1.5 na na na
Perusahaan Gas Negara* PGAS IJ Buy 3,900 3,600 12.7 14.7 14.3 6.3 5.2 4.6 4.3 4.7 4.3
Glow GLOW TB Neutral 62.00 54.00 17.5 17.3 10.4 2.3 2.2 1.9 3.4 3.6 4.1
NTPC* NTPC IN Buy 206.00 183.70 19.0 17.1 16.7 2.4 2.2 2.1 2.4 2.4 2.5
Power Grid* PWGR IN Buy 120.00 114.30 22.5 19.6 17.6 3.0 2.5 2.3 1.5 1.8 2.1
Top Sells
China Gas 384 HK Neutral 3.32 3.70 18.2 30.7 18.5 3.0 2.1 1.8 0.4 0.6 0.7
Xinjiang Goldwind 2208 HK Reduce 3.50 5.12 4.4 12.6 15.2 0.8 0.8 0.8 9.1 3.2 2.6
Canadian Solar* CSIQ US Neutral 3.40 4.02 1.8 na na 0.3 0.3 0.4 na na na
JA Solar JASO US Neutral 2.00 1.94 1.2 10.2 na 0.3 0.3 0.4 na na na
LDK Solar LDK USReduce 2.60 5.97 2.7 na na 0.8 0.6 0.7 na na na
JSW Energy* JSW IN Reduce 65.00 63.05 13.9 12.3 7.3 2.2 1.8 1.5 1.4 na na
Reliance Power* RPWR IN Reduce 136.00 119.15 41.8 39.3 34.6 2.0 1.9 1.8 na na na
Meralco MER PM Reduce 134.10 269.00 20.1 16.1 15.9 4.7 3.9 3.4 1.5 2.2 2.4
P/E (x) P/B (x) Yield (%)
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FY11 earnings previewFig. 2: Upcoming results announcements
Note: *Bloomberg estimates
Source: Nomura research
Ticker Com pany Reporting date Period
TSL US Trina Solar 2/23/2012 4Q11
AGK AU AGK AU equity 2/24/2012 1H12
2 HK CLP Holdings 2/27/2012 FY11
JASO US JA Solar 24 to 29 Feb 4Q11
967 HK Sound Global Ltd 2/28/2012 FY11
YGE US Yingli Green 2/29/2012 4Q11PGAS IJ Perusahaan Gas March FY11
EDC PM Energy Development Early March FY11
6 HK Pow er Assets Holdings Ltd. 3/7/2012 FY11
CSIQ US Canadian Solar 3/7/2012 4Q11
STP US Suntech 3/8/2012 4Q11
1038 HK CKI 3/8/2012 FY11
1193 HK China Resources 3/13/2012 FY11
3800 HK GCL Poly 10 to 15 March 2H11
6244 TT Motech Industries 12 to 15 March 4Q11
1083 HK Tow ngas China 3/16/2012 FY11
1133 HK Harbin Pow er 3/16/2012 FY11
3 HK Hong Kong & China Gas 3/19/2012 FY11
836 HK China Resources 3/19/2012 FY11270 HK Guangdong Investment 3/19/2012 FY11
LDK US LDK 13 to 23 March 4Q11
902 HK Huaneng Pow er Intl 3/20/2012 FY11
1065 HK Tianjin Capital 3/22/2012 FY11
2380 HK China Pow er Intl 3/23/2012 FY11
658 HK China High Speed 3/23/2012 FY11
2208 HK Xinjiang Goldw ind 3/23/2012 FY11
2727 HK Shanghai Electric 3/23/2012 FY11
1171 HK Yanzhou Coal Mining 3/24/2012 FY11
991 HK Datang Intl 3/26/2012 FY11
1088 HK China Shenhua Energy 3/26/2012 FY11
916 HK China Longyuan 3/26/2012 FY11
2688 HK ENN Energy 3/27/2012 FY11757 HK Solargiga 3/28/2012* 2H11
1071 HK Huadian Pow er Intl 3/28/2012 FY11
1898 HK China Coal Energy 3/28/2012 FY11
371 HK Beijing Enterprises 3/29/2012 FY11
1072 HK Dongfang Electric 3/29/2012 FY11
392 HK Beijing Enterprises 3/30/2012 FY11
1393 HK Hidili Industry End of March FY11
639 HK Shougang Fushan End of March FY11
3452 TT E-Ton Solar Tech 4/20/2012* 4Q11
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Fig. 3: Reporting dates and forecasts of upcoming results for Asia ex-Japan stocks
Notes: *Amount in bn units
Source: Bloomberg, company data, Nomura estimates
Company TickerReporting
currencyRating
Price
Target
Reporting
period
Est. DPS
for the period
Likely earnings
surprise
Management Bloomberg Nomura Consensus %diff.
