China Power Sector

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

Client-Driven Solutions, Insights, and Access

Equity Research China&Hong Kong

Utilities (Utilities CN (Asia))

29 April 2015

China Power Sector THEME

The Ideas Engine

series showcases

Credit Suisse’s unique

insights and investment ideas.

Reforms bite!

New game rules. Safety will become Rule No.1 when investing in the power generators

in the coming years amid China's aggressive push for power reforms. Our preliminary

analysis of market-based pricing in the recent primer report is now strengthened by the

four official documents issued in the past month. Without large demand recovery,

electricity will remain a seriously oversupplied commodity, and price war and consolidation

could pull the average ROE of national coal-fired IPPs from 17% in 2014 down to 10%

by 2020E. With 2Q15 earnings likely marking a meaningful inflection, we recommend

investors exit.

A painful process before gain. The IPPs tariffs could go down further after the recent

5% cut and IPPs' tariffs for direct supplied contracts in 2014 (10% lower on average) is a

very strong early signal of what market forces can do. China aims full liberalisation of power

pricing and when it happens, depressed tariffs could force the exit of uncompetitive smaller

units together with a large impairment (before full depreciation). Competitive survivors could

swell after consolidation but the process could take years and could be painful.

Safe waters in the storm. Meanwhile, investors should find much better visibility for

demand and prices in: (1) wind operators; (2) low-cost hydro power generators; and (3)

A-share listed local IPPs with protective schemes. Nuclear operators are no longer

attractive with rising uncertainty on utilisation and technology risks.

SELL the national IPPs. With valuation nearing a five-year high plus major industry

headwinds, we recommend investors to sell the national IPPs. We cut target prices and

ratings (Huadian-H) on lower sustainable ROEs and our top sells are Huaneng (both A/H)

and CR Power. We also downgrade CGN to UNDERPERFORM with an unjustified valuation

and rising nuclear earnings risks. Areas that are worth buying include wind operators, low-

cost hydro power generators and local power utilities (we are initiating on Jingneng and

Mengdian with an Outperform).

Structural ROE trend of the national IPPs

Source: Company data, Credit Suisse estimates

Switch to the safer sectors!

Source: Credit Suisse research

The report follows our China Utilities Reform Primer in March 2015

(click here)

RESEARCH ANALYSTS

Dave Dai, CFA

852 2101 7358

[email protected]

Ran Ma 852 2101 6653

[email protected]

18% 17% 16%

14%

11%

9% 10% 10%

6%

8%

10%

12%

14%

16%

18%

20%

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

IDEAS ENGINE SERIES

https://doc.research-and-analytics.csfb.com/docView?sourceid=em&document_id=x622179&serialid=N%2fQm0%2b6kxbyRuCKZHUuEc42yZIX57T63fL5NSh%2fgNww%3d

IDEAS ENGINE 2

China Power Sector

Focus charts

Figure 1: Slow demand scenario—utilisation trend would

continue to weaken without power reforms

Figure 2: Slow demand scenario—market reform can make

consolidation possible

Figure 3: IPPs with larger exposure to smaller units could

see greater shut-down risks

Source: CEIC, Credit Suisse estimates Source: CEIC, Credit Suisse estimates Source: Company data

Figure 4: Inner Mongolia enjoys better utilisation hours than the

national average

Figure 5: Forward P/B of national IPPs at five-year high despite

upcoming ROE pressure

Figure 6: Switch to the safer sectors!

Source: CEIC Source: Bloomberg, Credit Suisse estimates, excluding Datang Source: Credit Suisse research

The author of this report wishes to acknowledge the contributions made by Gary Zhou, an employee of Evalueserve Research Hong Kong Ltd, a third-party provider to Credit Suisse of

research support services.

5,031

5,294

4,9655,012

4,706

4,559

5,1025,043 5,085 5,130

4,000

4,200

4,400

4,600

4,800

5,000

5,200

5,400

2010 2011 2012 2013 2014

(Hours)

China Inner Mongolia

0%

4%

8%

12%

16%

20%

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

ROE (RHS)

0.8x Avg-1SD

0.6x Avg-2SD

1.0x Avg

1.2x Avg+1SD

1.4x Avg+2SD

(x)

IDEAS ENGINE 3

China Power Sector

Reforms bite!

New game rules

This report is the second part of our analysis on China's utilities reforms, especially the

electricity industry. Following our first report in March 2015, China has taken further steps on

the long-awaited power reforms by issuing four guiding documents (power reform guidelines,

renewable energy purchase, power demand management and transmission and distribution

(T&D) reform) within the past month. As expected, "competition" is the key word and will be

introduced to the current quasi-planned power economy and we believe that this could result in

great uncertainties with volume and prices going forward. Investing in power operators is no

longer about growth and yield; we see safety as a prominent factor from here on and we

selectively prefer clean energy and local utilities (initiations) over national IPPs.

Power reform is fast and furious and could change the rules of investing in power operators

in China.

A painful process before gain

China is very oversupplied in electricity and overall thermal utilisation may drop to a 39-year low

in 2015. With market forces in play, consolidation cannot be ruled out. Without the necessary

reforms, overall utilisation may get depressed further in the coming years without a meaningful

recovery in demand. For the national IPPs, looking beyond the recent impact of 5% tariff cuts

(a result of coal price declines in the past, so cost-plus practice!), consolidation could involve

further pressure of tariffs, evidenced by the contracted direct sales last year with an average

10% tariff cut. On the positive side, the reforms may mean more longer-term orders as smaller

uncompetitive units get phased out. And once the pain subsides, more efficient survivors should

enjoy recovering utilisation and stable market shares. But the process can be painful, and could

take years to complete.

Prepare for consolidation and price wars!

Stay in safer waters

With great pollution pressure, clean energy generally should be more protected. We like wind

operators and low-cost hydro companies given higher visibility on volume and power prices but

high-cost hydro (risk of tariff cuts) and nuclear (utilisation risks and technology issues) power

companies may face rising uncertainties. We add two A-share listed local utilities (Mengdian

and Jingneng) to our coverage space, representing a new area of growth. Protected by

outbound transmission, Inner Mongolia should stand on a sweet spot with protected growth.

Renewables and local utilities still represent opportunities.

SELL the national IPPs

With valuation nearing a five-year high plus major industry headwinds, we recommend investors

to sell the national IPPs. We cut target prices and ratings (Huadian-H) on lower sustainable

ROEs and our top sells are Huaneng (both A/H) and CR Power. We also downgrade CGN to

UNDERPERFORM with an unjustified valuation and rising nuclear earnings risks. Areas that are

worth buying include wind operators, low-cost hydro power generators and local power utilities

(we are initiating on Jingneng and Mengdian with an Outperform).

Three groups of safety choices

Figure 7: Recommendation summary of China power operators

POSITIVE NEGATIVE

Wind National IPPs

Huaneng Renewables (0958.HK) Huaneng Power-H (0902.HK): top sell

Longyuan Power (0916.HK) Huaneng Power-A (600011.SS): top sell

Low-cost hydro CR Power (0836.HK): top sell

Yangtze Power (600900.SS) Datang Power-A (601991.SS)

Local IPPs Huadian Power-H (1071.HK): downgrade to U/P

Jingneng (600578.SS): initiation Huadian Power-A (600027.SS)

Mengdian (600863.SS): initiation Nuclear

CGN Power (1816.HK): downgrade to U/P

Source: Credit Suisse estimates

IDEAS ENGINE 4

China Power Sector

Figure 8: Valuation summary

Name Ticker Rating Price TP Mkt cap P/E (x) P/B (x) Yield (%) ROE (%) %EPS CAGR

(US$ bn) 15E 16E 15E 16E 15E 16E 15E 16E 14-16E

China Wind power sector

Huaneng Renewables 0958.HK O 3.3 4.0 4.1 13.4 9.6 1.5 1.3 1.5 2.1 11.4 14.3 49.2

Longyuan Power 0916.HK O 9.7 11.5 10.0 14.8 11.9 1.7 1.5 1.3 1.7 12.0 13.5 42.7

China Datang Renewables 1798.HK O 1.3 1.5 1.2 17.0 11.5 0.7 0.6 0.6 0.9 4.0 5.6 n.a.

