2013 strategy: `alphas` vs. `betas`

Transcription

Utilities / China
17 December 2012
2013 strategy: ‘alphas’ vs. ‘betas’
• China utilities no longer look cheap following a large rerating in
2012; sub-sector picking should depend much on macro trends
• Daiwa’s optimism on GDP and caution on inflation suggest
gas/water/power equipment should outperform IPPs/wind
• We like SHE, HPE and CRP as cyclical picks; ENN, BJE and CEI
offer more resilient earnings-growth outlooks
Dave Dai, CFA
(852) 2848 4068
[email protected]
Gary Zhou
(852) 2773 8535
[email protected]
■ What's new
We believe investment themes for the
China utilities and clean energy space
will continue to be influenced by
macro factors in 2013, but three of the
companies we like should see more
resilient earnings growth.
■ What's the impact
On the back of falling coal prices,
increased gas supply and a pick-up in
waste-to-energy investments, the
sector (ex-equipment suppliers) has
outperformed the HSCEI Index by
5.6% YTD, mainly driven by an
average 17% PBR rerating. The sector
no longer looks cheap and is
approaching its past-five-year mean
PBR.
Going into 2013, we believe sub-sector
picking cannot be done without
considering the major macro
assumptions. Driven by Daiwa’s
optimism that China’s GDP should
recover over the next three quarters,
we believe investors should prepare
for upside surprises in: power
demand, power capex (which could
translate into new order growth for
China Utilities and
Clean Energy Sector
How do we justify our view?
power-equipment suppliers), a
possible recovery in coal prices (cost
inflation for the IPPs) and the
extension of gas price reforms to more
provinces (with possible margin risks
for certain gas utilities). Other nonChina challenges include complicated
carbon repricing risks for wind-power
operators.
inflation in 2H13, the gas, water and
power-equipment companies should
outperform the IPPs and wind-power
companies in 2013. As such, we like
Shanghai Electric (SHE) and Harbin
Electric (HPE) on already recovering
orders, and China Resources Power
(CRP) on a likely rerating of its coalmine business, as cyclical picks.
Of the sub-sectors, we expect the citygas sub-sector to post the strongest
2013 revenue and net-profit growth,
driven by a few new gas sources
opening up next year. Given China’s
continuously expanding gas supply
and more diversified demand based
on new gas-usage policies, we believe
the overall risk of city-gas companies
has diminished and that gas-price
reforms are unlikely to cause major
earnings downside for most
companies. For the water industry,
investors are likely to focus on
earnings quality (in terms of project
quantity), and we expect a sustainable
inflow of waste-to-energy projects.
Three companies should see more
sustainable earnings growth vs. the
sector on average: ENN Energy (ENN)
due to its geographical advantage and
new gas sources supporting high
organic sales-volume growth, Beijing
Enterprises (BJE) on the visible rampup of its pipeline and city-gas
business, and China Everbright
International (CEI) on China’s
continuous waste-to-energy business
growth.
The power story looks more cyclical,
with power capex likely to go back to
normal levels in 2013, benefiting the
power-equipment suppliers, while a
rebound in coal prices could be a
major risk for the IPPs. Wind power
remains unexciting, with continuing
grid bottlenecks and repricing risk for
carbon income.
■ What we recommend
We maintain our Neutral sector rating
and upgrade our gas sub-sector rating
to Positive (from Neutral). Based on
our view of an economic recovery in
China in 1H13, coupled with a rise in
■ How we differ
We are less optimistic than the market
on the 2013 earnings outlooks for the
IPPs and wind-power operators.
Key stock calls
New
ENN Energy (2688 HK)
Rating
Buy
Target
43.00
S 29.7%
Upside
Beijing Enterprises (392 HK)
Rating
Outperform
Target
59.00
S 14.6%
Upside
China Everbright International (257 HK)
Rating
Buy
Target
4.60
S 16.2%
Upside
Source: Daiwa forecasts.
See important disclosures, including any required research certifications, beginning on page 69
Prev.
Buy
33.50
Outperform
52.70
Buy
4.70
China Utilities and Clean Energy Sector
17 December 2012
How do we justify our view?
Growth outlook
Valuation
Earnings revisions
Growth outlook
Sub-sectors’ weighted-average EPS CAGRs (2012-14E)
Among all the sub-sectors we cover, the city-gas sector
should see the highest earnings growth over 2012-14,
followed by the water sub-sector and the IPPs, based on
our forecasts. We expect the power-equipment sector to
record single-digit-percentage annual EPS growth per
on average over the next two years, except for SHE, for
which we still forecast mid-teens-percentage EPS
growth over this period. The earnings outlook for the
wind-power sub-sector will remain uncertain going
forward, in our view.
(%)
25
19.2
20
15.4
14.4
15
10
7.0
3.9
5
0
Gas
Water
IPPs
Power equipment
Wind
Source: Daiwa forecasts
Valuation
China Utilities and Clean Energy (ex-power equipment):
12-month forward PBR
The China Utilities and Clean Energy Sector on average
has seen 5% upward revisions in the Bloomberg
consensus EPS forecasts year-to-date in 2012, with
substantial upward revisions for the IPPs (28% on
average, as a result of falling coal prices more than
offsetting weak power output) and city-gas utilities
(averaging 8% on the back of acquisitions and positive
earnings surprises). As a whole, the utilities and clean
energy space is no longer cheap, in our view. As such,
we believe stock picking is now more important than
sub-sector picking, with some companies trading at
what we consider as attractive valuation discounts to
their sector peers.
(x)
3.0
2.4x Avg+2SD
2.0
2.0x Avg+1SD
1.6x Avg
1.5
1.2x Avg-1SD
1.0
0.8x Avg-2SD
0.5
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Source: Bloomberg, Daiwa forecasts
Sub-sectors: consensus YTD EPS-forecast revisions (2012E)
Year-to-date, the Bloomberg consensus has cut its 2012
EPS forecasts for the China water companies by 3% and
for the wind-power operators by 15%. The valuations of
the utilities companies (excluding the equipment
suppliers) on average have risen by 17% YTD on a 12month-forward PBR basis, with major reratings for the
city-gas companies, IPPs and water companies more
than offsetting deratings for the wind-power operators.
We expect to see further downward revisions to
consensus forecasts for the IPPs and wind-power
subsectors, while we are more comfortable with the
consensus earnings forecasts for gas and water.
(Rebased to 100)
130
120
110
100
90
IPPs
Source: Bloomberg
-2-
Wind
Gas
Water
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Jan-12
80
Feb-12
Earnings revisions
2.5
17 December 2012
Sector stocks: key indicators
EPS (local curr.)
Rating
Target price (local curr.)
FY2
FY1
Company Name
Stock code
Share
Price
Beijing Enterprises
392 HK
51.50
Outperform
Outperform
59.00
52.70
12.0%
2.914
2.811
3.7%
3.667
3.517
4.3%
China Everbright International
257 HK
3.96
Buy
Buy
4.60
4.70
(2.1%)
0.268
0.275
(2.5%)
0.292
0.319
(8.3%)
7.00 (17.9%)
New
Prev.
New
Prev.
% chg
New
Prev.
% chg
New
Prev.
% chg
China Longyuan Power
916 HK
5.23
Outperform
Outperform
5.75
0.396
0.398
(0.4%)
0.366
0.443 (17.3%)
China Resources Gas
1193 HK
16.68
Hold
Hold
15.50
13.80
12.3%
0.731
0.735
(0.6%)
0.863
0.872
China Resources Power
836 HK
18.54
Buy
Buy
21.00
20.00
5.0%
1.391
1.439
(3.3%)
1.747
1.710
2.2%
Datang International Power
991 HK
2.93
Hold
Hold
2.93
2.65
10.6%
0.218
0.191 14.1%
0.264
0.204
29.1%
ENN Energy
2688 HK
33.15
Buy
Buy
43.00
33.50
28.4%
1.476
1.517
(2.7%)
1.868
1.861
0.4%
Harbin Electric
1133 HK
6.90
Buy
Buy
8.10
8.10
0.0%
0.934
0.934
0.0%
1.033
1.033
0.0%
Huaneng Power International
902 HK
7.00 Underperform Underperform
6.00
5.10
17.6%
0.432
0.382
13.2%
0.520
0.431
20.6%
Shanghai Electric Group
2727 HK
3.39
4.10
4.10
0.0%
0.273
0.273
0.0%
0.315
0.315
0.0%
Buy
Buy
Source: Daiwa forecasts; note: prices as of close on 14 December 2012
-3-
(1.0%)
17 December 2012
Contents
2013 outlook: ‘alpha’ vs. ‘beta’ stocks ..........................................................................................5
What is likely to come next after the rerating in 2012? ...........................................................5
Macro view: economic recovery in China, but concerns remain ............................................ 6
Macro trends should continue to dominate sector themes ...................................................... 7
Three ‘alpha’ champions we like for 2013 .............................................................................. 11
China IPPs: risk-reward does not look balanced ................................................................... 11
China power equipment: likely to be event-driven in 2013 ................................................... 16
China city-gas: risk profile has improved ............................................................................... 19
China water: focus on the value-added projects ................................................................... 30
China wind power: our main concerns have intensified ....................................................... 32
Company Section
ENN Energy ............................................................................................................................ 37
Beijing Enterprises ................................................................................................................. 40
China Everbright International ............................................................................................. 43
Shanghai Electric Group ........................................................................................................ 46
Harbin Electric ....................................................................................................................... 49
China Resources Power...........................................................................................................52
Datang International Power ...................................................................................................55
Huaneng Power International ............................................................................................... 58
China Resources Gas ............................................................................................................... 61
China Longyuan Power .......................................................................................................... 64
-4-
17 December 2012
China Utilities and Clean Energy Sector (ex-power equipment):
12-month forward PER
(x)
20
18.7x Avg+2SD
18
2013 outlook: ‘alpha’
vs. ‘beta’ stocks
15.9x Avg+1SD
16
14
13.2x Avg
12
10.5x Avg-1SD
10
What is likely to come next after
the rerating in 2012?
6
Jan-07
Jan-09
Jan-10
Jan-11
Jan-12
Although investors’ expectations for the outlooks of the
utilities companies’ are improving now, we would
caution about the changing macro trends that Daiwa
expects in 2013, which we believe could have an impact
on overall sector valuations (forward PER and PBR
multiples). Hence, we place a premium on stock
picking over sub-sector picking as we head into 2013.
Beware of the macro trends
The utilities and clean energy companies are usually
affected by government policies, which in turn are
generally influenced directly or indirectly by macro
trends such as GDP growth and inflation. Looking at
the sector’s overall performance over the past decade,
we have observed that during periods of upturns in
China’s GDP growth, which may or may not have been
coupled with a pick-up in inflation (especially CPI), the
IPPs have tended to underperform the market (HSCEI
Index) during GDP-growth upturn periods. In our
view, this could be due largely to support from
commodity prices during economic growth cycles,
while inflation could cap market expectations about an
efficient pass-through of costs to customers. Subsectors like gas and water have outperformed the
HSCEI Index consistently over the past six years.
China Utilities and Clean Energy Sector (ex-power equipment):
12-month forward PBR
(x)
3.0
2.4x Avg+2SD
2.0
Stock performances vs. HSCEI and macro trends
2.0x Avg+1SD
Relative*
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E YTD
1.6x Avg
1.5
1.2x Avg-1SD
1.0
0.8x Avg-2SD
0.5
Jan-07
Jan-08
The China Utilities and Clean Energy Sector (IPPs, citygas, water and wind-power operators, excluding the
power-equipment suppliers) has had a great year in
terms of share-price performance, outperforming the
HSCEI Index by 5.6% on average, driven by both
upward revisions to the Bloomberg consensus 2012
EPS forecasts and valuation expansion. The China
utilities and clean energy companies on average have
seen 5% upward revisions to consensus EPS forecasts,
with large upward revisions for the IPPs (28% on
average as a result of falling coal prices more than
offsetting weak power output) and the city-gas utilities
companies (8% on average due to acquisitions and
positive earnings surprises). The water companies have
seen consensus EPS forecasts cut by 3% on average,
while the wind-power operators have undergone a 15%
cut. The China Utilities and Clean Energy Sector has
rerated by 17% YTD on a 12-month-forward PBR basis,
with a large rerating of the gas, IPP and water
companies more than offsetting the derating of the
wind operators.
2.5
7.7x Avg-2SD
8
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
IPPs
19.7%
-0.5%
-45.0%
0.3%
-19.7%
-20.3%
-9.0%
5.6%
-62.4%
-14.9%
24.9%
27.8%
Gas
30.5%
14.5%
-93.7%
18.1%
8.9%
-59.0%
9.7%
5.4%
124.0%
3.4%
24.8%
28.7%
Wind
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-28.4%
-7.2%
-33.0%
Water
-3.6%
-44.8%
-111.5%
23.1%
-21.9%
102.2%
42.6%
5.8%
87.6%
2.0%
4.6%
-1.2%
GDP (YoY)
8.3%
9.1%
10.0%
10.1%
11.3%
12.7%
14.2%
9.6%
9.2%
10.4%
9.3%
7.8%**
CPI (YoY)
0.7%
-0.8%
1.2%
3.9%
1.8%
1.5%
4.8%
5.9%
-0.7%
3.3%
5.4%
2.6%**
Source: Bloomberg
Note: *Performance relative to HSCEI index; ** Daiwa forecasts for 2012E
-5-
PPI (YoY)
-1.3%
-2.2%
2.3%
6.1%
4.9%
3.0%
3.1%
6.9%
-5.4%
5.5%
6.0%
-1.6%**
17 December 2012
GDP and inflation trends
Macro view: economic recovery
in China, but concerns remain
Daiwa’s house view projects China’s real-GDP growth
to slow from 9.3% YoY for 2011 to 7.8% YoY for 2012,
and to recover to 8.0% YoY for 2013. It expects a
recovery to start in 4Q12 (8.2% YoY) and pick up in
1Q13 (8.5% YoY), 2Q13 (8.6% YoY), before slowing
again in 3Q13 (8.0% YoY) and 4Q13 (7.0% YoY).
With recent macro indicators pointing to China
undergoing an economic recovery, Mingchun Sun,
Daiwa’s Chief Economist for Asia ex-Japan, and Chi
Sun, Daiwa’s China economist, expect the following
trends over the next five quarters:
Besides demand, the other most important macro
factor for the China Utilities and Clean Energy Sector is
the trends in and the level of inflation, especially in
terms of consumer prices (CPI). Daiwa’s GDP forecast
of 8.5% YoY for 1Q13 and 8.6% YoY for 2Q13 could look
too high for China’s new political leaders (who should
stay in power for 10 years) from the perspective of
long-term sustainable economic growth. Due to the
base effect, Daiwa forecasts CPI inflation to rebound to
over 3.7% YoY for 3Q13 and 4.3% YoY for 4Q13.
Therefore, Daiwa expects another round of policy
tightening in 2H13.
• Despite weaker-than-expected data in 2Q-3Q12,
Daiwa believes the economy has started to recover
and that it will continue to do so over the near term.
• Production growth should pick up soon as
destocking draws to an end.
• As a result, the Daiwa China Momentum Gauge
points to an uptrend in the economy that should
continue through 1H13.
• Daiwa expects real GDP growth to rebound strongly
in 4Q12 as a result of reduced destocking and the
government’s ‘mini stimulus’ programme, resulting
in full-year growth of 7.8% YoY for 2012E. For 2013
Daiwa projects real GDP growth of 8.0% YoY.
• However, long-term constraints on the
government’s budget are likely to prevent the
government from introducing a major stimulus
package.
China macroeconomic indicators: actual and Daiwa forecasts
Indicator
Real GDP
CPI
PPI
Fixed-asset investment (nominal, YTD)
Retail sales (nominal)
Industrial production
Exports
Imports
Trade balance
Exchange rate (end of period)
M2
1-year base lending rate (end of period)
1-year deposit rate (end of period)
Required reserve ratio (end of period)
Current account balance
Foreign reserves (end of period)
Fiscal balance
Unit
YoY %
YoY %
YoY %
YoY %
YoY %
YoY %
YoY %
YoY %
USDbn
CNY/USD
YoY %
% pa
% pa
%
% of GDP
USDtn
% of GDP
1Q12
8.1
3.8
0.1
20.9
15.8
11.5
7.6
6.9
0.3
6.29
13.4
6.56
3.50
20.0
2Q12
7.6
2.8
(1.4)
20.4
13.9
9.5
10.5
6.5
68.5
6.32
13.6
6.31
3.25
19.5
3Q12
7.4
1.9
(3.3)
20.5
13.5
9.1
4.5
1.4
79.4
6.28
14.8
6.00
3.00
19.5
4Q12E
8.2
2.1
(2.0)
20.5
13.8
9.6
11.0
15.7
31.9
6.25
14.0
6.00
3.00
19.5
1Q13E
8.5
2.2
(0.2)
20.5
14.6
9.9
7.2
9.0
(2.4)
6.20
13.7
6.00
3.00
19.5
2Q13E
8.6
2.8
(0.2)
20.2
15.3
10.3
10.0
15.0
58.5
6.15
13.2
6.00
3.00
19.5
3Q13E
8.0
3.7
2.1
19.2
15.4
10.1
10.7
14.0
67.9
6.12
12.6
6.25
3.25
19.5
4Q13E
7.0
4.3
2.7
18.0
14.9
9.8
11.7
20.0
(0.1)
6.10
12.0
6.50
3.50
19.5
3.3
3.2
3.3
3.4
3.4
3.5
3.5
3.5
Source: CEIC, Daiwa forecasts
-6-
2012E
7.8
2.6
(1.6)
20.5
14.2
9.9
8.4
7.7
180
6.25
14.0
6.00
3.00
19.5
2.6
3.5
(1.5)
2013E
8.0
3.3
1.1
18.0
15.0
10.0
10.0
14.0
124
6.10
12.0
6.50
3.50
19.5
1.5
3.5
(1.6)
17 December 2012
average next year, with power demand likely to
improve, and we expect the power-equipment suppliers
to see stable thermal-equipment output following a
substantial decline in 2012. On profit margins, we are
concerned about a further potential squeeze in netprofit margins for the wind-power developers
depending on the outcome of price changes for carbon.
Macro trends should continue to
dominate sector themes
For 2013, we continue to expect the prevailing macro
climate to influence the five sub-sectors under our
coverage. The IPPs, power-equipment and wind-power
sub-sectors should be influenced heavily by the macro
trends, while the wind-power sub-sector is likely to be
affected more by repricing of carbon credits under the
new pricing mechanism, which is in turn impacted by
carbon demand in the EU.
Valuations and stock preferences
We expect the following policy changes in China in 2013:
1) the extension of gas-price reforms to more provinces
(which could lead to a 20% increase in city-gas prices) in
the middle of 2013, 2) more new nuclear projects should
be approved during 2013, and 3) no power pricing
reforms are likely in 2013 and we do not envisage full
convergence between spot and contact coal prices.
Looking at the sub-sectors’ 2013E PER and PBR
multiples (at current prices and based on our forecasts)
compared with their past-five-year mean multiples, the
gas sub-sector is the most expensive, followed by the
water, IPP and wind-power sectors. As such, within
each of the sub-sectors we favour those stocks that look
reasonable currently relative to their own historical
valuation levels. For instance, ENN and BJE are the
two gas names we like within the gas sub-sector, and
CRP is the only name we like among the IPPs. We
explain our preferences in our individual company
analyses later in this report.
Demand-supply dynamics
China Utilities and Clean Energy sub-sectors: 12-month
forward PERs vs. past-5-year mean
On the demand-supply situation, we expect a
continuous shortage of natural gas in China in 2013,
while future gas-demand growth should be driven by a
ramp-up in the supply of new gas, which we project to
increase at a 17% CAGR over 2012-15.
*(x)
2013E
Mean + 2SD
Mean + 1SD
Mean
Mean - 1SD
Mean - 2SD
Policy trends
IPPs
12.0
31.1
24.1
17.0
10.0
3.0
Wind
11.0
23.8
19.8
15.9
12.0
8.1
Gas
17.1
22.5
18.6
14.8
10.9
7.1
Water
11.1
22.4
18.1
13.7
9.4
5.0
Source: Bloomberg, Daiwa
Note: in the tables, 2013E multiples in these tables are
based on our 2013 forecasts and share prices of 14 December 2012
In our view, China’s waste-to-energy business is
underdeveloped with a low penetration rate and could
continue to see very strong project flows coming out
next year. We still see an oversupply situation for power
in general, and believe the non-thermal-power segment
is better positioned than the thermal-power segment.
However, this is not to say that China is likely to see a
sequential decline in new capacity additions next year,
especially with hydro power still accounting for a big
proportion of the country’s power mix. As we project
improving power demand (from 5% YoY for 2012 to 8%
YoY for 2013), we also expect power capex to pick up,
which should bode well for the power-equipment
suppliers as well as approvals for new nuclear-power
projects. We believe the wind-power companies are the
worse positioned among all the sub-sectors heading into
2013, due to the continuing power curtailments that we
see and no near-term solutions likely given construction
delays in building long-distance transmission networks.
China Utilities and Clean Energy sub-sectors: 12-month
forward PBRs vs. past-5-year mean
(x)
2013E
Mean + 2SD
Mean + 1SD
Mean
Mean - 1SD
Mean - 2SD
IPPs
1.2
2.6
2.0
1.4
0.9
0.3
Wind
1.0
2.5
2.0
1.6
1.1
0.7
Gas
2.4
2.5
2.1
1.7
1.3
0.9
Water
1.5
2.4
2.0
1.6
1.2
0.8
City-gas companies’ 12-month forward PERs vs. past-5-year
mean
(x)
2013E
Mean + 2SD
Mean + 1SD
Mean
Mean - 1SD
Mean - 2SD
ENN
14.4
18.3
15.5
12.7
9.9
7.1
BJE
13.8
21.6
18.2
14.8
11.4
8.0
CHG
23.9
38.2
27.6
17.1
6.5
-4.0
CRG
19.6
20.6
17.3
13.9
10.6
7.2
IPPs’ 12-month forward PBRs vs. past-5-year mean
Revenue and margins
(x)
2013E
Mean + 2SD
Mean + 1SD
Mean
Mean - 1SD
Mean - 2SD
Of all the sub-sectors that we cover, we expect the citygas companies to record the strongest revenue growth
in 2013, driven by robust natural gas demand, secured
by the country’s increasing gas supply. The IPPs should
see their utilisation rates improve by about 2% on
-7-
CRP
1.4
2.7
2.2
1.6
1.1
0.5
DTP
0.7
2.9
2.1
1.3
0.6
-0.2
HNP
1.4
2.4
1.9
1.3
0.8
0.2
17 December 2012
Our respective ratings for the sub-sectors are
unchanged, aside from the gas sub-sector, which we
upgrade from Neutral to Positive (as set out in the
subsequent table). We are upgrading our stance on the
city-gas sub-sector as we are now more positive about
its supply-demand outlook for 2013. We believe the
sub-sector is likely to maintain mid-teens-percentage
growth in sales out to 2015, and that the ongoing gasprice reforms are unlikely to lead to major earnings
downside for most city-gas companies.
Key sector risks
The greatest risks we see to our sector calls relate
mostly to macro trends, especially regarding a general
economic recovery for China, which could affect the
direction of power demand, coal prices and gas
demand. Economic activity in the EU could also have
an impact on future carbon prices, which would be
relevant for China’s wind-power developers. The trend
in China’s inflation is also important, in our view, as a
return to rising inflation could reduce the chances of
power tariff hikes or the extent of any gas price
increases.
Across the China Utilities and Clean Energy sector, we
are revising our six-month target prices for some of the
companies to reflect primarily adjustments to our
earnings forecasts, as set out in our company analyses
later in this report. Our individual company ratings
remain unchanged.
-8-
17 December 2012
Daiwa sub-sector views and top picks for 2013
Policy trend
IPPs
Power
equipment
Influence of Demandmacro
supply
factors
No near-term High
In general,
changes in
power is
power pricing
oversupplied
reform, and no
but as hydroliberal pricing
power
in coal
accounts
for >20% of
contract prices
capacity, there
could be
shortages in
certain
provinces
during
droughts, as in
2011
Power capex High
While coalcould improve
fired power is
given the very
over-supplied,
low base in
we expect
1H12,
continuing
especially for
investments in
thermal-power
gas, hydro and
plants; new
nuclear power,
nuclear
which are the
projects could
key policy
be approved
areas
in 2013
Gas
Natural gas
Low
should remain
one of the
main energy
growth drivers,
with the
government
working on
more supply
ramp-up
Water and
Waste
Waste-toenergy
segment
should grow
more rapidly
than water
projects
Wind
We expect
High
China to see
less
investments in
wind power
Low
Volume
growth
Revenue
growth
Cost trends
Margin trends Main risks
Key catalysts
Valuation
Besides
capacity
expansion, we
expect power
demand to
rise by 8%
YoY (5% YoY
in 2012E) in
China and 2%
YoY for
thermal power
utilization in
2013
We expect no
change in ongrid tariffs, so
revenue
growth in 2013
should be
driven by
output growth
We expect
overall coal
costs to
stabilise or
only decline
marginally,
with IPPs
continuing to
switch
between
contract, spot
and import
coal prices
Profitability
should
stabilise but
could come
under
pressure if
China
introduces
more
tightening
measures with
a lending rate
hike
Rebound in coal
prices, cuts in
on-grid tariffs
and increases in
lending rates
Recovering gas
demand,
incremental gas
supply available
and new project
wins
Not cheap,
approaching
past-5-year
mean but
Huaneng’s
PBR is
already
above its
past-5-year
mean
We could see
lower margins
for thermal
equipment
together with
more low-price
orders
received in
2012 (2-year
lag)
Lower-thanexpected power
demand
recovery,
continuing
declines in new
order ASPs,
rebound in rawmaterial prices
(especially
steel), execution
risks for
overseas orders
Recovering
new orders and
announcements
of new nuclear
projects
Substantially Positive
below past5-year PER
mean
We expect
stable dollar
margins for
most
companies,
with low
exposure to
residential
customers
Higher-thanexpected gas
cost hikes,
lower-thanexpected cost
pass-through
and lower-thanexpected new
connections
Stronger-thanexpected
volume demand
and new
connections;
new project
wins
Above past5-year mean
PER, but we
prefer
companies
that are
trading at a
discount to
their peers’
average
valuation]
Margins
should be
volatile based
on
construction
timelines and
proportion of
recurring
earnings from
operations
Earnings likely
to depend on
execution
following project
announcements,
but on a
discounted FCF
basis are highly
visible
New project
Below their Positive
wins for waste- past-5-year
to-energy and mean
water-treatment
projects
CEI
EBITDA
margins
should remain
stable for
wind-power
developers
Main earnings
risks in 2013, in
our view, will be
associated with
carbon income
repricing
Improving
utilisation hours
or major capex
cuts, which
should improve
FCF
N.A.
We expect flat Same as
Due to the
thermalvolume growth usual 12equipment
month
revenue, but
inventory
continuing
turnover, risks
revenue
of negative
growth for the
surprises in
non-thermal
raw-material
power
costs seem
business but
minimal in
new orders
2013, but we
worry about
should grow
2014 if steel
prices recover
in 2013
There is gas We forecast a Depends on We forecast a
shortage given 17% CAGR geographical 20% YoY
low
for gas supply and customer increase in
penetration of for 2012-15
exposure.
city-gas prices
both
and see little Companies
(higher costs
households
risk of
with more
for the citygas
and industrials oversupply in coastal and
the medium industrial
companies) in
customers
term
mid-2013
could grow
faster than
peers
Waste-toDriven by
Revenue
Costs should
energy
project growth growth should be stable but
segment is
and we expect be driven by those with inunderWTE to
power tariffs house
developed
account for
and tipping
equipment
and should
35% of non- fees (a form of could increase
see faster
hazardous
government
their margins
investment,
municipal
subsidies)
with more
solid waste
cities likely to treatment
follow
We think wind We expect
Utilisation
Costs should
power is over- investment to hours are
stabilise but
supplied due fall in 2013
uncertain due carbon
to continuing
to ongoing
income could
power
power
fall sharply in
curtailments 2013 due to
curtailments
and volatile
low spot
wind speeds prices in
Europe
Source: Daiwa
-9-
Daiwa
Top pick
sub-sector
rating
Neutral
CRP
SHE, HPE
Upgrade
ENN, BJE
from
Neutral to
Positive
Substantially Neutral
below past5-year PER
mean,
justified by
deteriorating
earnings
outlook
17 December 2012
Daiwa’s China Utilities and Clean Energy coverage: valuation summary
Company
Bloomberg
Rating
code
Power-equipment companies
Harbin Electric
Dongfang Electric
Simple average
Weighted average
City-gas distributors
ENN Energy
Beijing Enterprises
China Resources Gas
China Gas
Simple average
Weighted average
IPPs
Simple average
Weighted average
Wind-power companies
China Suntien Green Energy
Simple average
Weighted average
Water companies
Guangdong Investment
Beijing Enterprises Water
Simple average
Weighted average
Share
price Market cap
(local
(USDm)
curr.)
PER (x)
PBR (x)
ROE (%)
Div yield (%)
EPS CAGR
(%)
2012E
2013E
2012E
2013E
2012E
2013E
2012E
2013E
2012-14E
2727 HK
1133 HK
1072 HK
Buy
Buy
Hold
3.4
6.9
15.1
5,609
1,227
3,914
3,583
2,908
10.1
6.0
10.1
8.7
8.3
8.7
5.4
10.1
8.0
7.8
1.1
0.7
1.9
1.2
1.2
1.0
0.6
1.6
1.1
1.1
11.5
11.6
18.1
13.7
14.5
12.2
11.6
17.0
13.6
14.1
3.0
3.0
1.0
2.3
2.1
3.5
3.3
1.0
2.6
2.3
13.8
8.9
3.3
8.7
7.0
2688 HK
392 HK
1193 HK
384 HK
Buy
Outperform
Hold
Hold
33.2
51.5
16.7
6.2
4,491
7,560
4,419
3,512
4,995
18.1
17.3
22.8
28.2
21.6
20.6
14.1
13.7
19.3
24.3
17.9
16.9
3.4
1.4
2.8
2.8
2.6
2.4
2.9
1.3
2.7
2.6
2.4
2.2
20.5
8.7
14.9
10.5
13.7
13.0
22.3
10.1
14.8
11.0
14.6
14.0
1.4
1.7
0.7
0.4
1.0
1.2
2.1
2.1
0.8
0.4
1.4
1.5
22.7
19.7
19.5
13.2
18.8
19.2
836 HK
902 HK
991 HK
Buy
Underperform
Hold
18.5
7.0
2.9
11,210
12,695
4,968
9,624
13.1
13.2
10.9
12.4
12.7
10.4
10.8
8.9
10.1
10.3
1.7
1.5
0.8
1.3
1.4
1.5
1.4
0.7
1.2
1.3
13.4
11.6
7.2
10.7
11.5
15.2
13.1
8.2
12.2
13.1
2.4
3.8
2.3
2.8
3.0
3.0
4.6
2.8
3.5
3.7
16.7
11.3
17.1
15.0
14.4
916 HK
956 HK
Outperform
Outperform
5.2
1.5
5,037
643
2,840
10.7
7.0
8.9
10.3
11.5
6.5
9.0
10.9
1.1
0.7
0.9
1.0
1.0
0.7
0.9
1.0
10.6
10.7
10.7
10.6
9.4
10.6
10.0
9.5
1.9
3.6
2.7
2.1
1.7
3.8
2.8
2.0
2.1
18.5
10.3
3.9
257 HK
270 HK
371 HK
Buy
Outperform
Underperform
4.0
6.3
2.0
1,921
5,083
1,756
2,920
14.8
13.7
17.0
15.1
14.6
13.6
12.6
13.0
13.1
12.9
1.8
1.7
1.6
1.7
1.7
1.7
1.6
1.4
1.6
1.6
14.0
13.3
9.6
12.3
12.7
13.6
13.2
12.1
13.0
13.1
1.4
2.8
2.0
2.1
2.3
1.5
3.1
2.7
2.4
2.6
17.8
12.2
22.1
17.4
15.4
Source: Bloomberg (tickers and share prices), Daiwa forecasts
Note: based on share prices as of 14 December 2012
- 10 -
17 December 2012
sensitivity to the macro economy). Not all the stocks we
cover should have a ‘beta’ nature in 2013, in our view.