(Local $) (Local $mn) y-y (%) (Local $) (Local $mn) (Local $mn) (+, -, inline)
Power Assets Holdings Ltd. 6 HK HKD Buy 57.3 FY11 8,541 17% 2.20 3/7/2012 3/7/2012 8,541 8,928 -4% In line
CLP Holdings 2 HK HKD Neutral 65.2 FY11 9,648 -4% 2.48 2/27/2012 2/27/2012 9,648 9,787 -1% -
Hong Kong & China Gas 3 HK HKD Reduce 16.5 FY11 5,295 9% 0.45 3/19/2012 3/15/2012 5,295 5,851 -10% +
CKI 1038 HK HKD Neutral 38.6 FY11 7,466 48% 1.66 3/8/2012 3/8/2012 7,466 7,674 -3% In line
Hong Kong utilities average 7,738 17% 1.70
Datang Intl 991 HK CNY Neutral 2.88 FY11 1,588 -38% 0.04 3/26/2012 3/28/2012 1,588 1,713 -7% In line
Huaneng Power Intl 902 HK CNY Buy 6.37 FY11 1,687 -50% 0.07 3/20/2012 3/29/2012 1,687 1,681 0% In line
Huadian Power Intl 1071 HK CNY Buy 2.31 FY11 103 -39% 0.00 3/28/2012 3/30/2012 103 -112 NM +
China Power Intl 2380 HK CNY Buy 2.97 FY11 624 -6% 0.04 3/23/2012 3/30/2012 624 577 8% In lineChina Resources Power 836 HK HKD Buy 17.8 FY11 4,873 -1% 0.27 3/19/2012 3/19/2012 4,873 4,909 -1% In line
China power average 1,775 -27% 0.08
China Shenhua Energy 1088 HK CNY Neutral 38.1 FY11 45,675 20% 0.92 3/26/2012 3/2/2012 45,675 46,127 -1% +
China Coal Energy 1898 HK CNY Buy 12.3 FY11 10,391 39% 0.21 3/28/2012 4/12/2012 10,391 10,274 1% +
Yanzhou Coal Mining 1171 HK CNY Reduce 17.1 FY11 9,042 26% 0.54 3/24/2012 3/27/2012 9,042 8,846 2% -
Hidili Industry 1393 HK CNY Neutral 6.11 FY11 826 23% 0.07 End of March 3/29/2012 826 668 24% -
Shougang Fushan 639 HK HKD Buy 5.27 FY11 2,508 25% 0.03 End of March 3/29/2012 2,508 2,224 13% -
China coal average 13,688 27% 0.35
Suntech STP US USD Neutral 2.20 4Q11 -58 NM 0.00 3/8/2012 3/8/2012 -140 -267 -48% In line
Canadian Solar CSIQ US USD Neutral 3.40 4Q11 -18 NM 0.00 3/7/2012 3/9/2012 -22 -39 -43% In line
Trina Solar TSL US USD Buy 7.00 4Q11 -31 NM 0.00 2/23/2012 2/23/2012 -3 -13 -76% +
Yingli Green YGE US CNY Neutral 3.40 4Q11 -190 NM 0.00 2/29/2012 2/17/2012 537 18 NM -
LDK LDK US USD Reduce 2.60 4Q11 -39 NM 0.00 13 to 23 March 3/16/2012 -10 -114 -91% -
JA Solar JASO US USD Neutral 2.00 4Q11 -10 NM 0.00 24 to 29 Feb 2/22/2012 7 -242 -103% In line
Solargiga 757 HK CNY Reduce 1.10 2H11 256 48% 0.00 NA 3/28/2012 315 254 24% -
GCL Poly 3800 HK HKD Neutral 2.50 2H11 1,255 -61% 0.00 10 to 15 March 3/19/2012 4,805 5,113 -6% In line
China solar average 146 NM 0.00
China Everbright 257 HK HKD Buy 3.90
Guangdong Investment 270 HK HKD Neutral 5.30 FY11 2,558 5.7% 0.09 3/19/2012 4/2/2012 2,558 2,659 -4% In line
China Water Affairs 855 HK HKD Neutral 2.40
Beijing Enterprises Water 371 HK HKD Buy 3.00 FY11 723 41% 0.00 3/29/2012 4/2/2012 723 722 0% In line
Hyflux Limited HYF SP SGD Reduce 1.00
Sound Global Ltd 967 HK CNY Buy 4.40 FY11 419 45% 0.07 2/28/2012 3/5/2012 419 408 3% -
Tianjin Capital 1065 HK CNY Reduce 1.80 FY11 253 -7% 0.10 3/22/2012 3/26/2012 253 276 -8% In line
China water average 988 21% 0.07
ENN Energy 2688 HK CNY Buy 29.1 FY11 1,345 32% 0.32 3/27/2012 3/26/2012 1,345 1,275 5% In line
Towngas China 1083 HK HKD Neutral 4.16 FY11 543 46% 0.04 3/16/2012 3/16/2012 543 564 -4% In line
China Resources Gas 1193 HK HKD Buy 14.5 FY11 1,190 71% 0.10 3/13/2012 3/16/2012 1,190 1,141 4% In line