Huadian Fuxin Energy 0816.HK O 4.3 5.5 4.7 10.6 8.7 1.7 1.5 1.8 2.9 17.0 18.1 30.2

China Suntien Green Energy 0956.HK O 2.1 2.5 1.0 12.5 8.6 0.8 0.7 2.7 4.0 6.4 8.8 44.4

Simple average 13.7 10.1 1.3 1.1 1.6 2.3 10.2 12.1 41.6

China Hydro power sector

SDIC Power 600886.SS N 12.5 12.5 13.7 11.7 11.0 3.1 2.6 3.0 3.2 28.5 25.5 17.3

China Yangtze Power Co Ltd 600900.SS O 12.6 14.8 33.6 17.6 18.6 2.3 2.2 2.9 2.7 13.6 12.1 -1.7

Sichuan Chuantou Energy 600674.SS O 26.2 30.0 9.3 11.4 10.9 3.2 2.6 1.3 1.4 32.1 26.3 23.6

Simple average 13.6 13.5 2.9 2.5 2.4 2.4 24.7 21.3 13.0

China IPPs sector - A (Local)

Inner Mongolia Mengdian 600863.SS O 6.1 7.5 5.7 34.2 21.4 3.2 3.0 3.1 2.3 9.4 14.5 10.5

Jingneng Power 600578.SS O 8.1 10.0 6.0 17.6 18.2 2.4 2.2 2.0 1.9 14.1 12.5 -10.3

Simple average 26.0 19.9 2.8 2.6 2.5 2.1 11.8 13.5 0.1

China Nuclear sector

CGN Power 1816.HK U 4.5 3.4 26.3 26.3 22.8 3.0 2.7 1.3 1.5 11.7 12.5 11.9

China IPPs sector - H (National)

Datang International Power 0991.HK O 4.8 4.6 14.9 10.5 8.7 1.1 1.0 3.8 4.6 10.4 11.6 52.1

Huadian Power International 1071.HK U 8.7 6.4 11.9 11.0 12.3 1.7 1.6 3.7 3.3 16.6 13.6 -8.7

China Resources Power 0836.HK U 23.3 16.3 14.4 9.2 9.3 1.4 1.3 3.5 3.8 16.2 14.5 14.4

Huaneng Power International 0902.HK U 11.3 7.3 24.3 10.8 12.0 1.7 1.6 5.1 4.6 16.6 13.8 -0.3

Simple average 10.4 10.6 1.5 1.4 4.0 4.1 14.9 13.4 14.4

China IPPs sector - A (National)

Huadian Power International 600027.SS U 8.7 5.1 11.9 13.8 15.4 2.2 2.0 2.9 2.6 16.6 13.6 -8.7

Datang International Power 601991.SS U 7.9 3.7 14.9 21.6 18.1 2.2 2.0 1.9 2.2 10.4 11.6 52.1

Huaneng Power International 600011.SS U 11.0 5.8 24.3 13.1 14.6 2.1 2.0 4.2 3.8 16.6 13.8 -0.3

Simple average 16.2 16.0 2.1 2.0 3.0 2.9 14.5 13.0 14.4

China City Gas sector

China Gas Holdings Ltd 0384.HK O 14.3 17.5 9.2 18.0 14.3 3.4 2.9 1.3 1.7 20.2 21.6 25.2

Beijing Enterprises Holdings 0392.HK O 72.1 82.0 12.0 15.7 13.7 1.5 1.4 1.9 2.2 10.1 10.7 17.9

China Resources Gas 1193.HK O 27.1 27.0 7.8 19.4 15.4 3.2 2.8 1.1 1.4 17.6 19.2 24.1

ENN Energy Holdings Ltd 2688.HK O 56.7 56.0 7.9 18.3 15.6 3.5 3.0 1.6 1.9 20.6 20.9 15.9

Shenzhen Gas Corporation 601139.SS U 12.3 6.6 3.9 30.6 27.2 4.1 3.8 1.3 1.5 14.0 14.5 11.3

Kunlun Energy 0135.HK N 9.1 8.7 9.4 14.4 12.3 1.3 1.2 2.0 2.3 9.3 10.1 2.8

Hong Kong and China Gas 0003.HK U 18.7 15.0 25.3 26.3 24.9 3.5 3.3 2.3 2.4 13.8 13.8 5.2

Simple average 20.4 17.7 2.9 2.6 1.6 1.9 15.1 15.8 14.6


IDEAS ENGINE 5

China Power Sector

New game rules YTD 2015, the national IPPs have mostly underperformed the broader index and most other

utilities sub-sectors. However, the names showed strength again in April with lower coal prices

and stronger-than-expected 1Q15 results. In our view, the national IPPs are unlikely to enjoy

such high profitability as in 1Q15 over the next few years as: (1) cheaper coal prices are likely

to be offset by another "cost-plus" tariff cut later this year; (2) the recent 5% tariff cut should

reflect legacy costs instead of recent costs; and (3) most importantly, the power reform is likely

to trigger huge dynamic changes in this oversupplied industry. With rising uncertainties on the

operational environment for power generators, we believe safety should replace growth as the

key investment criteria.

Figure 9: YTD sub-sector performance

Source: Bloomberg

Further downgrade of national IPPs

With four separate documents issued in the past month, there is little doubt that China is very

determined to push for a market-based power economy. This is likely to radically change the

dynamics from the current industry structure, whereby every power tariff change has been

regulated by the central authority (National Development and Reform Commission or the

NDRC) and power plants' utilisation ability is largely planned. In an oversupplied industry

(thermal utilisation is nearing a 39-year-low this year), market pricing could pull down sector

ROE from 17% in 2014 to about 10% in 2020E in a slow demand scenario. We reflect our

P/B-based target prices with lower sustainable ROE (average of a stable demand and slow

demand scenario).

Figure 10: China IPPs—target price and rating changes

Company Ticker Prev.

rating

New

rating

Prev.

TP

New

TP

U/D Target

P/B

Underlying

ROE

Prev. ROE

HNP-H 0902.HK U U 7.7 7.3 -35% 1.0 11.3% 13.5%

HDP-H 1071.HK N U 6.6 6.4 -26% 1.2 12.2% 14.0%

CRP 0836.HK U U 17.0 16.3 -30% 1.2 12.6% 14.0%

HNP-A 600011.SS U U 6.2 5.8 -47% 1.0 11.1% 13.5%

HDP-A 600027.SS U U 5.2 5.1 -41% 1.2 12.2% 14.0%


Coal prices are unlikely to impact post-FY15 profits

In 1Q15, some IPPs reported strong profits and the key positive surprises mostly came from

cheaper coal prices. However, the recent tariff cut suggested that China has started to base

regulated tariff calculations on movements in fuel prices, suggesting any weakness in coal

prices could trigger another tariff cut later this year. Therefore, given that it is largely a rule of

90% pass-through, a stronger FY15 net profit would mean more tariff cuts going into FY16.

This is why we now base our target price calculations on FY16E P/B which will largely reduce

any influence of short-term movements in coal prices. Taking a longer-term view, valuation

would become much more stretched vs. history.

Figure 11: Three-year forward P/B history

Source: Bloomberg, Credit Suisse estimates

IDEAS ENGINE 6

China Power Sector

Why is consolidation needed?

In the following sections, we try to reflect on the "consolidation" and "no consolidation" cases in

a "slow demand" scenario. Given the continuing pressure on overall thermal utilisation, the

power reforms may make consolidation possible where power generating units compete with

each other on generation costs. In a nutshell, with utilisation hours likely touching a 39-year low

in 2015 (4,706 in 2014), a large fleet of units need to be phased out for the entire thermal

power industry to restore the optimal level of >5,000 hours. In the consolidation scenario, we

assume utilisation and tariffs to keep weakening in the next three years, phasing smaller units

out but companies that need to shut down before full depreciation may realise impairment

losses; however, a recovery may happen in 2019-20 as smaller units would be out of the fray

and it would be a more orderly industry. If there is no power reform and consolidation, tariffs

may be less destructive but everyone will get hurt with the rising pain of oversupply. Therefore,

without assuming additional asset injections, the key loser would be Huaneng with similar ROE

in both scenarios while the other three companies will be better positioned post consolidation

vs. no consolidation at all. More details are in the following sections.

Figure 12: ROE scenarios in the two cases (slow demand scenario)

2014 ROE 2020E ROE

Huaneng Power Consolidation 16.2% 10.2%

No consolidation 16.2% 10.5%

Datang Power Consolidation 4.0% 11.9%


Huadian Power Consolidation 21.8% 12.2%


CR Power Consolidation 13.6% 12.1%



The reform is moving quicker than expected

In our first primer report published in March 2015, we expected that coal-fired IPPs could face

both near-term and longer-term earnings headwinds. In the short run, we forecast an

asymmetric cut to on-grid power tariffs: coastal and inland provinces to be impacted by 2.5

fen/kWh (6%) and 1.5 fen/kWh (4%) cuts, respectively. Given that the IPPs could deflect

incremental pricing pressure to the coal producers, we expect average unit fuel cost to drop 5%

YoY for the IPPs in FY15. However, the cost-plus formula should remain effective going

forward, which will trigger another possible tariff cut in early FY16 (we assume further cuts by

1.5 fen and 1.0 fen/kWh for coastal and inland provinces ,respectively).

Also, our previous analysis of full-blown power reforms was based more on tariff differences

whereby high-tariff zones could see much larger tariff pressure than low-tariff locations. This

would result in an ROE squeeze of another >100 bp, but this scenario excludes the impact of

further utilisation downside.

Figure 13: The first reform primer report (March 2015)


Figure 14: China IPPs ROE (stable demand scenario)

Source: Company data, Credit Suisse estimate

IDEAS ENGINE 7

China Power Sector

Tick! The tariff cut happened!