Three of the companies we cover, namely ENN, BJE
and CEI, should see more resilient earnings growth
next year compared with their peers (ie, ‘alpha’ stocks).
Three ‘alpha’ champions we like
for 2013
For the purposes of our sector strategy for 2013, we
have split the stocks into two groups: ‘alpha’ ones (ie,
ENN, BJE, CEI) and ‘beta’ ones (ie, those with high
Growth and risk factors for our three ‘alpha’ picks
ENN
EPS CAGR for
2012-14E
23%
ROE for
Industry demand2012-14E
supply
22% Gas shortage in China;
should see 17% YoY
sales volume growth out
to 2015
BJE
20%
10%
Gas shortage in China
and Beijing; should see
stronger gas sales
volume growth than the
national average due to
additional power
demand
CEI
18%
14%
Waste-to-energy
segment is underdeveloped and should
see accelerated
investment, with more
cities likely to take it up
Top-line risks
Margin risks
Earnings risks
Key catalysts
Valuation
We forecast 25% YoY ENN should be able to
ENN’s capex has
Recovering gas
gas-volume growth for
defend cost risks
peaked in past 2-3
demand, incremental
2013 and stable resulting from gas-price
years, which should gas supply available and
connection fees, which reforms given its higher
imply little risk of
new project wins
should be protected by
exposure to non- negative surprises from
ENN's geographical
SG&A costs; it is also
residential sales
de-leveraging, reducing
advantage
its finance-cost burden
We forecast 26% YoY BJE should be able to Gas accounts for >80% Recovering gas demand
and 14% YoY gasdefend cost risks
of our earnings
and incremental gas
volume growth for 2013- resulting from gas-price
forecasts for the next
supply available
14, highly secured by reforms given its higher
two years, with high
Beijing's new gas-fired
exposure to nonvisibility
power plants coming
residential sales; the
online; its Shaanxi- brewery business could
Beijing pipeline also has
see some margin
low utilisation risks as it pressure if barley prices
is a strategic pipeline
recover
Revenue growth should
Margins are volatile, Earnings should depend
New project wins for
be based mostly on based on construction on execution following
waste-to-energy and
pipeline projects and times and the earnings project announcements water treatment projects
2013 could be a peak proportion coming from but its discounted FCF
construction year
recurrent business
basis is highly visible
Cheaper than peers
based on 2013E PERs
Cheaper than peers
based on 2013E PERs
Cheaper than peers
based on 2013E PERs
China IPPs: risk-reward does not
look balanced
China IPPs: EBITDA margins
(%)
35
31.8
30.2
30
Our major question going into 2013 for the IPPs is
whether their profitability will continue to improve
following substantial improvements in 2012. Driven by
a generous on-grid tariff increase (around 6%) in late
2011 and a major spot-coal price decline (around 11%
YoY for 2012E based on our forecast), the China IPPs
have enjoyed a substantial earnings recovery (together
with share-price outperformance relative to the HSCEI
Index) year-to-date in 2012. We forecast the IPPs’
average EBITDA margins to rise back up to 2009 levels
for 2012 and onwards, and project significant
improvements in their ROEs, from 5.9% recorded for
2011 to 10.7% for 2012 and above 12% for 2013-14
(displayed in the following charts).
25.6
25
20
22.6
21.8
2010
2011
25.8
26.5
26.7
2012E
2013E
2014E
15.9
15
10
5
0
2006
2007
2008
2009
Source: Companies, Daiwa forecasts
- 11 -
17 December 2012
China IPPs: ROEs
(%)
14
China: monthly power-output growth (YoY)
12.6
12.2
11.5
12
25
10.7
9.7
10
(%)
30
12.1
20
15
7.0
8
6
10
5.9
5
4.7
0
(5)
2
(10)
Jan-Feb 98
Aug-98
Mar-99
Sep-99
Apr-00
Oct-00
May-01
Nov-01
Jun-02
Dec-02
Jul-03
Jan-Feb 04
Aug-04
Mar-05
Sep-05
Apr-06
Oct-06
May-07
Nov-07
Jun-08
Dec-08
Jul-09
Jan-Feb 10
Aug-10
Mar-11
Sep-11
Apr-12
Oct-12
4
0
2006
2007
2008
2009
2010
2011
2012E
2013E
2014E
Source: CEIC, Daiwa
All this suggests to us that there are few grounds to
argue that the IPP sub-sector has sub-optimal
profitability and returns. As the three listed IPPs we
cover operate mostly coal-fired power plants, our
projected ROE trends for these companies indicate that
coal-fired power is increasingly more competitive
compared with alternatives. As the IPPs are
government-regulated utilities, we see few logical
reasons for them to boost their ROEs further beyond
our projected levels, especially with the country
attempting to diversify its energy mix and reduce its
reliance on coal.
We forecast growth in power generation for the country
to increase from 5% YoY for 2012 to 8% YoY for 2013,
indicating a 1.0x power-intensity factor. (These
forecasts compare with Daiwa’s projection of 8% YoY
GDP growth for China for 2013, a recovery from 7.8%
YoY for 2012E.) The recovery in the intensity factor
that we expect should also be driven by China’s
restocking activities, which could trigger sustainable
power demand from energy-intensive industries.
China: power generation, GDP and power-intensify factor
(%)
20
Comparison of leveraged IRRs by fuel in China
(X)
10.0
8.0
15
(%)
16
6.0
10
4.0
14
5
12
10
2.0
6
Power gen YoY
Power-GDP Intensity factor (RHS)
4
2010
2012E
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
0.0
1980
0
8
GDP growth
2
0
Nuclear
Coal (2012E)
Hydro
Solar
Wind
Coal (2011)
Note: IRR = internal return rate
Demand, supply and utilisation
China’s power demand was affected negatively by the
country’s economic slowdown during most of 2012
until October, when we saw a strong recovery, and we
expect this power-demand upturn to continue in 2013.
On the supply side, we forecast capacity to increase by
about 7% YoY for 2013, which should support a small
utilisation-rate rise at thermal plants of about 3% YoY.
Another of our key assumptions is a stable YoY
utilisation rate for hydro power at 3,400 hours, which
can be a swing factor depending on the rainfall each
year. For example, during the serious droughts in 2011,
hydro power’s utilisation rate was as low as 3,028
hours (its worst since 2003). Over the long term, we
forecast power demand to stay below 7% YoY annually
and capacity growth to be even lower to support higher
utilisation of base-load energy (thermal).
- 12 -
17 December 2012
China: power-generation trend and forecasts
Power generation
bn kwh
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
Total Hydro
4,141
662
4,722
663
4,958
834
5,354
845
5,751
896
6,153
947
6,553
995
6,979 1,029
7,433 1,063
7,916 1,097
8,430 1,131
China IPPs: Daiwa changes in assumptions for 2012E
YoY (%)
Thermal Nuclear Wind Solar Total Hydro
3,325
74
47
0 11.5
7.6
3,898
87
73
1 14.0
0.1
3,937
94
89
4
5.0
25.9
4,280
101 120
9
8.0
1.3
4,575
118 148
15
7.4
6.0
4,801
204 180
21
7.0
5.7
5,030
290 212
27
6.5
5.0
5,359
313 246
33
6.5
3.4
5,713
341 277
39
6.5
3.3
6,074
392 309
45
6.5
3.2
6,464
443 342
51
6.5
3.1
Thermal Nuclear
11.5
5.3
17.2
18.3
1.0
7.9
8.7
7.5
6.9
16.2
5.0
73.1
4.8
42.3
6.5
8.0
6.6
9.0
6.3
14.7
6.4
13.2
Wind
120.2
55.7
21.5
34.6
23.3
22.2
17.5
16.1
12.6
11.5
10.7
Solar
1,252.0
814.8
375.4
142.9
70.0
41.2
29.2
22.6
18.4
15.6
13.5
China: power-capacity trend and forecasts
YoY (%)
Power Capacity
GW
Total Hydro
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
962
1,056
1,133
1,213
1,305
1,399
1,477
1,552
1,629
1,706
1,778
Thermal
213
231
246
261
276
291
301
311
321
331
341
Nuclear Wind Solar Total Hydro
707
765
810
858
906
951
995
1,037
1,077
1,115
1,153
11
12
13
13
24
37
40
43
49
56
60
31
47
59
71
85
100
117
132
148
164
180
0
2
6
11
16
21
26
31
36
41
46
10.1
9.7
7.3
7.1
7.6
7.1
5.6
5.1
5.0
4.7
4.3
Thermal
Nuclear
Wind
Solar
8.4
8.3
5.9
5.9
5.6
5.0
4.6
4.2
3.9
3.6
3.3
19.2
10.0
9.5
0.0
81.1
55.5
8.1
7.5
14.6
14.9
6.9
92.7
51.3
25.5
20.3
19.7
17.6
17.1
12.8
11.7
10.8
10.1
852.0
799.2
186.9
81.4
44.9
31.0
23.7
19.1
16.1
13.8
12.2
8.4
8.0
6.5
6.1
5.8
5.4
3.4
3.3
3.2
3.1
3.0
China: utilisation-hour trend and forecasts
YoY (%)
Utilisation hours
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
Total Hydro
Thermal
Nuclear
Wind
Solar Total Hydro Thermal Nuclear Wind
3,429
3,028
3,573
3,400
3,400
3,400
3,400
3,400
3,400
3,400
3,400
5,031
5,294
5,025
5,158
5,212
5,194
5,192
5,298
5,427
5,561
5,719
7,924
7,772
7,772
7,772
7,772
7,772
7,772
7,772
7,772
7,772
7,772
2,097
1,903
1,800
1,950
2,000
2,050
2,050
2,050
2,050
2,050
2,050
1,200
1,200
1,200
1,200
1,200
1,200
1,200
1,200
1,200
1,200
1,200
4,660
4,731
4,628
4,660
4,670
4,647
4,633
4,678
4,743
4,815
4,901
2.9
1.5
-2.2
0.7
0.2
-0.5
-0.3
1.0
1.4
1.5
1.8
5.1
-11.7
18.0
-4.8
0.0
0.0
0.0
0.0
0.0
0.0
0.0
4.0
5.2
-5.1
2.7
1.0
-0.4
0.0
2.0
2.5
2.5
2.8
2.7
-1.9
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.9
-9.3
-5.4
8.3
2.6
2.5
0.0
0.0
0.0
0.0
0.0
Solar
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
One of the major changes we have made in this report
compared to the forecasts we made a year ago is our
total nuclear capacity forecast for 2020, which we have
cut from 68GW to 60GW to exclude all inland reactors
(especially Taohuajiang, Pengze and Xianning), as
suggested by the State Council’s recent decision.
Currently, China has 14 reactors operating and 25
under construction.
What share prices seem to be pricing in
currently …
The large upward revisions to the consensus 2012 EPS
forecasts for the IPPs so far this year have been a direct
result of the collapse in spot coal prices. Compared
with the current consensus expectations of a 2-3% YoY
increase in unit fuel costs for 2012, we now forecast
unit fuel costs to decline by 4.5% YoY for 2012, which
has led us to revise down our total fuel cost
assumptions for the companies we cover by 6-8% for
2012.
Utilisation
Spot coal (CNY/t)
Contract coal (CNY/t)
Unit fuel cost change
Impact on average earnings
Our forecasts in Dec ‘11
1.0%
818
613
2.5%
0.0%
Current
-7.0%
713
595
-4.5%
52.0%
Going into 2013, under what we would consider as the
most bearish scenario, which assumes that current spot
prices remain seasonally unchanged and contract
prices are frozen at current levels, we estimate that
average unit fuel costs would drop by a further 3% YoY,
compared with our current forecast for flat unit fuel
costs. This would suggest less exciting earnings upside
for the IPPs than seen in 2012, if a recovery in power
demand is weaker than we expect. Another reason we
see for less earnings upside potential is reduced
earnings sensitivity following improvements in the
companies’ EBITDA margins year-to-date in 2012.
China IPPs: potential scenarios in 2013
Base case
2.7%
713
613
Flat
0.0%
Utilisation
Spot coal (CNY/t)
Contract coal (CNY/t)
Unit fuel cost change
Impact on average earnings
Bull case
0.0%
693
595
-3.0%
19.1%
If we were to incorporate our bull case into our
forecasts and target prices, we estimate that current
share prices have mostly reflected such optimistic
expectations, especially for HNP, followed by DTP and
CRP.
China IPPs: Daiwa target prices and upside case
Target prices (HKD)
Bull case for target prices (HKD)
Share prices on 14-Dec-12 (HKD)
Upside potential in bull case (%)
HNP
6.0
7.2
7.0
3%
CRP
21.0
22.0
18.5
19%
DTP
2.65
3.2
2.9
9%
Source: Bloomberg (current share prices), Daiwa estimates
Thermal coal demand-supply looks set to
improve, supporting spot coal prices
Our view on spot coal prices is more optimistic than
that of many analysts as we expect: 1) power demand
(the main driver for coal demand) to recover
sequentially in 2013, supported by restocking activity
in China’s economy, especially in 1H13, 2) coal supply
in the near term to be constrained with a large number
of loss-making coal producers and most small coal
mines remaining shut as a result of safety concerns
elevated to a priority for the new government, and 3)
spot coal prices to increase by 0.9% YoY on average as
a result of an improving demand-supply balance and
normalising inventory throughout 2013. (For more
details, see our report of 19 November 2012: China
Thermal Coal Sector: Reassessing costs and benefits.)
- 13 -
17 December 2012
As we expect spot-coal prices to remain higher than
contract prices during 2013, we expect the proportion
of contract sales to total sales to fall further in the
future. We forecast a 3% YoY increase in contract-coal
prices for 2012. However, any move towards a more
market-based system could benefit the listed coal
producers rather than the IPPs, especially with our
expectation for a further recovery in demand and a
rally in spot coal prices next year.
China: spot coal price (Qinhuangdao) forecasts
(CNY/t)
1,100
1,000
Price cap
900
800
700
600
500
400
2012's low
300
200
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Shanxi premium blend 5500kcal
Source: SX Coal, Daiwa forecasts
In China, electricity prices are fully regulated by the
National Development and Reform Commission
(NDRC) at both the on-grid (tariffs paid by the power
grid companies to the power plants) and end-user
(tariffs paid by the users to the power grids) levels. Over
the past decade, there have been a few times when
inflation has been the key impediment to electricity price
hikes (especially after 2006), resulting in volatile
profitability for the power producers. With the relatively
soft economic growth currently, if China were to link
fuel prices fully with electricity prices, a sudden sharp
rise in coal prices could further squeeze the already weak
margins of industrial users, such as steel mills and
aluminium smelters (industrial users account for more
than 70% of total power consumption currently).
Another important issue is the railway transport quota,
which has been used to guarantee the transportation of
key contract coal supplies in the past. If China opens its
coal market fully, it could become increasingly difficult
for coal companies to secure railway transport,
especially ahead of periods of peak demand. In our
view, until China resolves fully the issues of the market
pricing of electricity and transportation bottlenecks,
any reform of coal pricing would continue to be only
partial. In fact, the NDRC has reduced the proportion
of contract coal in the market by cutting railway quotas
for cross-provincial transportation in 2012, while the
target shipments for 2012 were 11% YoY lower at 834m
tonnes, accounting for 36% of our 2012 total railshipment forecast for coal.
In summary, while more macro indicators in the
coming months could solidify a low expectation for coal
prices in 2013, the IPPs’ earnings in general are still
sensitive to such an assumption, especially those of
HNP (for which we estimate that a 1% higher unit fuel
cost versus our current assumption could lead to 7.7%
earnings downside in 2013), followed by DTP (6.3%)
and CRP (1.8%).
China IPPs: 2013E EPS sensitivity to 1% rise in unit fuel costs
0
(1)
(2)
(4)
(5)
(6)
(7)
Cross-provincial
target YoY (%)
785
846
7.8
907
7.2
932
2.8
834
-10.5
Actual total rail
shipment YoY (%)
1,691
1,751
3.5
2,000
14.3
2,270
13.5
2,350
3.5
-6.3
(8)
-7.7
(9)
(%)
HNP
DTP
CRP
Profit redistribution does not seem
impossible
Given the improving profitability of the IPPs, we do not
expect an increase in on-grid power tariffs any time
soon. However, investors should be aware of the risks
of profit redistribution among the IPPs, power-grid
companies and end-users. The power-grid companies,
the largest investors in power transmission and
distribution assets, have seen thin net-profit margins in
recent years (3% on average in 2011).
PRC Government: target shipments by rail (m tonnes)
Year
2008
2009
2010
2011
2012E*
-1.8
(3)
% of key target
46.4
48.3
45.3
41.1
35.5
Source: NDRC; *2012E represents target from NDRC
- 14 -
17 December 2012
Power grid companies: net profit and net-profit margins
(CNY bn)
70
60
59.3 4.7
(%)
5
60.7
55.9
4
50
3
3.0
2.9
40
30
2
15.9
20
1.1
10
8.1
1
0.5
0
0
2007
2008
2009
Total net profit (LHS)
2010
2011
Average net margin (RHS)
Source: State Electricity Regulatory Commission
To compensate the IPPs for the difficult operating
environment, the government increased on-grid tariffs
(ie, what the power-grid companies pay to the IPPs)
much more than end-user tariffs (what the end users
pay to the power grid companies). The following two
charts show the tariff spread (difference between enduser and on-grid tariffs) for the two grid companies,
State Grid and China Southern Grid (both unlisted).
The latter even sees a lower spread than the level in
2007.
State Grid: tariff spread
(CNY/MwH)
700
33.0
31.5
26.5
600
32.2
28.6
(%)
35
30
500
25
400
20
300
15
200
10
100
5
0
0
2007
2008
Retail tariff (LHS)
2009
2010
On-grid tariff (LHS)
2011
Spread (RHS)
China Southern Grid: tariff spread
(CNY/MwH)
700
32.6
32.9
26.8
600
(%)
31.5
27.0
35
30
500
25
400
20
300
15
200
10
100
5
Therefore, as inflation returns in China, the likelihood
of further tariff hikes could be reduced at both the ongrid and end-user level. With the IPPs recording
higher-than-expected ROEs for 9M12, it would not be
completely impossible to rebalance or redistribute the
profits between the IPPs and power-grid companies, or
even implement some tariff cuts for certain end users,
(such as the energy-intensive industries) to encourage
re-stocking, in our view. In November 2009, the
government made the first decision to cut on-grid
tariffs for seven coastal provinces to rebalance the
interests between more profitable and less profitable
power plants, although the CPI only saw a 0.6%
reduction at that time.
History of power-tariff hikes and CPI at the time
Year
2005-May
2006-Jun
2008-Jul
2008-Aug
2009-Nov
2011-Apr
2011-Jun
2011-Nov
Tariff hike
2.5 fen
1.5-5%
2.5 fen
2 fen for on-grid only
On-grid tariff rebalancing
1 fen for on-grid only in 11 provinces
1.67 fen for commercial and agriculture tariffs in 15 provinces
Average of 2.5fen for on-grid and 3 fen for non-residential tariffs
CPI (%)
1.8
1.5
6.3
4.9
0.6
5.3
6.4
5.5
Source: State Grid, CEIC
Watch for the rainfall level in 2013
China’s total investment in thermal power has been
affected by economic conditions this year, with
reported investments down 26% YoY for the first five
months. While we only predict 5,025 utilisation hours
(or 58%) for thermal power this year, investors should
bear in mind that the strong hydro output should result
in an 18% YoY increase in utilisation to 3,573 hours for
2012 based on our forecasts. In 2011, China was hit by
a series of droughts, which caused concerns about a
possible power shortage during the summer. That year,
hydro-power utilisation dropped by 12% YoY to 3,028
hours, while thermal-power utilisation increased by 5%
YoY to 5,294 hours.
According to a study by Northwest Agriculture and
Forestry University, there is high probability that China
could see another dry year in 2013. If in a worst
scenario we were to assume that hydro-power hours
were to fall back to 3,208 again in 2013, the implied
thermal utilisation would return to 5,270 hours (5%
YoY growth), which would be similar to the 2011 level
and could provide strong support for: 1) a utilisation
improvement for existing coal-fired power plants, and
2) coal demand or coal prices.
0
0
2007
2008
Retail tariff (LHS)
2009
2010
On-grid tariff (LHS)
2011
Spread (RHS)
As a memory refresher, on 28 April 2011, the China
Electricity Council (CEC) predicted a peak-demand
power shortage of 30GW over the summer in China in
2011, which turned out to be correct, and which
sequentially triggered various power constraint
measures by the government.
- 15 -
17 December 2012
Jiangsu Electric Power Company (Not listed) predicted
a supply gap of 11GW in Jiangsu Province for the
summer of 2011. Two other coastal provinces, Zhejiang
and Guangdong, communicated that they might see
shortages of 4GW each for the same period. These
three provinces made up 63% of China’s total power
shortage in 2011.
China: monthly thermal-capacity additions (YoY change)
Oct-12
Sep-12
Jul-12
Aug-12
Jun-12
Apr-12
May-12
Mar-12
Dec-11
Oct-11
Nov-11
Slowdown in capacity
installation due to GDP
slowdown
Sep-11
Jul-11
Aug-11
Jun-11
Apr-11
May-11
Mar-11
Jan-Feb 11
Other provinces with public estimates included Henan,
Anhui, Hunan, Shandong, Guizhou and Jiangxi.
Provinces such as Shanxi and Hubei were believed by
local government to see shortages but no official
estimates have been made available.
Capacity installation
picked up after
shortage warning
Jan-Feb 12
(MW)
10,000
8,000
6,000
4,000
2,000
0
(2,000)
(4,000)
(6,000)
(8,000)
(10,000)
Source: CEIC, Daiwa
In May 2011, CEC released forecasts for the following
two years, with power shortages of 50GW for 2012 and
70GW for 2013, which would mean that China could
see its greatest power shortage for a decade (its
previous record-high shortage levels were in 2003-04).
China power equipment: likely to
be event-driven in 2013
China: predicted power shortages in the summer of 2011
7.5
7.0
5.7
5.8
3.8
3.1
4.9
4.0
4.0
2.5
1.1
1.0
1.0
Henan
Zhejiang
Guangdong
Anhui
Hunan
Shandong
Guizhou
11.0
Shortage
(% )
9
8
7
6
5
4
3
1.5
2
1.0
1
0
Jiangx i
8.3
Jiangsu
China
(GW)
35
30.0
30
25
20
15
10
5
0
We think the underperformance versus the HSCEI
Index of the three power-equipment stocks we cover
year-to-date in 2012 has been associated with a fall in
investment capex (as a result of the economic
slowdown), which in turn has triggered downward
earnings-forecasts revisions by the consensus.
Dongfang Electric (DEC), which has underperformed
the most YTD in 2012, has accordingly seen the
greatest cuts to consensus earnings forecasts YTD.
China power-equipment companies: consensus 2012E EPS
(Rebased to 100)
120
% of country demand
110
Source: CEC, various press reports
Note: power shortage figures were from CEC in April 2011
100
90
80
70
SHE
DEC
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
60
Jan-12
Following the government’s warning about the power
shortage in April 2011, there was an acceleration in
new-capacity additions in subsequent months. This
may have been due to accelerated construction work by
the IPPs and quicker approval by the power-grid
companies on connections. This situation serves as an
example of the influence the government has over
capacity growth in China’s power industry.
HPE
Source: Bloomberg
The steep YoY decline in the power-equipment
companies’ thermal revenue year-to-date in 2012 (close
to 20% on average) is also much worse than the earlier
projections of the IPPs and equipment suppliers when
we interviewed them in December 2011. Back then,
four out of eight companies saw a stable outlook, while
two expected a small increase in thermal-power capex
and two a modest decline. The two companies with
guidance that turned out to be a little closer to the
reality were Datang Power (DTP) and Harbin Electric
(HPE), although none expected the magnitude of the
actual decline.
- 16 -
17 December 2012
Companies’ opinions on 2012 thermal new installations
(interviewed in December 2011)
Companies’ opinions on 2013 thermal new installations
(interviewed in December 2012)
IPPs
CRP
IPPs
CRP
HNP
DTP
CPI
HDP
Power-equipment companies
SHE
DEC
HPE
2012 capex on coal-fired power plants
Similar to 2011
No official guidance change (original guidace:15% YoY
increase)
Reduction
Similar to 2011
Similar to 2011
HNP
DTP
CPI
HDP
Power-equipment
companies
SHE
DEC
HPE
2012 production of thermal equipment
Small increase
Stable
Small reduction
Source: Companies, compiled by Daiwa
Source: Companies, compiled by Daiwa
Stable outlook for thermal-equipment
revenue for 2013
Despite years of diversification efforts, thermal power
equipment remains the largest earnings contributor for
the power-equipment companies. We forecast it to
contribute 56%, 50% and 38% to gross profit for HPE,
DEC and SHE, respectively, for 2013E.
China power-equipment companies: thermal power as % of
total gross profit for 2013E
(%)
55.9
60
2013 capex on coal-fired power plants
Higher than 2012
Slightly less than 2012
Similar to 2012 (not likely to increase)
Similar to 2012
Similar to 2012
2013 production of thermal equipment
Similar to 2012
Stable
No official guidance yet
We believe that most of these capex forecasts are based
on a stable economic outlook, which implies to us that
thermal equipment revenue/thermal power capex in
2013 should continue to be subject largely to the trend
in China’s economy. HPE, which in 2011 correctly
guided for a declining trend in its capex for 2012, has
not provided official guidance for 2013.
New orders could see divergent trends
On the back of falling investment YTD in 2012, the
power-equipment suppliers have seen a decline in new
orders. Going into 2013, however, not all the
companies will see growth in new orders resume, in
our view.
49.9
50
40
38.5
30
20
10
0
SHE
DEC
HPE
We recently interviewed the five listed IPPs and three
power-equipment suppliers for their views on the new
installed capacity and equipment production for coalfired power plants in 2013. Opinions were slightly
mixed, but five of the eight companies we spoke to
believed that stability would be the likely scenario
going into 2013.
We think DEC’s investment case is unexciting as: 1) its
usual share-price driver, new orders, is unlikely to beat
expectations in 2013 (we forecast new orders of
CNY42.6bn for 2012 and CNY42.0bn for 2013) driven
by high base of gas-turbine orders received in 2012
(CNY9.7bn for 9M12; CNY4.3bn for 2011), and 2) we
are concerned about DEC’s ability to win large Gen-III
nuclear orders (as the company has focused largely on
Gen-II+ projects in the past), and its profitability in the
initial years of production could be lower given its lack
of production scale and experience.
China power-equipment companies: new order trend
(CNY m)
50,000
48,000
46,000
44,000
42,000
40,000
38,000
SHE
DEC
2012E
- 17 -
2013E
HPE
17 December 2012
Nuclear approvals could resume by mid2013
China: total nuclear-capacity trend and forecasts
(GW)
80
70
60
50
40
30
11
20
10
0
New status
Restarted
Restarted
Restarted
Approved
Based on our industry research, 4-5 projects could be
approved during 2013 and all could be related to GenIII technology. Although the government has not
released its final 2020 capacity targets, we forecast
60GW by 2020, up from 40GW in 2015. We believe the
market expects a range of 57-70GW by 2020, and our
forecast is closer to the low end of this range.
2017E
2020E
2016E
2019E
2015E
49
2013E
2018E
13
2014E
13
2012E
24
12
Toshiba-Westinghouse (Not listed) announced in 2008
that it was working with the State Nuclear Power
Technology Corporation and the Shanghai Nuclear
Engineering Research and Design Institute (SNERDI)
to jointly develop a passively safe large design of the
AP1000 reactor, probably with a capacity of 1,400MWe
for large-scale deployment. This development with
SNERDI opens the possibility of China exporting the
new large units with Toshiba-Westinghouse’s cooperation.
Status of key nuclear projects in China
Source: NDRC
43
57
At the same meeting in which the State Council
approved the two key documents in October, the
agency also emphasised the importance of Gen-III
technology. Following the country’s technology
experience with Gen-II and Gen-III, we see the next
stage in China’s nuclear strategy focusing on fully
localising Gen-III technology and modifying it to a
Gen-III+ standard (CAP1400 or enhanced AP1000
reactor).
In terms of newly approved construction, the
government officially approved the Tianwan Unit 3-4
reactor projects and Qinshan reactor anti-flooding
project in late November, which is the first approval of
greenfield projects that were not suspended previously,
indicating that additional new approvals could be on
their way.
Previous status
Construction suspended
Approval suspended
40
60
After close to two years of suspension, on 24 October
2012 China’s State Council officially passed two key
documents: 1) Nuclear Safety Plans and 2) Nuclear
Medium- and Long-term Development Plans 20112020. In our view, this implies an official green light to
restart approving nuclear power investment in China.
In November 2012, construction officially restarted on
the Fuqing Unit 4 and Yangjiang Unit 4 (two of the key
projects suspended last year) and another project that
could be restarted is the Shidaowan project.
Project
Fuqing 4-5
Yangjiang 4
Shidaowan
Tianwan 3-4
37
56
Market expectation
- low
Market expectation
- high
It also suspended work on four approved units due to
start construction in 2011 (Fuqing 4, 5 and 6, and
Yangjiang 4). About 34 reactors had previously been
approved by the central government, with 26 in the
process of being built. The construction of the
Shidaowan high-temperature reactor, although ready
for building, was also deferred.
70
2011
2010
China’s reaction to the Fukushima crisis in Japan was
to immediately suspend all nuclear projects on which
construction had not yet started. On 16 March 2011,
China’s State Council announced that it would suspend
approvals for new nuclear power stations and
undertake comprehensive safety checks of all nuclear
projects, including those under construction (with an
immediate halt required on any that were deemed not
satisfactory).
Based on the official recent cost estimates for proposed
projects, China’s projects have a clear cost advantage
(USD1,589/KW) compared with the average for foreign
projects (USD2,611/KW). We believe the cost
advantage will be the key driver of potential nuclearpower-equipment exports in the future. This once
again implies that AP1000 technology is the necessary
key to unlock China’s manufacturing potential in
CAP1400 technology.
China’s nuclear technology roadmap
N/A
GI
Not used in China
Source: Daiwa
- 18 -
Operation of first
reactor since 1994
GII
PWR (PHWR)
Operation of first
reactor by late 2010
GII+
CPR, CNP,
HTR-PM, AES91
Operation of first
Construction of first
Close to the end
of R&D stage
GIII
GIII+
GIV
AP1000, EPR
CAP1400
CEFR
(Fast reactors)
17 December 2012
Current backlog contribution by Gen-III reactor orders (by value)
(%)
90
80
70
China and India could take more than three quarters of
the share, and the China power-equipment suppliers
look well-positioned to remain market leaders given
their dominance in China and stable market shares in
India.
60
For gas-fired power, which could be the most exciting
power source as the IEA projects impressive growth
potential across most regions, the Chinese are mostly
technology partners with leading gas-fired equipment
makers in China, but exports are likely to depend on
future technology transfers.
50
40
30
20
10
0
HPE
SHE
DEC
Coal-fired power capacity by region/country (2012-35E)
Source: Companies, Daiwa estimates
(GW)
China power-equipment companies’ nuclear business:
contribution to gross profit
(in %)
DEC
SHE*
HPE
2010
9.0
6.3
0.0
2011
9.0
6.2
0.0
2012E
10.4
7.7
0.0
2013E
13.4
12.7
0.0
450
428
400
2014E
13.8
16.7
3.4
350
300
251
250
207
200
*SHE’s nuclear business includes both equipment and nuclear forging products
150
100
Assessing the earnings downside risks
60
59
50
33
28
15
US
Japan
3
1
0
History suggests that growth rates in power capacity
tend to be positively correlated with growth in power
demand. Therefore, the investment capex trend going
into 2013 would still depend on the demand trajectory,
especially demand for thermal power, as this is the
base-load power. We calculate that every 1% smaller
increase in power demand compared to our current
assumptions would cause an 8GW (14%) cut in gross
thermal-power capacity additions, which would
accordingly put pressure on thermal-equipment
revenue.