China Gas 384 HK HKD Neutral 3.32
Beijing Enterprises 392 HK HKD Buy 58.6 FY11 2,939 5% 0.53 3/30/2012 4/2/2012 2,939 2,907 1% In line
China gas average 3,008 77% 0.50
China High Speed 658 HK CNY Neutral 4.69 FY11 730 -47% 0.14 3/23/2012 3/30/2012 730 780 -6% In line
China Longyuan 916 HK CNY Buy 7.40 FY11 2,698 49% 0.05 3/26/2012 3/15/2012 2,698 2,423 11% -
Xinjiang Goldwind 2208 HK CNY Reduce 3.50 FY11 876 -62% 0.13 3/23/2012 3/27/2012 876 803 9% -
China wind average 1,435 -20% 0.11
Shanghai Electric 2727 HK CNY Buy 4.70 FY11 3,269 17% 0.08 3/23/2012 3/26/2012 3,269 3,174 3% In line
Dongfang Electric 1072 HK CNY Buy 30.5 FY11 3,174 23% 0.16 3/29/2012 3/30/2012 3,174 3,127 2% -
Harbin Power 1133 HK CNY Neutral 9.40 FY11 1,015 -1% 0.14 3/16/2012 3/20/2012 1,015 1,088 -7% -
China equipment average 2,486 13% 0.13Korea Electric Power 015760 KS KRW Buy 35,000
Korea Gas 036460 KS KRW Buy 52,000
Korea utilities average
E-Ton Solar Tech 3452 TT TWD Reduce 37.0 4Q11 91 NM 0.00 NA 4/20/2012 433 433 0% -
Motech Industries 6244 TT TWD Reduce 39.0 4Q11 -154 NM 0.00 12 to 15 March 2012 3/15/2012 -329 -875 -62% -
Taiwan solar average -32 NM 0.00
Indonesia
Perusahaan Gas PGAS IJ IDR Buy 3,900 FY11 5918* -14% 168 March 3/30/2012 5918* 6410* -8% -
Glow GLOW TB THB Neutral 62.0
Electricity Generating EGCO TB THB Buy 110
Ratchaburi Generating RATCH TB THB Buy 41.0
Thailand power average
Tenaga Nasional TNB MK MYR Neutral 6.60
YTLP YTLP MK MYR Neutral 2.28
Malaysia utilities average
Philippines
Energy Development EDC PM PHP Buy 7.20 FY11 6,633 -8% 0.11 Early March 3/22/2012 6,633 4,609 44% -
Adani Power ADANI IN INR Neutral 115
JSW Energy JSW IN INR Reduce 65.0
Lanco Infratech LANCI In INR Buy 30.0
NTPC NTPC IN INR Buy 206
PGCIL PWGR IN INR Buy 120
Reliance Power RPWR IN INR Reduce 136
India utilities average
India coal
Coal India COAL IN INR Buy 398
Australia
AGK AU equity AGK AU AUD Buy 17.5 1H12 235 4% 0.30 2/24/2012 2/24/2012 482 487 -1% +
Reported
March Y/E
Reported
Reported
Reported
March Y/E
March Y/E
Est. Net Profit for the
periodAnnouncement date FY11 Net Profit
Reported
March Y/E
Reported
Reported
March Y/E
March Y/E
March Y/E
Reported
Reported
March Y/E
March Y/E
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Hong Kong utilities: Strong 2011 driven by overseasacquisitions, upcoming risk on HK SOC earnings
HK utilities outperformed the market significantly in 1H11 (except HKCG), due to the
flight to defensive names as a favourable regulatory regime (guaranteed 10% ROA)
allows the names to sail against macro headwinds such as rising interest rates, fuel
costs and inflation. The weakening USD also supports overseas earnings. However, they
have started to underperform since Dec 2011 when the debate on electricity tariff hikes
in HK became intensified and investors started to become aware of the risk of their HK
earnings (a potential lower capex for 2014-18 and changes on scheme of control (SOC)return post 2018 both of them will be discussed from 2013, and we expect increasing
public pressure from this year). We expect the utilities to post strong results for 2011
driven by overseas acquisitions, especially by our favoured companies PAH and CKI.