The tariff overhang is now clear with the State Council's decision on 8 April 2015. The average

on-grid tariff cut of 2 fen/kWh (or a 5% cut) will apply to coal-fired power, in line with our

expectations. On 19 April, the NDRC issued final details by province (average cut of 4.2% for

inland provinces (1.6 fen/kWh) and 5.4% cut for coastal provinces (2.3 fen/kWh), effective 20

April. Unlike the past few cuts, end-user tariffs for commercial and industrial users will also be

cut by 1.8 fen per kWh. According to the State Council, this round of on-grid tariff cut was: (1)

due to the coal price and power tariff pass-through mechanism, (2) intended to lower

operational costs for enterprises by lowering retail electricity prices and promoting economic

growth, and (3) subsidising gas-fired power and environmentally friendly power generation with

de-nitrification and de-dusting facilities, and ultra-low emissions.

Tick! Four reform documents in one month!

Regarding the government's official announcement, we are also very surprised at the pace of

proceedings as there have been four guiding documents published in last one month alone.

Figure 15: Four guiding documents in one month

Source: National Energy Administration (NEA), China Electricity Council

Figure 16: Details of the four reform documents

1. Embarking the reform

(State Council [2015] 5

Document): The long-

awaited power reform

guidelines have been

circulated within the power

industry since late-March

2015, according to China

Securities Daily and was

officially published on the

China Electricity Council

website recently. The basic

principal of the No.5

Document targets separating

market-based electricity

pricing (power generation

and power retail) from

regulated pricing

(transmission and

distribution). Currently, the

IPPs mostly sell to the power

grid companies, which

monopolise both networks

and customer retail. Going

forward, the power networks

will operate on regulated

cost-plus returns and power

generation (direct supply and

competitive bidding) and

retail tariffs should be

decided by demand-supply.

With a bi-lateral mechanism,

qualified power generators,

retailers and end-users will

have more discretion to

influence volume and pricing

while only paying designated

network charges. Power retail

(currently operated by power

grid cos) will be opened,

allowing both city utilities (city

water, gas and heat

suppliers) and power

generators to participate in

this business. Distributed

energy will also be fully

opened, encouraging users

to build such solutions from

solar, wind, biomass and gas.

2. Protecting renewables

(NDRC [2015] 518

Document): On 23 March,

NDRC and NEA issued a

supplementary document

for power reform - Guidance

on Improving Power

Dispatch and Promoting the

Sustainable Development of

Clean Energy Power

Generation. According to

the document, renewable

power should be fully

purchased as long as grid

safety and stability are

ensured. The annual power

dispatch plans should

prioritise clean energy

power generation. Wind,

solar, biomass power

generation should be

purchased based on local

resource conditions. Hydro

should be purchased based

on both resources and

historical average

generation. The safety of

nuclear power generation

should be ensured and

peak-shaving also be

considered. Gas-fired

power generation should be

determined by heating,

peak-shaving and balancing

demands. For coal-fired

power, high-efficiency and

environmentally friendly

units should have higher

utilisation hours than others.

Incremental power demand

should be first met by clean

energy power from both

local generation and cross-

provincial power

transmission, and then met

by high-efficiency coal-fired

units.

3. City project

guidance (NDRC

[2015] 703

Document): Another

supplementary

document for power

reform was published

on 9 April, addressing

power demand

management issues

(notification on

improving the power

emergency planning

mechanism and

managing city power

demand). Local

governments should

make detailed plans

on how to encourage

end-users to reduce

power consumption

during peak load and

improving peak and

off-peak tariffs. The

document also

mentions that the

power service

industry should be

promoted and a

national electricity

demand monitoring

system should be

established with real-

time data inputs from

local power networks.

Test runs have been

conducted in

provinces and cities

such as Beijing,

Hebei, Jiangsu,

Guangdong and

Shanghai, which

could help gain

experience for power

retail reform in the

long run.

4. Accelerating

power

transmission and

distribution

reforms: After the

test runs at

Shenzhen and

Western Inner

Mongolia, NDRC

decided to expand

the pilot power

transmission and

distribution (T&D)

reforms in Anhui,

Hubei, Ningxia and

Yunnan provinces.

Their T&D tariffs

will be calculated

using the cost-plus

method, the same

as Shenzhen and

Western Inner

Mongolia. It also

encourages other

provinces to

actively prepare for

the coming

reforms, such as

calculating T&D

costs, investigating

T&D assets and

the profitability of

grid companies,

and calculating

reasonable T&D

tariffs. NDRC urges

local Price Bureaus

to work dedicatedly

on this issue and

asks that the State

Grid, Southern Grid

and Inner Mongolia

Grid should co-

operate.

IDEAS ENGINE 8

China Power Sector

Conclusion: Competition is

the key word, which should

gradually take place for both

power retail (introduction of

private capital and multiple

licences) and power

generation (direct supply and

competitive bidding).

Conclusion: The

supplementary document

came in time to reduce

policy confusion on the

role of renewables, which

remain protected in

dispatches. Key change

for nuclear is the idea of

peak load functions.

Conclusion: After

testing the water in

Shenzhen, China has

targeted power retail

management in

multiple regions such

as Beijing, Hebei,

Jiangsu, Guangdong

and Shanghai.

Conclusion: The

T&D reforms are

expanded to Anhui,

Hubei, Ningxia and

Yunnan after test

runs in Shenzhen

and Western Inner

Mongolia.

Source: China Electricity Council, NDRC, Credit Suisse research]

Moving to a liberalised market

China's first power reform in 2002 resulted in a break-up of state power monopoly towards

power grid companies and power gencos (thermal separated from hydro). Thirteen years later,

the progressive attempt should further specify the functions and tariffs of power networks

(separately specifying transmission and distribution tariffs) and introduce market forces for both

generation and retail. As a result, China's electricity industry should largely look like the

Western models such as the UK and the US.

Figure 17: China's first power reform in 2002


Figure 18: China's second power reform post-2015


One of the key conclusions from our first reform report was: If China opens the generation

market to competition in an oversupplied market, power plants with cost advantages could

outbid the higher-cost producers. As a result, market share of these low cost producers could

expand at the expense of lower on-grid tariffs. After introducing the new mechanism (NETA),

the UK saw a rapid reduction in both wholesale and retail electricity prices in the first year of

implementation. The price reductions especially took place with no softening in demand.

IDEAS ENGINE 9

China Power Sector

Figure 19: UK—OTC annual contract prices under NETA—baseload and peak

Source: OFGEM

Figure 20: UK—spot OTC baseload prices and daily electricity demand

Source: OFGEM

The competition could happen largely amongst the base-load power plants, namely thermal

power and possibly hydro. Thermal power (dominated by coal plus small weights of gas and oil)

accounted for about 75% of power output in 2014 and we forecast the contribution to only

reduce to 70% by 2020E. Alternative energy, such as nuclear and renewables, should remain

small even by the end of the decade.

IDEAS ENGINE 10

China Power Sector

A painful process before gain We begin this section by looking at how seriously oversupplied electricity is in China. In 2014,

China recorded thermal utilisation hours of 4,706 (implying a 54% utilisation rate), which is

reportedly the lowest reading in the past 38 years. Utilisation hours of 5,500 are used as a

common industry borderline between shortages and surpluses.

Figure 21: China—power demand/supply/utilisation trend

Source: CEIC

Further downside in utilisation

The power-GDP intensity factor is a way to gauge the amount of electricity inputs required to

support a period of economic activities. Given that the majority of power users in China are

industrial users, power intensity tends to overshoot on either side during sudden changes in

GDP. For example, during 4Q08 and 1Q09, overall power demand was reported as negative

despite quarterly GDP at 7.6% and 6.6%, respectively. Another recent weakness was

recorded in 2Q-3Q12, whereby power demand growth was close to zero as a result of

continuing GDP slowdown that marked the end of the "8%" growth era. Most recently, we saw

a negative growth in power demand in August 2014, the first negative month since 2009.

Figure 22: Power demand vs GDP

Source: CEIC

Figure 23: Monthly power consumption growth (YoY)

Source: CEIC

-5.0%

5.0%

15.0%

25.0%

35.0%

4,000

4,500

5,000

5,500

6,000

6,500

199719981999200020012002200320042005200620072008200920102011201220132014

Thermal power demand Thermal power capacityThermal utilization hours (LHS)

Power shortage

Power oversupply

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

(10)

(5)

0

5

10

15

20

25(x)

(%)

Power gen YoY GDP growth Power-GDP Intensity factor (RHS)

(15)

(10)

(5)

0

5

10

15

20

25

30

Jan-F

eb 0

7

May-

07

Au

g-0

7

Nov-

07

Mar-

08

Jun-0

8

Se

p-0

8

Dec-

08

Ap

r-0

9

Jul-0

9

Oct

-09

Jan-F

eb 1

0

May-

10

Au

g-1

0

Nov-

10

Mar-

11

Jun-1

1

Se

p-1

1

Dec-

11

Ap

r-1

2

Jul-1

2

Oct

-12

Jan-F

eb 1

3

May-

13

Au

g-1

3

Nov-

13

Mar-

14

Jun-1

4

Se

p-1

4

Dec-

14

(%)

IDEAS ENGINE 11

China Power Sector

Figure 24: Power consumption breakdown (2014)

Source: CEIC

Figure 25: Power demand weakness driven by industrials

Source: CEIC

However, besides continuing expansion of alternative energy (hydro, nuclear and renewables),

total thermal capacity additions did not slow down, which could otherwise optimise the utilisation

situation. In 2014, China added a total of 47GW of new thermal capacity (36GW in 2013),

leading to another 6% growth in overall thermal capacity despite a 1% decline in thermal power

generation.