China
India
Europe Africa Russia
Brazil Middle Others
East
Source: IEA
Gas-power capacity additions by region/country (2012-35E)
(GW)
300
250
273
205
176
200
150
150
143
91
100
HPE, as the most leveraged company to thermal
equipment, could see the largest EPS downside in this
case, followed by DEC and SHE, based on our forecasts
for 2013. Also, new orders for thermal equipment could
also head into the same direction.
165
74
69
50
46
0
US
Europe China Middle Russia India
East
Japan
Africa
Brazil Others
Source: IEA
Scenario analysis in key variables (2013E)
GDP
Power demand
Overall power capacity
Gross thermal addition (GW)
Net thermal addition (GW)
Downside in thermal additions
Base case
8.0%
8.0%
7.1%
58
48
0%
Downside case
7.0%
7.0%
6.3%
50
40
-14%
Source: Daiwa estimates and forecasts
Focus on long-term key competitive edge
For the long term, we think the outlook for thermal
equipment globally is still promising. According to the
IEA’s latest forecasts, over 2012-35 the world should
add 1,392GW and 1,085GW of gas-fired and coal-fired
power capacities, respectively. For coal-fired power,
China city-gas: risk profile has
improved
Among China’s various utilities and clean energy subsectors, the city-gas sub-sector is one of the few that is
currently enjoying supply shortages, and we believe the
fortunes of this sub-sector could decouple from the
trend in China’s economic growth during 2013.
According to official estimates by the NDRC, China’s
gas consumption is expected to reach 230bn cm by
2015 and 300bn cm by 2020. This implies CAGRs of
16% over 2011-15E and 5% over 2015-20E.
- 19 -
17 December 2012
A common question among investors may be: how
much of the supply growth is visible to help support
these demand projections to avoid any possible
shortage gaps? On our calculations, we expect upside to
China’s total gas supply, which could mean that
demand always has more room to grow faster due to
abundant gas supply in this decade.
China: natural gas supply forecasts
(Bn cm)
9% CAGR
2015-20E
450
400
350
300
18% CAGR
2011-15E
250
200
150
China: apparent natural-gas consumption
100
(Bn cm)
50
350
5% CAGR
2015-20E
300
0
2011
16% CAGR
2011-15E
250
2015E
Domestic
2020E
Imports
Source: Daiwa forecasts, NDRC
200
To draw the supply picture for China before 2020, first,
we have mapped out the gas sources from now to 2015,
which are highly visible. Our next step has been to
work out how much power-supply growth potential
could be generated from 2015 to 2020. The 60bn cm
annual capacity growth from 2015E to 2020E for
domestic gas should be easy to achieve, especially given
China’s aggressive plans for shale gas (6.5bn cm in
2015 and 60-100bn cm in 2020). As the government’s
coal-bed methane (CBM) (another type of conventional
gas, which is more mature than shale gas) target
remains unchanged at 50bn cm, if we follow our more
conservative forecast of 15bn cm shale gas output,
China would only need to ramp up its domestic
conventional gas production to an 8% CAGR to reach
the 200bn cm target by 2020.
150
100
50
0
2011
2015E
2020E
Source: NDRC, Daiwa forecasts
Government has more ambitious supply
targets
According to government estimates, China is expected
to have total gas-production capacity of 260bn cm and
400bn cm by 2015 and 2020, respectively, to support
such demand growth. By 2020, imports could account
for half of the total supply, thus 200bn cm, according
to our estimates.
China: gas supply by source (official)
2011
2015E
2020E
Source (bn cm)
Domestic
Imports
102.5
31.4
140.0
120.0
200.0
200.0
Total
133.9
260.0
400.0
Domestic
76.5
53.8
50.0
Mix (%)
Imports
23.5
46.2
50.0
Total
100.0
100.0
100.0
Source: NDRC, Daiwa forecasts
China’s capacity targets are much more aggressive than
its demand targets; its capacity targets imply an 18%
CAGR for 2011-15E, and a further 9% CAGR for 201520E. Our calculations suggest an even more bullish
range for total production capacity of 427-495bn cm by
2020E.
On the import side, China has more choices. First,
liquefied natural gas (LNG) looks set to become a
dominant source of growth. Sinopec and CNOOC have
both announced their import capacity targets by 2020,
at 30m and 35.7m tonnes, respectively. PetroChina has
not given its 2020 target, but based on what we have
calculated on the proposed terminal capacity, its target
could be close to 36.6m tonnes by 2020, which gives a
combined target of 139bn cm for the three oil majors.
The long negotiations between China and Russia
(regarding both the east and west Siberia pipelines)
have not been resolved yet, due mainly to their
different views on pricing (press reports by Sina
suggest a bid-ask spread of USD0.235/0.335 per cm or
CNY1.5/2.2 per cm) and the success of agreeing on the
pricing could help bring another 68bn cm annual gas
supply to the gas-hungry country.
However, given the oil majors’ ambitious LNG import
targets, even without Russian gas supplies, China
should be able to reach 227bn cm in imported gas by
2020. Given the wide gas shortage issues in northeast
China, having Russian piped gas (gas form) would be
- 20 -
17 December 2012
less costly than importing LNG, which could be costly
to transport, in our view.
both cases would be higher than the government’s
forecast of 400bn cm.
LNG import targets by the three oil majors (2020E)
China: natural gas supply sources
Importer
PetroChina*
Sinopec
CNOOC
Total
Total (bn cm)
m tonnes
36.6
30.0
35.7
102.3
139.1
2010
Source: Companies, various press, Daiwa calculation
*Based on sum of parts of announced LNG terminals
%
(bn cm)
85.3
77%
91.0
Domestic
Conventional
gas
Domestic
Unconventional
gas
Domestic
gas
Imported
gas
Imported LNG
Imported piped
gas (inc.
Russia)
Imported piped
gas (ex Russia)
Including
Total supply
Russia
Excluding
Russia
Therefore, if we include Russian gas, we estimate that
the total supply capacity by 2020 could be as high as
495bn cm; without Russian gas it would be 427bn cm –
2011
(bn cm)
2015E
% (bn cm)
68%
138.5
2020E
%
(bn cm)
%
51%
135.0
27%
9.1
8%
11.5
9%
37.5
14%
65.0
13%
12.7
11%
16.6
12%
40.0
15%
139.1
28%
3.9
3%
14.8
11%
54.0
20%
156.0
32%
3.9
14.8
54.0
88.0
111.0 100%
133.9 100%
270.0 100%
495.1
111.0 100%
133.9 100%
270.0 100%
427.1
Source: CEIC, various press reports, Daiwa estimates and forecasts
China: map of gas sources and companies’ project exposure
China Gas
ENN Energy
Beijing Enterprises
CR Gas
Kunlun Gas
Eastern Siberia
Western Siberia
17%
Heilongjiang
Central Asia – China Pipeline
(from Kazakhstan)
Jilin
7%
Liaoning 1%
Xinjiang
Inner Mongolia
Gansu
2%
CNOOC Hebei LNG
Hebei
CNOOC Hebei Qinhuangdao LNG
Sinopec Qingdao LNG
Shandong
15% 17%
4%
Qinghai
Henan
Tibet
9%
Sichuan
14%
Existing pipeline
Jiangxi
2% 17%
Burma-China Pipeline
(PetroChina)
Shaanxi-Beijing Pipeline III
(PetroChina)
Yulin-Jinan Pipeline
(Sinopec)
West-East Pipeline I
(PetroChina)
Sichuan-East Pipeline
(Sinopec)
West-East Pipeline II
(PetroChina)
Zhong-Wu Pipeline
(PetroChina)
Yunan
CNOOC Ningbo Zhejiang LNG
Zhejiang
6%
3% 10%
Hunan
Guizhou
1%
10%
1%
Guangxi
2%
Guangdong1%
1% 11%
CNOOC Shantou LNG
CNOOC Dapang LNG
CNOOC Zhuhai LNG
Hong Kong
Sinopec Beihai LNG
CNOOC Hainan LNG
Hainan
- 21 -
CNOOC Putian LNG
Taiwan
Fujian
Macau
Source: Companies, Daiwa
CNOOC Shanghai Yangshan LNG
3%
6%
1%
1%
Chongqing
16%
PetroChina Rudong LNG
Shanghai
Anhui
5%Hubei
Construction pipeline
Shaanxi-Beijing Pipeline I
(PetroChina)
17%
6%
8%
1%
8% Jiangsu
13%
8%
9%
3%
Shaanxi-Beijing Pipeline II
(PetroChina)
CNOOC Binhai LNG
12%
Shaanxi
LNG terminals in China
(existing and potential)
PetroChina Tangshan LNG
Sinopec Tianjin LNG
Tianjin
3%
Shanxi
PetroChina Dalian LNG
13%
7%
Ningxia
CNOOC Yingkou LNG
Beijing
2%
9%
100%
17 December 2012
China: pipeline and LNG capacity forecasts
Major natural gas pipelines
Project
Operator
PetroChina
1st West-East
Zhong-wu
PetroChina
1st Shaanxi-Beijing
PetroChina
2nd Shaanxi-Beijing
PetroChina
Sichuan-Shanghai
Sinopec
2nd West-East
PetroChina
Status
Operating
Operating
Operating
Operating
Operating
Operating
3rd Shaanxi-Beijing
4th Shaanxi-Beijing
Myanmar-China
3rd West-East
PetroChina
PetroChina
PetroChina
PetroChina
Operating
Preliminary approval
Under construction
Under construction
Western Siberia
Eastern Siberia
PetroChina
PetroChina
Negotiating
Negotiating
Major LNG receiving terminals
Location
Operator
Dapeng, Guangdong
CNOOC Group
Xiuyu, Fujian
CNOOC Group
Yangshan, Shanghai
CNOOC Group
Ningbo, Zhejiang
Zhuhai, Guangdong
Yangpu, Hainan
Tianjin
Dalian, Liaoning
Rudong, Jiangsu
Shenzhen, Guangdong
Caofeidian, Hebei
Qinzhou, Guangxi
Qingdao, Shandong
Zhuhai, Guangdong
Beihai, Guangxi
Tianjin
New LNG terminals
New LNG terminals
New LNG terminals
CNOOC Group
CNOOC Group
CNOOC Group
CNOOC Group
PetroChina
PetroChina
PetroChina
PetroChina
PetroChina
Sinopec
Sinopec
Sinopec
Sinopec
PetroChina
Sinopec
CNOOC Group
Status
Operating
Operating
Operating
Operating
Under construction
Under construction
Under construction
Operating
Operating
Initial approval
Under construction
Under construction
Source of gas
Tarim Basin, Xinjiang
Sichuan Basin, Sichuan
Ordos Basin, Shaanxi
Central Asia
Puguang, Sichuan
1. Turkmenistan, Central Asia
2. Kazakhstan, Central Asia
3. Uzerbekstan, Central Asia
Central Asia, Changqin oil field
Central Asia
Block A-1 (offshore), Myanmar
1. Turkmenistan, Central Asia
2. Kazakhstan, Central Asia
3. Uzerbekstan, Central Asia
Russia
Russia
Source of gas
NWS, Australia
Tangguh, Indonesia
1. Tiga, Malaysia
2. QCLNG, Australia
Qatargas 2, Qatar
n.a.
n.a.
n.a.
Qatargas 4, Qatar
Gorgon, Australia
Gorgon, Australia
South Pars 11, Iran
n.a.
LNG from Paupa New Guinea
n.a.
n.a.
n.a.
Annual turnover capacity (bcm)
2012E
2013E
2014E
2015E
18.0
18.0
18.0
18.0
4.0
4.0
4.0
4.0
3.6
3.6
3.6
3.6
17.0
17.0
17.0
17.0
12.0
12.0
12.0
12.0
30.0
30.0
30.0
30.0
Commencement
2005
2005
1997
2006
Apr 2010
end of 2012
2005
4.0
3.0
3.6
-
2006
8.0
4.0
3.6
12.0
-
2007
12.0
4.0
3.6
12.0
-
2008
16.0
4.0
3.6
12.0
-
2009
18.0
4.0
3.6
17.0
-
2010
18.0
4.0
3.6
17.0
4.0
5.0
2011
18.0
4.0
3.6
17.0
8.0
18.0
2011
By 2013
By 2013
By 2015
-
-
-
-
-
-
12.5
-
15.0
-
15.0
11.5
5.0
-
15.0
23.0
10.0
10.0
15.0
23.0
10.0
20.0
15.0
23.0
10.0
30.0
n.a.
n.a.
Elimination between
pipelines
Total PNG capacity
Newly-added capacity
-
-
-
-
-
-
(6.3)
(7.5)
(19.0)
(30.5)
(30.5)
30.0
38.0
(30.5)
10.6
27.6
17.0
31.6
4.0
35.6
4.0
42.6
7.0
51.6
9.0
74.9
23.3
200.1
78.0
Commencement
Sep 2006
May 2009
Oct 2009
2005
-
2006
5.1
-
2007
5.1
-
2008
5.1
-
2009
9.1
3.6
4.1
2010
9.1
3.6
4.1
2011
9.1
7.2
4.1
92.1
97.1
112.1
122.1
17.3
5.0
15.0
10.0
Annual turnover capacity (bcm)
2012E
2013E
2014E
2015E
9.1
9.1
9.1
9.1
7.2
7.2
7.2
7.2
4.1
4.1
4.1
4.1
Sep 2012
By 2013
By 2014
By 2013
Apr 2011
Apr 2011
n.a.
By 2013
By 2015
By 2013
n.a.
n.a.
By 2015
n.a.
Before 2020
Before 2020
-
-
-
-
-
-
4.1
4.8
-
4.1
4.1
4.8
-
4.1
4.8
3.0
4.1
4.8
4.8
4.1
-
4.1
4.8
4.1
3.0
4.1
4.8
4.8
4.1
-
4.1
4.8
4.1
3.0
4.1
4.8
5.5
4.8
4.1
4.1
3.0
-
5.1
5.1
22.1
5.1
4.0
5.1
4.0
16.8
11.7
18.7
46.8
56.1
19.9
69.5
23.9
81.3
17.0
88.7
9.1
16.8
9.0
6.0
103.7
16.9
29.4
12.6
35.8
6.0
145.5
40.3
33.5
4.1
21.4
6.0
172.9
18.8
50.4
16.9
21.9
6.0
200.7
16.1
54.5
4.1
19.1
10.0
229.9
14.5
67.1
12.6
22.6
10.0
262.5
14.2
Newly-added capacity
Overall newly added PNG and LNG capacity (bcm)
Estimated domestic production growth (excl Puguang) plus estimated spot LNG spot cargoes (bcm)
Total gas capacity in China (bcm)
Growth YoY (%)
2020E
18.0
4.0
3.6
17.0
12.0
30.0
2020E
9.1
7.2
4.1
4.1
4.8
4.1
3.0
4.1
9.0
5.5
13.8
4.1
6.9
4.8
4.1
3.0
21.9
15.0
129.0
61.8
139.8
60.0
462.3
76.1
Source: Companies, NDRC, Daiwa forecasts
Highest gas-volume areas for 2013E still
central and east coast
Companies’ exposure to new gas supplies in 2013E
Regarding the expansion of China’s gas supplies for both
2011 and 1H12, ENN was the strongest organic growth
leader due to its larger exposure to the east coast versus
peers. We expect the trend seen in 2012 to continue in
2013, with new gas supplies (or expanded capacities)
from Shaanxi-Beijing III, West-East II (reaching full
capacity), Ningbo LNG (which should have a full-year
contribution), Zhuhai LNG (scheduled to be operational
in June 2013), Tianjin LNG (operational in February
2013), Caofeidian (operational in late 2013) and
Qingdao LNG (operational later in 2013). This would
mean that 2013 could see a gradual supply ramp-up
throughout the year.
Shaanxi-Beijing
III
West-East
Pipeline II
Ningbo LNG
Zhuhai LNG
Tianjin LNG
Caofeidian LNG
Qingdao LNG
Total exposure
Provinces to
benefit
Beijing, Hebei,
Shanxi, Shaanxi
Henan, Hubei,
Jiangxi, Hunan,
Guangdong,
Guangxi,
Zhejiang,
Shanghai,
Jiangsu, Anhui
Zhejiang
Guangdong
Tianjin
Hebei
Shandong
ENN
CRG
BJE
Bejing (2%),
Hebei (2%),
Shanxi (3%)
Hebei (7%)
Shaanxi (4%)
Henan (9%),
Henan (3%), Henan (9%), Hubei
Hunan (17%),
Hubei (8%), (5%), Jiangxi (2%),
Guangdong
Hunan (2%),
Hunan (1%),
(11%), Guangxi Guangdong (1%),
Guangdong
(1%), Zhejiang Guangxi (10%),
(1%), Zhejiang
(6%), Jiangsu
Zhejiang (3%),
(1%), Jiangsu
(13%), Anhui
Jiangsu (8%), (17%), Anhui (1%)
(6%)
Anhui (8%)
Zhejiang (6%)
Zhejiang (3%)
Zhejiang (1%)
Guangdong Guangdong (1%)
Guangdong (1%)
(11%)
Tianjin (0%)
Tianjin (0%)
Tianjin (13%)
Hebei (7%)
Hebei (2%)
Hebei (0%)
Shandong (17%) Shandong (15%)
Shandong (12%)
89%
64%
65%
Beijing
(~100%)
-
Source: Companies, Daiwa calculations
Note: figures represent percentages of sales
As a result, among the national players, we expect ENN
to retain the highest exposure to new gas supplies, 89%
of its 2013E sales exposed to these new sources, followed
by CRG (65%) and CHG (64%). BJE (100%) is a special
case as it has strong leverage to the Shaaxi-Beijing
expansion.
- 22 -
CHG*
~100%
17 December 2012
More diversified demand could reduce
overall margin risks
Comparison of natural-gas usage policies (2012 vs. 2007)
Priority
On the demand side, the key change we have seen
recently is the NDRC’s revision of its gas usage policy,
which could fuel the city-gas industry’s further
development with more support from rising gas
demand. One major positive development is the
introduction of a number of gas users into the
government’s priority list. In our view, this is
directionally positive for the city-gas operators, which
have seen investors scrutinise their exposure to
household users via both risks of connection fees and
possible profit-margin pressure as a result of ongoing
gas-price reform.
2007
Households
Public facilities
Natural gas vehicles
Combined heat and power system
Allowed
In the last week of October 2012, the NDRC released a
revised version of ‘Natural Gas Usage Policy’, effective
from 1 November 2012. The key change we see
compared with the previous policy (2007) is the
reclassification of more users from the ‘allowed’ group
to the ‘priority’ group. Among the changes, we note
that there is: 1) more description of natural gas vehicles
(now specifying the inclusion of public-transport
taxies, cargo vehicles, passenger vehicles, etc.), 2) a
reclassification of a number of industrial customers
from the ‘allowed’ to the ‘priority’ list, and 3) additions
of new target users like natural gas ships, gas storage
facilities and CBM power-generation projects. In our
view, this implies a strong commitment by China to
natural gas usage amid rising supply (especially from
imports) in the future. We project a natural gas
consumption CAGR of 19% during the 12th Five-Year
Plan.
Centralized heating
Decentralized heating
Central air conditioning
Substitution projects for oil and LNG
Substitution projects for coal with
environmental benefits
Industrial consumers for which supply
can be interrupted from time to time
Confined
Prohibited
Low-return hydrogen projects
Low-return nitrogenous fertilizer
projects
Peak-sharing power generation in
areas with sufficient supply
Expansion of ammonia projects
Some chemical projects using
methane
Non-essential lead power-generation
Methanol projects
Base load gas-fired generation in
large coal-based areas
Substitution projects for coalmethane
2012
Households
Public facilities
Natural gas vehicles, including public transport, taxies,
etc.
Centralised heating
Air conditioning
Industrial consumers for which supply can be
interrupted
Hydrogen projects for which supply can be interrupted
Distributed energy projects
Natural gas ships
Gas storage facilities with peaking functions
CBM power-generation projects
Combined heat and power system
Decentralised heating
Substitution projects for oil and LNG
Substitution projects for coal with environmental
benefits
Greenfield industrial projects to use natural gas
Central boiler substitution projects
Other natural-gas power projects excluding those in
the ‘priority’ group
Other gas-hydrogen projects excluding those in the
‘priority’ group
Small gas storage facilities with peaking functions
Expansion of ammonia projects
Some chemical projects using methane
Greenfield nitrogenous fertilizer projects
Methanol projects
Base load gas-fired generation in large coal-based
areas
Substitution projects for CBM
Source: NDRC
LNG should be a major driver
Gas in liquid forms, or liquefied natural gas (LNG), has
wide applications to transportation. China has seen
rapid growth of gas demand on vehicles but most of
these have been based on the form of compressed
natural gas (CNG). LNG can be applied to public
transportation like buses and coaches and heavy-duty
trucks, replacing diesel. The payback period is usually
12 months based on ENN’s calculation. Besides cost
savings, LNG vehicles (LNGVs) are usually less noisy,
more environmentally-friendly, safer and more coldresistant.
Payback calculations on vehicle conversion
Payback calculation of a CNG
taxi
Average gasoline price (CNY/litre)
Average CNG price (CNY/cm)
Gasoline consumption per km (litre)
CNG consumption per km (cm)
Cost saved per km (CNY)
Average driving distance (km/day)
Daily average savings (CNY)
Monthly average savings (CNY)
7.5
3.9
0.05
0.06
0.141
400
46.4
1,692
Conversion fee (CNY)
Monthly maintenance cost (CNY)
Payback period (months)
3,500
175
2
Source: ENN
- 23 -
Payback calculation of a new LNG
truck
Average diesel price (CNY/litre)
7.1
Average LNG price (CNY/cm)
4.4
Diesel consumption per km (litre)
0.4
LNG consumption per km (cm)
0.5
Cost saved per km (CNY) 0.64
Average driving distance (km/day) 400
Daily average savings (CNY) 256
Monthly average savings (CNY) 7,680
Price difference of LNG truck & diesel 80,00
truck (CNY)
0
Monthly maintenance cost (CNY) 150
Payback period (months)
10
17 December 2012
Quality of LNG vehicles
Metrics
Power
Noise
Environment
Durability
Safety
Cold resistance
Cost
Quality
No lower than diesel-based trucks
Lower noise level than diesel-based trucks
Zero emission on PM2.5
Larger energy density, can sustain 1,000km
Safer than LPG-based vehicles
High
30% fuel saving vs. diesel-based trucks
Source: Various press sources
Based on PetroChina’s forecasts (presented at an
industry conference in October 2012), the number of
total natural gas vehicles is set to increase from
800,000 units in 2011 to 1.5m units in 2015, at a 17%
CAGR. The same rate applies to gas consumption by
these vehicles, up from 8.7bn cm in 2011 to 16.5bn cm
per year in 2015E.
Growth in gas consumption by natural gas vehicles
(%)
35
(bn cm)
18
16
30
14
25
12
10
20
8
15
6
LNG refuelling stations by 2015. ENN expects to build
up to 500 stations (in addition to its planned 400 CNG
refuelling stations).
th
Kunlun Energy’s investment plan during 12 Five-Year Plan
LNG refuelling stations
LNG satellite stations
LNG storage
LNG on-the-water refuelling stations
LNG vehicles
LNG duel-fuel ships
Gas drilling stations
Number
1,500
150
10
20
200,000
1,000
1,000
Source: Kunlun Energy
Major events of LNG stations and development plans
Year
2001
2001
2006
2007
2010
2012
2012
By 2015
By 2015
By 2020
By 2020
Event
Beijing started the first LNG public transportation fleet (50 units); refuelling station
equipment was 100% imported
First LNG refuelling station was built in Xinjiang
Guiyang tested the first LNG vehicle
Guangdong built the first LNG refuelling station in Zhanjiang
Fujiang built its first station
Guangdong now has 20 LNG stations with 1,000 LNGVs
Guizhou now has 4 LNG stations with 800 LNGVs
Xinjiang plans to build up to 300 LNG stations with 30,000 LNGVs
Hainan plans to build up to 400 LNG stations
Fujian plans to build up to 147 LNG stations (currently 4)
Inner Mongolia plans to build up to 300 LNG stations (currently 60)
10
Source: Various press and government websites
2
5
0
0
What our site visit to ENN’s gas processing
and storage facility reveals
4
2006
2007
2008
2009
2010
Demand
2011
2012E 2013E 2014E 2015E
YoY (RHS)
Source: PetroChina
Demand for vehicles using gas
('000 vehicles )
1,600
(%)
140
1,400
120
1,200
100
1,000
80
800
60
600
40
400
20
200
0
0
2006
2007
2008
2009
2010
No. of vehicles
2011 2012E 2013E 2014E 2015E
YoY (RHS)
Source: PetroChina
As CNG has been used mainly so far for passenger
vehicles and taxies in selected cities, a wider
application to heavier-duty transportation by LNG is
likely to trigger substantial investments in
infrastructure, especially the LNG refuelling stations,
LNG processing plants and LNG storage facilities. The
most aggressive company in terms of such investments
is Kunlun Energy (Not rated), a subsidiary owned by
CNPC Group, which is planning to build up to 1,500
LNG imports usually come from China’s coastal areas,
implying that distant inland provinces will need to
construct LNG processing plants to liquefy gas and
storage facilities to store the manufactured LNG. This
is why Kunlun Energy is planning to build up to 22 new
LNG processing plants over the period of the 12th FiveYear Plan.
We recently visited ENN’s new gas-processing and
storage facility in Changsha, Hunan (100% owned by
ENN’s Changsha Company, one of the largest city
projects owned by ENN). The facility has a designed
capacity of 1200 x 10,000 cm, which could supply 15
days to the Changsha city’s full demand during periods
of supply interruptions, especially in winter times. The
project was fully operational in June 2012 and is
currently in its stockpiling process. The usual process is
to purity – liquefy – storage. When needed, the gas will
be shipped by trucks either in liquid forms or piped gas
forms throughout existing pipelines back to the city
(the project is located in suburban area). The total
running cost is about CNY0.6-0.7/cm for the whole
process, with liquefaction accounting for a dominant
part.
- 24 -
17 December 2012
We were interested to hear that, given that ENN is a
local monopoly in gas supply, there are other gas
companies running retail business like CNG stations –
we saw quite a few owned by CRG, PetroChina and
Sinopec during our trip. When ENN’s storage projects
sells gas to these external distributors, they are all
likely to pass on the operating cost of CNY0.6-0.7 plus
a mark-up, so this storage project should also generate
a profit, in our view, boosting additional returns for
ENN overall in Changsha. This project is the largest in
southern and central China and more of these similar
projects will be considered in many other provinces in
the future, especially where there is no readilyavailable LNG, like on the east coast. LNG stations
should be new drivers for Changsha and this storage
project is capable of supporting 20 stations running at
the same time. Also, if there is strong demand, the
project could easily extend capacity with some unused
land area. The total investment was CNY140m.
ENN’s gas storage facility in Changsha
Gas storage facilities to be built over the 12th Five-Year Plan
Location
Liaohe
Dagang
Huabei
Gas storage
Shuang 6
Bannan
Su 1
Su 20
Su 4
Su 49
Guxinzhuang
Wen 23
Xiangguosi
Hutubi
Yulin
Daqing group
Jilin
Qi 13
Jintan 1
Jintan 2
Wen 96
Yong 21
Wen 23
Huangchang
Huaian
Anning
Yunying
Pingdingshan
Xinan
Xinjiang
Yulin
Daqing
Jilin
Liaohe
Jiangsu
Jiangsu
Zhongyuan
Shengli
Zhongyuan
Jianghan
Jiangsu
Yunnan
Hubei
Henan
Total
Capacity (bn cm)
1.6
0.4
0.2
0.1
1.2
0.5
0.4
0.5
2.3
4.5
6.0
1.0
1.0
0.3
0.2
0.2
0.3
0.1
1.7
0.3
1.2
1.0
0.6
1.2
25.7
Investment (CNY bn)
8.4
1.3
6.7
1.9
11.9
9.9
18.0
6.5
0.8
1.0
1.5
1.0
0.5
5.0
1.3
1.3
1.0
1.7
1.5
81.1
Source: NDRC
ENN: total revenue forecasts
100%
Gas connection fees
90%
Sales of piped gas
(resi and C&I)
80%
70%
Sales of CNG vehicle
60%
50%
Distribution of LPG midstream
40%
Sales of appliances
30%
20%
Sales of materials
10%
Energy solutions
0%
2011
Source: Photo taken by Daiwa
2012E
2013E
Source: Company, Daiwa forecasts
For storage facilities, the government plans to spend
CNY81bn to build up to 25bn cm of storage facilities by
2015. The total capacity accounts for 35% of the
government’s overall demand target by 2015, which we
believe would greatly alleviate supply bottlenecks,
especially during peak demand periods.
- 25 -
2014E
2015E
17 December 2012
Gas contracts can be versatile
China: gas-price reform history
Also in Changsha, we recently visited ENN’s project
supplying gas to the Changsha Airport, which is
considered as a landmark project showcasing the
application of ENN's long-talked-of energy solutions.
This project started operations last year, supplying gas
to the airport's own heating-cooling-power system with
a joint venture (60%/40%) between ENN and Broad (a
large local air-conditioning maker and energy-solution
provider). Total capex in the project is about CNY80m,
and for its first year of operation the project made a
small cash profit but further upside should come from
local government approval to put the power on the
grid, according to ENN. The power units chosen by the
joint venture were designed for on-grid dispatch not
off-grid, so they have to gain access to the grid to
generate stable cash flows. ENN’s local management
expects this to happen by the end of 2012, which could
then bring in a further profit, achieving at least a 10%
annual IRR on ENN’s calculations.
Stage
1959-1993
1993-2005
2005-11
December 2012
Details
Fully controlled well-head prices and kept prices low to attract demand
Introduced price-hike allowance for enterprises, and gas price
consideration incorporated prices of alternative fuel
Classified gas source by pipeline and introduced two tiers of gas prices.
The second-tier gas price is benchmarked against oil, LPG, and coal.
New reform trial run to begin with Guangdong and Guangxi
Source: Daiwa
As we highlighted in the same report (A tale of gains
and pain), China is facing substantial pricing pressure
in gas, with imported gas accounting for bigger portion
of overall supply. The following table shows that
China’s current well-head price is significantly below
most international benchmarks (except those of the US
and Canada) and its own imported prices (West-East II
and LNG prices). As a result, gas importers (namely
China’s oil and gas trio) are running negative profit
margins on new imported gas contracts, both piped gas
and LNG.
Country comparison of natural-gas prices (current)
Besides profitability, we believe the significance of this
project is really to brand ENN's pursuit of one-stop
energy services as a new growth driver.
ENN’s pilot programme in energy solutions
Country
Japan
South Korea
India
US
Canada
Germany
UK
China's current well-head
W-E II import price
China's new LNG prices
Type of gas
LNG import
LNG import
LNG import
Henry Hub spot
AECO C Hub spot
Import from Russia
Heren NBP Index
Domestic piped gas
Piped gas
LNG import
CNY per m3
3.7
3.7
3.1
0.8
0.8
2.8
2.0
1.4-1.6
2.3
3.0-4.0
Source: Bloomberg, Index Mundi, various press reports (including Sina)
Full reform could take place in 2013
In the beginning of the year, we calculated the various
scenarios of the gas price reform in the report, China
City Gas Sector: 2012: a tale of gains and pain (3
January 2012). However, there has not been any
meaningful progress year-to-date in 2012, after the
trial run took place in December 2011 for Guangdong
and Guangxi provinces, which we believe has been
partially due to the slowing economy and risk-aversion
of energy reform supporters to weigh pressure on the
cost of the economy.
On 26 December 2011, the NDRC announced that it
was starting gas-price reform trials in Guangdong and
Guangxi provinces. The pilot programmes see PRC
city-gate ceiling prices set with reference to the market
prices of its substitutes (namely fuel oil and LPG),
replacing the previous cost-plus basis, to reflect supplydemand equilibrium. The main points include: 1) using
Shanghai as a reference point for pricing, 2) calculating
Shanghai’s ceiling city-gate price based on the formula
shown in the following table (a 60/40 weighting for
fuel oil/LPG), 3) arriving at the city-gate prices in
Guangdong (CNY2.74/m3) and Guangxi (CNY2.57/m3)
based on the 2010 year-end prices of alternative fuels,
4) city-gate prices applying to both domestic and
imported piped gas with uniform city-gate prices
regardless of their source, and 5) retail pricing being at
the discretion of the local government, ie, linked to gasoutput costs where applicable. The mechanism will be
adjusted annually and moved gradually to a semiannual or quarterly basis.