However, we expect momentum to slow and they may underperform the market from
2012 as CLP, PAH and CKI have already attained our price targets, valuations becoming
stretched and increasing risks on their HK earnings which may induce a de-rating given
HK still accounts for more than 40% of their total earnings. As well, the market is
gradually taking on risk on expectations of a recovery in 2H11, which does not provide a
positive backdrop, in our view. This is unless they can maintain their acquisition pace,
however, after a busy 2011, we believe they should take a rest this year to digest and
repair their balance sheets. Meanwhile, we will be watching HKCG, as its upstream new
energy business is expected to report a first-time FY profit in 2011 results.
China IPPs: A turnaround story in 2012F
China IPPs experienced a significant earnings decline in 2011, by -0.6 to -49.6%, per our
estimates, due to the rising fuel cost (spot coal price up 10.2% and blended contract coal
price up 3% in 2011) and interest rate hikes (up 75bps in 2011), which was partially
offset by a 9.7% tariff hike announced in 2011 (with 6.5% granted effective on 1 Dec
2011). In 2012F, we expect IPPs earnings to be more than doubled, based on: 1) The
full year impact of the 9.7% tariff hike announced in 2011; together with another potential
tariff hike of 5% likely to occur in July 2012 due to lowering CPI, current low black spread
and potential utilities price reform, in our view; 2) Unit fuel cost to change slightly (-1.4%
to +4.9%) due to a 4% decline in spot coal price and a 6.2% increase in blended contract
price in 2012F; 3) An interest rate decline of 25bps in 1Q12F; and 4) A stable utilizationrate and 8.1% growth in installed capacity for 2012F. Overall, we expect tariff hikes to be
a multi-year theme due to low inflation and Beijings target to implement tariff reform by
2014-15F. With power tariff reform and fuel cost relief, we prefer Huaneng and CPID as
our top Buys, given Huanengs traditional coal-fired IPP nature and CPIDs bigger
leverage to tariff hikes and recovery in hydropower generation in 2012F.
China coal: Strong earnings growth became a history
Given average spot coal price rose 10% in 2011, despite key contract price was frozen,
coal companies are expected to report robust earnings growth of 20-39% for 2011, with
highest forecast EPS growth from China Coal (+39%), followed by Yanzhou (+26%) and
Shenhua (+20%). In 2012, we expect average Chinese spot coal price to fall by 4% and
key contract price to rise by 5%. This should put the coal companies ASP to remain flat
for 2012F. This, together with a likely less robust production and volume sales growth for
2012 due to slowing demand growth for coal as a result of economic slowdown and
increasing power generation from non-coal fired alternatives, as well as a 5-6% rise in
production costs. We expect sector earnings to rise by a slower 13% for 2012F (vs 28%
for 2011F). Thus, we have turned Neutral on the sector and would only prefer China
Coal, given less exposure on spot and high visibility on production growth. We expect
Shenhua to be range-bound between HK$32-38, while we expect Yanzhou to hit
HK$17.10 again this year.
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Asia solar: LDK US (Reduce); 6244 TT (Reduce)
Solar stock prices have outperformed the market YTD-12F on the back of rush orders
from Germany and the US in 4Q11F as developers looked to lock in projects before
subsidy changes from Jan-12. However, the sharp decline in ASPs through 4Q11 will
see most solar companies continuing to report losses despite demand growth. While
channel inventories declined in 4Q11, high utilizations currently could lead to further
inventory escalation in 1H12. Furthermore, macroeconomic concerns remain, coupled
with the expected subsidy cuts in Germany from April-12F and the US ITC investigation
overhang.Top Reduces LDK Solar (LDK US); and Motech (6244 TT)
LDK Solar: We remain concerned about LDKs liquidity issues with its net debt to equity
at 227.1% in 3Q11. We also remain concerned on cost structure improvements coming
in slower than expected, potential sharp market share loss in the wafer business to
GCL and weak end-market demand likely hurting module sales. As such, we see rapid
deterioration in the company's financial health with LDK potentially coming under
pressure.