In a less positive scenario where thermal capacity growth continues to outpace demand

(assuming 3% p.a. demand), we could see a sequential slip in thermal utilisation from 4,706

hours in 2014 to 4,000 by 2020. This 15% downside in utilisation would result in huge

earnings/ROE downside for existing coal-fired units.

Consolidation pain

In this scenario, to reduce oversupply and hopefully restore the optimal level of 5,500 hours, a

net reduction of 152GW thermal capacity (or 17% less) is required. The following sensitivity

shows the net reduction in thermal capacity required in each annual demand scenario.

Figure 26: Capacity upside to restore optimal 5,500 hours utilisation

Demand 3% 4% 5% 6% 7%

Capacity reduction -152GW -79GW +56GW 116GW 178GW

2020 capacity upside vs 2014 -17% -9% 6% 13% 19%


In a simple exercise, if all the smaller (<300MW) coal-fired units not performing co-generation

functions (power and heat) eventually exit, the IPPs with an average smaller fleet could face

larger shut-down risks coupled with impairment costs involved (before full depreciation). Among

the coal-fired IPPs, Mengdian, Jingneng, CRP and DTP have relatively lower exposure than

HNP and HDP.

Figure 27: Project size distribution of coal-fired power plants of the listed IPPs


Agriculture, 2%

Industrial, 74%

Commercial, 12%

Residential, 13%

(20)

(10)

0

10

20

30

40

50

Jan-

Feb

07

Jun-

07

Oct

-07

Mar

-08

Jul-0

8

Nov

-08

Apr

-09

Aug

-09

Dec

-09

May

-10

Sep

-10

Jan-

Feb

11

Jun-

11

Oct

-11

Mar

-12

Jul-1

2

Nov

-12

Apr

-13

Aug

-13

Dec

-13

May

-14

Sep

-14

Jan-

Feb

15

YoY (%)

Industrial Non-industrial

IDEAS ENGINE 12

China Power Sector

Figure 28: Age distribution of coal-fired power plants of the listed IPPs


Figure 29: Potential impairment costs involving shutdown of smaller units

Capacity (1)

>10 year; (2)

<300MW & not

for cogen

Total

capacity

2014

Percentage BV of such

capacity

Total BV Percentage

(MW) (MW) (Rmb mn) (Rmb mn)

Huaneng Power 17,513 69,981 25% 9,802 71,738 14%

Datang Power 4,360 32,480 13% 1,732 46,539 4%

Huadian Power 4,000 33,596 12% 2,565 32,663 8%

China Resources

Power

1,870 28,980 6% 1,209 59,181 2%


Utilisation gain after the consolidation pain

After consolidation, the survivors should see stable market shares or even higher utilisation. The

winners are therefore those that need to shut down fewer units while enjoying market share

increases after the consolidation, in this case, Mengdian and CRP. But the process can be

painful, especially given the price competition involved. Tariff risks are analysed in the following

part of the section.

Figure 30: China—power demand/supply/utilisation trend (optimal solutions)

Source: CEIC, Credit Suisse estimates

Direct supply is a prelude to lower tariffs

Spot tariffs in a fully competitive market could go down, well evidenced in the UK case with a

similar bilateral model. During the consolidation phase, power plants may compete with each

other on generation costs to gain market share. Bigger and more efficient units could protect or

gain market share by bidding down the tariffs, resulting in the eventual exit of less competitive

units. Therefore, tariffs may even start to rise at the end of the consolidation, which could well

take several years. It is not unlikely that average tariffs will follow the general trend of overall

utilisation (likely a "smile" curve in the above chart").

Besides the recent ad-hoc tariff cut, another indication of lower tariffs is the extended direct

contracts, which did not account for a meaningful part of the power pool until 2014 (2-5% of

the listed IPPs' total power sales). By locking power contracts with customers directly, the

power plants will be able to protect the volume before full-scale competition breaks out. The

drawback is the tariff discounts offered to customers in the oversupplied market. According to

the IPPs, the average contracted tariff was lower but with a large variance (minimum: 4% drop;

maximum: 15% drop). We believe this variance has a lot to do with location- and customer-

specific reasons. In less oversupplied markets such as Shandong and Inner Mongolia, the

bargaining power of power producers may not be as weak as in the significantly oversupplied

areas.

-5.0%

5.0%

15.0%

25.0%

35.0%

4,000

4,500

5,000

5,500

6,000

6,500

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E

Thermal power demand Thermal power capacity

Power shortage

Power oversupply

Survival of the fittest

Consolidation pain

IDEAS ENGINE 13

China Power Sector

Figure 31: Direct sales contribution and average contracted tariff

As % of power sales Discount to benchmark tariff Note

2014 2015E 2014 2015E

Huaneng

Power

3% No guidance 3-4 fen (or 8-10%) No guidance

Datang

Power

<2% No guidance 5-6 fen (or 12-15%) No guidance Some in northeast (large

discount, due to low

thermal utilisation and

thus more competition)

Huadian

Power

3.2% 5.5% 1.7 fen (or 4%) Similar to

2014

Mainly in Shandong

(1.5fen), Ningxia (1.7fen)

CR Power 4.6% 5.8% No disclosure No disclosure Henan, Guangdong, etc.


It is also very likely that the 2-5% contribution could grow much larger in the next few years,

especially ahead of all the uncertainties with power pooling and competitive-bidding. The UK

case (after introduction of the NETA mechanism) suggested that the "bi-lateral" mechanism

(allowing power generators to sell via both spot competition and direct contracts with retailers)

could result in an efficient drop in electricity prices.

How electricity will be traded in a spot market remains a big question mark. In our previous

report, we analysed the difficulty of creating a national network given the large dispersion of

endemic tariffs and economic structure and a regional model may make more sense (the six

regional networks are: Southern, Eastern, Central, Northern, Northwest and Northeast).

Figure 32: The six existing regional power networks

Source: WIND, Credit Suisse research

National or regional pools?

China's large geographical variances in economic conditions and local coal supplies have led to

a large variance in on-grid power tariffs. Guangdong's on-grid tariff is as high as Rmb0.5/kWh

while Xinjiang's is as low as Rmb0.25/kWh. This could result in large cost gaps if all power

plants are pooled into a single arena. For example, if a plant in Guangdong competes with one

in Xinjiang, assuming these two have same net margins, the latter can easily protect or

generate additional volume/profits by outbidding for a tariff that is equal to or higher than the

existing Xinjiang tariff given the large Rmb0.25/kWh tariff difference.

Therefore, regional power pools with similar tariff structure make more sense. We base our

analysis on the existing regional grid systems, and the provinces with largest tariff downside

risks in each of the regional grids are: (1) Guangdong in the Southern Grid (Guangdong,

Yunnan, Guizhou, Guangxi and Hainan); (2) Zhejiang in the Eastern Grid (Zhejiang, Jiangsu,

Fujian, Anhui and Shanghai); (3) Hunan in the Central grid (Hubei, Hunan, Jiangxi, Henna,

Sichuan and Chongqing), Hunan is an outlier; (4) Shandong in the Northern Grid (Beijing,

Tianjin, Hebei, Shanxi and Tianjin); (5) Shaanxi in the Northwest Grid (Shaanxi, Gansu, Ningxia,

Qinghai and Xinjiang); and (6) similar tariff in the Northeast Grid.