- 26 -
17 December 2012
Calculation formula for ceiling city-gate prices
Pnatural
gas
= K ∗ α ∗ Pfuel
oil
Hnatural gas
Hnatural gas
∗
+ β ∗ PLPG ∗
∗ (1 + R)
Hfuel oil
HLPG
Source: NDRC
K = adjustable discount factor (currently at 0.9), α = weight of fuel oil (60%), β = weight of
LPG (40%), H = heat value of natural gas, R = tax rate of natural gas (13%)
China would benefit from such an adjustment, again
mainly because Guangxi Province has been paying high
prices for LNG imports.
Gas-price implications for China’s regions based on 2011
benchmarks
Trend in crude-oil price
Current city-gate price
(CNY/m3)
3.49
1.96
2.29
2.01
1.65
1.72
1.68
Provinces
South
Northeast
East
Beijing
Southwest
Central
North ex-Beijing
Average
(USD/bbl.)
160
140
120
100
80
60
Common increase
(CNY/m3)
(0.07)
0.18
0.72
1.04
0.97
1.13
1.30
Increase
(%)
(2)
9
32
52
59
66
77
42
Source: Daiwa estimates
40
20
0
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Source: Bloomberg
Gas-pricing pressure for different provinces would
come from Shanghai’s prevailing reference price. Based
on the given formula, we calculate that the ceiling citygate price in Shanghai based on the current fuel oil and
LPG prices should be CNY2.8/m3, which is 33% higher
than the current city-gate price (about CNY2.1 m3) in
Shanghai. Based on our calculation and assumptions
for transmission costs, we arrive at the ceiling city-gate
prices for each province. It appears that northern
China (excluding Beijing) is likely to see the highest
cost increase, followed by the central and southwestern parts of the country, while southern China
would benefit from such an adjustment, mainly
because Guangxi Province has been paying high prices
for LNG imports so far.
Gas-price implications for provinces based on 2010
benchmarks
Provinces
South
Northeast
East
Beijing
Southwest
Central
North ex-Beijing
Average
(CNY/m3)
3.5
2.0
2.2
2.0
1.7
1.7
1.7
Common increase
(CNY/m3)
(0.3)
0.1
0.4
0.4
0.4
0.5
0.7
Increase
(%)
(7)
5
17
22
22
31
42
19
One drawback of this reform, in our view, is its failure
to incorporate imported LNG prices, which could
account for a significant amount of gas supply in China
over the long term. Compared with previously signed
contracts (CNY1-2/m3), new contracts that are signed
by China in the next five years could see rapid increases
in LNG prices to as high as CNY3.5/m3 on average.
Compared with step 2, if future LNG imports are
included, there could be higher city-gate prices for
northeast, east, and northern China, while the
remaining provinces should see no impact on their
city-gate prices as they have no dependence on
imported LNG.
3
Immediate gas-price implications for China’s regions (CNY/m )
Provinces
South
Northeast
East
Beijing
Southwest
Central
North ex-Beijing
Average
3.49
1.96
2.29
2.01
1.65
1.72
1.68
Once all provinces follow the mechanism, we would
expect China to reset the formula with the most recent
alternative-fuel prices. Based on our calculation, this
would mean an overall increase of 42% in average citygate prices. Similar to step 1, the implications would be
most negative to northern China (excluding Beijing),
which would be likely to see the highest cost increase,
followed by central and south-western China. Southern
- 27 -
Common increase
(0.32)
0.27
0.96
1.04
0.97
1.13
1.40
Increase (%)
(9)
14
42
52
59
66
84
44
17 December 2012
China provinces and gas sources by 2015E
Pricing power of different customer groups
Provinces
North-east
Heilongjiang
Jilin
Liaoning
North
Beijing
Tianjin
Shanxi
Hebei
Inner Mongolia
Central
Shaanxi
Henan
Anhui
Hubei
Chongqing
Jiangxi
Hunan
Xinjiang
Qinghai
Gansu
Ningxia
South-west
Yunnan
Sichuan
Guizhou
East
Shandong
Jiangsu
Zhejiang
Shanghai
Fujian
South
Guangxi
Guangdong
Hainan
Customers
Industrials
Commercial
Heating and cooling
Power generation
Residential
Vehicles
Gas sources by 2015E
Domestic gas, Eastern Siberia
Domestic gas, Eastern Siberia
Domestic gas, LNG import, Eastern Siberia
Shaanxi-Beijing I, II, II & IV
Shaanxi-Beijing I, II, II & IV, offshore gas, LNG import
Coalbed methane, Shaanxi-Beijing II & III
Domestic gas, Shaanxi-Beijing II & III, LNG import
Domestic gas
Domestic gas
West-East I & II, domestic gas
West-East I & II, Sichuan-Shanghai
Sichuan-Shanghai, Zhong-wu, West-East II
Sichuan-Shanghai
Sichuan-Shanghai, West-East II
Zhong-wu, West-East II
Domestic gas
Domestic gas
Domestic gas
West-East I
Burma-China
Domestic gas
Burma-China
Shaanxi-Beijing II, West-East II, LNG import
West-East I & II, Sichuan-Shanghai, LNG import
West-East I & II, Sichuan-Shanghai, offshore gas, LNG import
West-East I & II, Sichuan-Shanghai, LNG import, offshore gas
LNG import
LNG import, West-East II, Burma-China
LNG import, West-East II
Offshore gas, LNG import
Source: Daiwa
Reform reinforcement likely in mid-2013
In our base case, we expect the gas-price reform to be
reinforced in the middle of 2013 with a 20% price
increase (or procurement costs for the city-gas
companies). If the economy is weaker than Daiwa
expects, the reform could possibly be delayed, or
reinforced with much larger relief measures, especially
in less developed provinces.
According to a report on Sina in late November 2011,
China is considering introducing a progressive-charge
mechanism for residential gas prices, which links gas
rates to spending power and the time of usage. Similar
to what we observed in the country’s electricity
industry, the implementation of such a mechanism
would mark the end of cities being the gate-keepers of
residential gas prices. Electricity and gas prices over
the long term should rise in line with China’s gradual
increase in per-capita GDP. We believe that if this
mechanism were introduced, residential gas prices
would effectively increase immediately, and that this
would come at the same time as gas-price reform,
causing earnings volatility for the gas distributors.
Pricing power
High: contract prices based on direct negotiation
High: contract prices based on direct negotiation
High: government subsidies the cost hikes for end users
High: government subsidies the cost hikes for end users
Low: likely to follow progressive-charge rules
Medium: price linked with petroleum with certain pricing power
Source: Daiwa
When calculating the potential upward cost pressure
for city-gas companies, our main concern is about
residential users, as history shows that the pass-though
of rising costs to price increases either never took place
or saw long delays (Beijing city saw more than a twoyear delay for the cost hike that was finally
implemented in June 2010). Increases in vehicle gas
costs are relatively easier to pass on to customers
through higher prices due to shortage issues, although
the pricing is generally benchmarked to current
petroleum prices. Other customers, namely industrial
and commercial (C&I), heating & cooling and powergeneration ones, have high pass-though power as
prices for the former two groups are based on demandsupply and for the latter two are usually subsidised by
local governments (Beijing as the best example).
Of the city-gas companies under our coverage, we can
see in the following table that CRG has a higher
household sales proportion than its peers.
Piped gas volume mix (2013E)
(%)
CRG
CHG
ENN
BJE
Residential
32
8
13
14
C&I
59
76
75
7
CNG
9
11
12
0
Others
0
0
0
79
In our earnings forecasts for the city-gas companies we
cover, we assume that only half of the household sales
see a pass-through (either with a partial pass-through
or delays, which is consistent with what occurred in
2010, when around half of the city-gas projects failed).
Also, we expect a complete pass-though for vehicle gas
and power generation. Based on the experience in
2010, city-gas operators leveraged to other customer
groups, especially C&I users, should see a higher tariff
hike to offset margin compression from household
users. Based on our calculations, to pass on fully the
20% cost pressure, ENN, BJE, CRG and CHG would
need to increase their tariffs for C&I customers (also
the cooling and heating users in Beijing) by 15.6%,
15.8%, 17.3% and 14.7%, respectively, which would not
be difficult in our view given the still-wide gas
shortages.
- 28 -
17 December 2012
Increase in tariffs for C&I customers required to protect a
dollar margin squeeze assuming a 20% cost increase
(CNY/cm) – annualised basis
Unit cost of gas purchases
ASP
Residential customers
C&I customers
CNG stations
Unit cost after reform
Unit cost after price reform (assuming 20% increase)
Unit cost increase
Unit gross profit before reform
C&I customers
CNG stations
Unit gross profit/(loss) after price reform
Residential (assuming 50% pass-through)
CNG stations (assuming 100% pass-through)
Required price increase for C&I customers
ENN
2.49
BJE
1.72
CRG
1.85
CHG*
1.8
2.55
3.47
3.93
2.28
2.33
n.a.
1.78
2.62
3.29
2.22
2.57
2.7
2.99
0.50
2.06
0.34
2.22
0.37
2.16
0.36
0.06
0.98
1.44
0.56
0.61
n.a.
-0.07
0.77
1.44
0.42
0.77
0.90
-0.19
1.44
15.6%
0.39
n.a.
15.8%
-0.26
1.44
17.3%
0.24
0.90
14.7%
The downside risks to our earnings forecasts for the
city-gas companies would be higher-than-expected gas
price increases. If, instead of a 20% cost increase, we
were to see a 40% increase, then we calculate that the
companies would have to increase C&I tariffs by close
to 32% on average to avoid margin pressure, which
could be much more difficult to do without having an
adverse impact on demand.
Increase in tariffs for C&I customers required to protect dollar
margin squeeze assuming a 40% cost increase)
(CNY/cm) – annualised basis
Unit cost of gas purchases
ASP
C&I customers
CNG stations
Unit cost after reform
Unit cost after price reform (assuming 20% increase)
Unit cost increase
Unit gross profit before reform
Residential customer
C&I customers
CNG stations
Unit gross profit/(loss) after price reform
Residential (assuming 50% pass-through)
CNG stations (assuming 100% pass-through)
Required price increase for C&I customers
ENN
2.49
BJE
1.72
CRG
1.85
CHG*
1.8
2.55
3.47
3.93
2.28
2.33
n.a.
1.78
2.62
3.29
2.22
2.57
2.7
3.49
1.00
2.41
0.69
2.59
0.74
2.52
0.72
0.06
0.98
1.44
0.56
0.61
n.a.
-0.07
0.77
1.44
0.42
0.77
0.90
-0.44
1.44
31.3%
0.22
n.a.
31.6%
-0.44
1.44
34.6%
0.06
0.90
29.3%
Another risk we see for the city-gas companies is a less
uniform gas pricing, which also seems likely given the
vast discrepancies of city-gas prices across the country.
We believe that if this happens, CRG will be worse
positioned than others given its larger exposure to
western China, thus a higher cost increase.
Potential gas-cost hikes weighted by geographical exposure
Company
Cost hike (%)
CHG
19
ENN
22
BJE
22
CRG
26
A pick-up in new housing starts could be a
positive
Connection-fee income is an essential part of the citygas business model, providing large cash flow in the
early stage of project life. Gas companies usually charge
such one-off income upon connection to a new
customer. For the listed companies, connection fees
account for an average 40% of our 2012E total gross
profit, excluding BJE, which barely charges connection
fees any more. Also, based on companies’ guidance,
most are predicting a YoY drop in total household
connections for 2013 as a result of slowing new housing
starts in China.
However, the trend has not been as bad as some were
concerned it would be this year. For 2013, according to
Jonas Kan, Daiwa’s Hong Kong/China Head of Property
Research, China is likely to see a slight increase in the
gross floor area (GFA) constructions in 2013 (a 5% YoY
increase). Tier-one coastal cities and certain inland cities
like Chengdu and Chongqing may be more badly hurt
than the country overall. This would not be good news
for the outlook for gas companies’ connections, as
household connections usually account for the majority
of their connection-fee income.
We continue to believe that CRG is the most impacted
by the housing market, with the majority of its new
connections still focused on newly-built properties.
However, this could also be the case if new housing
starts surprise on the upside, which would make CRG
the biggest beneficiary.
Companies’ sources of new household connections (%)
Com
pany
ENN
BJE
CRG
CHG
New connections from
newly built properties
~50
~0
~80
~50
Connection fee as % Earnings exposure to newly-built
properties (max % downside)
of 2013E gross profit
40
20
0
0
41
33
32
16
Source: Companies, Daiwa estimates and forecasts
This winter’s benefit should be small
Given the colder-than-expected winter in China so far,
Beijing has started the heating season one week earlier
than usual. Based on our research with the listed gas
companies, we see the key beneficiary of this cold
winter as BJE, as it is the sole gas supplier in Beijing
and the largest gas user in China with heating based on
burning gas. The colder-than-normal winter could also
benefit other listed companies in other northern city
projects. However, given that the latter mostly do not
sell to central-heating facilities (or the projects burn
coal to generate heat), we expect the benefits to be
small (maybe some households or commercial – like
hotels and restaurants – could see more demand in
colder winter).
- 29 -
17 December 2012
Daily temperature of Beijing
China water industry: growth phases
(℃)
25
Extensive growth phase
Intensive growth phase
Key words:
• Construction
• Penetration
Key words:
• Upgrade
• Quality standard
Characteristics:
• High government involvement
• Large capex
• Fast additions of projects
• Fast rising penetration
• Low water tariff
Characteristics:
• Rising privatization of projects
• Capex focused on pipeline
rehabilitation and upgrade
• Slowdown of project additions
• Penetration rate already high
• Increase in water tariff
20
15
10
5
0
(5)
2012
2011
24-Dec
17-Dec
10-Dec
3-Dec
26-Nov
19-Nov
12-Nov
5-Nov
29-Oct
22-Oct
15-Oct
8-Oct
1-Oct
(10)
Historical average (2008-2011)
Growth drivers:
• Large fixed investment
• New additions of projects
• Fast rising penetration
Key achievements:
• Water access rate: 72% by 2001 to
97% by 2010
• Urban wastewater treatment rate:
36% by 2001 to 77% by 2010
China water: focus on the valueadded projects
Growth drivers:
• Rising privatization of projects
• Water tariff increase
• Future water revolution: water reuse
and seawater desalination
Source: Daiwa
As we highlighted in our sector initiation report
published in February 2012, China Water: turning on
the taps, following 10 years of extensive industry
development, we believe that early this year, the
industry entered a new growth phase of what we call
intensive growth, characterised by the following: 1)
high penetration of fresh water access and a high
waste-water treatment rate already achieved, 2)
infrastructure investment focused on the rehabilitation
and upgrading of water pipelines and treatment plants,
3) a slowdown in new project additions, 4) increasing
industry consolidation and rising privatisation of water
projects due to local governments’ poor operating
profitability, 5) rising water tariffs to promote water
conservation, and 6) wider application of new
technologies such as seawater desalination and water
reuse.
We believe this thesis will still be valid in 2013, and one
more trend we have observed from the water
companies during 2012 is their expansion into the
waste-to-energy business, which has higher ROEs and
is less developed in China than the traditional watersupply and waste-water treatment businesses.
Waste-to-energy continues to gain traction
We believe it has become a prevailing trend for water
companies to expand into the waste-to-energy business,
in an endeavour to capture its higher 10-15% average
project IRR, compared to an average IRR of 8-12% for
water treatment. According to the 12th Five-Year Plan
for urban solid waste treatment development published
in May 2012, a total investment of CNY263.6bn on
municipal solid waste (MSW) treatment will be spent
over 2011-15. China targets to improve the solid waste
non-hazardous treatment ratio to 90% for urban areas
by 2015, from the current 78%. Waste-to-energy
receives the biggest policy support among the nonhazardous MSW treatment methods given its limited
land requirement, effective waste reduction and energy
recycling. China targets to increase its waste-to-energy
capacity to 35% (48% for eastern region) of total MSW
treatment capacity by 2015, from 7% currently.
- 30 -
17 December 2012
2
Official capacity targets for non-hazardous municipal solid
waste (MSW) treatment and WTE
('000 tonne/day)
17% CAGR
2010-15E
1,000
CO emission for processing 1,000 tonnes of municipal solid
waste based on different treatment methods
(tonne)
500
871
400
800
600
67% CAGR
2010-15E
300
200
399
400
305
100
200
0
24
0
WTE
2010
(100)
Non-hazardous MSW treatment
2015E
Landfill (no gas
control)
Landfill (with partial Landfill (with full gas
gas control)
control)
Incineration
Source: NDRC, National Bureau of Statistics
Source: US Environmental Protection Agency
The term ‘non-hazardous MSW treatment’ means the
disposal of MSW by recycling, composting, waste-toenergy and sanitary landfilling. China generated
around 159mt of MSW in 2010, around 90% of which
was disposed of via landfills. Landfills are no longer
feasible for land-scarce cities, and inappropriate
landfill of hazardous waste can cause irrecoverable
pollution of the soil and underground water. The Earth
Engineering Centre of Columbia University has
estimated that 1m2 is used up for every 10 tonnes of
MSW land filled forever. Waste-to-energy, on the other
hand, is a more ideal disposal method and can recover
energy in the form of electricity or heat, or produce a
combustible fuel commodity, such as methane,
methanol, ethanol or synthetic fuel, from the
incineration of waste sources. Waste-to-energy
incineration) especially reduces CO2 emissions into the
air, compared with other means of waste treatment,
such as landfill.
According to our company visit in July 2012, China’s
second-largest player by supply and treatment capacity,
Beijing Capital (Not rated), reaffirmed our view that
waste-to-energy is gaining traction from water
companies. The government’s environmental policy
has tended to promote the formation of large
integrated environmental-solution providers. As
urban-water treatment capacity growth has slowed to a
10.8% CAGR towards the end of the current Five-Year
Plan, from a 16.9% CAGR during the 11th Five-Year
Plan, waste-to-energy has thus become the hot area
that water players have begun to pursue.
CEI’s waste-to-energy plant in Changzhou, Jiangsu
Comparison of waste-to-energy and landfill processes
Land requirement (m2/t)
Location difficulty
Waste reduction
Waste-processing time
Energy recycling
Investment ('000 CNY/t excl. land cost)
Waste-to-energy
Landfill
(incineration)
500-900
60-100
Difficult
Comparably easier
nil
80-90%
20-50 years
2 hours
Waste recycling;
Generate biomass for
power generation Generate heat and power;
100-200
400-500
Source: Daiwa
Although waste-to-energy is not very welcomed by
local residents due to its emission of dioxins and
odours during the incineration process, the companies
we interviewed have indicated that meeting emission
standards is a key to securing new projects and
avoiding project postponements or changes in sites
planned. For instance, China Everbright International
(CEI) was able to secure a pipeline of waste-to-energy
projects which are all in compliance with the most
- 31 -
17 December 2012
developing countries and weak demand from Europe
with the deteriorating sovereign debt crisis. It traded at
around EUR0.7/tonne at the end of November 2012,
far below its average price of EUR12/tonne during
2009 and 2010. As many fixed-price CDM contracts
signed in the past few years were priced at EUR510/tonne, we believe the upcoming contract renegotiations could put large pressure on CDM income
of the wind-power operators in 2013 and onwards.
stringent EU2000 waste incineration emission
standards, which limit dioxins to 1.0ng/m3.
In the long run, we believe direct competition is
inevitable between different government-backed
companies within the same region when securing new
projects. It is a common industry observation that the
stronger grow stronger by winning projects in
peripheral areas upon completing one or few initial
projects. Beijing Enterprises Water (BEW) has
acquired mainly water projects in other provinces after
its successful completion of pilot projects in one
province, while CEI has proven success in securing
waste-to-energy projects in neighbouring
municipalities within the same province. We believe
strong links with local governments assist in securing
lucrative projects.
Price trend of CERs and EU Emission Allowance (EUA)
(EUR/co2t)
40
35
30
25
20
15
10
China wind power: our main
concerns have intensified
5
0
Aug-07
Apr-08
Dec-08
Aug-09
Apr-10
Dec-10
CER
In our industry report, published in May 2012, China
Wind: 360° reassessment II – the wind giant is taking
a break, we highlighted four major concerns we had for
the wind farm operators: 1) continuing power
curtailments, 2) unstable wind blows, 3) uncertainty
about carbon repricing, and 4) equipment performance
risks. During the past six months since our report,
some of these risks have increased our concerns and we
see little improvement heading into 2013. Of these four
risks, the most imminent one we see for investors to
assess the 2013 earnings outlook for the wind-power
sub-sector is related to carbon repricing.
1. Worsening climate for carbon repricing
According to the Kyoto Protocol governing carbon
emissions globally, the first commitment period (200812) by Annex I countries (mostly developed countries)
will expire at the end of 2012. As a result, most fixedprice Clean Development Mechanism (CDM) contracts
signed between China wind-farm operators and foreign
carbon-credit users will also expire by this year-end.
Therefore, in 2013 many wind farms will have to renegotiate new contracts with end-users or trading
agencies for contracts based on floating-price
agreements. For the contracts that have fixed pricing,
even extending a few years after 2012, investors should
also bear in mind the contract default risks, especially
if the contract was taken out through a third-party
agent instead of the end user.
As the closest reference on how the contracts will be
benchmarked to, Europe’s spot price of Certified
Emission Reductions (CERs) has plummeted since
mid-2011, due to an oversupply of carbon credits from
Aug-11
Apr-12
EUA
Source: Bloomberg
The price of EU Emission Allowance (EUA) (the carbon
credit used exclusively in Europe) has stabilised in
2012. The EUA-CER spread has been widened to
EUR7/tonne at the end of November 2012, and some
traders are expecting CER prices to rebound from
historical lows next year. However, we believe such a
rebound could be limited given the current demand
and supply situation.
To quantify such a risk, based on 1H12 results, CDM
accounted for 13-82% of the pre-tax profit of the listed
wind-power operators. China Longyuan (LYP) and
China Suntien Green (Suntien) have relatively lower
profit contributions than peers like Huaneng
Renewables and Datang Renewables (both unrated).
China wind-power companies: CDM as % of pre-tax profit
(%)
100
82
80
60
40
20
36
30
19
17
7
11
31
9 11
37
26
12
20
9
42
22
14
21
0
2008
2009
China Longyuan
Huaneng Renewables
Source: Companies
- 32 -
2010
2011
Datang Renewables
China Suntien
1H12
13
17 December 2012
Also, not all the companies have the same pricing
structure. LYP and Datang Renewables have more
fixed-price contracts than others, while Huaneng
Renewables has close to 90% on floating pricing. Thus,
the former two companies should face greater repricing
risks, while CSG and Huaneng Renewables have lower
risks as their most recent financial statements have
reflected some of the risks (their floating prices are
closer to spot prices). In its 1H12 results, Datang
Renewables booked some of its fixed-price contracts
based on market prices due to its perception of their
high default risks, which has to some extent reduced
the repricing risk for next year. Based on our
conversation with LYP’s management, LYP expects its
CDM income to fall by around 50% YoY in 2013 even
incorporating new contracts next year. The average
carbon price for LYP’s fixed-price contracts is about
EUR10-10.5/tonne, while current spot pricing is
trading at below EUR1/tonne. Management expects the
spot price to rebound to around EUR3-4/tonne in
2013.
China wind-power companies: % of CDM contracts with
floating and fixed prices (1H12)
LYP
Datang Renewables
Huaneng Renewables
Suntien
Floating price
26%
0%
90%
50%
Fixed price
74%
~100%
10%
50%
Source: Companies
In terms of contract default risks, LYP and Suntien
have little exposure, as most of their carbon contracts
were signed with direct end users, the majority of
which are large multi-national corporations with good
reputations. However, as 50-70% of the carbon
contracts of Datang Renewables and Huaneng
Renewables were signed with intermediates, they look
more vulnerable to contract default risks.
China wind-power companies: % of CDM contracts signed
with direct users and agencies
LYP
Datang Renewables
Huaneng Renewables
Suntien
Source: Companies
Direct user
100%
30%
~50%
~100%
Agency contracts
0%
70%
~50%
0%
Consequently, the earning downside in 2013 associated
with CDM could still be larger for Huaneng
Renewables and Datang Renewables, exaggerated by
their contract default risks.
2. Power curtailments may not improve in
the near term
Since our first 360° sector reassessment report in
September 2011, we were concerned about delays in
China’s aggressive investments in the ultra-high
voltage (UHV) power-transmission network, and
predicted at least one-year delays in the completions of
most lines. Based on our most recent research, the
progress remains unexciting. Out of the seven UHV
lines (four AC lines and three DC lines) that were
planned by the State Grid to receive final approval
within 2012, only three have been approved year-todate in 2012. Normally, these UHV lines need to
receive preliminary approval from China’s National
Energy Administration (NEA) for preparation work
such as feasibility study, and final approval from the
NDRC for construction. As the construction usually
takes more than two years, we see a low likelihood of
the grid bottleneck for wind-power transmission issue
being resolve by the end of 2013, so power curtailment
risks are likely to persist over the next 12 months
State Grid: working plans for UHV lines (2011 and 2012)
UHV lines
UHV AC lines planned in 12th
Five-Year Plan
Huainan, Anhui - Jiangsu Shanghai - Northern Zhejiang Southern Anhui - Huainan, Anhui
Ximeng, Inner Mongolia Nanjing, Jiangsu
Western Inner Mongolia Changsha, Hunan
Jingbian, Shaanxi Lianyungang, Jiangsu
Jingmeng, Hubei - Nanchang,
Hunan
UHV DC lines planned in 12th
Five-Year Plan
Hami, Xinjiang - Zhengzhou,
Henan
Xiluodu, Yunan - Western
Zhejiang
Hami, Xinjiang – Chongqing
2011 target
2012 target
To obtain
To obtain
Voltage capacity
final
final Result
(kV)
(MW) approval Result approval (YTD)
1,000
N/A
√
√
1,000
9,400
√
x
√
√
1,000
10,000
√
x
√
x
1,000 ~10,000
√
x
√
x
√
x
1,000 ~10,000
800
7,600
√
x
√
√
800
800
7,500
7,200
√
x
√
√
√
x
Source: State Grid, Xinhuanet, various news reports
- 33 -
17 December 2012
Major UHV lines planned under China’s 12th Five-Year Plan
Number UHV lines
UHV AC lines planned in 12th Five-Year Plan
Three vertical lines
1
Ximeng, Inner Mongolia - Nanjing, Jiangsu
2
Zhangbei, Hebei - Nanchang, Jiangxi
3
Western Inner Mongolia - Changsha, Hunan
Three horizontal lines
4
Northern Shaanxi - Weifang, Shandong
5
Jingbian, Shaanxi - Lianyungang, Jiangsu
6
Ya'an, Sichuan - Shanghai
One circular line - not particularly critical to wind-power
development
Huainan, Anhui - Jiangsu - Shanghai - Northern Zhejiang 7
Southern Anhui - Huainan, Anhui
UHV DC lines planned in 12th Five-Year Plan
8
Jingping, Sichuan - Southern Jiangsu
9
Nuozhadu, Yunnan - Jiangmen, Guangdong
10
Hami, Xinjiang - Zhengzhou, Henan
11
Xiluodu, Yunan - Western Zhejiang
12
Hami, Xinjiang - Chongqing
13
Ximeng, Inner Mongolia - Taizhou, Jiangsu
14
Jiuquan, Gansu - Changsha, Hunan
15
Zhundong, Xinjiang - Chengdu, Sichuan
16
Eastern Ningxia - Zhejiang
17
Hulunbeier, Inner Mongolia - Qingzhou, Shandong
18
Hulunbeier, Inner Mongolia - Northern Henan
19
Chifeng, Inner Mongolia - Jiangsu
Preliminary
approval from
AC/DC Voltage (kV) capacity (MW)
NEA
Construction
Daiwa
estimated
completion
time
wind
wind/coal-fired
wind/coal-fired
2014
2015
2015
coal-fired
coal-fired
hydro
~2015
~2015
~2015
1,000
1,000
1,000
9,400
~10,000
10,000
AC
AC
AC
1,000
1,000
1,000
~10,000
~10,000
~10,000
AC
1,000
N/A
√
√
√
N/A
2013
DC
DC
DC
DC
DC
DC
DC
DC
DC
DC
DC
DC
800
800
800
800
800
800
800
1100
800
800
800
800
7,200
5,000
7,600
7,500
7,200
7,200
7,500
7,500
7,600
7,500
7,500
7,500
√
√
√
v
v
v
√
√
√
v
√
hydro
√
hydro
√ wind/coal-fired
v
hydro
wind/coal-fired
wind/coal-fired
wind
wind/coal-fired
coal-fired
wind
wind
wind
2012
2013
2014
2014
2014
2014-15
2015
2015
2015
2015
2015-16
2015-16
- 34 -
√
Major
benefiting
power types
AC
AC
AC
Source: State Grid, various news sources, Daiwa estimates
√
Final
approval
from NDRC
√
v
v
17 December 2012
In terms of utilisation hours, most of the wind-power
companies have seen YoY declines in 1H12, due mainly
to unsolved power curtailment issues and lower wind
speeds in much of China. We do not expect to see a
large improvement in wind-power utilisation until the
UHV power-transmission network is mostly completed
in late 2014 or 2015.
Wind-power utilisation hours (1H12)
(Hours)
1,400
1,200
1,000
800
600
400
200
0
China Longyuan
Datang Renewables
1H11
Huaneng
Renewables
China Suntien
1H12
Source: Companies
3. Wind speeds have stabilised recently
According to our monthly wind resource indicator,
China’s average wind speed has seen meaningful
improvements over the past three months, especially
for central, western and eastern regions. The average
wind speed in November 2012 was only 11% below its
30-year historical average, which was close to the best
level achieved this year. This is consistent with LYP’s
monthly wind-power output year-to-date in 2012.
in 2013, which could also impact the wind speed
volatilities, as it did in 2011.
4. Do not underestimate the equipment
performance risks
Potential increases in repair and maintenance costs
post warranty periods could be another risk to windfarm operators. Wind-turbine manufacturers usually
provided warranties of 2-3 years to wind operators in
the past, which was then extended up to 4-5 years
recently due to a number of equipment failures. During
the warranty period, most of the repair expenses are
borne by the equipment suppliers, while wind-power
companies only have to pay a small amount for
maintenance costs. According to the management of
Huaneng Renewables, repair and maintenance costs of
wind turbines paid by wind IPPs could surge to CNY80
per KW post the warranty period, compared with less
than CNY20 per KW during the warranty period.
As a pioneer in China’s wind-power industry, LYP
currently has 34% of its wind-turbine capacity with
expired warranty periods, while the ratios for Datang
Renewables and Huaneng Renewables as newcomers
are 3-20%. Based on our calculations, the average
repair and maintenance costs per KW in 2011 were
CNY 33 for LYP, and CNY7-15 for Datang Renewables
and Huaneng Renewables.
China wind-power companies: repair and maintenance costs
per KW
(CNY per KW)
40
33
35
LYP’s power output and Daiwa’s wind-resource indicator
(%)
80
70
60
50
40
30
20
10
0
(10)
(%)
5
30
0
(5)
20
25
(20)
5
(25)
0
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
However, wind resources can be volatile in nature, and
short-term trends may not have very strong predictive
power for the future. One positive sign we see is that,
unlike last year, we have not seen very extreme climate
conditions so far this winter, which could bode well for
the utilisation hours for the whole year. However, as
highlighted earlier in the section on the IPPs in this
report, there is the pending question of China’s rainfall
11
7
9
n.a.
2011
(30)
China wind speed compared with its 30-year historical average
20
15
10
(15)
Source: Companies, Daiwa
31
15
(10)
LYP's power output YoY (LHS)
33
LYP
2010
Datang Renewables
2009
Huaneng Renewables
Source: Companies, calculated by Daiwa
The repair and maintenance costs as a percentage of
total operating expenses in 2011 were 4.1% for LYP, but
only 1.9% and 0.9% for Datang Renewables and
Huaneng Renewables, respectively.