Motech: Motech has a healthy balance sheet and strong backing from TSMC (which
has a 20% stake in the company). That said, we do not believe Motech has any
meaningful advantages in terms of costs or business model vs. its China-based peers.
We see losses continuing through FY12~13F and view Motech as overpriced
compared to its peer group.
China water: Prefer quality play in light of slower growth thanbefore
In our view, key investment themes in 2012F for the water and environmental sector are:
(1) As wastewater treatment (WWT) build-out during 11-15F (42mn tons/day) is slower
than 06-10 (68mn tons/day), focus on WWT plays with competitive edge on: a) rural
development; b) upgrade projects; c) being an industry leader in the consolidating space;
(2) Avoid tap water as privatisation is slowing as profitability of state-own water utilities
improves due to continuous tariff hike; (3) The number of waste-to-energy (WTE) plants
is expected to more than double by 2015F; (4) Non-traditional water source (Recycle-
water and desalination) are expected to experience stronger-than-industry capacity
growth and; (5) Focus on quality plays with a strong track record in delivering capacity
growth.
In light of the above, Beijing Enterprises Water (371 HK, Buy) remains our top pick due
to its (1) exposure to the potential desalination development in Caofeidian; (2) its strong
project pipeline secures earnings growth ahead; (3) being a clear industry leader in
WWT which has already started getting projects through acquisition during 11 and (4)
good track record in capacity growth. We also like China Everbright (257 HK, Buy) and
Sound Global (967 HK, Buy), largely due to their respective exposure to WTE and rural
WWT. We expect strong (y-y growth) FY11 results on our preferred plays, Beijing
Enterprises Water and Sound Global, largely due to capacity expansion and increasing
projects execution. For China Everbright, FY11 results were reported earlier in February,
which came in at HKD801mn, up 30% y-y.
China gas: Strong volume growth story continues
Solid 2011 results are expected, given strong gas volume growth across the sector,
benefiting from strong gas demand with rising gas supply in China. In 2012, we look for
the strong volume growth story to continue, with a possibility for gas cost pass-through to
resume, given an expected downward trend of CPI in 1H12.
Heading to 2012, our top sector pick remains CR Gas and Beijing Enterprises. For CR
Gas, with the visible growth opportunities from the parents asset injection and potential
new projects from local governments (such as Shanghai, Guangzhou, Dalian, Hefei,
Lanzhou and Changchun), we see the stock to continue its outperformance vs market in
2012. For Beijing Enterprises, we believe it is a recovery story in the sector, with
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continuous improvement in fundamentals, coming from: i) strong gas consumption
growth in Beijing per the Beijings 12th Five Year Plan; ii) improvement in transmission
margin with volume picking up; and iii) potential resumption of gas cost pass through
amid the CPI pressure relieves.
China wind farm: 916 HK (Buy)
Our China Longyuan FY11 earnings forecast stands at RMB 2,698mn (~11% above
consensus). Per operational data from the company, while FY11 coal power generation
volume is largely in line, wind power depicts softer y-y utilisation, due to weaker-than-trend 4Q wind resources and continued grid curtailment. Thus, we believe there may be
downside risk to our forecasts, factoring in sub 2000hr utilisation for FY11 (as the data
suggests), we estimate our core EPS could be around 10pct heavy.
Nevertheless, off-trend wind resources in FY11 are by definition transitory, and factors
(CDM, curtailment and liquidity) which saw the stock de-rate last year (-16.0%) are
improving. We see value in Longyuan, which trades at 1.4x P/B and not far off its wind
power capacity replacement cost. Reiterate Buy.