IDEAS ENGINE 14

China Power Sector

Figure 33: Provincial differences in coal-fired on-grid tariffs

Region Province On-grid tariff (Rmb/kWh)

Difference with regional average

(Rmb/kWh)

Difference in percentage

Southern Grid Guangdong 0.50 0.06 12%

Hainan 0.48 0.04 8%

Guangxi 0.46 0.02 4%

Guizhou 0.38 -0.06 -16%

Yunnan 0.37 -0.07 -18%

Weighted average 0.44

Eastern Grid Zhejiang 0.46 0.02 4%

Shanghai 0.46 0.02 4%

Fujian 0.44 0.00 0%

Jiangsu 0.43 -0.01 -2%

Anhui 0.43 -0.01 -3%


Central grid Hunan 0.49 0.04 9%

Hubei 0.46 0.01 2%

Jiangxi 0.46 0.01 1%

Sichuan 0.46 0.00 1%

Chongqing 0.44 -0.01 -3%

Henan 0.42 -0.03 -7%


Northern Grid Shandong 0.44 0.03 6%

Hebei 0.42 0.01 1%

Tianjin 0.40 -0.01 -2%

Beijing 0.39 -0.02 -5%

Shanxi 0.38 -0.04 -10%


Northwest Grid Shaanxi 0.39 0.05 12%

Qinghai 0.35 0.01 4%

Gansu 0.33 -0.01 -4%

Ningxia 0.28 -0.06 -22%

Xinjiang 0.25 -0.09 -36%


Northeast Grid Heilongjiang 0.41 0.00 1%

Liaoning 0.40 0.00 0%

Jilin 0.40 0.00 -1%



Figure 34: Thermal IPPs' geographical capacity exposure (2015E)

HNP DTP HDP CRP

Guangdong 8.1% 7.9% 2.4% 16.9%

Zhejiang 9.4% 9.6% 6.2% 5.6%

Hunan 2.1% 0.0% 0.0% 1.9%

Shandong 10.8% 0.0% 41.7% 3.5%

Shaanxi 0.0% 0.0% 0.0% 0.0%

Anhui 1.1% 0.0% 11.2% 2.3%

Beijing 1.1% 5.8% 0.0% 0.2%

Chongqing 3.1% 2.1% 0.0% 0.0%

Fujian 4.1% 5.4% 0.0% 0.0%

Gansu 2.5% 1.5% 0.0% 0.0%

Guangxi 0.0% 0.0% 0.0% 3.2%

Guizhou 0.0% 0.0% 0.0% 0.0%

Hainan 3.6% 0.0% 0.0% 0.0%

Hebei 3.8% 27.1% 14.0% 8.8%

Heilongjiang 0.0% 0.0% 0.0% 0.0%

Henan 6.1% 0.0% 7.6% 15.5%

Hubei 4.4% 0.0% 0.0% 10.6%

Inner Mongolia 0.0% 12.4% 0.0% 1.4%

Jiangsu 9.7% 6.1% 0.1% 26.7%

Jiangxi 6.0% 1.9% 0.0% 0.0%

Jilin 0.0% 0.0% 0.0% 0.0%

Liaoning 7.2% 2.5% 0.0% 3.3%

Ningxia 0.0% 2.5% 8.3% 0.0%

Qinghai 0.0% 0.0% 0.0% 0.0%

Shanghai 6.0% 0.0% 0.0% 0.0%

Shanxi 3.5% 11.4% 2.0% 0.0%

Sichuan 0.0% 0.0% 6.4% 0.0%

Tianjin 1.7% 3.8% 0.0% 0.0%

Tibet 0.0% 0.0% 0.0% 0.0%

Xinjiang 0.0% 0.0% 0.0% 0.0%

Yunnan 5.5% 0.0% 0.0% 0.0%

Exposure to high-

risk regions

30% 17% 50% 28%


IDEAS ENGINE 15

China Power Sector

Figure 35: Potential EPS impact based on regional power pooling averages


National champions does not mean lower costs players

Intuitively, investors would think that the Big Five gencos should be better positioned given their

vast market share (40% of capacity share in 2013) and profitability. However, by examining the

operating and net margins of the listcos, we found that the listed subsidiaries of the Big Five

gencos are in the mediocre part of the distribution.

Figure 36: Capacity market share (2013)

Source: Company data

Figure 37: Capacity market share of key listcos (2013)


Figure 38: Distribution of profit margins of listed IPPs


Meanwhile, the IPPs have enjoyed rapidly declining fuel costs (largely coal) since 2011 and the

average coal consumption rate has declined by ~15% over the past ten years and is getting

close to the average level of developed countries (around 300 g/kWh). We forecast stable

SG&A expenses over the next few years, so there could be more room to cut non-fuel

expenses if competition heats up.

-11.5%-10.6%

-8.9%

-3.3%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

HDP HNP CRP DTP

Datang Group,

9.3%

Huaneng

Group, 11.5%

Huadian Group,

9.0%

Guodian Group,

9.8%

Others, 60.4%

HNP, 5.4% DTP, 3.1%

HDP, 2.9% CRP, 2.2%

CYP, 2.0%

Chuantou,

0.5%

SDIC, 2.5%

Others, 81.4%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0

Operating margin (%)

Net margin (%)

CYP

CRP

SDIC

HNP

HDP

DTP

IDEAS ENGINE 16

China Power Sector

Figure 39: Listed IPPs' unit fuel cost trend


Figure 40: China's overall coal consumption rate

Source: NEA

Figure 41: Listed IPPs' SG&A expense trend


Figure 42: Employee per MW for the listed IPPs


Furthermore, within the thermal-based IPPs (CYP, SDIC and Chuantou derive their earnings

mostly from hydro power), CRP has the youngest fleet (~50% of the plants are less than five

years old), which would mean a lighter burden on performance issues and repair costs.

High incentives for IPPs exposed to tariff risks to invest into retail

If the power pools follow regional models (based on the existing regional grid systems), the

largest tariff pressure could take place in Guangdong, Zhejiang, Hunan, Shandong and

Shaanxi. In this case, power producers exposed to these provinces have larger incentive to

protect margin erosion by investing into the retail business. If the realised wholesale prices are

lower than the existing on-grid tariffs, power retailers could purchase electricity at lower costs

while trying to sell at normal retail tariffs. Of course, if competition intensifies at the retail level,

such cost advantages would reduce over time.

IDEAS ENGINE 17

China Power Sector

Stay in safer waters In a "fire and ice" era, we prefer power producers that can offer better visibility either through

government-mandated support or output protection driven by location-specific reasons, coupled

with protection of tariff risks. Therefore, the following groups stand out:

(1) Renewables such as wind power operators are positioned at sweet spots.

(2) Clean energy such as hydro power. Within hydro, we prefer low-cost producers exposed to

lower tariff cut risks.

(3) Local utilities with protective utilisation and potential to enter new power retail markets.

(4) Nuclear operators could face issues of lower utilisation hours with more flexible peak

functions.

The power of priority

Given the high cost and intermittency issues of renewable energy and non-stop features of

nuclear power, they are unlikely to be included in the power pool, in our view. China's current

power dispatch order protects the on-grid purchases of renewable energy and nuclear energy.

According to the policy, power grid companies are required to follow a pecking order of: (1)

maximum purchase of renewable energy (wind, solar, marine energy, hydro and renewables

with no flexibility in power generation adjustments), (2) hydro, biomass, geothermal and other

renewables with flexibility of adjustments, (3) nuclear power, (4) co-generation coal-fired power

(power and heat), (5) gas-fired power and coal gasification power, (6) coal-fired power and (7)

oil-fired power.

Potential overhang for nuclear and hydro tariffs

Although nuclear and renewables may be free from pooling, tariff risks could emerge with

further downside adjustment of coal-fired tariffs, which are usually the benchmark prices.

1. Nuclear tariff

The on-grid tariffs of CGN's nuclear projects which commenced operation before 2013 were

determined project-by-project in accordance with fixed costs and operating costs. According to

NDRC's Circular on Relevant Issues Concerning Improving the On-grid Tariff Mechanism for

Nuclear, nuclear generating units (Gen-II) that started operations after 1 January 2013, will be

subject to a national benchmark no-grid tariff of Rmb0.43/kWh (including the 17% value-

added tax). However, it is worth noting that the tariff set for Hongyanhe's first two units has

been Rmb0.4142/kWh, which is same as the local benchmark tariff for coal-fired power before

the adjustment in September 2014.

Figure 43: China's electricity purchase priority list

Source: NDRC, Credit Suisse research

Given the high cost and reliability issues of renewable energy and non-stop features of nuclear

power, they are unlikely to be included in the power pool, in our view. China's current power

dispatch order protects the on-grid purchases of renewable energy and nuclear energy.

Figure 44: Comparison between coal-fired benchmark price and CGN's tariff

Rmb/kWh

(including VAT)

Coal-fired benchmark

price (2011-2012)

Coal-fired benchmark price

after the 2014 price cut

Tariff of CGN's units in

the provinces

Liaoning 0.4142 0.4044 0.4142

Fujian 0.4528 0.4379 0.43

Guangdong 0.5290 0.5020 0.42/0.43

* The benchmark price includes desulfurisation, denitration and de-dust subsidy.

Source: Company data.

Wind, solar, marine energy, hydro and other renewables (with no flexibility in power generation)

Hydro, biomass, geothermal and other renewables (with flexibility in power generation) & waste-to-energy

Nuclear power

Co-generation coal-fired power

Gas-fired power and coal gasification power

Coal-fired power (units with lower energy consumption and emissions have higher dispatch priority)

Oil-fired power

IDEAS ENGINE 18

China Power Sector

2. Hydro tariff

Hydro power tariffs were previously set on a plant-by-plant basis usually based on cost-plus

models (reasonable return based on budgeted capex and opex). However, China is working on

a different pricing option for hydro power designed for outer transmissions. The so-called

retrograde method is calculated by deducting on-grid selling tariff by transmission charges.