- 35 -
17 December 2012
5. Favourable government policies for
solar?
China wind-power companies: repair and maintenance costs
as % of wind revenue (ex CDM income)
(%)
4.5
Although we have not seen major policy developments
for wind power in China yet, there have been major
changes relevant to solar power. The country’s solar
manufacturing value chain has been threatened by the
anti-dumping actions in the Western countries and as
the survival of the country’s solar-power industry is
now at stake, the PRC Government could release more
policy support, especially by raising capacity targets
and encouraging more domestic investments, in our
view.
4.1
4.0
3.5
3.0
2.5
1.9
2.0
1.5
0.9
1.0
0.5
0.0
LYP
Datang Renewables
Huaneng Renewables
Therefore, we would not be surprised if the
government were to revise up its 2015 target for solarpower capacity once more (currently more than 21GW
by 2015) after the past few revisions (initially 5GW,
then to 15GW and 21GW). The relevant risks to the
wind-power operators would be whether they would be
likely to come under pressure to delay investments in
wind power and allocate them to develop more solarpower plants. If this were to occur, it could reduce
earnings visibility for the wind-power operators, as
solar-power plants have less proven returns than wind
farms in China.
Source: Companies, calculated by Daiwa
Therefore, we see a greater risk in repair and
maintenance costs for Datang Renewables and
Huaneng Renewables, as their current per KW cost is
still way below the unit cost level post the warranty
period. Suntien has a relatively higher percentage of
wind turbines with expired warranties, and thus has
less risk associated with cost hikes for repairs and
maintenance.
Wind-power capacity with expired warranties (1H12)
Company
LYP
Datang Renewables
Huaneng Renewables
Suntien
Wind-power capacity with
expired warranty (MW)
3,100
~1,000
133
380
Total consolidated
capacity (MW)
8,994
5,382
5,052
1,201
Percentage
34%
~20%
3%
32%
Source: Companies
- 36 -
Utilities / China
2688 HK
Utilities / China
17 December 2012
ENN Energy
ENN Energy
Target (HKD): 33.50 J 43.00
Upside: 29.7%
14 Dec price (HKD): 33.15
2688 HK
Three reasons to buy ENN
Buy (unchanged)
Outperform
Hold
Underperform
Sell
1
• With industrial demand returning and more supply becoming
available, ENN’s organic growth rate could surprise
• With gas price reforms in 2013, ENN should be able to defend
its margins by passing on more costs to C&I customers
• LNG refuelling station business should be a long-term driver,
and helps raise our DCF-based target price substantially
forecast and 40% of our gross-profit
forecast for 2013.
Dave Dai, CFA
(852) 2848 4068
[email protected]
Gary Zhou
(852) 2773 8535
[email protected]
Another long-term volume-growth
driver should come from ENN’s
ambitions in vehicle refuelling
stations, with much higher growth
potential offered by LNG stations
than CNG. The company’s target is
to open 500 LNG and 400 CNG
refuelling stations by the end of
2015.
2
3
4
5
■ How we differ
Our 2013-14E EPS are more bullish
than the Bloomberg consensus as we
expect a recovery in C&I demand.
Forecast revisions (%)
Year to 31 Dec
Revenue change
Net profit change
Core EPS (FD) change
12E
(2.7)
(2.7)
13E
3.7
0.4
0.4
Share price performance
(%)
(HKD)
■ What's new
We have incorporated the long-term
earnings benefits from the increase
in LNG refuelling stations into our
DCF-based target price.
With China’s continuing gas
shortage and the availability of new
natural gas sources over the next few
years, we expect ENN Energy (ENN)
to maintain at least 20% organic
earnings growth per year on strong
natural gas sales. In 2013, 89% of
the company’s projects will have
access to new natural gas sources,
which should ensure ENN expands
at a faster organic growth rate than
its domestic peers. Management also
expects new household connections
to remain stable for the next two
years, suggesting limited downside
for connection fee revenue, which
still accounts for 15% of our revenue
We expect ENN to defend its
margins well, with gas-price reforms
continuing in mid-2013 (we estimate
prices will rise by 20%). Even
assuming no full cost pass-through
to residential customers by
increasing tariffs, we estimate that
ENN would only need to raise
commercial and industrial (C&I)
tariffs by 16% to successfully defend
its profitability.
The substantial upgrade to our DCFbased six-month target price from
HKD33.5 to HKD43.0 comes after
we incorporated assumptions for the
continuing addition of LNG stations
(90 per year over 2012-20). In
addition, we are raising our 2013-14
EPS forecasts slightly by 0.4%. Risks
would include worse-than-expected
gas sales and an unexpected margin
squeeze.
14E
11.7
0.4
0.4
36
130
32
118
29
105
25
93
22
Dec-11
80
Mar-12
Jun-12
ENN Energy (LHS)
Sep-12
Dec-12
Relative to HSI (RHS)
12-month range
Market cap (USDbn)
3m avg daily turnover (USDm)
Shares outstanding (m)
Major shareholder
22.05-35.40
4.49
6.80
1,050
ENN Group (31.2%)
Financial summary (CNY)
Year to 31 Dec
Revenue (m)
Operating profit (m)
Net profit (m)
Core EPS (fully-diluted)
EPS change (%)
Daiwa vs Cons. EPS (%)
PER (x)
Dividend yield (%)
DPS
PBR (x)
EV/EBITDA (x)
ROE (%)
12E
17,377
2,837
1,567
1.476
25.1
0.7
18.1
1.4
0.379
3.4
9.7
20.5
Source: FactSet, Daiwa forecasts
13E
22,722
3,426
1,983
1.868
26.5
6.2
14.3
2.1
0.560
2.9
7.7
22.3
14E
29,019
4,012
2,359
2.221
18.9
7.7
12.0
2.9
0.777
2.5
6.4
22.8
17 December 2012
Financial summary
Key assumptions
Year to 31 Dec
Gas sales volume (m cm)
Gas ASP - retail (Rmb/cm)
Gas ASP - CNG (Rmb/cm)
Gas purchase cost (Rmb/cm)
Revenue contribution – connection
fee (%)
Gas penetration rate for residential
households (%)
2007
2,287
2.5
2.3
1.7
2008
2,889
2.5
2.3
1.7
2009
2,940
2.5
2.5
1.7
2010
4,149
2.6
2.7
1.8
2011
5,373
2.7
2.9
1.9
2012E
6,711
2.8
2.8
2.0
2013E
8,073
3.0
3.4
2.2
2014E
10,048
0.0
5.5
2.4
33.4
29.3
30.4
27.2
22.7
20.5
15.3
12.1
23.6
27.0
32.4
36.0
38.1
44.2
50.7
57.5
2007
2,366
1,925
1,466
5,756
178
(4,006)
(695)
(244)
989
(228)
53
815
(108)
(199)
508
508
0.513
0.513
0.503
0.126
989
1,233
2008
3,095
2,422
2,749
8,266
184
(6,019)
(847)
(313)
1,270
(351)
211
1,131
(260)
(240)
631
631
0.625
0.625
0.614
0.154
1,270
1,583
2009
4,078
2,554
1,782
8,413
84
(5,873)
(625)
(391)
1,608
(308)
83
1,383
(304)
(276)
803
803
0.775
0.775
0.772
0.192
1,608
1,999
2010
6,633
3,049
1,534
11,215
162
(8,203)
(929)
(453)
1,792
(284)
303
1,811
(410)
(388)
1,013
1,013
0.965
0.965
0.954
0.286
1,792
2,245
2011
9,152
3,415
2,501
15,068
96
(11,166)
(1,152)
(511)
2,335
(389)
381
2,327
(660)
(414)
1,253
1,253
1.194
1.194
1.180
0.303
2,335
2,845
2012E
10,869
3,555
2,953
17,377
26
(12,783)
(1,190)
(595)
2,837
(388)
296
2,744
(658)
(518)
1,567
1,567
1.493
1.493
1.476
0.379
2,837
3,431
2013E
14,822
3,479
4,421
22,722
66
(17,335)
(1,290)
(738)
3,426
(375)
421
3,472
(833)
(655)
1,983
1,983
1.889
1.889
1.868
0.560
3,426
4,164
2014E
18,675
3,515
6,828
29,019
66
(22,830)
(1,458)
(784)
4,012
(340)
457
4,129
(991)
(779)
2,359
2,359
2.247
2.247
2.221
0.777
4,012
4,796
2007
815
244
(108)
385
(87)
1,248
(1,984)
(234)
(106)
(2,325)
1,159
116
(127)
171
1,319
0
242
(736)
2008
1,131
313
(260)
55
23
1,261
(1,418)
(180)
111
(1,487)
349
0
(158)
47
238
0
12
(157)
2009
1,383
391
(304)
910
198
2,578
(1,552)
(289)
(144)
(1,985)
481
237
(200)
258
776
0
1,369
1,026
2010
1,811
453
(410)
902
93
2,849
(2,497)
(509)
16
(2,991)
378
0
(304)
206
280
0
139
352
2011
2,327
511
(660)
416
(242)
2,351
(2,654)
(578)
(200)
(3,432)
(723)
83
(322)
5,215
4,254
0
3,173
(303)
2012E
2,744
595
(658)
252
(640)
2,293
(2,500)
0
0
(2,500)
(642)
0
(402)
0
(1,044)
0
(1,251)
(207)
2013E
3,472
738
(833)
867
145
4,388
(2,000)
0
0
(2,000)
(747)
0
(595)
0
(1,342)
0
1,046
2,388
2014E
4,129
784
(991)
294
168
4,384
(1,500)
0
0
(1,500)
(179)
0
(826)
0
(1,004)
0
1,880
2,884
Profit and loss (CNYm)
Year to 31 Dec
Sales of piped gas
Gas connection
Other Revenue
Total Revenue
Other income
COGS
SG&A
Other op.expenses
Operating profit
Net-interest inc./(exp.)
Assoc/forex/extraord./others
Pre-tax profit
Tax
Min. int./pref. div./others
Net profit (reported)
Net profit (adjusted)
EPS (reported)(CNY)
EPS (adjusted)(CNY)
EPS (adjusted fully-diluted)(CNY)
DPS (CNY)
EBIT
EBITDA
Cash flow (CNYm)
Year to 31 Dec
Profit before tax
Depreciation and amortisation
Tax paid
Change in working capital
Other operational CF items
Cash flow from operations
Capex
Net (acquisitions)/disposals
Other investing CF items
Cash flow from investing
Change in debt
Net share issues/(repurchases)
Dividends paid
Other financing CF items
Cash flow from financing
Forex effect/others
Change in cash
Free cash flow
- 38 -
17 December 2012
Financial summary continued …
Balance sheet (CNYm)
As at 31 Dec
Cash & short-term investment
Inventory
Accounts receivable
Other current assets
Total current assets
Fixed assets
Goodwill & intangibles
Other non-current assets
Total assets
Short-term debt
Accounts payable
Other current liabilities
Total current liabilities
Long-term debt
Other non-current liabilities
Total liabilities
Share capital
Reserves/R.E./others
Shareholders' equity
Minority interests
Total equity & liabilities
EV
Net debt/(cash)
BVPS (CNY)
2007
1,693
235
1,070
506
3,504
6,761
623
1,662
12,550
1,233
2,205
519
3,957
3,821
111
7,889
106
3,629
3,736
925
12,550
31,405
3,361
3.776
2008
1,725
254
1,431
943
4,354
7,855
634
1,731
14,574
1,869
2,752
807
5,428
3,534
171
9,133
106
4,149
4,256
1,186
14,574
31,802
3,678
4.217
2009
2,713
286
1,208
547
4,754
9,028
622
2,231
16,635
1,484
2,772
1,108
5,364
4,400
444
10,208
110
5,007
5,117
1,310
16,635
31,131
3,172
4.939
2010
2,851
249
1,356
623
5,079
10,800
894
2,867
19,640
2,379
3,573
1,536
7,488
3,884
728
12,100
110
5,922
6,031
1,508
19,640
31,060
3,412
5.745
2011
6,024
272
1,837
811
8,944
13,073
1,247
3,624
26,888
3,213
4,172
2,135
9,520
7,459
1,069
18,048
110
6,936
7,046
1,794
26,888
32,004
4,648
6.711
2012E
4,757
311
2,119
842
8,028
15,011
1,214
3,624
27,878
2,505
4,776
2,134
9,415
7,525
414
17,355
110
8,101
8,211
2,312
27,878
33,147
5,273
7.821
2013E
5,809
422
2,770
913
9,915
16,307
1,181
3,624
31,026
2,015
6,477
2,196
10,688
7,268
503
18,460
110
9,489
9,599
2,967
31,026
32,003
3,474
9.143
2014E
7,658
556
3,538
1,771
13,523
17,056
1,147
3,624
35,350
2,001
8,530
2,252
12,784
7,104
584
20,471
110
11,022
11,132
3,747
35,350
30,755
1,446
10.604
2007
69.5
54.8
65.7
33.7
30.0
30.4
21.4
17.2
14.9
4.5
11.2
12.0
90.0
13.3
59.2
0.9
4.3
24.5
2008
43.6
28.4
28.4
24.3
22.1
27.2
19.2
15.4
15.8
4.7
12.4
11.4
86.4
23.0
55.2
0.8
3.6
24.6
2009
1.8
26.2
26.6
27.3
25.7
30.2
23.8
19.1
17.1
5.1
13.9
13.4
62.0
22.0
57.3
0.9
5.2
24.8
2010
33.3
12.3
11.5
26.2
23.6
26.9
20.0
16.0
18.2
5.6
13.7
13.5
56.6
22.6
41.7
0.7
6.3
29.7
2011
34.4
26.7
30.3
23.7
23.7
25.9
18.9
15.5
19.2
5.4
14.0
13.7
66.0
28.4
38.7
0.9
6.0
25.4
2012E
15.3
20.6
21.5
25.1
25.1
26.4
19.7
16.3
20.5
5.7
14.2
14.7
64.2
24.0
41.5
0.9
7.3
25.4
2013E
30.8
21.3
20.8
26.5
26.5
23.7
18.3
15.1
22.3
6.7
16.2
16.4
36.2
24.0
39.3
0.9
9.1
29.7
2014E
27.7
15.2
17.1
18.9
18.9
21.3
16.5
13.8
22.8
7.1
17.5
18.8
13.0
24.0
39.7
1.1
11.8
34.6
Key ratios (%)
Year to 31 Dec
Sales (YoY)
EBITDA (YoY)
Operating profit (YoY)
Net profit (YoY)
Core EPS (fully-diluted) (YoY)
Gross-profit margin
EBITDA margin
Operating-profit margin
ROAE
ROAA
ROCE
ROIC
Net debt to equity
Effective tax rate
Accounts receivable (days)
Current ratio (x)
Net interest cover (x)
Net dividend payout
Company profile
Founded in 1989, ENN Energy is engaged principally in the investing in, and the operation and management of, gas-pipeline
infrastructure and the sale and the distribution of piped and bottled gas in more than 80 cities in the PRC.
- 39 -
Industrials / China
392 HK
Industrials / China
17 December 2012
Beijing Enterprises
Target (HKD): 52.70 J 59.00
Upside: 14.6%
Beijing Enterprises
392 HK
Time to catch up
Buy
Outperform (unchanged)
Hold
Underperform
Sell
1
• Underperformance vis-à-vis peers YTD seems unjustified
• Cold weather bodes well short term; city-gas volume growth and
capacity expansion of pipeline assets would boost 2013 earnings
• BJE’s margins should be among the most defensive in the face of
continuing gas-price reforms
also see a large earnings boost in
2013 driven by its Phase III
expansion. As a result, gas-related
assets account for 76% of our
estimated NAV for BJE.
Dave Dai, CFA
(852) 2848 4068
[email protected]
Gary Zhou
(852) 2773 8535
[email protected]
■ What's new
With winter setting in and likely to be
longer and colder than usual, we see
small upside for Beijing Enterprises’
(BJE) 2012-13 city gas sales volume.
We are also impressed with BJE’s
asset restructuring in 2012,
including: 1) the injection of its No.9
water plant into its subsidiary,
Beijing Enterprises Water (371 HK,
HKD1.97, Underperform [4]) in
September, and 2) in November, the
disposal of the loss-making Beijing
Capital Airport Expressway for a
book gain of HKD150m, which we
see as positive.
Following the divestments, most of
the businesses directly operated at
the group level are now natural gasrelated assets, especially the 100%owned Beijing city gas. The 40%owned associate (Huayou) should
Also, we see small upside for BJE’s
city-gas sales volumes during the
‘heating’ season, which started a
week earlier than expected. At the
organic level, we expect capacity
additions at BJE’s gas-fired power
plants in Beijing to lead to 27% YoY
volume growth for 2013. Last,
continued gas-price reforms could
lead to a 20% increase in natural-gas
prices in other provinces in mid2013, but we expect BJE’s margins
to be protected by it being able to
pass on cost increases to other users
(excluding residential customers).
We are raising our 2012-13 earnings
forecasts to incorporate the small
gas volume upside and recent
divestments. We are raising our
NAV-based six-month target price to
HKD59.0 (76% for the gas assets,
15% for the breweries and 8% for the
water-treatment and supply assets).
The risks to our forecasts would be
lower-than-expected gas-sales
volumes and higher-than-expected
costs for the pipeline business.
■ How we differ
We are more optimistic than the
2
3
4
5
market on BJE’s gas volume sales in
2012-13 due to high demand.
Year to 31 Dec
Revenue change
Net profit change
12E
(0.1)
3.7
3.7
13E
5.5
4.3
4.3
14E
n.a.
n.a.
n.a.
(%)
(HKD)
55
115
51
108
48
100
44
93
85
40
Dec-11
Mar-12
Jun-12
B'Jing Ent (LHS)
Sep-12
Dec-12
12-month range
41.45-52.75
Market cap (USDbn)
7.56
7.41
1,138
Beijing Enterprises Group (59.4%)
Major shareholder
Financial summary (HKD)
Year to 31 Dec
Revenue (m)
Net profit (m)
EPS change (%)
PER (x)
Dividend yield (%)
DPS
PBR (x)
EV/EBITDA (x)
ROE (%)
12E
33,905
4,148
3,388
2.914
22.1
3.3
17.7
1.7
0.876
1.4
9.2
8.7
13E
40,158
4,876
4,263
3.667
25.8
6.3
14.0
2.1
1.107
1.3
8.6
10.1
14E
44,950
5,269
4,876
4.194
14.4
1.9
12.3
2.5
1.268
1.2
7.0
10.7
17 December 2012
Financial summary
Key assumptions
Year to 31 Dec
Gas ASP - retail (CNY/cm)
Gas purchase cost (CNY/cm)
Transmission capacity (mmcfpd)
Transmission sales vol (mmcfpd)
Transmission utilization rate (%)
Volume of beer sales (mil hl)
ASP (local curr./hl)
Capacity – sewage treatment (kt/day)
2007
3,683
1.78
1.29
15,300
8,860
57.9
40.2
173
0
2008
4,890
1.81
1.40
15,300
12,190
79.7
42.2
184
1,100
2009
5,690
1.81
1.40
15,300
14,390
94.1
46.7
193
1,615
2010
6,460
1.86
1.53
22,950
17,240
75.1
50.3
194
2,532
2011
6,470
1.96
1.65
35,600
20,300
57.0
55.1
209
4,200
2012E
7,512
1.98
1.66
35,600
25,026
70.3
56.8
210
4,800
2013E
9,522
1.98
1.70
35,600
27,276
76.6
59.6
211
5,300
2014E
10,860
2.02
1.76
35,600
30,482
85.6
62.6
212
6,100
2007
3,254
6,738
983
10,976
533
(7,811)
(1,780)
(86)
1,831
(243)
439
2,027
(264)
(366)
1,397
1,397
1.630
1.630
1.620
0.797
1,831
2,755
2008
10,152
8,473
1,079
19,704
986
(15,199)
(2,601)
(193)
2,697
(407)
766
3,056
(359)
(414)
2,282
2,282
2.010
2.010
1.900
0.651
2,697
4,019
2009
11,943
9,758
2,508
24,208
546
(18,390)
(3,154)
(325)
2,885
(364)
1,084
3,605
(559)
(648)
2,399
2,399
2.110
2.110
2.020
0.650
2,885
4,300
2010
14,119
10,545
2,949
27,613
593
(21,214)
(3,771)
(418)
2,804
(374)
1,365
3,795
(685)
(470)
2,639
2,639
2.320
2.320
2.270
0.700
2,804
4,293
2011
16,460
13,373
638
30,472
873
(23,738)
(4,642)
257
3,222
(647)
1,674
4,249
(583)
(889)
2,776
2,776
2.440
2.440
2.387
0.700
3,222
4,996
2012E
17,490
13,800
2,615
33,905
1,386
(25,978)
(5,165)
0
4,148
(915)
1,822
5,054
(685)
(981)
3,388
3,388
2.978
2.978
2.914
0.876
4,148
5,820
2013E
22,011
14,583
3,564
40,158
2,355
(31,519)
(6,118)
0
4,876
(982)
2,471
6,365
(865)
(1,237)
4,263
4,263
3.748
3.748
3.667
1.107
4,876
6,527
2014E
25,579
15,412
3,959
44,950
2,792
(35,625)
(6,848)
0
5,269
(990)
3,303
7,582
(1,353)
(1,354)
4,876
4,876
4.286
4.286
4.194
1.268
5,269
6,934
2007
2,027
924
(264)
(4,590)
16,514
14,611
(8,977)
(3,600)
(61)
(12,638)
4,023
52
(683)
0
3,391
0
5,364
5,634
2008
3,056
1,322
(359)
698
(2,134)
2,583
(3,383)
(1,146)
136
(4,393)
1,144
(0)
(739)
0
405
0
(1,406)
(800)
2009
3,605
1,415
(559)
(504)
1,702
5,659
(2,363)
(967)
(6)
(3,335)
1,234
0
(739)
0
495
0
2,819
3,296
2010
3,795
1,489
(685)
(3,263)
(3,961)
(2,626)
(2,404)
(3,630)
(11)
(6,046)
1,245
0
(796)
0
449
0
(8,223)
(5,030)
2011
4,249
1,774
(583)
2,089
(3,741)
3,787
(4,249)
(3,485)
(465)
(8,199)
7,927
0
(796)
0
7,130
0
2,719
(461)
2012E
5,054
1,672
(685)
(4,376)
5,013
6,678
(3,514)
(1,822)
0
(5,336)
500
0
(996)
0
(496)
0
846
3,164
2013E
6,365
1,650
(865)
5,074
(3,782)
8,443
(2,779)
(2,471)
0
(5,251)
0
0
(1,259)
0
(1,259)
0
1,933
5,664
2014E
7,582
1,665
(1,353)
(4,276)
(232)
3,387
(2,110)
(3,303)
0
(5,413)
0
0
(1,443)
0
(1,443)
0
(3,469)
1,276
Profit and loss (HKDm)
Year to 31 Dec
Piped gas
Brewery
Other Revenue
Total Revenue
Other income
COGS
SG&A
Other op.expenses
Operating profit
Pre-tax profit
Tax
EPS (reported)(HKD)
EPS (adjusted)(HKD)
EPS (adjusted fully-diluted)(HKD)
DPS (HKD)
EBIT
EBITDA
Cash flow (HKDm)
Year to 31 Dec
Profit before tax
Tax paid
Capex
Change in debt
Dividends paid
Forex effect/others
Change in cash
Free cash flow
- 41 -
17 December 2012
Balance sheet (HKDm)
As at 31 Dec
Inventory
Accounts receivable
Fixed assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Total liabilities
Share capital
Minority interests
EV
Net debt/(cash)
BVPS (HKD)
2007
8,072
2,342
817
2,078
13,310
15,814
8,343
7,556
45,022
2,641
1,738
5,247
9,626
3,282
550
13,458
114
26,775
26,889
4,675
45,022
56,930
(2,149)
31.365
2008
6,667
3,067
1,056
2,166
12,956
17,988
10,366
10,386
51,697
3,173
1,190
5,617
9,979
3,895
1,511
15,386
114
29,518
29,632
6,679
51,697
60,356
401
26.102
2009
9,486
2,995
1,098
2,598
16,177
19,045
10,373
13,509
59,105
3,038
1,408
6,439
10,885
5,264
3,939
20,088
114
31,191
31,305
7,712
59,105
58,818
(1,184)
27.535
2010
14,447
3,727
1,347
2,260
21,780
22,244
8,516
14,489
67,029
2,320
4,554
7,917
14,791
7,227
4,075
26,093
114
34,154
34,268
6,668
67,029
51,144
(4,899)
30.122
2011
12,579
5,286
1,586
4,046
23,498
26,317
8,702
18,838
77,355
5,705
1,905
8,677
16,287
11,769
4,103
32,159
114
37,496
37,610
7,587
77,355
58,284
4,895
33.060
2012E
17,113
4,577
1,677
4,046
27,414
28,159
8,671
20,660
84,905
6,205
5,163
8,677
20,045
11,769
4,103
35,917
114
40,305
40,419
8,568
84,905
53,410
861
35.530
2013E
12,907
7,389
2,188
4,046
26,531
29,288
8,640
23,131
87,591
6,205
3,412
8,677
18,294
11,769
4,103
34,166
114
43,505
43,619
9,805
87,591
56,382
5,068
38.342
2014E
18,585
6,136
2,139
3,942
30,801
29,733
8,610
26,219
95,362
6,205
6,280
8,677
21,162
11,769
4,103
37,034
114
47,055
47,169
11,159
95,362
48,755
(611)
41.463
2007
51.5
133.7
295.8
1,294.4
912.5
28.8
25.1
16.7
7.8
4.5
7.0
7.6
n.a.
13.0
21.2
1.4
7.5
48.9
2008
79.5
45.9
47.3
63.3
17.3
22.9
20.4
13.7
8.1
4.7
6.7
7.2
1.4
11.8
17.4
1.3
6.6
32.4
2009
22.9
7.0
7.0
5.1
6.3
24.0
17.8
11.9
7.9
4.3
6.4
6.5
n.a.
15.5
16.2
1.5
7.9
30.8
2010
14.1
(0.2)
(2.8)
10.0
12.4
23.2
15.5
10.2
8.0
4.2
5.7
6.2
n.a.
18.0
16.2
1.5
7.5
30.2
2011
10.4
16.4
14.9
5.2
5.2
22.1
16.4
10.6
7.7
3.8
5.7
6.5
13.0
13.7
17.6
1.4
5.0
28.7
2012E
11.3
16.5
28.7
22.1
22.1
23.4
17.2
12.2
8.7
4.2
6.4
7.2
2.1
13.6
17.6
1.4
4.5
29.4
2013E
18.4
12.1
17.6
25.8
25.8
21.5
16.3
12.1
10.1
4.9
7.0
7.8
11.6
13.6
17.6
1.5
5.0
29.5
2014E
11.9
6.2
8.1
14.4
14.4
20.7
15.4
11.7
10.7
5.3
7.1
7.5
n.a.
17.8
17.6
1.5
5.3
29.6
Key ratios (%)
Year to 31 Dec
Sales (YoY)
EBITDA (YoY)
Net profit (YoY)
Gross-profit margin
EBITDA margin
ROAE
ROAA
ROCE
ROIC
Net debt to equity
Effective tax rate
Current ratio (x)
Net dividend payout
Company profile
Founded in 1997, Beijing Enterprises Holdings Limited (BJE) is involved mainly in the following activities: 1) the distribution
and sale of piped natural gas, 2) the production, distribution, and sale of beer in Beijing and other Mainland provinces, 3) the
construction of sewage and water-treatment plants, sewage treatment and water supply in the Mainland, and 4) investment in
transportation infrastructure.
- 42 -
Industrials / China
257 HK
Industrials / China
17 December 2012
257 HK
Target (HKD): 4.70 J 4.60
Upside: 16.2%
Market leader in WTE
Buy (unchanged)
Outperform
Hold
Underperform
Sell
1
• We see no fundamental change in CEI’s leadership position in
the WTE segment; strong project flow likely to continue
• Market concerns about the profitability of certain projects
appear to be overdone
• We expect sustainable new project wins to serve as the main
share-price catalyst in 2013
and CEI expects 2013 to be a strong
year for new project construction,
and 2) CEI is looking at a number of
new projects, but will be selective
(project returns are key).
Dave Dai, CFA
(852) 2848 4068
[email protected]
Gary Zhou
(852) 2773 8535
[email protected]
■ What's new
We have incorporated into our
earnings forecasts the recent sharedilution effect due to China
Everbright International’s (CEI)
recent share placement. This report
marks the transfer of analyst
coverage to Dave Dai.
While water-treatment investment
may slow in 2013 due to the high
penetration rate of water treatment,
we see no slowdown in the growth of
waste-to-energy projects as the
country’s preferred municipal waste
disposal method. Our industry
research suggests that CEI currently
has a market share of about 11%, the
highest in China.
Management sent two strong
messages at the company’s recent
analyst briefing: 1) the construction
of newly won projects is on track
There are some concerns in the
market that the tipping fees for
some of CEI’s projects will be lower
than expected. According to
management, while new projects
recently had a higher tipping fee of
CNY90/tonne, earlier projects had a
tipping fee of CNY60-90/tonne, in
line with expectations. We are
comfortable with CEI’s proven price
discipline when acquiring projects,
so tipping fees going forward should
be considered in line with electricity
tariffs, scale and costs.
Incorporating the recent sharedilution effect (350m shares issued
in August 2012), we are cutting our
DCF-based six-month target price
from HKD4.70 to HKD4.60 (about
HKD0.6 of our target price is for
new projects over 2013-16, while the
remainder [about HKD4.0] is for the
company’s announced project
backlog). The key risks to our view
would include slower-than-expected
project commencement and tippingfee hikes, as well as a worse-thanexpected cash flow.
2
3
4
5
■ How we differ
Our 2013E EPS is slightly lower than
the consensus, but we are sanguine
on the long-term earnings outlook.