China power equipment: Favours 3G nuclear exposure / avoidwind equipment plays
Our expected 1H12 nuclear project approval resumption announcement by the State
Council would act as key catalyst for companies with nuclear exposure, in our view. We
continue to like Shanghai Electric (2727 HK, Buy), due to its: (1) 3G nuclear equipment
exposure; (2) integrated value chain within nuclear island equipment fabrication; (3) less
exposure to wind equipment in comparison with its peer, Dongfang Electric (1072 HK,
Buy). Easing material cost (benchmark HRC price down 10% over 2H11) will not
materially improve 2H11s but may improve FY12s operating environment, in our view,
as power equipment has a long product-cycle nature. We expect in-line results from
SEG, largely due to its on-track production execution. We see slight downside to our
Dongfang Electrics and Harbin Electric (1133 HK, Neutral)s FY11F earnings forecast
due to their respective exposure to weak wind equipment sales and one-off investment
loss.
For pure wind equipment plays, we expect China High Speed (658 HK, Neutral) and
Goldwind (2208 HK, Reduce), to report weak FY11F results due to: (1) continued fall in
wind equipment ASP; (2) downward gross margin trend and (3) poor sales volume. Into
2012F, we do not expect a drastic improvement in light of our expected sluggish
domestic wind equipment demand. Our reduce call, Goldwind, also has overhang due to
rare earth material cost in 2H12F.
ASEAN utilities: PGAS IJ (Buy), EDC PM (Buy)
Perusahaan Gas NegaraOur FY11F profits forecast of IDR5,918bn is c.8% below consensus on account of a
more pensive stance on the groups piped gas supply outlook (FY11F:785mmscfddistribution volume) and a strengthening (5%) IDR relative to the US$. Although we
believe there may be downside risk to consensus earnings expectations, we note that
the post Aug 2011 sell-down in PGNs stock after BP Migas announcement that it
intended to broker more robust upstream gas prices has seen the stock detach from its
near-term earnings outlook. We believe PGN has both the cost-plus pricing mandate
and, importantly, pricing power to defend its distribution margins should this materialise.
We concede that the stock has rebounded considerably (+64%) from its local minimum
of IDR2,200/share in Sept 2011, and in that sense our high conviction reflation theme
may no longer have legs; however, we believe the markets post-3Q11 concentration
with potential earnings erosion has completely diverted focus away from what we
regard as perhaps the most attractive secular, fundamental growth story in the ASEAN
power and utilities space. Wedged monopolistically between easing piped gas supply
dynamics and what we see as outstaying natural gas demand fundamentals, and with
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~50% excess distribution capacity, we see PGN as the ideal conduit through which to
gain exposure to what we believe will be a marked lift in Indonesias domestic natural
gas penetration over the medium term. To the extent that the company can insulate
margin, more market-aligned upstream piped gas prices and the groups pending
(2HFY12F) migration to an LNG supply paradigm bode well for unlocking the volume-
driven growth potential inherent in the business. We reiterate our Buy call.
Energy Development CorporationEnergy Development Corp (EDC) is in for a challenging FY11 (and for that matter 1-
2QFY12) relative to published consensus earnings expectations, in our view, given therecent news of Bacmans (~10% of consolidated capacity) rehabilitation delays from
previous guidance of 4Q11 to managements most recent 3QFY12F goalpost. Aside
from the obvious foregone earnings, to the extent that EDC has contracted out Bacmans
capacity, the delay has left EDC short spot market tariffs over 1HFY12, and even
though management argues that there is sufficient slack in the portfolio to meet the vast
majority of the companys contract obligations over this period, such a strategy may lay
claim to lucrative ancillary market income streams. That being said, we believe EDC
remains one of the most compelling growth stories in the ASEAN power space. Despite
Bacmans delays which should arguably be viewed as a deferral of earnings tariff
reversions at the Palinpinon-Tongonan will, in our view, support a healthy FY12F
earnings growth rate, while the (eventual) recommissioning of Bacman, together with a
healthy (c.25%) domestic greenfield development pipeline over the coming 4-6 years,bode well for the business earnings growth trajectory over the medium term. We would
advise investors to look at any weakness post the companys 4QFY11-1QFY12 as an
opportunity to accumulate.
Australian IPPs: We forecast AGK will report 1H12F NPAT ofA$235mn
In October 2011, at the AGM, AGK guided the market to a FY12 underlying profit NPAT
of A$470-500mn. Nomura forecasts FY12F reported NPAT of A$482mn. We see the
potential for a weaker first-half, given the reduction in wind farm development fees, lower
contribution from retail given the mild winter that was experienced on the Eastern
seaboard of Australia in the 1H and a lower contribution from merchant energy given low
wholesale electricity price through the period.
Key points to watch for in the 1H results will be:
Evidence of retail electricity customer growth in New South Wales (NSW) (Nomura
forecasting AGL will have grown electricity retail customers to over 500,000 at 1H12F).