CYP's parentco's new plants—Xiluodu and Xiangjiaba—have much higher pricing than the

current Gezhouba and Three Gorges units given that the calculation is now benchmarking to the

new method. Similarly, the Yalong River projects (owned by SDIC and Chuantou) also enjoy this

calculation, although most hydro tariffs are still lower than coal-fired tariff, which is now at

Rmb400/MWh including VAT. The differences are slightly smaller, if we take into consideration

the hydro VAT rebates currently enforced.

Figure 45: Hydro tariff comparison

Company Hydro tariff in 2013

(incl. VAT, Rmb/MWh)

Hydro tariff in 2013

(ex. VAT, Rmb/MWh)

Below national

coal tariff

CYP (Three Gorges) 262 243 -29%

CYP (Gezhouba) 215 199 -42%

CYP (Xiluodu &

Xiangjiaoba)

348 322 -6%

SDIC/Chuantou

(Yalong River)

320 296 -13%

Average coal-fired

tariffs

400 342 0%


Figure 46: Theoretical downside of nuclear and hydro tariffs

Location of

power

generation

units

Location of

power

consumers

On-

grid

tariff

Long-

distance

transmis

sion cost

Implied

local

tariff

Current

local on-grid

tariff (by

Dec-2014)

Local

on-grid

tariff

(2016E)

Down-

side

(%)

Jinguan Power Units (锦官

电源) – Hydro (exposed by

SDIC Power and

Chuantou)

Sichuan Jiangsu 0.320 0.100 0.420 0.419 0.384 -9%

Three Gorges Power Units

– Hydro (exposed by China

Yangtze Power)

Hubei Zhejiang/Jian

gsu/Shangha

i

0.262 0.08-0.10 0.350 0.42-0.45 0.38-0.41 N.A.

Nuclear units (exposed by

CGN Power)

Liaoning Liaoning 0.414 0.414 0.392 0.357 -14%

Shandong Shandong 0.430 0.430 0.427 0.392 -9%

Jiangsu Jiangsu 0.430 0.430 0.419 0.384 -11%

Fujian Fujian 0.430 0.430 0.426 0.391 -9%

Guangdong Guangdong 0.430 0.430 0.490 0.455 N.A.


The renewable quotas are on the way

The recent supplementary document (NDRC [2015] 518 Document) made it clear that

renewable energy should be protected. The figures below show that besides the nature-related

fluctuations, wind power has also faced curtailment issues (grid's failure to fully purchase). We

believe that China should finalise the "Renewable Quotas System (RQS)" within 2015 to ensure

the protection, with coordinated efforts between local government and grid cos.

Figure 47: Utilisation hours of key clean energy

Source: CEIC

Figure 48: Annual curtailment rates of wind power

Source: NDRC

0

2,000

4,000

6,000

8,000

Hydro Nuclear Wind

(hours)

2010 2011 2012

IDEAS ENGINE 19

China Power Sector

China started planning the renewable quota system in December 2009. The first draft for

discussion was issued in February 2012, which specified the responsibilities of IPPs

(renewables as a % of power generation), grid companies (renewables as a % of power

purchased), and local governments (renewables as a % of power consumption). For example,

wind will account for 3.5% of China’s power consumption by 2015; State Grid and Southern

Grid have to purchase 5% and 3.2% of renewables power as a % of their total power purchases by

2015; large IPPs’ renewables should account for 11% and 6.5% of their capacity and power

generation, respectively, by 2015. In early 2013, the second draft for seeking advance was issued

by the National Energy Administration. According to media such as Sina , it made several changes

compared with the first draft, including: (1) Local governments were designated as the major entities

to take the responsibilities of accepting renewable energy and (2) it slightly adjusted the renewable

portfolio for each province. Recently, news reports such as CN Stock's suggested that the final

version of the renewable quota system assessment method has passed NDRC discussion and has

been submitted to the State Council.

We believe that the NDRC is collecting the proposals from local governments. According to local

press such as China Power, Inner Mongolia and Hubei have already given their 2015 proposals.

Inner Mongolia is targeting 15% of local power consumption from wind power and this is largely

consistent with the previous draft and does not represent a large upside looking at the 2014 power

generation (15.7% of local consumption). Hubei has proposed local power groups to have

renewable generation capacity contributing >3%, >6% and >10% by 2015, 2017 and 2020. In our

view, the low hanging fruits are: Hebei, Liaoning, Jilin and Heilongjiang, whereby curtailments in

2014 remained high and wind power output as a % of total output is below previous targets.

Figure 49: Wind outputs contribution vs previous draft of RQS

RQS (previous

draft)

2012 2013 2014 2014

curtailment

Beijing 6.0% 0.4% 0.3% 0.3% 0.0%

Tianjin 6.0% 0.7% 0.7% 0.8% 1.0%

Hebei 6.0% 4.1% 4.7% 4.9% 12.0%

Shanxi 6.0% 2.0% 3.2% 4.3% 0.0%

Inner Mongolia 15.0% 13.8% 17.2% 15.7% 9.0%

Liaoning 10.0% 4.0% 5.0% 5.0% 6.0%

Jilin 10.0% 7.0% 9.2% 8.7% 15.0%

Heilongjiang 10.0% 6.2% 8.2% 8.5% 12.0%

Shanghai 3.0% 0.4% 0.5% 0.5% 0.0%

Jiangsu 4.0% 0.8% 0.9% 1.1% 0.0%

Zhejiang 1.0% 0.2% 0.3% 0.4% 0.0%

Anhui 3.0% 0.3% 0.6% 0.8% 0.0%

Fujian 3.0% 1.7% 2.1% 2.0% 0.0%

Jiangxi 3.0% 0.4% 0.5% 0.6% 0.0%

Shandong 6.0% 1.7% 2.2% 2.4% 1.0%

Henan 3.0% 0.1% 0.2% 0.2% 0.0%

Hubei 1.0% 0.1% 0.3% 0.8% 0.0%

Hunan 4.0% 0.2% 0.4% 0.6% 0.0%

Guangdong 3.0% 0.2% 0.5% 0.2% 0.0%

Guangxi 1.0% 0.1% 0.2% 0.2% 0.0%

Hainan 1.0% 2.3% 2.6% 2.0% 0.0%

Chongqing 1.0% 0.1% 0.2% 0.2% 0.0%

Sichuan 3.0% 0.0% 0.0% 0.2% 0.0%

Guizhou 4.0% 0.5% 1.1% 1.5% 0.0%

Yunnan 6.0% 2.1% 3.1% 4.1% 4.0%

Shanxi 6.0% 0.2% 0.6% 1.1% 2.0%

Gansu 10.0% 9.5% 11.1% 10.5% 11.0%

Qinghai 6.0% 0.0% 0.1% 0.6% 0.0%

Ningxia 10.0% 5.1% 7.5% 7.9% 0.0%

Xinjiang 10.0% 4.0% 5.8% 9.1% 15.0%

National 2.1% 2.6% 2.8% 8.0%

Source: NDRC

IDEAS ENGINE 20

China Power Sector

Figure 50: Geographical split of capacity (2014)

Longyuan Huaneng Re Datang Re Huadian Fuxin Suntien

Heilongjiang 9% 0% 7% 10% 0%

Jilin 3% 1% 11% 4% 0%

Liaoning 7% 17% 6% 3% 0%

Inner Mongolia 18% 24% 42% 31% 0%

Jiangsu 9% 0% 0% 2% 0%

Zhejiang 1% 0% 0% 0% 0%

Fujian 4% 0% 0% 1% 0%

Hainan 1% 0% 0% 0% 0%

Gansu 8% 0% 9% 25% 0%

Xinjiang 10% 3% 0% 8% 0%

Hebei 8% 5% 1% 3% 90%

Yunnan 4% 11% 2% 2% 0%

Anhui 4% 0% 1% 1% 0%

Shandong 2% 13% 8% 1% 0%

Tianjin 1% 0% 0% 0% 0%

Shanxi 4% 10% 3% 4% 10%

Ningxia 2% 0% 4% 0% 0%

Guizhou 3% 9% 0% 0% 0%

Tibet 0% 0% 0% 0% 0%

Shaanxi 1% 1% 2% 0% 0%

Hunan 0% 0% 0% 2% 0%

Guangdong 0% 5% 1% 2% 0%

Shanghai 0% 1% 2% 0% 0%

Guangxi 0% 0% 0% 0% 0%

Henan 0% 0% 2% 0% 0%

Chongqing 0%

Others 1%

Total 100% 100% 100% 100% 100%

Northeast 19% 18% 23% 17% 0%

Hebei 8% 5% 1% 3% 90%

Subtotal 27% 23% 24% 20% 90%


Rising uncertainties with nuclear power

While there is much debate whether nuclear tariffs could be revised down according to the

changes in coal-fired tariffs, we see utilisation and technology as the two issues that are more

likely to occur than the tariff debates themselves.