Year to 31 Dec
Revenue change
Net profit change
12E
0.9
(0.3)
(2.5)
13E
(4.4)
0.7
(8.3)
14E
(2.9)
0.6
(8.4)
(%)
(HKD)
4.3
145
3.9
133
3.5
120
3.0
108
2.6
95
Dec-11
Mar-12
Jun-12
Sep-12
Ch Everb (LHS)
Dec-12
12-month range
Market cap (USDbn)
Major shareholder
2.68-4.28
2.06
6.17
4,038
Guildford Limited (45.8%)
Year to 31 Dec
Revenue (m)
Net profit (m)
EPS change (%)
PER (x)
Dividend yield (%)
DPS
PBR (x)
EV/EBITDA (x)
ROE (%)
12E
3,997
1,406
1,008
0.268
22.7
1.6
14.8
1.4
0.055
1.9
12.4
14.0
13E
6,370
1,990
1,180
0.292
9.0
(1.6)
13.6
1.5
0.060
1.7
9.8
13.6
14E
6,465
2,511
1,503
0.372
27.4
8.2
10.6
1.9
0.077
1.5
8.0
15.4
17 December 2012
Financial summary
Key assumptions
Year to 31 Dec
Designed capacity – waste
processing (ton/day)
Designed capacity – wastewater
treatment (ton/day)
Waste processing tariff (CNY/ton)
Waste-to-energy on-grid tariff
(CNY/KWh)
Wastewater treatment tariff (CNY/ton)
2007
2008
2009
2010
2011
2012E
2013E
2014E
1,692
3,292
4,292
4,692
8,662
9,298
10,798
18,198
1,290
1,350
1,490
1,550
1,602
1,762
2,016
2,216
85.8
83.1
84.3
84.7
84.1
86.1
89.2
94.0
0.58
0.60
0.60
0.60
0.60
0.63
0.64
0.68
0.90
0.90
1.14
1.13
1.14
1.17
1.16
1.20
2007
688
550
109
1,348
18
(888)
(71)
(29)
378
(55)
43
367
(7)
(22)
338
338
0.109
0.109
0.106
0.016
378
407
2008
845
890
128
1,863
21
(1,209)
(90)
(37)
548
(140)
52
461
(95)
(26)
339
339
0.108
0.108
0.106
0.016
548
585
2009
604
1,036
126
1,766
53
(991)
(126)
(39)
664
(161)
5
508
(99)
(37)
372
372
0.114
0.114
0.112
0.023
664
702
2010
1,816
857
256
2,929
53
(1,784)
(146)
(41)
1,012
(169)
2
845
(192)
(37)
616
616
0.169
0.169
0.167
0.025
1,012
1,053
2011
2,161
805
698
3,664
46
(2,088)
(195)
(58)
1,369
(233)
(1)
1,135
(290)
(44)
801
801
0.219
0.219
0.219
0.045
1,369
1,427
2012E
2,117
1,336
544
3,997
60
(2,375)
(170)
(105)
1,406
(299)
246
1,354
(346)
0
1,008
1,008
0.268
0.268
0.268
0.055
1,406
1,511
2013E
4,114
1,327
929
6,370
72
(4,014)
(306)
(133)
1,990
(318)
(1)
1,671
(427)
(65)
1,180
1,180
0.292
0.292
0.292
0.060
1,990
2,123
2014E
3,608
1,184
1,674
6,465
100
(3,601)
(306)
(147)
2,511
(382)
(1)
2,129
(544)
(82)
1,503
1,503
0.372
0.372
0.372
0.077
2,511
2,658
2007
367
29
(7)
(131)
(1,033)
(774)
(89)
0
0
(89)
544
6
(50)
161
661
0
(202)
(864)
2008
461
37
(95)
(119)
(1,362)
(1,079)
0
0
0
0
962
1
(50)
79
992
0
(87)
(1,079)
2009
508
39
(99)
(217)
(802)
(572)
(18)
(1)
0
(19)
591
1,435
(75)
22
1,972
0
1,382
(590)
2010
845
41
(192)
246
(2,154)
(1,214)
(372)
1
0
(372)
834
1
(91)
239
983
0
(602)
(1,586)
2011
1,135
58
(290)
3
(1,071)
(165)
(929)
0
61
(868)
1,326
2
(165)
214
1,376
0
343
(1,094)
2012E
1,354
105
(346)
97
(435)
776
(601)
0
33
(568)
800
350
(208)
900
1,842
0
2,050
175
2013E
1,671
133
(427)
724
(3,230)
(1,129)
(601)
0
0
(601)
600
0
(244)
0
356
0
(1,373)
(1,730)
2014E
2,129
147
(544)
166
(1,873)
25
(200)
0
0
(200)
0
0
(310)
0
(310)
0
(486)
(175)
Year to 31 Dec
Environmental energy
Environmental water
Other Revenue
Total Revenue
Other income
COGS
SG&A
Other op.expenses
Operating profit
Pre-tax profit
Tax
EPS (reported)(HKD)
EPS (adjusted)(HKD)
DPS (HKD)
EBIT
EBITDA
Cash flow (HKDm)
Year to 31 Dec
Profit before tax
Tax paid
Capex
Change in debt
Dividends paid
Forex effect/others
Change in cash
Free cash flow
- 44 -
17 December 2012
As at 31 Dec
Inventory
Accounts receivable
Fixed assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Total liabilities
Share capital
Minority interests
EV
Net debt/(cash)
BVPS (HKD)
2007
555
6
431
77
1,068
305
615
2,538
4,526
143
334
6
484
1,293
146
1,922
313
2,138
2,451
152
4,526
17,023
881
0.782
2008
562
12
680
137
1,391
165
624
4,121
6,301
546
471
9
1,026
1,784
360
3,170
314
2,505
2,820
311
6,301
18,069
1,767
0.897
2009
1,944
13
906
80
2,944
168
600
4,956
8,667
696
481
10
1,188
2,253
297
3,738
364
4,209
4,573
357
8,667
17,352
1,005
1.257
2010
1,341
21
1,024
96
2,484
414
685
7,288
10,870
732
853
29
1,615
3,037
470
5,122
365
4,973
5,338
411
10,870
18,829
2,428
1.461
2011
1,684
43
1,569
216
3,513
888
1,116
8,363
13,880
1,064
1,423
52
2,539
4,029
650
7,218
368
5,822
6,190
472
13,880
19,871
3,409
1.688
2012E
3,734
49
1,662
216
5,661
1,323
1,143
8,853
16,980
1,064
1,619
52
2,735
4,829
650
8,214
718
7,522
8,240
527
16,980
18,676
2,159
2.041
2013E
2,361
84
2,020
216
4,681
1,732
1,202
12,083
19,698
1,064
2,736
52
3,852
5,429
650
9,930
718
8,459
9,177
591
19,698
20,714
4,132
2.273
2014E
1,876
75
1,582
216
3,748
1,729
1,258
13,956
20,691
1,064
2,454
52
3,570
5,429
650
9,649
718
9,652
10,369
673
20,691
21,281
4,617
2.568
2007
52.5
109.8
125.2
(26.6)
(32.3)
34.1
30.2
28.1
15.2
8.5
10.7
13.0
35.9
1.9
87.7
2.2
6.9
14.4
2008
38.2
43.5
44.8
0.3
0.4
35.1
31.4
29.4
12.9
6.3
11.5
10.4
62.7
20.7
108.9
1.4
3.9
14.5
2009
(5.2)
20.1
21.1
9.7
5.7
43.9
39.8
37.6
10.1
5.0
9.9
9.9
22.0
19.5
164.0
2.5
4.1
19.9
2010
65.9
50.0
52.5
65.8
49.1
39.1
36.0
34.5
12.4
6.3
11.6
11.1
45.5
22.7
120.3
1.5
6.0
14.6
2011
25.1
35.4
35.3
30.0
31.1
43.0
38.9
37.4
13.9
6.5
12.9
11.2
55.1
25.5
129.2
1.4
5.9
20.6
2012E
9.1
5.9
2.7
25.8
22.7
40.6
37.8
35.2
14.0
6.5
10.6
10.0
26.2
25.5
147.5
2.1
4.7
20.6
2013E
59.4
40.5
41.5
17.1
9.0
37.0
33.3
31.2
13.6
6.4
12.9
11.9
45.0
25.5
105.5
1.2
6.3
20.6
2014E
1.5
25.2
26.2
27.4
27.4
44.3
41.1
38.8
15.4
7.4
14.9
12.7
44.5
25.5
101.7
1.0
6.6
20.6
Key ratios (%)
Year to 31 Dec
Sales (YoY)
EBITDA (YoY)
Net profit (YoY)
Gross-profit margin
EBITDA margin
ROAE
ROAA
ROCE
ROIC
Net debt to equity
Effective tax rate
Current ratio (x)
Net dividend payout
Company profile
China Everbright International Limited focuses on its core businesses in green environmental protection and alternative energy.
These mainly include waste-to-energy, solid waste landfill, wastewater treatment, reusable water, biomass power generation,
solar photovoltaic energy, wind power, methane-to-energy, environmental protection engineering, environmental protection
equipment manufacturing, etc.
- 45 -
Industrials / China
2727 HK
Industrials / China
17 December 2012
Upside: 20.9%
2727 HK
Still the most solid player
Buy (unchanged)
Outperform
Hold
Underperform
Sell
1
• Following the likely slow EPS growth for 2012, we expect SHE’s
earnings growth to accelerate in 2013
• Driven by a recovery in power demand, SHE should also see
new order growth next year (especially thermal and nuclear)
• Besides SHE’s wide range of high-end products, a potential joint
venture with Alstom could unlock future competitiveness
Dave Dai, CFA
(852) 2848 4068
[email protected]
Gary Zhou
(852) 2773 8535
[email protected]
■ What's new
We now expect SHE to record new
order growth in 2013, driven by both
normalising thermal-equipment
orders and new approvals for
thermal and nuclear-power projects.
Following SHE’s double-digit EPS
growth in 2010 and 2011, we forecast
7% YoY EPS growth for 2012, due to
the slowdown in China’s demand for
power earlier this year. However, we
forecast power demand to recover in
2013 (from 5% YoY to 8%), which
bodes well for SHE to improve power
capex next year. We expect stable
thermal revenue in 2013, while
revenue for its other businesses like
gas, nuclear, power transmission and
distribution should continue to grow.
SHE received CNY27bn worth of new
orders (including services and
ancillary products) for 9M12 (1H12:
CNY11.3bn). The biggest
improvement came from SHE’s strong
market-share gains in the ultra-critical
coal-fired equipment business for
China’s coastal areas (about 60%
market share). We now forecast the
company’s new orders in 2012 to
reach CNY42bn, and improve to
CNY49bn in 2013. Another positive is
that SHE’s current nuclear backlog is
not exposed to inland reactors, which
could be cancelled or replaced, as in
the case for Dongfang Electric (we
estimate it has a 10-13% exposure to
inland nuclear orders).
2
3
4
5
margin expansion for the nuclear and
gas divisions, as well as the new joint
venture with the State Grid.
Year to 31 Dec
Revenue change
Net profit change
12E
-
13E
-
(%)
(HKD)
120
4.5
4.0
105
3.5
90
3.1
75
60
2.6
SHE’s talks with Alstom (Not rated)
about a global joint venture to merge
their thermal-boiler businesses are
ongoing. If the venture goes ahead,
this would set SHE apart from its
Asian competitors overseas due to
Alstom’s high-end technology.
We maintain our six-month target
price of HKD4.10, based on 10x
2013E blended PER for different
business segments. The key nearterm downside risk to our forecasts
would be worse-than-expected new
order growth in 2013.
■ How we differ
Our 2013-14 EPS forecasts are 7-13%
higher than those of the consensus,
as we are more optimistic about
14E
-
Dec-11
Mar-12
Jun-12
Shang Elec (LHS)
Sep-12
Dec-12
12-month range
2.62-4.44
Market cap (USDbn)
5.61
11.26
12,823
Shanghai Electric Group (57.8%)
Major shareholder
Year to 31 Dec
Revenue (m)
Net profit (m)
EPS change (%)
PER (x)
Dividend yield (%)
DPS
PBR (x)
EV/EBITDA (x)
ROE (%)
12E
71,402
3,906
3,501
0.273
7.2
(1.8)
10.0
3.0
0.082
1.1
2.7
11.5
13E
77,545
4,799
4,036
0.315
15.3
7.4
8.7
3.5
0.094
1.0
2.6
12.2
14E
81,762
5,591
4,536
0.354
12.4
13.0
7.7
3.9
0.106
0.9
2.2
12.6
17 December 2012
Financial summary
Key assumptions
Year to 31 Dec
New orders (CNY m)
Order backlog (CNY m)
Thermal equipment delivery (MW)
Nuclear equipment margin (%)
2007
77,400
123,000
27,972
0.0
2008
83,774
160,589
25,857
0.0
2009
83,037
191,118
25,780
10.7
2010
83,791
230,705
25,394
15.0
2011
77,883
256,252
26,996
17.0
2012E
42,000
244,199
24,296
19.0
2013E
49,000
237,447
25,296
20.0
2014E
50,000
230,241
26,511
20.0
2007
0
0
55,929
55,929
0
(46,881)
(4,022)
(1,792)
3,235
51
2,319
5,604
(1,313)
(1,480)
2,811
2,811
0.236
0.236
0.236
0.059
3,235
4,077
2008
0
0
59,058
59,058
0
(49,029)
(4,543)
(2,734)
2,752
144
1,178
4,075
(396)
(1,112)
2,566
2,566
0.215
0.215
0.215
0.064
2,752
3,586
2009
3,998
27,446
26,178
57,622
0
(48,772)
(4,094)
(2,986)
1,771
100
1,358
3,229
(7)
(768)
2,453
2,453
0.196
0.196
0.196
0.059
1,771
2,759
2010
6,200
27,161
29,596
62,957
0
(52,679)
(4,271)
(4,071)
1,936
88
2,002
4,026
(228)
(1,014)
2,784
2,784
0.220
0.220
0.220
0.066
1,936
3,052
2011
7,170
30,172
30,576
67,918
0
(55,740)
(4,733)
(3,898)
3,547
83
1,461
5,091
(715)
(1,109)
3,267
3,267
0.255
0.255
0.255
0.076
3,547
4,719
2012E
8,011
30,675
32,716
71,402
0
(58,762)
(4,767)
(3,968)
3,906
153
1,499
5,557
(889)
(1,167)
3,501
3,501
0.273
0.273
0.273
0.082
3,906
5,154
2013E
10,643
32,043
34,858
77,545
0
(63,541)
(4,975)
(4,230)
4,799
198
1,565
6,562
(1,181)
(1,345)
4,036
4,036
0.315
0.315
0.315
0.094
4,799
6,140
2014E
12,495
33,500
35,767
81,762
0
(66,505)
(5,199)
(4,467)
5,591
265
1,611
7,467
(1,419)
(1,512)
4,536
4,536
0.354
0.354
0.354
0.106
5,591
7,024
2007
5,604
843
(1,313)
(1,831)
79
3,382
(4,831)
(304)
2,023
(3,111)
1,717
0
(700)
424
1,441
0
1,712
(1,449)
2008
4,075
834
(396)
187
(1,072)
3,627
(3,000)
190
2,953
143
713
0
(763)
(3,785)
(3,836)
0
(66)
627
2009
3,229
988
(7)
2,493
952
7,654
(1,955)
(282)
(507)
(2,744)
(194)
0
(735)
(1,538)
(2,468)
0
2,442
5,699
2010
4,026
1,116
(228)
950
(237)
5,627
(2,297)
(306)
414
(2,189)
(321)
2,220
(835)
(691)
373
0
3,811
3,330
2011
5,091
1,172
(715)
(446)
(2,301)
2,801
(1,329)
(23)
(485)
(1,837)
(1,321)
0
(980)
161
(2,140)
0
(1,175)
1,473
2012E
5,557
1,248
(889)
(7,511)
(161)
(1,756)
(2,000)
(771)
0
(2,771)
0
0
(1,050)
32
(1,018)
0
(5,545)
(3,756)
2013E
6,562
1,341
(1,181)
(4,160)
(174)
2,388
(2,000)
(838)
0
(2,838)
0
0
(1,210)
33
(1,177)
0
(1,627)
388
2014E
7,467
1,433
(1,419)
(1,302)
(186)
5,993
(2,000)
(883)
0
(2,883)
0
0
(1,360)
35
(1,325)
0
1,785
3,993
Year to 31 Dec
New Energy
High efficiency and clean energy
Other Revenue
Total Revenue
Other income
COGS
SG&A
Other op.expenses
Operating profit
Pre-tax profit
Tax
EPS (reported)(CNY)
EPS (adjusted)(CNY)
DPS (CNY)
EBIT
EBITDA
Cash flow (CNYm)
Year to 31 Dec
Profit before tax
Tax paid
Capex
Change in debt
Dividends paid
Forex effect/others
Change in cash
Free cash flow
- 47 -
17 December 2012
As at 31 Dec
Inventory
Accounts receivable
Fixed assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Total liabilities
Share capital
Minority interests
EV
Net debt/(cash)
BVPS (CNY)
2007
21,478
16,291
12,132
9,032
58,933
10,230
1,975
4,883
76,021
667
11,120
33,720
45,507
1,824
1,179
48,510
11,892
7,778
19,669
7,842
76,021
20,855
(18,987)
1.654
2008
21,218
21,372
11,430
9,777
63,797
11,312
763
6,007
81,878
667
12,044
37,913
50,624
2,537
693
53,854
12,508
9,003
21,510
6,514
81,878
20,781
(18,014)
1.801
2009
25,762
19,532
13,614
11,200
70,108
12,279
1,593
5,645
89,626
901
14,399
42,025
57,325
2,342
895
60,562
12,508
9,967
22,475
6,589
89,626
16,190
(22,518)
1.797
2010
30,405
19,872
15,977
10,590
76,844
13,461
1,361
6,546
98,212
396
17,507
42,976
60,878
2,021
810
63,709
12,824
14,179
27,002
7,500
98,212
11,275
(27,988)
2.132
2011
33,291
20,885
18,365
11,402
83,942
13,618
1,474
7,680
106,715
685
22,650
44,049
67,385
701
974
69,059
12,824
16,434
29,257
8,399
106,715
8,141
(31,905)
2.282
2012E
27,722
22,539
19,111
10,359
79,731
14,369
1,474
8,670
104,245
685
23,931
36,615
61,231
701
1,040
62,971
12,824
18,885
31,708
9,566
104,245
14,106
(26,336)
2.473
2013E
26,066
24,372
20,756
10,099
81,292
15,029
1,474
9,748
107,543
685
25,715
33,888
60,288
701
1,110
62,099
12,824
21,710
34,534
10,911
107,543
16,270
(24,680)
2.693
2014E
27,813
25,509
21,884
9,822
85,028
15,596
1,474
10,895
112,993
685
26,822
33,467
60,974
701
1,186
62,861
12,824
24,886
37,710
12,423
112,993
15,151
(26,427)
2.941
2007
27.0
13.3
20.1
37.2
37.8
16.2
7.3
5.8
15.4
4.0
11.9
29.4
n.a.
23.4
73.0
1.3
n.a.
24.9
2008
5.6
(12.0)
(14.9)
(8.7)
(9.1)
17.0
6.1
4.7
12.5
3.3
9.0
26.8
n.a.
9.7
72.8
1.3
n.a.
29.7
2009
(2.4)
(23.1)
(35.7)
(4.4)
(8.7)
15.4
4.8
3.1
11.2
2.9
5.6
21.3
n.a.
0.2
79.3
1.2
n.a.
30.0
2010
9.3
10.6
9.3
13.5
12.1
16.3
4.8
3.1
11.3
3.0
5.6
28.0
n.a.
5.7
85.8
1.3
n.a.
30.0
2011
7.9
54.6
83.2
17.4
15.9
17.9
6.9
5.2
11.6
3.2
9.3
49.7
n.a.
14.0
92.3
1.2
n.a.
30.0
2012E
5.1
9.2
10.1
7.2
7.2
17.7
7.2
5.5
11.5
3.3
9.6
31.7
n.a.
16.0
95.8
1.3
n.a.
30.0
2013E
8.6
19.1
22.9
15.3
15.3
18.1
7.9
6.2
12.2
3.8
10.7
22.0
n.a.
18.0
93.8
1.3
n.a.
30.0
2014E
5.4
14.4
16.5
12.4
12.4
18.7
8.6
6.8
12.6
4.1
11.4
20.4
n.a.
19.0
95.2
1.4
n.a.
30.0
Key ratios (%)
Year to 31 Dec
Sales (YoY)
EBITDA (YoY)
Net profit (YoY)
Gross-profit margin
EBITDA margin
ROAE
ROAA
ROCE
ROIC
Net debt to equity
Effective tax rate
Current ratio (x)
Net dividend payout
Company profile
Shanghai Electric Group is one of China's oldest and largest industrial conglomerates engaged in the design, manufacture, sale
and servicing of a wide range of products and services. Its products include power, electro-mechanical, heavy-machinery, and
transportation equipment, and environmental-protection systems.
- 48 -
Industrials / China
1133 HK
Industrials / China
17 December 2012
Harbin Electric
Upside: 17.4%
Harbin Electric
1133 HK
The most leveraged play on a
thermal recovery
• With high exposure to the thermal-power-equipment business,
HPE would benefit the most from a power demand recovery
• Strong order backlog should support further earnings growth
• Valuation looks attractive with a deep PER discount to peers;
reiterate Buy (1) rating
Dave Dai, CFA
(852) 2848 4068
[email protected]
Gary Zhou
(852) 2773 8535
[email protected]
■ What's new
We believe Harbin Electric (HPE)
would benefit the most, among the
stocks that we cover in the sector,
should power demand recover in
2013, as we expect.
We forecast HPE’s EPS growth to
slow in 2012 (to 5% YoY), mainly
due to sluggish power demand.
However, 2013 should be a better
year for HPE (2013E EPS up 11%
YoY), as a recovery in power
demand should see more new orders
for the power-equipment sector.
Based on our forecasts, HPE’s
thermal business should account for
48% of total revenue and 56% of
total gross profit for 2013. In 1H12,
HPE received CNY24.5bn in new
orders, of which 44% was for the
thermal business. Beyond 2012, we
expect its other businesses (mainly
hydro and natural gas) to drive
additional earnings growth, while its
stable thermal-equipment business
should provide strong support to
overall profitability.
We believe the current order backlog
of CNY157bn (2012E) should be able
to support 5 years of revenue (based
on 2013E revenue). About 80% of
HPE’s nuclear backlog is based on
the Gen-III standard, which could be
an earnings driver in the long run
(we do not expect a positive grossprofit contribution from the nuclear
business until 2014).
Meanwhile, the stock has the
cheapest valuation among its peers
in terms of 2013E PER. It is trading
currently at a 5x 2013E PER, 31%
below the sector average and at a
54% discount to its past-5-year
mean.
We reiterate our Buy (1) rating. Our
six-month target price is HKD8.10,
based on 7x 2012E PER, backed by a
2012-14E EPS CAGR of 8.9%.The
near-term risk to our forecasts
would be worse-than-expected
thermal revenue in 2013.
■ How we differ
Our 2013-14 EPS forecasts are 1317% higher than those of the
Buy (unchanged)
Outperform
Hold
Underperform
Sell
1
2
3
4
5
Bloomberg consensus due to our
more optimistic margin assumptions
and revenue growth forecasts.
Year to 31 Dec
Revenue change
Net profit change
12E
-
13E
-
14E
-
(%)
(HKD)
115
9.5
8.4
104
7.3
93
6.1
81
70
5.0
Dec-11
Mar-12
Jun-12
Harb Elec (LHS)
Sep-12
Dec-12
12-month range
Market cap (USDbn)
Major shareholder
5.15-9.02
1.23
3.62
1,378
Harbin Power Group (50.9%)
Year to 31 Dec
Revenue (m)
Net profit (m)
EPS change (%)
PER (x)
Dividend yield (%)
DPS
PBR (x)
EV/EBITDA (x)
ROE (%)
12E
31,072
1,197
1,287
0.934
4.8
1.4
5.9
3.0
0.168
0.7
1.0
11.6
13E
32,382
1,394
1,423
1.033
10.5
13.0
5.4
3.3
0.186
0.6
0.3
11.6
14E
33,204
1,580
1,527
1.109
7.4
16.5
5.0
3.6
0.200
0.5
(0.4)
11.4
17 December 2012
Financial summary
Key assumptions
Year to 31 Dec
New orders (CNY m)
Order backlog (CNY m)
Thermal equipment margin (%)
Hydro equipment margin (%)
Nuclear equipment margin (%)
2007
51,300
84,900
16.7
14.1
0.0
2008
57,354
91,500
14.8
23.0
0.0
2009
41,677
112,475
13.4
23.1
0.0
2010
42,398
126,977
14.6
26.2
0.0
2011
44,611
143,819
23.1
30.3
0.0
2012E
43,624
156,589
20.3
30.0
0.0
2013E
43,913
168,340
20.3
30.0
5.0
2014E
43,913
179,268
20.3
30.0
10.0
2007
20,464
2,173
5,013
27,649
0
(23,321)
(1,823)
(626)
1,878
75
163
2,116
(331)
(257)
1,528
1,528
1.123
1.123
1.123
0.091
1,878
2,356
2008
20,493
2,863
6,547
29,904
0
(25,896)
(2,099)
(554)
1,354
42
177
1,573
(290)
(242)
1,042
1,042
0.757
0.757
0.757
0.075
1,354
1,834
2009
19,221
1,893
7,515
28,630
0
(24,964)
(2,291)
(813)
561
86
338
985
(227)
(151)
606
606
0.440
0.440
0.440
0.068
561
985
2010
17,984
2,362
8,826
29,172
0
(24,982)
(2,835)
(840)
515
139
709
1,362
(269)
(92)
1,001
1,001
0.727
0.727
0.727
0.140
515
943
2011
17,295
3,163
8,030
28,488
0
(22,777)
(3,111)
(1,456)
1,144
174
323
1,640
(257)
(155)
1,229
1,229
0.892
0.892
0.892
0.140
1,144
1,630
2012E
15,566
3,796
11,711
31,072
0
(25,574)
(3,364)
(938)
1,197
164
323
1,684
(269)
(127)
1,287
1,287
0.934
0.934
0.934
0.168
1,197
1,731
2013E
15,566
4,175
12,641
32,382
0
(26,729)
(3,358)
(900)
1,394
167
323
1,884
(320)
(141)
1,423
1,423
1.033
1.033
1.033
0.186
1,394
1,971
2014E
15,566
4,175
13,463
33,204
0
(27,334)
(3,339)
(951)
1,580
169
323
2,072
(394)
(151)
1,527
1,527
1.109
1.109
1.109
0.200
1,580
2,199
2007
2,116
477
(331)
743
(21)
2,984
(672)
175
(253)
(749)
309
994
(124)
111
1,290
0
3,524
2,312
2008
1,573
480
(290)
(4,881)
(25)
(3,142)
(1,427)
(22)
(10)
(1,459)
(193)
0
(103)
3,438
3,141
0
(1,460)
(4,569)
2009
985
423
(227)
26
(15)
1,192
(882)
(29)
46
(864)
97
0
(94)
3,059
3,062
0
3,390
310
2010
1,362
428
(269)
2,685
46
4,252
(1,057)
(149)
77
(1,130)
(1,557)
0
(193)
(526)
(2,275)
0
847
3,195
2011
1,640
487
(257)
(1,469)
169
570
(1,396)
(218)
(536)
(2,151)
(158)
0
(193)
(1,255)
(1,606)
0
(3,187)
(827)
2012E
1,684
534
(269)
(1,308)
0
641
(404)
(78)
0
(482)
(1,099)
0
(232)
0
(1,331)
0
(1,172)
237
2013E
1,884
577
(320)
233
0
2,373
(800)
(78)
0
(878)
(82)
0
(256)
0
(338)
0
1,157
1,573
2014E
2,072
619
(394)
491
(0)
2,789
(800)
(78)
0
(878)
0
0
(275)
0
(275)
0
1,636
1,989
Year to 31 Dec
Thermal
Hydro
Other Revenue
Total Revenue
Other income
COGS
SG&A
Other op.expenses
Operating profit
Pre-tax profit
Tax
EPS (reported)(CNY)
EPS (adjusted)(CNY)
DPS (CNY)
EBIT
EBITDA
Cash flow (CNYm)
Year to 31 Dec
Profit before tax
Tax paid
Capex
Change in debt
Dividends paid
Forex effect/others
Change in cash
Free cash flow
- 50 -
17 December 2012
As at 31 Dec
Inventory
Accounts receivable
Fixed assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Total liabilities
Share capital
Minority interests
EV
Net debt/(cash)
BVPS (CNY)
2007
8,688
10,167
8,995
10,369
38,219
2,856
0
1,015
42,090
753
5,267
21,883
27,904
4,010
1,764
33,678
1,377
5,836
7,213
1,199
42,090
4,792
(3,925)
5.301
2008
7,236
12,941
12,354
11,585
44,116
3,803
0
1,047
48,967
871
7,715
21,912
30,497
3,535
5,366
39,399
1,377
6,759
8,136
1,432
48,967
6,096
(2,830)
5.912
2009
10,619
14,230
12,169
10,567
47,585
4,261
0
1,030
52,876
1,289
10,167
19,565
31,020
2,707
8,932
42,659
1,377
7,262
8,639
1,578
52,876
2,421
(6,623)
6.270
2010
12,752
12,825
11,270
7,917
44,763
4,890
0
1,102
50,755
627
11,867
16,880
29,374
1,583
8,635
39,592
1,377
8,325
9,701
1,462
50,756
(1,762)
(10,542)
7.042
2011
10,366
11,616
12,918
7,839
42,739
5,800
0
1,857
50,396
582
14,646
13,795
29,023
1,314
7,536
37,873
1,377
9,225
10,602
1,922
50,396
550
(8,470)
7.695
2012E
9,194
14,714
14,472
8,003
46,383
5,669
0
1,935
53,987
582
14,884
17,064
32,530
1,314
6,437
40,281
1,377
10,280
11,657
2,049
53,987
1,771
(7,299)
8.461
2013E
10,351
15,378
15,082
8,154
48,966
5,893
0
2,013
56,871
500
15,557
18,050
34,106
1,314
6,437
41,858
1,377
11,447
12,824
2,190
56,871
595
(8,537)
9.308
2014E
11,987
15,726
15,465
8,295
51,473
6,074
0
2,091
59,638
500
15,909
19,060
35,469
1,314
6,437
43,220
1,377
12,700
14,076
2,341
59,638
(968)
(10,173)
10.217
2007
(5.0)
43.8
44.0
49.1
39.7
15.7
8.5
6.8
25.4
3.8
16.1
33.5
n.a.
15.7
102.8
1.4
n.a.
8.1
2008
8.2
(22.1)
(27.9)
(31.8)
(32.6)
13.4
6.1
4.5
13.6
2.3
10.0
19.7
n.a.
18.4
130.3
1.4
n.a.
9.9
2009
(4.3)
(46.3)
(58.6)
(41.8)
(41.9)
12.8
3.4
2.0
7.2
1.2
4.0
8.4
n.a.
23.0
156.3
1.5
n.a.
15.5
2010
1.9
(4.2)
(8.3)
65.1
65.1
14.4
3.2
1.8
10.9
1.9
3.7
19.6
n.a.
19.7
146.6
1.5
n.a.
19.3
2011
(2.3)
72.9
122.2
22.7
22.7
20.0
5.7
4.0
12.1
2.4
8.2
41.3
n.a.
15.7
155.0
1.5
n.a.
15.7
2012E
9.1
6.2
4.6
4.8
4.8
17.7
5.6
3.9
11.6
2.5
8.0
19.2
n.a.
16.0
160.9
1.4
n.a.
18.0
2013E
4.2
13.8
16.5
10.5
10.5
17.5
6.1
4.3
11.6
2.6
8.6
18.0
n.a.
17.0
166.6
1.4
n.a.
18.0
2014E
2.5
11.6
13.3
7.4
7.4
17.7
6.6
4.8
11.4
2.6
9.0
20.1
n.a.
19.0
167.9
1.5
n.a.
18.0
Key ratios (%)
Year to 31 Dec
Sales (YoY)
EBITDA (YoY)
Net profit (YoY)
Gross-profit margin
EBITDA margin
ROAE
ROAA
ROCE
ROIC
Net debt to equity
Effective tax rate
Current ratio (x)
Net dividend payout
Company profile
Harbin Power Equipment (HPE) is one of China's largest and oldest power-equipment providers. Founded in October 1994, the
company was listed in Hong Kong in December 1994. The currently-listed company was formed from the restructuring of the
three power-equipment groups – Harbin Generators, Harbin Boilers, and Harbin Turbines. Its major products include thermal
equipment, hydro turbines and generators, and nuclear equipment.
- 51 -
Utilities / China
836 HK
Utilities / China
17 December 2012
Target (HKD): 20.00 J 21.00
Upside: 13.3%
836 HK
Meeting guidance is key
Buy (unchanged)
Outperform
Hold
Underperform
Sell
1
• CRP’s power business should enjoy a strong earnings recovery in
2012, but the coal output is likely to miss 2012 guidance
• The key to share-price performance is the delivery of meaningful
coal-output growth, which we forecast at 35% YoY for 2013
• While CRP’s peers are struggling with stretched balance sheets,
we think its 2013 net gearing will be below its internal target
Dave Dai, CFA
(852) 2848 4068
[email protected]
Gary Zhou
(852) 2773 8535
[email protected]
if spot coal prices stay at current
levels, unit-fuel costs may decline in
2013 and contract prices may not
increase given that some areas are
seeing a premium over spot prices. In
our view, this is counterintuitive amid
a few quarters of strong GDP recovery.
Our house view calls for a pick-up in
China’s inflation in 2H12, which could
lead to a 50bp lending-rate hike.
However, CRP’s net gearing looks
robust, at below 150% for 2013E,
leaving little chance of equity-raising.
■ What's new
We have revisited our assumptions for
China Resources Power’s (CRP) power
and coal businesses. The company
remains our only preferred China IPP.