The company is targeting 800900,000 electricity customers in NSW by FY14F.
Evidence of a reduction in churn in AGLs other gas and electricity retail and small and
medium enterprise (SME) markets.
News on when and if AGL will receive NSW Government approval to proceed with the
500-750 MW Dalton gas-fired peaking generator and the Tomago gas storage facility.
An update on recent press speculation (confirmed by the company) that they are
considering options for their future investment in Loy Yang A power station. Update on coal seam methane and gas reserves and development options.
Updates on impact on generation assets given the introduction of a carbon tax from 1
Jul 2012.
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Appendix A-1
Analyst Certification
We, Ivan Lee, Daniel Raats, Anirudh Gangahar, David Fraser, Keith Nam, Joseph Lam, Alan Hon and Nitin Kumar, 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.
Issuer Specific Regulatory Disclosures
The term "Nomura Group Company" used herein refers to Nomura Holdings, Inc. or any affiliate or subsidiary of Nomura Holdings, Inc. Nomura
Group Companies involved in the production of Research are detailed in the disclaimer below.
Issuer name Ticker Price Price date Stock rating Sector rating Disclosures
Motech Industries 6244 TT TWD 60.5 24-Feb-2012 Reduce Not rated
China Longyuan Power 916 HK HKD 6.42 24-Feb-2012 Buy Not rated
AGL Energy AGK AU AUD 13.67 24-Feb-2012 Buy Not ratedEnergy Development Corp EDC PM PHP 5.30 24-Feb-2012 Buy Not rated
LDK Solar LDK US USD 5.97 23-Feb-2012 Reduce Not rated A9
Perusahaan Gas Negara PGAS IJ IDR 3,600 24-Feb-2012 Buy Not rated
A9 Nomura Securities International Inc. makes a market in securities of the issuer.
Previous Rating
Issuer name Previous Rating Date of change
Motech Industries Neutral 25-Oct-2011
China Longyuan Power Neutral 12-Dec-2011
AGL Energy Not Rated 10-Jan-2011
Energy Development Corp Neutral 22-Aug-2011LDK Solar Neutral 25-Oct-2011
Perusahaan Gas Negara Not Rated 15-May-2009
AGL Energy (AGK AU) AUD 13.67 (24-Feb-2012)Rating and target price chart (three year history)
Buy (Sector rating: Not rated)
Date Rating Target price Closing price
07-Feb-11 17.50 15.01
10-Jan-11 Buy 15.22
10-Jan-11 17.85 15.22
For explanation of ratings refer to the stock rating keys located after chart(s)
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Valuation Methodology Our A$17.50 target price is based on discounted cashflow valuation assuming a risk free rate basedon the 10-year Australian bond rate of 5.5%. Key assumptions used in the discounted cash flow valuation include a WACC of9.3% based on a 0.70 asset beta and 20% target debt to enterprise value, and a real long term growth rate of 1.0%, discountedback to FY12.
Risks that may impede the achievement of the target price Risks that may impact on our target price include churn-out ofretail customers to competitors, electricity supply and price, gas supply and price, deliverability of owned or controlled coal seammethane assets, water volumes in hydro assets, coal seam methane development environmental concerns, any introducedemissions trading scheme or carbon tax and lastly AGL may be seen as a potential source of funding for a TRUenergy IPO.
China Longyuan Power (916 HK) HKD 6.42 (24-Feb-2012)Rating and target price chart (three year history)
Buy (Sector rating: Not rated)
Date Rating Target price Closing price
12-Dec-11 Buy 5.65
12-Dec-11 7.40 5.65
18-Mar-11 Neutral 7.90
09-Sep-10 7.60 8.16
01-Apr-10 8.50 9.14
29-Jan-10 Reduce 9.60
29-Jan-10 9.50 9.60
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our PT of HKD7.40 is based on three-stage DCF valuation, assuming a WACC of 7.5% and 2.5%terminal growth rate
Risks that may impede the achievement of the target price Key downside risks to our view are weaker-than expectedmedium term utilisation on account of grid connectivity and curtailment bottlenecks
Energy Development Corp (EDC PM) PHP 5.30 (24-Feb-2012)Rating and target price chart (three year history)
Buy (Sector rating: Not rated)
Date Rating Target price Closing price
22-Aug-11 Buy 5.80
22-Aug-11 7.20 5.80
12-Apr-11 Neutral 6.71
12-Apr-11 7.30 6.71
17-May-10 6.40 5.10
29-Apr-10 6.20 5.40
05-Feb-10 Buy 4.65
05-Feb-10 5.90 4.65
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our PHP7.2 DCF-based target price assumes a WACC of 9.5% and a terminal growth rate of 2%. Thecashflows are discounted back to FY11F.