Moving to peak-load function

According to the supplementary document for power reform (NDRC [2015] 518 Document),

nuclear power may be considered for peak functions over time. This is not a major risk to the

long perceived stable and close-to-maximum utilisation hours a nuclear reactor can enjoy in

China. Given lack of details and regulatory guidance, we believe that such uncertainty may

apply to oversupplied locations such as Liaoning, if it happens.

CGN's nuclear units are exposed to three provinces: Guangdong (Daya Bay, Ling'ao,

Lingdong, Yangjiang and Taishan), Fujian (Ningde) and Liaoning (Hongyanhe). By capacity

contribution, Guangdong, Zhejiang and Fujian had over 8% local power capacity contribution as

of November 2014 while Liaoning and Jiangsu were lower. However, it is important to note

that Liaoning, as a Northeast province, also harnessed 15% of capacity exposure to wind

power.

Figure 51: Power demand growth in 11M14

Source: CEIC

Figure 52: Thermal utilisation hours in 11M14

Source: CEIC

IDEAS ENGINE 21

China Power Sector

Figure 53: Nuclear capacity contribution (11M14)

Source: CEIC

Figure 54: Wind capacity contribution (11M14)

Source: CEIC

Rising uncertainties around Generation-III technology

China's restart in nuclear projects is fast paced. YTD, the State Council has given the green

light to two new projects (Hongyanhe Unit 5-6 and Fuqing 5-6). However, how fast the other

projects in the approval pipelines can go ahead is uncertain as most of the others will be based

on foreign Generation-III technology (AP1000). This is especially true as the two recent

approvals are largely standard with Chinese modifications (ACP and Hualong One). In our view,

given the pending issues with Taishan EPR project, whether the government will aggressively

approve additional AP1000 projects (no operational track record and various delays in the past)

is a big question mark.

Figure 55: A list of projects that may receive final approval

Projects Capacity

(GW)

Type Approval status Operator

Hongyanhe #5/6 （红沿

河2期）

2.3 ACPR1000 Approved CGNPC, CPI

Fuqing #5/6 （福清2

期）

2.3 Hualong One Approved CNNC, Huadian

Fuxin

Xudapu #1/2 （徐大堡） 2.5 AP1000 Not yet CNNC, Datang

Lufeng #1/2 （陆丰） 2.5 AP1000 Not yet CGNPC

Shidaowan #1/2 （石岛

湾）

2.8 CAP1400 Not yet SNPTC, Huaneng

Haiyang #3/4 （海阳2

期）

2.5 AP1000 Not yet CPI, Guodian,

CNNC, Huaneng

Sanmen #3/4 （三门2

期）

2.5 AP1000 Not yet CNNC, CPI,

Huadian

Source: Caixin, the Economic Observer, the Paper, World Nuclear Association

Figure 56: China's nuclear technology roadmap by technology owners

Note: IPR stands for Intellectual Property Rights.

Source: Company data, Credit Suisse research

SNPTC

CGN

CNNC

Gen II Gen II+ Gen III

French

M310

(Daya Bay in 1994)

CRP-1000

CNP-300

(Qinshan Ph.I in 1994)

CNP-600

(Qinshan Ph.II)

ACP1000

(mainly developed by CGN

while Areva retains IPR)

ACRP1000+

(full Chinese IPR) Hualong

One

Candu 6

(Canadian)

EPR (French)

AP1000 CAP1400

AES91

(Russian)

(Qinshan Ph.III in 2002)

(at Taishan)

(full Chinese IPR)

(full Chinese IPR)

Foreign

technology

Domestic

technologyLegend

(at Tianwan)

IDEAS ENGINE 22

China Power Sector

Background of EPR issues: According to local press (chinanews.com), China's National

Nuclear Safety Association responded to an earlier warning from French authorities on potential

safety issues concerning the Taishan nuclear project under construction. The Chinese

authorities have dispatched professionals to inspect the project and suggested no operation

until full clearance.

The Taishan project is owned and operated by CGN Power (CGN) and most recently, the listed

company has completed the asset purchase of the remaining shares from parentco, consistent

with the purpose of IPO proceeds. The project is also one of the few Generation-III units under

construction based on French EPR technology.

According to South China Morning Post, France's nuclear safety authority has recently warned

that Taishan could face safety issues after it found weak spots (excessive concentration of

carbon in steel parts of the reactor vessel) of a similar reactor, the Flamanville EPR nuclear

power plant. The toughness of the reactor shell is crucial because it relates to the ability of the

material to withstand propagation of cracks. However, the excessive carbon would lead to

"lower-than-expected mechanical toughness values" according to the French nuclear regulator

ASN.

Tariffs are unknown

Given that Gen-III units usually require higher upfront investment and there has been no official

benchmark tariff yet, we refer to CNNC's Sanmen project as a reference. The tariff of Sanmen

project is also undetermined but CNNC provided some explanations in the company's

prospectus for the proposed IPO on the Shanghai Stock Exchange: "The required tariff for

Sanmen would be Rmb0.51/kWh to achieve the 9% equity IRR investment threshold, if the

total capital expenditure on the Sanmen project reaches ~Rmb19,000/kW (or 20% beyond the

previous budget of Rmb16,000/kW)." While the technology standards of Taishan and Sanmen

are different, they are both classified as Generation–III standards, so we forecast Taishan with

the same tariff of Rmb0.51/kWh. According to the prospectus, the current investment budget

for the Taishan 2 x 1,750 units is around Rmb21,000/kW. In this case, base case equity IRR is

only 11%, lower than 17% for Gen-II+ projects.

Figure 57: Equity IRR of Gen-III projects

Construction cost /Tariffs Rmb/kWh

Rmb/kW 0.43 0.47 0.51 0.55 0.59

17,000 10.0% 12.5% 14.8% 16.4% 18.9%

19,000 8.0% 10.3% 12.5% 14.6% 16.6%

21,000 6.6% 8.6% 10.6% 12.6% 14.5%

23,000 5.4% 7.2% 9.0% 10.9% 12.6%

25,000 4.4% 6.0% 7.7% 9.4% 11.0%


Transmission themes in Western Inner Mongolia

(WIM)

Not only Inner Mongolia could be an area of reform target after Shenzhen, there are also strong

opportunities for local power generators to transmit outbound power. In 2014, thermal and wind

accounted for 73% and 22% of Inner Mongolia's power supply. The western part (WIM) of the

district accounted for one-third of the entire Inner Mongolia with the remaining generated in

EIM. The outbound transmission (to EIM or to neighbouring provinces like Shaanxi) was 34%

(or 123 bn kWh) of total power generation from WIM and the western grid can sell power to the

eastern grid as well as to Shaanxi and the Northern Grid network.

Figure 58: Structural of the Inner Mongolia power grid


Additionally, the outbound transmission should be further supported by additional long-distance

transmission (capacity to be built. In the next 3-4 years, we expect about 57GW of ultra-high

voltage transmission to be completed for the entire province and about 22GW in WIM. These

should help protect utilisation and further capacity ramp-up of both coal-fired and wind power

capacity.

IDEAS ENGINE 23

China Power Sector

Figure 59: Outbound ultra-high voltage transmission in the pipeline

Lines Chinese name Location MW Year of likely

completion

Ximeng-Shandong 锡盟-山东 EIM 9,000 2016

WIM - Tianjin 蒙西-天津 WIM 6,000 2016

Shanghaimiao - Shandong 上海庙-山东 WIM 8,000 2017

Ximeng-Jiangsu 锡盟-江苏 EIM 8,000 2017

Zhalute-Henan 扎鲁特-河南 EIM 10,000 2018

Humeng-Qingzhou 呼盟-青州 EIM 8,000 2018

WIM - Hubei 西盟-湖北 WIM 8,000 2018

WIM total 22,000

EIM total 35,000

Source: State Grid, NDRC, Credit Suisse estimates

Figure 60: Power output growth—local vs national

Source: CEIC

Figure 61: Thermal utilisation hours—local vs. national

Source: CEIC

Limited pressure from wind power

Given that wind power is the second-largest generation source in the region, local coal-fired

utilisation could be impacted by protective schemes of wind power. Recent local press reports,

such as those by China Power, suggested that Inner Mongolia has finalised the Renewable

Quotas, targeting to achieve 15% of power consumption on wind for 2015. In our view, this is

not a threat as wind was about 14% of consumption in 2014. Meanwhile, the scheme targets

to keep wind utilisation hours at 2,000 hours for WIM and 1,800 for EIM. In 2014, the average

utilisation hours for Inner Mongolia was about 2,000 hours, which is largely within the range of

the scheme. As a result, it is reasonable to assume that the protective scheme for wind power

dispatches should pose limited threat to local coal-fired operators in the near term.

Less oversupplied and direct supply is more favourable

In 2014, Inner Mongolia was one of the very few provinces that enjoyed >5,000 thermal

utilisation hours, thanks to the favourable demand-supply helped by outbound transmission.