The most important share-price driver
should be CRP’s delivery of
meaningful growth in its coal output
for 2013. We believe the stock
deserves a valuation premium over
peers given its much higher expected
ROE (15% for 2013E), partially
supported by more vertical
integration. Our new NAV-based sixmonth target price of HKD21 is based
on HKD17/share for the power
business (equal to a 1.7x 2013E PBR)
and HKD4/share for the coal mines
(valued using DCF). While the 2013E
dividend yield looks less appealing
than that of Huaneng Power, CRP
offers a less volatile earnings profile
and therefore higher dividend
visibility. We reiterate our Buy (1)
rating. Risks include lower-thanexpected power output and coal costs.
CRP’s power business has seen a
strong earnings recovery in 2012 on
the back of on-grid tariff hikes in late
2011 and falling coal prices this year
(we forecast a 5% YoY fall in 2012).
However, on the coal side, as the
recent output has been affected by
safety measures and a lack of demand,
we now forecast 17mt (18mt
previously) of output in 2012
(company target: 18.5mt) and 22mt in
2013 (35% YoY growth). We forecast
CRP’s self-sufficiency ratio in coal to
reach 25% in 2013 and 31% in 2014.
Management has indicated
sequentially improving power demand
in recent weeks. It also suggested that
■ How we differ
We are more positive on coal prices
2
3
4
5
in 2013, which could provide upside
to our forecasts.
Year to 31 Dec
Revenue change
Net profit change
12E
(0.7)
(3.3)
(3.3)
13E
2.2
2.2
14E
2.4
2.4
(%)
(HKD)
19
125
18
115
16
105
15
95
85
13
Dec-11
Mar-12
Jun-12
Ch Res Pow (LHS)
Sep-12
Dec-12
12-month range
13.48-18.98
Market cap (USDbn)
11.21
13.61
4,686
China Resources Group (64.1%)
Major shareholder
Year to 31 Dec
Revenue (m)
Net profit (m)
EPS change (%)
PER (x)
Dividend yield (%)
DPS
PBR (x)
EV/EBITDA (x)
ROE (%)
12E
68,716
13,397
6,645
1.391
49.3
(2.1)
13.3
2.4
0.440
1.7
8.4
13.4
13E
85,123
17,498
8,344
1.747
25.6
3.3
10.6
3.0
0.552
1.5
6.7
15.2
14E
92,229
18,500
9,047
1.894
8.4
0.0
9.8
3.2
0.599
1.4
6.2
14.9
17 December 2012
Financial summary
Key assumptions
Year to 31 Dec
Attributable capacity (MW)
Utilisation rate (%)
Net generation (bn kWh)
Avg tariff (incl. VAT) (Rmb/MWh)
Unit fuel costs (Rmb/MWh)
2007
9,008
69.3
52.6
364
172
2008
12,632
62.4
64.7
407
237
2009
14,890
61.4
75.2
426
222
2010
18,260
67.1
95.2
450
273
2011
21,894
66.0
112.1
441
290
2012E
24,694
61.0
124.5
450
275
2013E
30,594
60.3
152.8
448
277
2014E
32,094
60.3
160.1
448
285
2007
16,830
0
0
16,830
243
0
(11,068)
(1,706)
4,299
(1,029)
606
3,876
(70)
(586)
3,221
3,221
0.821
0.821
0.779
0.231
4,299
6,006
2008
25,103
1,346
323
26,772
561
0
(21,035)
(2,814)
3,484
(1,712)
379
2,152
(216)
(218)
1,717
1,717
0.413
0.413
0.399
0.127
3,484
6,297
2009
30,918
1,363
932
33,214
416
0
(22,929)
(3,244)
7,456
(1,932)
883
6,408
(370)
(720)
5,317
5,317
1.194
1.194
1.170
0.373
7,456
10,701
2010
41,719
5,430
1,429
48,578
1,130
0
(37,181)
(4,275)
8,253
(2,527)
791
6,517
(755)
(858)
4,904
4,904
1.047
1.047
1.027
0.324
8,253
12,527
2011
50,706
7,985
2,018
60,709
2,479
0
(48,144)
(5,502)
9,542
(3,516)
836
6,863
(1,243)
(1,169)
4,451
4,451
0.950
0.950
0.932
0.295
9,542
15,044
2012E
59,332
6,760
2,623
68,716
1,200
0
(50,444)
(6,075)
13,397
(4,941)
1,414
9,870
(1,481)
(1,745)
6,645
6,645
1.418
1.418
1.391
0.440
13,397
19,472
2013E
72,485
9,228
3,410
85,123
1,200
0
(62,054)
(6,771)
17,498
(5,947)
1,488
13,039
(2,477)
(2,218)
8,344
8,344
1.781
1.781
1.747
0.552
17,498
24,269
2014E
75,965
11,831
4,434
92,229
1,200
0
(67,480)
(7,449)
18,500
(6,026)
1,664
14,138
(2,686)
(2,405)
9,047
9,047
1.931
1.931
1.894
0.599
18,500
25,949
2007
3,876
1,706
(70)
(3,946)
13,308
14,875
(14,661)
(2,078)
(2,106)
(18,846)
10,081
0
(957)
0
9,124
0
5,153
213
2008
2,152
2,814
(216)
2,829
(5,282)
2,296
(13,932)
(534)
(888)
(15,354)
10,999
214
(546)
0
10,667
0
(2,391)
(11,636)
2009
6,408
3,244
(370)
(2,072)
2,868
10,078
(25,050)
(2,726)
(549)
(28,326)
18,813
2,286
(1,693)
0
19,406
0
1,158
(14,973)
2010
6,517
4,275
(755)
(309)
5,130
14,858
(26,946)
(3,172)
(40)
(30,158)
18,427
0
(1,546)
0
16,881
0
1,581
(12,088)
2011
6,863
5,502
(1,243)
(1,707)
4,535
13,950
(18,672)
(6,014)
(237)
(24,923)
8,076
0
(1,407)
0
6,669
0
(4,305)
(4,722)
2012E
9,870
6,075
(1,481)
2,509
(613)
16,360
(12,600)
0
0
(12,600)
1,104
0
(2,101)
0
(996)
0
2,764
3,760
2013E
13,039
6,771
(2,477)
(3,175)
1,022
15,179
(12,000)
0
0
(12,000)
(1,117)
0
(2,638)
0
(3,755)
0
(576)
3,179
2014E
14,138
7,449
(2,686)
(1,142)
18
17,777
(12,000)
0
0
(12,000)
(745)
0
(2,860)
0
(3,605)
0
2,172
5,777
Year to 31 Dec
Sales of electricity
Coal trading
Other Revenue
Total Revenue
Other income
COGS
SG&A
Other op.expenses
Operating profit
Pre-tax profit
Tax
EPS (reported)(HKD)
EPS (adjusted)(HKD)
DPS (HKD)
EBIT
EBITDA
Cash flow (HKDm)
Year to 31 Dec
Profit before tax
Tax paid
Capex
Change in debt
Dividends paid
Forex effect/others
Change in cash
Free cash flow
- 53 -
17 December 2012
As at 31 Dec
Inventory
Accounts receivable
Fixed assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Total liabilities
Share capital
Minority interests
EV
Net debt/(cash)
BVPS (HKD)
2007
7,902
958
5,140
282
14,282
40,658
2,320
6,555
63,815
8,076
8,376
1,543
17,995
18,596
165
36,757
0
24,813
24,813
2,244
63,814
102,045
18,770
6.322
2008
5,512
1,858
4,797
1,683
13,849
51,777
3,207
10,817
79,650
9,485
7,977
3,031
20,492
28,187
810
49,489
0
27,215
27,215
2,946
79,650
115,603
32,160
6.545
2009
6,669
1,432
8,288
2,608
18,998
73,583
3,757
22,589
118,926
23,494
12,763
3,498
39,756
32,990
1,023
73,769
0
37,594
37,594
7,561
118,925
135,147
49,815
8.438
2010
7,074
2,006
10,763
4,492
24,334
96,254
3,797
18,626
143,011
20,668
14,682
1,359
36,709
54,243
1,798
92,750
0
42,164
42,164
8,096
143,011
150,532
67,838
8.998
2011
4,801
3,593
16,123
1,290
25,806
109,424
4,033
29,103
168,366
26,418
19,306
3,252
48,976
56,569
1,248
106,794
0
47,473
47,473
14,099
168,366
160,870
78,187
10.131
2012E
5,201
3,972
18,249
1,290
28,712
115,949
4,033
29,103
177,797
4,117
21,344
3,252
28,713
79,974
1,248
109,936
0
52,017
52,017
15,844
177,797
163,319
78,890
11.100
2013E
6,502
4,905
22,607
1,290
35,304
121,178
4,033
29,103
189,618
745
26,358
3,252
30,355
82,230
1,248
113,833
0
57,723
57,723
18,062
189,618
163,118
76,472
12.318
2014E
9,633
5,299
24,494
1,290
40,716
125,728
4,033
29,103
199,580
1,653
28,474
3,252
33,379
80,577
1,248
115,204
0
63,909
63,909
20,467
199,580
161,648
72,597
13.638
2007
72.8
69.7
68.4
36.2
29.6
100.0
35.7
25.5
16.1
6.3
9.8
11.0
75.6
1.8
80.9
0.8
4.2
28.2
2008
59.1
4.9
(19.0)
(46.7)
(48.8)
100.0
23.5
13.0
6.6
2.4
5.7
5.8
118.2
10.0
67.7
0.7
2.0
30.7
2009
24.1
69.9
114.0
209.6
193.6
100.0
32.2
22.4
16.4
5.4
8.8
8.9
132.5
5.8
71.9
0.5
3.9
31.2
2010
46.3
17.1
10.7
(7.8)
(12.2)
100.0
25.8
17.0
12.3
3.7
7.3
6.8
160.9
11.6
71.6
0.7
3.3
30.9
2011
25.0
20.1
15.6
(9.2)
(9.2)
100.0
24.8
15.7
9.9
2.9
7.1
6.1
164.7
18.1
80.8
0.5
2.7
31.0
2012E
13.2
29.4
40.4
49.3
49.3
100.0
28.3
19.5
13.4
3.8
9.0
7.9
151.7
15.0
91.3
1.0
2.7
31.0
2013E
23.9
24.6
30.6
25.6
25.6
100.0
28.5
20.6
15.2
4.5
11.3
9.5
132.5
19.0
87.6
1.2
2.9
31.0
2014E
8.3
6.9
5.7
8.4
8.4
100.0
28.1
20.1
14.9
4.6
11.4
9.7
113.6
19.0
93.2
1.2
3.1
31.0
Key ratios (%)
Year to 31 Dec
Sales (YoY)
EBITDA (YoY)
Net profit (YoY)
Gross-profit margin
EBITDA margin
ROAE
ROAA
ROCE
ROIC
Net debt to equity
Effective tax rate
Current ratio (x)
Net dividend payout
Company profile
Listed in November 2003, China Resources Power is the power utility arm of China's renowned conglomerate, China Resources
Group. The company pursues a vertical-integration model, had total time-weighted attributable power capacity in 2011 of
21,894MW and acquired a number of coal mines with total reserves of 3,542m tonnes. In August 2009, the company was added
to the Hang Seng Index, making it the first China IPP to enter the Hang Seng Index.
- 54 -
Utilities / China
991 HK
Utilities / China
17 December 2012
991 HK
Upside: 0.0%
Overhangs persist
Buy
Outperform
Hold (unchanged)
Underperform
Sell
1
• DTP’s profit recovery in 2012 could be weaker than those of its
peers; maintain Hold (3) rating
• We are concerned about the profitability of the company’s coalchemical and coal-gas projects
• Very high net gearing ratio remains a big concern, and could
disadvantage DTP if the monetary-tightening cycle returns
Dave Dai, CFA
(852) 2848 4068
[email protected]
Gary Zhou
(852) 2773 8535
[email protected]
tariff (CNY1.8/cm) from the
Shaanxi-Beijing pipeline, making
the project’s return unattractive, 3)
DTP’s balance sheet remains the
most leveraged (404% net gearing in
2013E) among its peers under our
coverage (218% on average), which
could once again become a major
concern if China enters a monetarytightening cycle in late 2013. We
therefore do not rule out the chance
of further equity placements.
2
3
4
5
■ How we differ
We are more bullish on 2013 coal
prices.
Year to 31 Dec
Revenue change
Net profit change
12E
(1.9)
7.6
14.1
13E
(1.8)
21.8
29.1
(%)
(HKD)
■ What's new
We have incorporated DTP’s 9M12
operating figures and management’s
revised guidance into our new
forecasts for the company.
History suggests that given DTP’s
heavy exposure to inland mine-mouth
coal prices, its unit-fuel cost changes
should be less volatile than those of its
peers exposed to coastal provinces.
We expect its unit-fuel cost to drop by
3% YoY in 2012 (we estimate peers
will see 4-5% YoY declines), and, thus,
we forecast DTP to see weaker 2012
net-profit growth (+46% YoY) than its
peers.
There are additional risks including:
1) the coal-chemical project
requiring further capital input and a
70% utilisation rate to break even, 2)
the Keqi coal-gas project could
continue to see a low wholesale gas
We are increasing our 2012-13
earnings forecasts by 14-29% to
mark to market the recent trend in
coal prices. We do not believe the
YTD share-price underperformance
justifies a near-term rerating until
the earnings risks have been
reduced.
Our higher NAV-based six-month
target price of HKD2.93 (from
HKD2.65) is made up of: 49% for
power, 16% for coal mines, 32% for
coal-chemical projects and 3% for
coal-gas projects. Although the stock
is trading below book for 2013E, we
believe this can be explained by its
lower-than-peers expected ROE
(8.2% in 2013E). Upside risks to our
investment case include higherthan-expected profitability for the
company’s coal-chemical and coalgas projects, as well as lower-thanexpected coal prices in 2013.
14E
n.a.
n.a.
n.a.
3.2
125
3.0
116
2.8
108
2.6
99
90
2.4
Dec-11
Mar-12
Jun-12
Datang Int (LHS)
Sep-12
Dec-12
12-month range
2.41-3.12
Market cap (USDbn)
4.97
4.25
13,140
Datang Power Group (34.1%)
Major shareholder
Year to 31 Dec
Revenue (m)
Net profit (m)
EPS change (%)
PER (x)
Dividend yield (%)
DPS
PBR (x)
EV/EBITDA (x)
ROE (%)
12E
77,326
12,343
2,868
0.218
45.5
(10.2)
10.8
2.3
0.055
0.8
9.4
7.2
13E
81,787
13,816
3,466
0.264
20.9
(13.2)
8.9
2.8
0.066
0.7
9.0
8.2
14E
86,343
15,179
3,910
0.298
12.8
(20.2)
7.9
3.2
0.074
0.7
8.7
8.7
17 December 2012
Financial summary
Key assumptions
Year to 31 Dec
Avg tariff (incl. VAT) (CNY/MWh)
Unit fuel costs (CNY/MWh)
2007
15,083
64.7
111.3
344
189
2008
17,975
57.9
119.1
353
170
2009
20,913
55.2
133.6
368
203
2010
27,989
53.6
164.2
396
227
2011
29,934
60.5
194.1
400
216
2012E
31,284
59.0
195.2
421
213
2013E
32,110
61.1
209.5
420
213
2014E
32,785
61.6
218.0
420
212
2007
32,763
0
0
32,763
0
0
(18,184)
(6,656)
7,923
(1,995)
136
6,063
(1,498)
(1,001)
3,564
3,564
0.310
0.310
0.310
0.123
7,923
12,835
2008
35,990
385
524
36,900
0
0
(26,272)
(7,736)
2,892
(3,611)
1,319
599
(72)
221
749
749
0.060
0.060
0.060
0.104
2,892
9,097
2009
42,043
5,144
756
47,943
0
0
(31,021)
(10,177)
6,745
(4,077)
564
3,231
(639)
(980)
1,613
1,613
0.130
0.130
0.130
0.069
6,745
14,252
2010
53,594
2,823
4,255
60,672
0
0
(39,178)
(12,290)
9,204
(5,335)
832
4,700
(871)
(1,259)
2,570
2,570
0.210
0.210
0.210
0.070
9,204
16,586
2011
64,367
2,938
5,077
72,382
0
0
(49,319)
(13,509)
9,553
(6,992)
1,149
3,710
(668)
(1,071)
1,971
1,971
0.150
0.150
0.150
0.111
9,553
18,158
2012E
68,164
2,938
6,225
77,326
0
0
(50,741)
(14,242)
12,343
(8,426)
1,481
5,398
(972)
(1,558)
2,868
2,868
0.218
0.218
0.218
0.055
12,343
21,681
2013E
70,265
2,938
8,585
81,787
0
0
(53,257)
(14,714)
13,816
(8,463)
1,251
6,605
(1,255)
(1,883)
3,466
3,466
0.264
0.264
0.264
0.066
13,816
23,625
2014E
70,427
2,938
12,979
86,343
0
0
(55,999)
(15,165)
15,179
(9,463)
1,827
7,544
(1,509)
(2,125)
3,910
3,910
0.298
0.298
0.298
0.074
15,179
25,440
2007
6,063
4,913
(1,498)
1,779
207
11,464
(27,374)
(1,534)
(3,217)
(32,125)
16,383
3,729
(1,349)
893
19,656
0
(1,005)
(15,910)
2008
599
6,206
(72)
709
(2,568)
4,875
(41,058)
(961)
1,227
(40,792)
35,481
0
(1,409)
3,477
37,549
0
1,632
(36,183)
2009
3,231
7,507
(639)
(7,515)
647
3,231
(28,688)
(2,058)
(1,122)
(31,867)
26,889
0
(1,296)
(528)
25,065
0
(3,572)
(25,457)
2010
4,700
7,382
(871)
4,365
(2,383)
13,192
(30,614)
(1,832)
(415)
(32,860)
17,338
5,000
(862)
128
21,605
0
1,937
(17,422)
2011
3,710
8,605
(668)
(2,989)
398
9,056
(30,295)
(1,633)
(1,277)
(33,206)
14,021
0
(862)
2,294
15,453
0
(8,697)
(21,239)
2012E
5,398
9,337
(972)
(2,390)
698
12,071
(20,000)
(681)
10
(20,671)
9,265
0
(1,464)
0
7,801
0
(799)
(7,929)
2013E
6,605
9,809
(1,255)
(811)
698
15,046
(20,000)
(581)
10
(20,571)
9,840
0
(717)
0
9,123
0
3,598
(4,954)
2014E
7,544
10,260
(1,509)
(1,337)
9,145
24,103
(20,000)
(1,141)
10
(21,131)
6,560
0
(867)
0
5,694
0
8,665
4,103
Year to 31 Dec
Sales of coal
Other Revenue
Total Revenue
Other income
COGS
SG&A
Other op.expenses
Operating profit
Pre-tax profit
Tax
EPS (reported)(CNY)
EPS (adjusted)(CNY)
DPS (CNY)
EBIT
EBITDA
Cash flow (CNYm)
Year to 31 Dec
Profit before tax
Tax paid
Capex
Change in debt
Dividends paid
Forex effect/others
Change in cash
Free cash flow
- 56 -
17 December 2012
As at 31 Dec
Inventory
Accounts receivable
Fixed assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Total liabilities
Share capital
Minority interests
EV
Net debt/(cash)
BVPS (CNY)
2007
3,471
993
4,937
1,789
11,191
99,968
1,258
7,372
119,789
26,461
9,848
3,987
40,296
43,551
1,588
85,435
11,734
18,022
29,756
4,599
119,790
99,711
66,540
2.588
2008
5,569
2,143
4,313
3,510
15,534
134,820
3,545
4,819
158,718
36,466
13,230
4,026
53,722
69,026
5,065
127,813
11,780
14,471
26,252
4,654
158,719
132,189
99,924
2.104
2009
1,506
1,855
6,635
6,683
16,680
156,001
3,940
7,603
184,224
26,936
14,040
418
41,394
105,445
4,537
151,376
11,780
14,418
26,198
6,650
184,224
163,077
130,875
2.113
2010
3,443
4,012
8,159
4,279
19,892
179,233
2,631
11,159
212,915
34,185
18,930
1,168
54,283
115,534
4,665
174,482
12,310
18,540
30,850
7,583
212,915
177,581
146,276
2.521
2011
4,467
6,094
10,209
9,304
30,074
200,923
2,747
13,953
247,697
37,149
23,940
2,326
63,415
126,592
6,959
196,965
13,310
25,631
38,941
11,791
247,697
193,152
159,273
2.964
2012E
3,718
6,302
10,906
9,914
30,840
211,586
2,737
14,635
259,798
24,729
23,168
2,224
50,121
148,277
6,959
205,356
13,310
27,782
41,092
13,350
259,798
204,044
169,288
3.127
2013E
6,468
6,484
11,535
10,465
34,952
221,777
2,727
15,216
274,672
23,009
23,671
2,272
48,952
159,837
6,959
215,748
13,310
30,381
43,691
15,233
274,672
212,436
176,378
3.325
2014E
5,878
6,664
12,178
11,028
35,748
231,517
2,717
16,357
286,338
21,862
23,671
2,320
47,854
167,544
6,959
222,356
13,310
33,314
46,624
17,358
286,338
220,571
183,529
3.548
2007
31.6
27.1
32.3
28.3
129.5
100.0
39.2
24.2
13.3
3.4
8.6
6.7
223.6
24.7
46.1
0.3
4.0
39.5
2008
12.6
(29.1)
(63.5)
(79.0)
(80.6)
100.0
24.7
7.8
2.7
0.5
2.4
2.2
380.6
12.0
45.7
0.3
0.8
173.1
2009
29.9
56.7
133.2
115.4
116.7
100.0
29.7
14.1
6.1
0.9
4.5
3.7
499.6
19.8
41.7
0.4
1.7
53.4
2010
26.6
16.4
36.5
59.4
61.5
100.0
27.3
15.2
9.0
1.3
5.2
4.3
474.2
18.5
44.5
0.4
1.7
33.5
2011
19.3
9.5
3.8
(23.3)
(28.6)
100.0
25.1
13.2
5.6
0.9
4.7
4.0
409.0
18.0
46.3
0.5
1.4
74.3
2012E
6.8
19.4
29.2
45.5
45.5
100.0
28.0
16.0
7.2
1.1
5.6
4.7
412.0
18.0
49.8
0.6
1.5
25.0
2013E
5.8
9.0
11.9
20.9
20.9
100.0
28.9
16.9
8.2
1.3
5.9
4.9
403.7
19.0
50.1
0.7
1.6
25.0
2014E
5.6
7.7
9.9
12.8
12.8
100.0
29.5
17.6
8.7
1.4
6.1
5.0
393.6
20.0
50.1
0.7
1.6
25.0
Key ratios (%)
Year to 31 Dec
Sales (YoY)
EBITDA (YoY)
Net profit (YoY)
Gross-profit margin
EBITDA margin
ROAE
ROAA
ROCE
ROIC
Net debt to equity
Effective tax rate
Current ratio (x)
Net dividend payout
Company profile
Listed in 1997 on the Hong Kong Stock Exchange, Datang International Power has been one of China's fastest-growing IPPs in
terms of installed capacity over the past decade. The company pursues a diversified business model and has invested in coal
mines, coal-to-chemical and coal-to-gas projects over the past three years. At the end of 2009, the company's total installed
power capacity reached 30,742MW. The company also has seven coal mines operating or due to start operations.
- 57 -
Utilities / China
902 HK
Utilities / China
17 December 2012
902 HK
Downside: 14.3%
Optimism seems fully priced in
Buy
Outperform
Hold
Underperform (unchanged)
Sell
1
• History suggests that IPPs tend to underperform during an
economic recovery, and especially amid a return to inflation
• Risks to a strong EPS recovery scenario include strength in coal
prices, increase in borrowing costs and possible placement
• Current price seems to have fully priced in an optimistic
scenario with continuing cost benefits; maintain Underperform
Dave Dai, CFA
(852) 2848 4068
[email protected]
Gary Zhou
(852) 2773 8535
[email protected]
■ What's new
We have incorporated the 3Q12
operations and management’s
revised guidance into our forecasts
for Huaneng Power (HNP).
HNP’s significant earnings recovery
YTD in 2012 has been driven largely
by the on-grid tariff increase in late
2011 and the fall in coal prices.
However, history also suggests that
the IPPs are less likely to outperform
during an economic recovery,
especially if inflation expectations
return. Our house view calls for GDP
expansion in China in 2013 and a
strong rebound in CPI in 2H13,
which could cap the earnings
benefits on cost savings via a 50bp
lending rate hike towards the end of
2013. We are also more optimistic
than many analysts about coal prices
going into 2013, amid a more
positive demand-supply balance for
the thermal-coal industry over the
next few quarters. HNP has one of
the most stretched balance sheets
(net gearing ratio of 295% for
2013E) among the utilities stocks in
our coverage universe, which could
leave room for equity-raising in
2013 (not in our forecasts).
In our view, the current share price
factors in almost no recovery in spot
coal prices in 2013 (or a 3% YoY
decline in unit fuel costs), which is
already the most optimistic scenario.
Also, a large part of the earnings
recovery this year has been driven
by the Singapore business (23% of
total net profit for 9M12). Our
economics team forecasts Singapore
to record GDP growth of 2.5% YoY
for 2013, which is much lower than
HNP’s peak profit in 2011 (when
GDP growth was 4.9% YoY).
We have incorporated HNP’s latest
guidance on fuel costs (down 4%
YoY for 2012E) into our forecasts
(2012-14 EPS forecasts raised by 1320%). Our PBR-based six-month
target price is raised to HKD6.0
(based on a 1.2x 2013E PBR
assuming a 12% sustainable ROE).
Risks to our forecasts would include
much weaker coal prices in 2013,
better-than-expected profits from
Singapore and a lower-thanexpected lending rate.
2
3
4
5
■ How we differ
We are more positive on coal prices
in 2013, which could be the key risk
to our forecasts.
Year to 31 Dec
Revenue change
Net profit change
12E
(0.8)
13.2
13.2
13E
(1.5)
20.6
20.6
14E
(1.5)
13.5
13.5
(%)
(HKD)
7.5
150
6.5
135
5.5
120
4.5
105
3.5
90
Dec-11
Mar-12
Jun-12
Hneng Pow (LHS)
Sep-12
Dec-12
12-month range
3.95-7.19
Market cap (USDbn)
12.69
14.28
14,055
Huaneng Power Group (50.8%)
Major shareholder
Year to 31 Dec
Revenue (m)
Net profit (m)
EPS change (%)
PER (x)
Dividend yield (%)
DPS
PBR (x)
EV/EBITDA (x)
ROE (%)
12E
134,467
16,744
6,077
0.432
414.8
0.8
13.0
3.8
0.216
1.5
8.4
11.6
13E
145,366
19,291
7,311
0.520
20.3
(5.4)
10.8
4.6
0.260
1.4
7.5
13.1
14E
156,466
21,338
7,521
0.535
2.9
(3.8)
10.5
4.8
0.268
1.3
6.9
12.7
17 December 2012
Financial summary
Key assumptions
Year to 31 Dec
Avg tariff (incl. VAT) (Rmb/MWh)
Unit fuel costs (Rmb/MWh)
2007
32,846
55.6
184
339
167
2008
36,364
60.3
207
408
250
2009
41,555
57.8
225
424
213
2010
45,412
62.3
265
485
248
2011
53,907
64.4
310
513
282
2012E
56,902
61.6
313
511
266
2013E
63,397
62.1
348
497
258
2014E
69,892
61.5
377
493
257
2007
49,768
n.a.
n.a.
49,768
0
0
(32,251)
(9,594)
7,922
(1,874)
1,271
7,319
(838)
(320)
6,161
6,161
0.510
0.510
0.510
0.299
7,922
15,148
2008
67,835
n.a.
n.a.
67,835
0
0
(54,677)
(14,394)
(1,236)
(3,624)
69
(4,792)
240
614
(3,938)
(3,938)
(0.330)
(0.330)
(0.330)
0.101
(1,236)
6,483
2009
76,863
n.a.
n.a.
76,863
0
0
(50,633)
(17,056)
9,174
(4,249)
780
5,705
(594)
(181)
4,930
4,930
0.410
0.410
0.410
0.211
9,174
17,746
2010
104,318
n.a.
n.a.
104,318
0
0
(74,402)
(21,287)
8,629
(5,106)
641
4,165
(843)
27
3,348
3,348
0.280
0.280
0.280
0.235
8,629
19,076
2011
133,421
n.a.
n.a.
133,421
0
0
(97,837)
(26,836)
8,748
(7,494)
796
2,050
(869)
(1)
1,181
1,181
0.084
0.084
0.084
0.050
8,748
20,614
2012E
134,467
n.a.
n.a.
134,467
0
0
(90,634)
(27,089)
16,744
(8,629)
542
8,657
(1,905)
(675)
6,077
6,077
0.432
0.432
0.432
0.216
16,744
28,465
2013E
145,366
n.a.
n.a.
145,366
0
0
(98,346)
(27,730)
19,291
(9,318)
442
10,414
(2,291)
(812)
7,311
7,311
0.520
0.520
0.520
0.260
19,291
32,032
2014E
156,466
n.a.
n.a.
156,466
0
0
(106,383)
(28,745)
21,338
(11,066)
442
10,714
(2,357)
(836)
7,521
7,521
0.535
0.535
0.535
0.268
21,338
35,055
2007
7,319
7,226
(838)
(714)
(1,392)
11,601
(6,908)
(5,690)
0
(12,598)
8,736
0
(3,617)
0
5,119
0
4,122
4,692
2008
(4,792)
7,719
240
(1,557)
(3,763)
(2,153)
(34,330)
(13,543)
0
(47,873)
49,464
0
(1,206)
0
48,258
0
(1,767)
(36,483)
2009
5,705
8,572
(594)
(1,085)
5,509
18,108
(32,612)
(3,758)
0
(36,370)
20,480
0
(2,532)
0
17,948
0
(314)
(14,505)
2010
4,165
10,447
(843)
1,966
546
16,281
(24,894)
(8,237)
0
(33,132)
13,037
10,720
(2,811)
0
20,946
0
4,096
(8,613)
2011
2,050
11,867
(869)
744
(3,347)
10,446
(34,610)
(1,873)
0
(36,483)
25,863
0
(703)
0
25,160
0
(878)
(24,165)
2012E
8,657
11,721
(1,905)
175
(691)
17,957
(20,800)
(1,359)
0
(22,159)
8,541
0
(3,039)
0
5,503
0
1,301
(2,843)
2013E
10,414
12,741
(2,291)
375
(712)
20,527
(20,000)
(392)
0
(20,392)
6,291
0
(3,655)
0
2,636
0
2,771
527
2014E
10,714
13,716
(2,357)
101
59
22,233
(19,000)
(392)
0
(19,392)
3,191
0
(3,761)
0
(569)
0
2,272
3,233
Year to 31 Dec
n.a.