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Risks that may impede the achievement of the target price We view 1) faster-than-anticipated progress in securing foreignnew-build projects and 2) additional asset acquisitions (notably Unified Leytes PPA) as the key upside risks to our call.Significant discontinuities in the Philippines regulatory environment while in our view a remote possibility would be the keydownside risk.
LDK Solar (LDK US) USD 5.97 (23-Feb-2012)Rating and target price chart (three year history)
Reduce (Sector rating: Not rated)
Date Rating Target price Closing price
25-Oct-11 Reduce 3.16
25-Oct-11 2.60 3.16
05-Aug-11 7.00 5.60
07-Jun-11 8.00 7.10
15-Nov-10 14.00 12.31
27-Nov-09 8.00 7.61
12-Mar-09 4.50 4.04
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We use the FY12F P/BV of global peers to value the company and apply a 25% discount to this toreflect macro concerns and LDKs stretched balance sheet for a target FY12F P/BV multiple of 0.3x. Our FY12F BVPS ofUSD8.84 gives us a target price of USD2.60.
Risks that may impede the achievement of the target price Upside risks to our target price include: 1) Stability in macro-conditions with improvements in available financing which will also help LDK to successfully execute on its IPO listing; 2)Ground-breaking cost reductions helping LDK to push its profitability curve ahead of peers
Motech Industries (6244 TT) TWD 60.5 (24-Feb-2012)Rating and target price chart (three year history)
Reduce (Sector rating: Not rated)
Date Rating Target price Closing price
25-Oct-11 Reduce 60.30
25-Oct-11 39.00 60.30
05-Aug-11 87.00 74.80
28-Apr-11 111.00 100.87
15-Nov-10 Neutral 104.35
15-Nov-10 119.00 104.35
27-Aug-10 97.00 111.30
30-Apr-10 97.50 97.72
03-Sep-09 Reduce 78.00
03-Sep-09 58.70 78.00
23-Apr-09 94.90 71.69
01-Apr-09 94.89 69.60
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We use the FY12F P/BV of Greater China peers to value the company and give Motech a 50%premium due to its strong balance sheet and stake-holding by TSMC. Our target price of TWD39 is based on peer averageFY12F P/BV of 0.8x and book value of TWD47.77
Risks that may impede the achievement of the target price Upside risks to our target price include: 1) Stability in macro-
conditions with improvements in available financing; 2) Faster capacity closures of higher cost peers helping improve supply-
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demand balance; 3) New project financing models finding success; and 4) Ground-breaking cost reductions helping Motech topush its profitability curve ahead of peers.
Perusahaan Gas Negara (PGAS IJ) IDR 3,600 (24-Feb-2012)Rating and target price chart (three year history)
Buy (Sector rating: Not rated)
Date Rating Target price Closing price
12-Sep-11 3,900.00 2,800.00
22-Apr-11 4,800.00 3,925.00
08-Nov-10 5,100.00 4,425.00
05-Nov-09 4,300.00 3,650.00
01-Sep-09 4,000.00 3,425.0010-Jun-09 3,900.00 3,125.00
15-May-09 Buy 2,450.00
15-May-09 3,300.00 2,450.00
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our IDR 3,900 DCF-based target price assumes a WACC of 9.5% and a terminal growth rate of 3%.The cash flows are discounted back to FY12F.
Risks that may impede the achievement of the target price Key downside risks to our view include a continuedstrengthening of the IDR relative to the USD, weaker-than-anticipated realised gas distribution flows, an inability to protectdistribution margins from higher gas costs, and government interference in gas supply contracts.
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In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriatevaluation methodology such as discounted cash flow or multiple analysis, etc.STOCKSA 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 thatthe analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, targetprice and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstancesincluding, but not limited to, 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://go.nomuranow.com/research/globalresearchportal);GlobalEmerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.SECTORSA '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 thatthe 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 EmergingMarkets ex-Asia.Explanation of Nomura's equity research rating system in Japan and Asia ex-JapanSTOCKSStock 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 than15% 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 certaincircumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company.
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