Other Revenue
Total Revenue
Other income
COGS
SG&A
Other op.expenses
Operating profit
Pre-tax profit
Tax
EPS (reported)(CNY)
EPS (adjusted)(CNY)
DPS (CNY)
EBIT
EBITDA
Cash flow (CNYm)
Year to 31 Dec
Profit before tax
Tax paid
Capex
Change in debt
Dividends paid
Forex effect/others
Change in cash
Free cash flow
- 59 -
17 December 2012
As at 31 Dec
Inventory
Accounts receivable
Fixed assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Total liabilities
Share capital
Minority interests
EV
Net debt/(cash)
BVPS (CNY)
2007
7,533
2,319
7,876
822
18,550
90,126
555
15,065
124,296
20,955
8,849
1,572
31,376
39,324
1,516
72,216
0
46,929
46,929
5,151
124,296
128,290
52,746
3.885
2008
5,766
5,170
7,795
1,288
20,018
116,737
11,108
18,054
165,918
40,387
11,410
689
52,486
68,862
2,010
123,358
0
36,830
36,830
5,731
165,918
179,579
103,483
3.087
2009
5,452
4,084
10,043
4,611
24,190
140,777
11,611
21,309
197,887
44,082
14,538
962
59,582
85,067
2,590
147,239
0
42,125
42,125
8,524
197,887
201,776
123,696
3.504
2010
9,548
5,190
10,909
5,909
31,556
155,225
12,641
28,517
227,938
62,900
19,642
1,095
83,637
79,016
2,860
165,512
0
53,789
53,789
8,636
227,938
208,155
132,368
4.498
2011
8,670
7,526
15,378
4,844
36,417
177,968
13,890
29,140
257,416
69,378
25,804
1,416
96,598
97,700
3,561
197,858
0
50,883
50,883
8,675
257,416
232,618
158,407
3.620
2012E
9,312
6,838
15,498
4,844
36,492
187,047
13,890
30,499
267,929
68,927
24,365
2,463
95,755
106,335
3,917
206,007
0
53,922
53,922
8,000
267,929
238,127
165,950
3.836
2013E
11,171
7,389
16,755
4,844
40,158
194,306
13,890
30,891
279,245
69,674
26,094
2,916
98,684
111,488
4,308
214,481
0
57,577
57,577
7,187
279,245
240,964
169,992
4.097
2014E
11,712
7,960
18,034
4,844
42,550
199,590
13,890
31,283
287,312
70,028
27,967
2,993
100,989
113,895
4,739
219,623
0
61,338
61,338
6,352
287,312
241,956
172,211
4.364
2007
12.7
(0.8)
(7.4)
1.5
2.0
100.0
30.4
15.9
13.6
5.2
7.4
6.9
112.4
11.5
55.7
0.6
4.2
58.7
2008
36.3
(57.2)
n.a.
n.a.
n.a.
100.0
9.6
n.a.
n.a.
n.a.
n.a.
(1.0)
281.0
n.a.
42.2
0.4
n.a.
n.a.
2009
13.3
173.7
n.a.
n.a.
n.a.
100.0
23.1
11.9
12.5
2.7
5.5
5.1
293.6
10.4
42.4
0.4
2.2
51.3
2010
35.7
7.5
(5.9)
(32.1)
(31.7)
100.0
18.3
8.3
7.0
1.6
4.5
3.7
246.1
20.2
36.7
0.4
1.7
84.0
2011
27.9
8.1
1.4
(64.7)
(70.0)
100.0
15.5
6.6
2.3
0.5
4.1
2.4
311.3
42.4
36.0
0.4
1.2
59.5
2012E
0.8
38.1
91.4
414.8
414.8
100.0
21.2
12.5
11.6
2.3
7.2
5.9
307.8
22.0
41.9
0.4
1.9
50.0
2013E
8.1
12.5
15.2
20.3
20.3
100.0
22.0
13.3
13.1
2.7
8.0
6.5
295.2
22.0
40.5
0.4
2.1
50.0
2014E
7.6
9.4
10.6
2.9
2.9
100.0
22.4
13.6
12.7
2.7
8.6
7.0
280.8
22.0
40.6
0.4
1.9
50.0
Key ratios (%)
Year to 31 Dec
Sales (YoY)
EBITDA (YoY)
Net profit (YoY)
Gross-profit margin
EBITDA margin
ROAE
ROAA
ROCE
ROIC
Net debt to equity
Effective tax rate
Current ratio (x)
Net dividend payout
Company profile
Listed on the Hong Kong Stock Exchange, Shanghai Stock Exchange and NYSE, Huaneng Power International is China's largest
IPP in terms of installed capacity. In 2011, the company's total time-weighted attributable capacity was 53,907MW with
domestic power plants located in 19 provinces. The company was the first of China's IPPs to acquire overseas power assets, while
it acquired its 100% interest in Singapore Tuas Power in 2008.
- 60 -
Utilities / China
1193 HK
Utilities / China
17 December 2012
China Resources Gas
Target (HKD): 13.80 J 15.50
Downside: 7.1%
China Resources Gas
1193 HK
Expensive and not defensive
Buy
Outperform
Hold (unchanged)
Underperform
Sell
1
• Following the completion of asset injections, we believe CRG
will need to deliver on organic growth going forward
• The Tianjin project should be a major top-line booster, but we
are concerned about the initial volume growth from households
• Trading at a premium to peers; earnings risks from gas price
reform; maintain Hold (3) rating
expect two-thirds of the JV’s piped
sales to come from C&I customers.
Dave Dai, CFA
(852) 2848 4068
[email protected]
Gary Zhou
(852) 2773 8535
[email protected]
■ What's new
We have incorporated our latest
natural gas volume forecasts for the
Tianjin gas project and recent equity
placement into our forecasts for
China Resources Gas (CRG).
Our recent checks with management
suggest that CRG targets its Tianjin
JV to reach 4bn cm of piped natural
gas sales by 2015, but that the
growth could be back-end loaded.
We therefore forecast the company
to achieve about 1.2bn cm in 2013
and 2bn cm in 2014. In the first few
years, the JV will focus on
penetrating household customers,
with commercial and industry (C&I)
growth coming at a later stage. This
could mean that in the near term,
the proportion of household revenue
in CRG’s sales mix could increase,
further exposing its overall margins
to the gas price reforms. By 2015, we
The recent 160m new share
placement (7.2% of enlarged capital)
should help support ongoing capex
for the Tianjin project. Given that
there were no new projects or
acquisitions announced together
with the placement, this dilutes our
EPS forecasts despite the upward
adjustments to our net-profit
forecasts as a result of the Tianjin
project. Our major revenue changes
reflect how large Tianjin could be in
terms of size, but our declining gross
margin trend also reflects the nearterm risk of a margin squeeze.
2
3
4
5
especially from the gas price reforms
in 2013.
Year to 31 Dec
Revenue change
Net profit change
■ How we differ
We are less positive about CRG’s
ability to pass on all its cost hikes,
13E
16.6
5.5
(1.0)
14E
30.6
6.8
0.2
(%)
(HKD)
19
150
16
133
14
115
12
98
80
10
Dec-11
Mar-12
Jun-12
Ch Res Gas (LHS)
We are raising our DCF-based sixmonth target price to HKD15.0
following incorporation of the
Tianjin project, but the stock is
currently trading at a premium to
most of its peers. For a potential
EPS CAGR of around 20% over the
next few years, we would suggest
investors buy ENN Energy (2688
HK, HKD33.15, Buy [1]) at a much
cheaper valuation. The key upside
risks to our forecasts are betterthan-expected pass-through from
the gas price increases.
12E
(0.6)
Sep-12
Dec-12
12-month range
10.52-18.46
Market cap (USDbn)
4.79
13.04
2,224
China Resources Group (63.3%)
Major shareholder
Year to 31 Dec
Revenue (m)
Net profit (m)
EPS change (%)
PER (x)
Dividend yield (%)
DPS
PBR (x)
EV/EBITDA (x)
ROE (%)
12E
16,703
2,690
1,500
0.731
14.4
(5.9)
22.8
0.7
0.117
3.1
11.9
14.9
13E
23,404
3,612
1,899
0.863
18.2
(9.5)
19.3
0.8
0.138
2.7
8.8
14.8
14E
29,531
4,355
2,296
1.044
20.9
(10.5)
16.0
1.0
0.167
2.4
7.1
15.7
17 December 2012
Financial summary
Key assumptions
Year to 31 Dec
Gas ASP - retail (CNY/cm)
Gas ASP - CNG (CNY/cm)
Gas purchase cost (CNY/cm)
Revenue contribution – connection
fee (%)
Gas penetration rate for residential
households (%)
2007
1,256
1.9
3.4
1.5
2008
1,371
1.9
3.4
1.2
2009
2,214
2.2
3.4
1.2
2010
5,577
2.2
3.3
1.4
2011
7,215
2.3
3.6
1.4
2012E
8,899
2.3
3.6
1.4
2013E
12,200
2.4
3.8
1.5
2014E
15,089
2.6
4.0
1.7
3.4
18.5
24.7
23.1
20.3
17.9
19.5
18.3
0.0
31.3
22.7
30.0
34.9
36.0
55.7
62.2
2007
1,326
211
4,631
6,168
154
(4,586)
(328)
(788)
621
(113)
(6)
502
(25)
(77)
400
400
1.436
1.436
1.417
0.099
621
1,175
2008
1,903
623
842
3,367
85
(2,359)
(445)
(227)
420
(14)
3
409
(65)
(47)
297
297
0.620
0.620
0.620
0.118
420
591
2009
3,096
1,014
0
4,110
141
(2,858)
(539)
(201)
653
(17)
7
644
(85)
(99)
460
460
0.340
0.340
0.330
0.061
653
854
2010
7,175
2,157
0
9,331
174
(6,594)
(1,156)
(375)
1,381
(30)
16
1,367
(329)
(252)
787
787
0.540
0.540
0.510
0.060
1,381
1,756
2011
10,766
2,741
0
13,507
353
(9,534)
(1,781)
(532)
2,013
18
117
2,148
(551)
(396)
1,200
1,200
0.660
0.660
0.639
0.097
2,013
2,545
2012E
13,710
2,992
0
16,703
353
(11,698)
(1,886)
(781)
2,690
(131)
100
2,660
(665)
(495)
1,500
1,500
0.731
0.731
0.731
0.117
2,690
3,472
2013E
18,838
4,566
0
23,404
353
(16,893)
(2,159)
(1,094)
3,612
(445)
200
3,367
(842)
(626)
1,899
1,899
0.863
0.863
0.863
0.138
3,612
4,706
2014E
24,136
5,395
0
29,531
353
(21,937)
(2,352)
(1,241)
4,355
(583)
300
4,072
(1,018)
(757)
2,296
2,296
1.044
1.044
1.044
0.167
4,355
5,595
2007
502
554
(25)
2,538
111
3,680
(2,256)
(8)
(62)
(2,325)
(46)
487
(28)
(309)
104
0
1,459
1,424
2008
409
171
(65)
(489)
(26)
(0)
(623)
(2)
4,340
3,715
(2,028)
0
(57)
(435)
(2,520)
0
1,195
(623)
2009
644
201
(85)
563
(105)
1,217
(2,780)
(11)
(1,483)
(4,274)
4,226
0
(85)
422
4,563
0
1,506
(1,563)
2010
1,367
375
(329)
2,675
(195)
3,893
(5,475)
(64)
665
(4,873)
1,368
2,712
(92)
1,420
5,408
0
4,427
(1,582)
2011
2,148
532
(551)
(185)
(384)
1,559
(1,954)
(1,557)
(61)
(3,572)
879
160
(182)
364
1,221
0
(791)
(395)
2012E
2,660
781
(665)
544
(327)
2,993
(9,000)
(10)
0
(9,010)
3,464
2,540
(240)
495
6,259
0
242
(6,007)
2013E
3,367
1,094
(842)
1,967
(151)
5,435
(5,000)
(10)
0
(5,010)
1,879
0
(304)
626
2,201
0
2,626
435
2014E
4,072
1,241
(1,018)
1,916
(757)
5,453
(5,000)
0
0
(5,000)
2,252
0
(367)
757
2,642
0
3,095
453
Year to 31 Dec
Sales of gas products
Gas connection
Other Revenue
Total Revenue
Other income
COGS
SG&A
Other op.expenses
Operating profit
Pre-tax profit
Tax
EPS (reported)(HKD)
EPS (adjusted)(HKD)
DPS (HKD)
EBIT
EBITDA
Cash flow (HKDm)
Year to 31 Dec
Profit before tax
Tax paid
Capex
Change in debt
Dividends paid
Forex effect/others
Change in cash
Free cash flow
- 62 -
17 December 2012
As at 31 Dec
Inventory
Accounts receivable
Fixed assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Total liabilities
Share capital
Minority interests
EV
Net debt/(cash)
BVPS (HKD)
2007
1,777
887
1,264
156
4,085
5,388
752
332
10,557
809
2,098
1,574
4,480
1,312
405
6,197
281
3,343
3,625
735
10,557
38,166
343
13.030
2008
1,347
51
328
236
1,962
1,642
679
244
4,527
108
1,175
449
1,732
39
216
1,988
141
2,087
2,229
311
4,527
36,197
(1,199)
4.653
2009
2,672
160
668
569
4,070
4,080
829
1,738
10,717
1,340
2,004
833
4,176
1,392
1,991
7,559
141
2,283
2,425
733
10,717
37,867
60
1.794
2010
6,707
269
1,771
550
9,298
9,101
1,244
1,137
20,779
534
3,667
2,789
6,990
5,156
649
12,795
183
5,648
5,832
2,152
20,779
38,147
(1,017)
4.003
2011
6,890
412
2,714
762
10,777
10,555
1,319
2,755
25,406
1,536
4,068
3,565
9,169
4,964
655
14,787
199
7,903
8,102
2,516
25,406
37,579
(390)
4.455
2012E
7,228
506
3,356
908
11,997
18,802
1,186
2,765
34,751
1,536
4,991
4,137
10,664
8,428
585
19,677
359
11,703
12,062
3,011
34,751
41,190
2,736
5.424
2013E
9,379
730
4,702
1,215
16,026
22,737
1,158
2,775
42,695
1,536
7,208
5,764
14,508
10,307
585
25,401
359
13,299
13,658
3,637
42,695
41,535
2,464
6.141
2014E
14,474
948
5,933
1,495
22,851
24,525
1,129
2,775
51,280
1,536
9,360
7,258
18,154
12,559
585
31,299
359
15,228
15,587
4,395
51,280
39,449
(379)
7.008
2007
n.a.
n.a.
n.a.
n.a.
n.a.
25.6
19.1
10.1
n.a.
n.a.
n.a.
n.a.
9.5
5.0
n.a.
0.9
5.5
6.9
2008
(45.4)
(49.7)
(32.4)
(25.7)
(56.3)
29.9
17.6
12.5
10.1
3.9
9.2
11.7
n.a.
16.0
86.3
1.1
30.7
19.1
2009
22.1
44.5
55.7
54.8
(46.8)
30.5
20.8
15.9
19.8
6.0
15.2
24.9
2.5
13.3
44.3
1.0
39.1
17.9
2010
127.0
105.6
111.4
71.2
54.5
29.3
18.8
14.8
19.1
5.0
14.1
20.6
n.a.
24.1
47.7
1.3
46.2
11.0
2011
44.7
44.9
45.7
52.6
25.2
29.4
18.8
14.9
17.2
5.2
13.1
17.4
n.a.
25.7
60.6
1.2
n.a.
14.7
2012E
23.7
36.4
33.7
25.0
14.4
30.0
20.8
16.1
14.9
5.0
12.8
14.4
22.7
25.0
66.3
1.1
20.6
16.0
2013E
40.1
35.5
34.3
26.6
18.2
27.8
20.1
15.4
14.8
4.9
13.3
14.4
18.0
25.0
62.8
1.1
8.1
16.0
2014E
26.2
18.9
20.6
20.9
20.9
25.7
18.9
14.7
15.7
4.9
13.8
16.6
n.a.
25.0
65.7
1.3
7.5
16.0
Key ratios (%)
Year to 31 Dec
Sales (YoY)
EBITDA (YoY)
Net profit (YoY)
Gross-profit margin
EBITDA margin
ROAE
ROAA
ROCE
ROIC
Net debt to equity
Effective tax rate
Current ratio (x)
Net dividend payout
Company profile
China Resources Gas is engaged principally in the city-gas distribution business, including piped natural or petroleum gas, and
operating compressed-natural-gas filling stations in the PRC. Its piped natural-gas operations are located strategically in areas
of China with rich reserves of natural gas, and areas that are economically more developed and densely populated.
- 63 -
Utilities / China
916 HK
Utilities / China
17 December 2012
Upside: 9.9%
916 HK
Various challenges in 2013
Buy
Outperform (unchanged)
Hold
Underperform
Sell
1
• While the market is prepared for carbon repricing post 2012,
there are still uncertainties as to how low prices could go
• Power-curtailment and share-placement risks are other
concerns, although these have partly been priced in
• Inexpensive, trading at close to book, but a rerating may be
difficult until the risk concerns are fully cleared
On the positive side, we are
comfortable with LYP’s contracts, as
100% of its counterparties are
carbon end-users rather than agents,
which should reduce the default risk.
Dave Dai, CFA
(852) 2848 4068
[email protected]
Gary Zhou
(852) 2773 8535
[email protected]
■ What's new
With the fixed-price cleandevelopment-mechanism contracts
signed between the Chinese windfarm operators and foreign carboncredit users expiring at the end of
2012, we believe the upcoming
contract re-negotiation could put a
lot of pressure on the CDM income
of the wind operators like China
Longyuan (LYP) in 2013.
Impacted by the weak economic
outlook for the EU, the spot carbon
price dropped below EUR1/tonne
CO2 recently, which is much lower
than LYP’s current fixed pricing of
close to EUR10/tonne CO2 and our
forecast of EUR5/tonne CO2 post
2012. In our view, forecasting LYP’s
post-2012 carbon income is difficult
given the complicated structure, and
our new 2013 earnings forecast
takes into account EUR3/tonne CO2.
With wind speeds normalising to the
historical mean in recent months,
we believe the risk element
associated with climate change has
reduced, but power curtailment
from the grid (especially in cold
winters like this year) could
continue to cap utilisation upside.
LYP’s balance sheet is less stretched
after the recent placement (168% net
gearing in 2013E) but we do not rule
out the possibility of a further equity
placement later in 2013 given the
company’s on-going capex program.
We are cutting our 2013-14 EPS
forecasts by 15-17% and lowering our
DCF-based six-month target price
from HKD7.0 to HKD5.75,
incorporating the latest placement.
The stock is inexpensive, trading close
to book, with around a 10% ROE over
the next few years. The main
downside risk would be a further
equity placement in 2013, which could
dilute our fair value estimate.
■ How we differ
Our 2013-14E EPS are below
consensus due to our much more
bearish view on carbon prices.
2
3
4
5
Year to 31 Dec
Revenue change
Net profit change
12E
(0.4)
(0.4)
13E
(2.3)
(11.0)
(17.3)
14E
(1.2)
(7.9)
(14.4)
(%)
(HKD)
110
7.5
6.6
100
5.8
90
4.9
80
70
4.0
Dec-11
Mar-12
Jun-12
Longyuan P (LHS)
Sep-12
Dec-12
12-month range
4.49-7.18
Market cap (USDbn)
5.42
6.08
8,036
China Guodian Group (58.4%)
Major shareholder
Year to 31 Dec
Revenue (m)
Net profit (m)
EPS change (%)
PER (x)
Dividend yield (%)
DPS
PBR (x)
EV/EBITDA (x)
ROE (%)
12E
18,097
6,042
2,955
0.396
12.0
4.2
10.6
1.9
0.079
1.1
9.3
10.6
13E
19,812
6,470
2,940
0.366
(7.6)
(9.7)
11.5
1.7
0.073
1.0
9.2
9.4
14E
21,775
7,725
3,316
0.413
12.8
(15.6)
10.2
2.0
0.083
1.0
8.6
9.8
17 December 2012
Financial summary
Key assumptions
Year to 31 Dec
Total wind power output (Million Kwh)
Wind power utilization hours
Unit fuel costs (CNY/MWh)
2007
1,692
45.4
1,514
2,317
179.7
2008
2,567
44.7
3,655
2,354
204.5
2009
4,324
37.3
6,211
2,268
143.6
2010
6,345
33.4
10,093
2,217
136.1
2011
8,406
29.7
13,355
2,026
136.2
2012E
9,852
28.0
16,808
2,000
120.7
2013E
11,297
27.4
20,192
2,050
107.9
2014E
13,104
27.0
24,054
2,100
96.2
2007
4,412
2,074
477
6,963
169
0
(5,120)
(894)
1,118
(364)
18
773
(60)
(497)
215
215
0.043
0.043
0.043
0.000
1,118
1,897
2008
5,752
2,200
603
8,555
390
0
(6,201)
(1,323)
1,421
(857)
53
616
(2)
(276)
338
338
0.068
0.068
0.068
0.000
1,421
2,504
2009
6,467
883
2,394
9,744
573
0
(5,672)
(1,788)
2,857
(1,020)
105
1,942
(296)
(753)
893
893
0.174
0.174
0.174
0.000
2,857
4,448
2010
8,544
1,450
4,223
14,218
986
0
(8,305)
(2,826)
4,072
(1,100)
228
3,200
(439)
(748)
2,013
2,013
0.270
0.270
0.270
0.054
4,072
6,309
2011
10,270
793
5,096
16,159
1,271
0
(8,884)
(3,511)
5,036
(1,487)
60
3,609
(305)
(667)
2,638
2,638
0.353
0.353
0.353
0.069
5,036
7,882
2012E
12,118
793
5,186
18,097
1,400
0
(9,449)
(4,005)
6,042
(1,892)
63
4,214
(563)
(696)
2,955
2,955
0.396
0.396
0.396
0.079
6,042
9,399
2013E
13,759
793
5,259
19,812
824
0
(9,666)
(4,500)
6,470
(2,398)
63
4,136
(551)
(644)
2,940
2,940
0.366
0.366
0.366
0.073
6,470
10,246
2014E
15,642
793
5,340
21,775
1,144
0
(9,921)
(5,273)
7,725
(2,970)
63
4,819
(828)
(675)
3,316
3,316
0.413
0.413
0.413
0.083
7,725
12,025
2007
773
778
(60)
(1,393)
490
588
(7,162)
(708)
505
(7,365)
6,970
670
0
(157)
7,483
0
706
(6,573)
2008
616
1,083
(2)
(330)
1,521
2,888
(11,603)
(726)
1,243
(11,086)
6,803
1,500
0
141
8,444
0
246
(8,715)
2009
1,942
1,572
(296)
(828)
(1,229)
1,162
(12,445)
(272)
(1,984)
(14,702)
11,275
17,713
0
0
28,988
0
15,449
(11,283)
2010
3,200
1,956
(439)
(2,696)
2,008
4,029
(17,846)
(516)
(1,629)
(19,990)
3,818
0
(403)
135
3,551
0
(12,410)
(13,817)
2011
3,609
2,462
(305)
(3,103)
1,044
3,708
(13,048)
(240)
(1,172)
(14,460)
10,502
0
(515)
318
10,305
0
(448)
(9,340)
2012E
4,214
3,357
(563)
(620)
(182)
6,206
(15,000)
0
0
(15,000)
10,139
2,200
(591)
696
12,444
0
3,650
(8,794)
2013E
4,136
3,775
(551)
(484)
(489)
6,387
(12,875)
0
0
(12,875)
5,632
0
(588)
2,594
7,639
0
1,151
(6,488)
2014E
4,819
4,300
(828)
(527)
(134)
7,630
(15,694)
0
0
(15,694)
8,614
0
(663)
675
8,626
0
563
(8,064)
Year to 31 Dec
Sales of concession revenue
Other Revenue
Total Revenue
Other income
COGS
SG&A
Other op.expenses
Operating profit
Pre-tax profit
Tax
EPS (reported)(CNY)
EPS (adjusted)(CNY)
DPS (CNY)
EBIT
EBITDA
Cash flow (CNYm)
Year to 31 Dec
Profit before tax
Tax paid
Capex
Change in debt
Dividends paid
Forex effect/others
Change in cash
Free cash flow
- 65 -
17 December 2012
As at 31 Dec
Inventory
Accounts receivable
Fixed assets
Total assets
Short-term debt
Accounts payable
Long-term debt
Total liabilities
Share capital
Minority interests
EV
Net debt/(cash)
BVPS (CNY)
2007
809
205
866
1,210
3,090
14,937
3,458
1,840
23,325
6,156
1,779
1,570
9,506
7,845
446
17,797
0
2,865
2,865
2,663
23,325
49,116
13,192
0.573
2008
1,055
279
1,241
2,305
4,880
24,290
5,640
1,239
36,049
4,686
2,729
1,998
9,413
17,345
2,219
28,977
0
3,875
3,875
3,198
36,049
57,495
20,976
0.774
2009
16,503
333
2,181
1,350
20,367
37,305
6,827
3,455
67,954
17,087
1,943
4,662
23,692
16,219
2,363
42,274
7,464
14,436
21,900
3,780
67,954
53,632
16,803
4.262
2010
4,491
636
3,496
1,768
10,392
50,651
8,549
5,083
74,675
17,200
1,515
6,230
24,945
19,975
2,330
47,250
7,464
15,817
23,281
4,144
74,675
69,360
32,683
3.119
2011
4,051
890
5,157
2,876
12,974
61,337
9,334
6,462
90,107
16,369
1,597
8,380
26,345
31,308
2,587
60,241
7,464
18,026
25,490
4,375
90,107
80,295
43,626
3.415
2012E
7,740
996
5,807
2,804
17,348
72,980
8,985
6,462
105,775
18,291
1,734
8,513
28,538
39,525
2,587
70,650
7,464
22,590
30,054
5,072
105,775
87,440
50,076
3.740
2013E
9,078
996
6,383
2,804
19,261
82,080
8,637
6,462
116,440
17,924
1,825
8,507
28,256
45,525
2,587
76,367
7,464
24,942
32,406
7,666
116,440
94,329
54,370
4.032
2014E
9,590
996
7,042
2,804
20,433
93,475
8,288
6,462
128,658
17,538
1,958
8,650
28,145
54,525
2,587
85,257
7,464
27,595
35,059
8,342
128,658
103,106
62,472
4.363
2007
27.9
20.4
15.7
43.1
43.8
100.0
27.2
16.1
8.9
1.1
7.4
7.0
460.4
7.8
37.5
0.3
3.1
0.0
2008
22.9
32.0
27.1
57.2
57.0
100.0
29.3
16.6
10.0
1.1
5.8
6.1
541.3
0.3
44.9
0.5
1.7
0.0
2009
13.9
77.6
101.1
164.3
157.4
100.0
45.6
29.3
6.9
1.7
6.5
6.9
76.7
15.3
64.1
0.9
2.8
0.0
2010
45.9
41.9
42.5
125.4
55.2
100.0
44.4
28.6
8.9
2.8
6.6
6.8
140.4
13.7
72.9
0.4
3.7
20.0
2011
13.7
24.9
23.7
31.0
31.0
100.0
48.8
31.2
10.8
3.2
7.1
6.9
171.1
8.4
97.7
0.5
3.4
19.5
2012E
12.0
19.3
20.0
12.0
12.0
100.0
51.9
33.4
10.6
3.0
7.1
6.6
166.6
13.4
110.6
0.6
3.2
20.0
2013E
9.5
9.0
7.1
(0.5)
(7.6)
100.0
51.7
32.7
9.4
2.6
6.6
6.2
167.8
13.3
112.3
0.7
2.7
20.0
2014E
9.9
17.4
19.4
12.8
12.8
100.0
55.2
35.5
9.8
2.7
7.1
6.4
178.2
17.2
112.5
0.7
2.6
20.0
Key ratios (%)
Year to 31 Dec
Sales (YoY)
EBITDA (YoY)
Net profit (YoY)
Gross-profit margin
EBITDA margin
ROAE
ROAA
ROCE
ROIC
Net debt to equity
Effective tax rate
Current ratio (x)
Net dividend payout
Company profile
Listed in December 2009, China Longyuan Power is Asia's largest and the world's second-largest wind-farm operator, with total
operational experience of 19 years. Total attributable capacity of wind farms reached 7,768 MW as of 2011. The group has
developed projects across 23 provinces and autonomous regions in China. China Guodian Group, one of the big-five
independent power producer groups, is the company's largest shareholder.
- 66 -
17 December 2012
HONG KONG
SOUTH KOREA
Nagahisa MIYABE
(852) 2848 4971
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Hiroaki KATO
(852) 2532 4121
Regional Research Co-head
John HETHERINGTON
(852) 2773 8787
[email protected]
Chang H LEE
(82) 2 787 9177
[email protected]
Head of Korea Research; Strategy; Banking/Finance
[email protected]
[email protected]
Sung Yop CHUNG
(82) 2 787 9157
[email protected]
Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles;
Shipbuilding; Steel
[email protected]
Anderson CHA
Banking/Finance
Daiwa’s
Asia
Pacific
Research
Directory
Regional Deputy
Head
of Asia Pacific
Research; Regional
Head of Product Management
Pranab Kumar SARMAH (852) 2848 4441
Regional Head of Research Promotion
Mingchun SUN
(852) 2773 8751
[email protected]
Head of China Research; Chief Economist (Regional)
Dave DAI
(852) 2848 4068
[email protected]
Deputy Head of Hong Kong and China Research; Pan-Asia/Regional Head of Clean
Energy and Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China)
Kevin LAI
(852) 2848 4926
[email protected]
Deputy Head of Regional Economics; Macro Economics (Regional)
Chi SUN
(852) 2848 4427
Macro Economics (China)
[email protected]
Mike OH
(82) 2 787 9179
[email protected]
Capital Goods (Construction and Machinery)
Sang Hee PARK
Consumer/Retail
(82) 2 787 9165
[email protected]
Jae H LEE
(82) 2 787 9173
[email protected]
IT/Electronics (Tech Hardware and Memory Chips)
Thomas Y KWON
(82) 2 787 9181
[email protected]
Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game
[email protected]
TAIWAN
Jonas KAN
(852) 2848 4439
[email protected]
Head of Hong Kong Research; Head of Hong Kong and China Property; Regional
Property Coordinator; Property Developers (Hong Kong)
Jeff CHUNG
(852) 2773 8783
Automobiles and Components (China)
(82) 2 787 9185
[email protected]
Grace WU
(852) 2532 4383
[email protected]
Head of Greater China FIG; Banking (Hong Kong, China)
Jerry YANG
(852) 2773 8842
Banking/Diversified Financials (Taiwan)
[email protected]
Leon QI
(852) 2532 4381
Banking (Hong Kong, China)
[email protected]
Joseph HO
(852) 2848 4443
[email protected]
Head of Industrials and Machineries (Hong Kong, China); Capital Goods –Electronics
Equipments and Machinery (Hong Kong, China)
Mark CHANG
(886) 2 8758 6245 [email protected]
Head of Research; Regional Head of Small/Medium Cap; Small/Medium Cap (Regional)
Birdy LU
IT/Technology Hardware (Handsets and Components)
Christine WANG
IT/Technology Hardware (PC Hardware)
Chris LIN
IT/Technology Hardware (Panels)
INDIA
Punit SRIVASTAVA
Head of Research; Strategy; Banking/Finance
Navin MATTA
(91) 22 6622 8411
Automobiles and Components
[email protected]
Saurabh MEHTA
Capital Goods; Utilities
(91) 22 6622 1009
[email protected]
Eric CHEN
(852) 2773 8702
[email protected]
Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)
Mihir SHAH
FMCG/Consumer
(91) 22 6622 1020
[email protected]
Felix LAM
(852) 2532 4341
[email protected]
Head of Materials (Hong Kong, China); Cement and Building Materials (China,
Taiwan); Property (China)
Deepak PODDAR
(91) 22 6622 1016
[email protected]
(91) 22 6622 1018
[email protected]
Bing ZHOU
(852) 2773 8782
[email protected]
Consumer/Retail (Hong Kong, China); Hotels, Restaurants and Leisure - Casinos and
Gaming (Hong Kong, Macau)
John CHOI
(852) 2773 8730
[email protected]
Head of Multi-Industries (Hong Kong, China); Small/Mid Cap (Regional);
Internet (China)
Kelvin LAU
(852) 2848 4467
[email protected]
Head of Transportation (Hong Kong, China); Hong Kong and China Research
Coordinator; Transportation (Regional)
Jibo MA
(852) 2848 4489
[email protected]
Head of Custom Products Group; Custom Products Group
Thomas HO
Custom Products Group
(852) 2773 8716
[email protected]
PHILIPPINES
Rommel RODRIGO
(63) 2 813 7344
[email protected]
ext 302
Head of Philippines Research; Strategy; Capital Goods; Materials
Danielo PICACHE
(63) 2 813 7344
ext 293
Property; Banking; Transportation – Port
Materials
Nirmal RAGHAVAN
Oil and Gas; Utilities
SINGAPORE
Adrian LOH
(65) 6499 6548
[email protected]
Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and
China); Capital Goods (Singapore)
Srikanth VADLAMANI
Banking (ASEAN)
(65) 6499 6570
[email protected]
David LUM
Property and REITs
(65) 6329 2102
[email protected]
Ramakrishna MARUVADA (65) 6499 6543
[email protected]
Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)
[email protected]
- 67 -
17 December 2012
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17 December 2012
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2013 strategy: `alphas` vs. `betas`

Transcription

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