Industrial accounted for close to 90% overall power consumption and local GDP has outpaced

the national average for years (in 2014, local GDP grew 7.8% vs China's average at 7.4%).

Average industrial end-user tariff in the province was much lower than most other districts,

making large tariff discounts less likely when the local power producers enter direct supplies

with customers.

15

12

67

4

1921

8 8

n.a.0

5

10

15

20

25

2010 2011 2012 2013 2014

(%)


5,031

5,294

4,9655,012

4,706

4,559

5,1025,043 5,085 5,130

4,000

4,200

4,400

4,600

4,800

5,000

5,200

5,400

2010 2011 2012 2013 2014

(Hours)


IDEAS ENGINE 24

China Power Sector

Figure 62: Local power consumption breakdown (2013)

Source: CEIC

Figure 63: Local GDP vs. national GDP growth (2005-14)

Source: CEIC

Figure 64: Provincial thermal utilisation hours (2014)

Source: CEIC

Figure 65: Provincial average industrial power tariffs (2014)

Source: NDRC

Power retail in West Inner Mongolia

Besides outbound transmission, another investment theme is the opening-up of local power retail business. After Shenzhen, the next market could be the Western Inner Mongolia grid, which is the only provincial level grid, outside the operating range of State Grid and China Southern Grid.

Power retail is an asset-light and service-driven business. Based on a 3% net margin (according to Western examples), the retail market (if fully opened) could be a market with Rmb100 bn annual profit. The power producers (IPPs) have a natural interest to expand to downstream markets to hedge long-term risks from competition-based generation market. However, the IPPs backed by local governments may have stronger advantages than national IPPs backed by the central government, if the power retail market is governed by local government. The stocks listed in Hong Kong are largely national IPPs. In many Western models, city gas distributors also happen to be power retailers. This could also take place in China, whereby city gas distributors could leverage on existing relationships with customers and local government to offer bundled power/gas products.

2%

89%

4% 5%

Agriculture

Industrial

Services

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

TibetYunnanSichuan

JilinShanghai

HunanHeilon…

GuangxiHubeiChong…Guang…Gansu

LiaoningGuizhou

HenanZhejiang

BeijingJiangxiFujianShanxiAnhui

I.M.Shando…

HebeiJiangsu

XinjiangTianjin

ShaanxiQinghaiHainanNingxia

Hours

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

HubeiJilin

ShanghaiTianjinAnhui

GuangxiGuang…

LiaoningJiangsu

HebeiZhejiangChongq…BeijingHeilong…

GansuFujian

Shando…Jiangxi

ShaanxiHenanHunan

NingxiaSichuan

ShanxiYunnan

GuizhouHainan

QinghaiI.M.

Xinjiang

Rmb/KWh

IDEAS ENGINE 25

China Power Sector

Retail markets with high end-user tariffs can be attractive initially but risks could rise with

increasing competition. In general, we believe that it is positive for IPPs and city gas distributors

to invest in a new business but whether the investment is accretive will vary case-by-case.

Unlike power networks (transmission and distribution) operating on cables, transformers and

switchgears, the last mile power retail is an asset-light (largely metering/billing system and

ownership of small networks) and service-centric business model, the competing retailers after

opening-up could largely compete on operating costs and service quality. The strong

competition and high churn rate (measuring customer switching frequency) in Australia, for

instance, implies the essence of quality customer service and reliable energy supplies.

In the UK, retail profit margins vary but follow consistent trends among competitors. If China

fully opens the retail market (not just the incremental part), based on a 3% average net profit

margin, total retail industry earnings could be as high as Rmb100 bn a year based on 2014

power consumption data. This is a significant part of the overall power generation/supply profits

(government reported Rmb423 bn in 2014). For the listcos, such a profit opportunity could be

lucrative for the listed IPPs (total net profit of Rmb51 bn) and city gas companies (total net

profit of Rmb17 bn) under our coverage.

Figure 66: UK retail—domestic supply margins 2009-2012

Source: OFGEM

Figure 67: China—power retail earnings potential

Source: CEIC, Credit Suisse estimates; listed companies are those under Credit Suisse coverage

Acquisition costs may not be substantial if the retailers are not to have ownership in networks.

In the UK, surveys suggest there are a number of fixed entry costs, with developing IT systems

for customer acquisition, customer information, and billing being the single biggest entry cost.

Estimates ranged from £1 mn to £2 mn for a firm seeking to enter at a relatively small scale,

and £5-20 mn for firms seeking to acquire a customer base of up to two million. The retail

profit should depend on the initial profitability structure established by the reform and level of

subsequent competition. Surveys suggest that in most years, more than 80% of the customers

are aware of the availability of supplier switch in the UK. A similar study shows that more than

75% of the supply switches were due to the belief that new offers are cheaper. Australia's

churn rate (a large range but Credit Suisse survey shows around 30% level in Victoria) is larger

than that in the UK (10-15%). However, whether such profitability can be sustained will depend

on the initial profitability structure established by the reform and level of subsequent

competition.

Other local power utilities

Besides Mengdian and Jingneng, there are a large number of A-share listed local utilities

exposed to less oversupplied regions (besides Inner Mongolia) such as Xinjiang, Qinghai,

Ningxia and Shandong. These utilities may also have better advantages when bidding for future

power retail business given their local background. On the other hand, the Hong Kong-listed

IPPs are all directly managed by central SASAC, which means they could have lower local

government influence than the energy companies backed by local governments. This is

especially interesting if the new operation rights are approved and governed by local

governments in the future.

100

51

17

0

20

40

60

80

100

120

Power retail @ 3% netmargin

Listed IPPs Listed city gas

(Rmb bn)

IDEAS ENGINE 26

China Power Sector

Figure 68: Locations of local power utilities


IDEAS ENGINE 27

China Power Sector

Sell the national IPPs In a world of safety for power gencos, we like: (1) Wind operators (top picks: Huaneng

Renewables and Longyuan), (2) Low-cost Hydro (China Yangtze Power) and (3) Local IPPs

protected by policies (top pick: Mengdian). We are negative on National IPPs (top sells:

Huaneng A/H, China Resources Power).

Figure 69: Recommendation summary of China power operators

POSITIVE NEGATIVE

Wind National IPPs

Huaneng Renewables (0958.HK) Huaneng Power-H (0902.HK) – top sell

Longyuan Power (0916.HK) Huaneng Power-A (600011.SS) – top sell

Low-cost hydro CR Power (0836.HK) – top sell

Yangtze Power (600900.SS) Datang Power-A (601991.SS)

Local IPPs Huadian Power-H (1071.HK) – downgrade to U/P

Jingneng (600578.SS) – initiation Huadian Power-A (600027.SS)

Mengdian (600863.SS) – initiation Nuclear

CGN Power (1816.HK) – downgrade to U/P


Figure 70: Matrix of volume/tariff visibility going into the power reform


Unsustainable valuation ahead of major headwinds

Following the recent share price strength, national IPPs are now trading at stretched multiples

with 12-month forward P/B nearing a five-year high despite likely pressure on future ROE. The

12-month dividend yield is also around 1 standard deviation below the five-year mean at around

4%. The current valuation could weaken the positive thesis of buying these names on the back

of near-term dividends. If we adjust the calculation to look at three-year forward multiples

(where we could see a meaningful downside in ROE), the multiple could become even more

stretched than the 12-month calculation.

Figure 71: National IPPs—one-year forward P/B history

Source: Bloomberg, Credit Suisse estimates, excluding Datang

0%

4%

8%

12%

16%

20%

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

ROE (RHS)

0.8x Avg-1SD

0.6x Avg-2SD

1.0x Avg

1.2x Avg+1SD

1.4x Avg+2SD

(x)

IDEAS ENGINE 28

China Power Sector

Figure 72: National IPPs—one-year dividend yield


Figure 73: National IPPs—three-year forward P/B history


Figure 74: National IPPs—three-year dividend yield

Source: Bloomberg, Credit Suisse estimates (excluding Datang)

Meanwhile, wind operators' valuation should continue to be supported by a recovering ROE

over the coming years, helped by potential improvement in utilisation hours (stabling wind

resources from 2014 low and gradual reduction in curtailment risks).

Figure 75: Wind operators—1-year forward P/B history


0%

2%

4%

6%

8%

10%

12%

14%

0.0

0.5

1.0

1.5

2.0

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

ROE (RHS)

0.9x Avg-1SD

0.4x Avg-2SD

1.3x Avg

1.7x Avg+1SD

2.1x Avg+2SD

(x)

IDEAS ENGINE 29

China Power Sector

Figure 76: Wind operators—three-year forward P/B history


Utilities not a choice in a bull market

With the recent liquidity-driven rallies in both A- and H-share indices, it is probably also relevant

to look at how history unfolded for such cycles. For example, the China IPPs (especially the

HK-listed shares) were notable underperformers during 2006, 2007 and 2009 and remain so

YTD this year. On the other hand, city gas outperformed substantially during 2007 and 2009

despite lagging slightly YTD while hydro underperformed during 2006 and 2009 but

outperformed in 2007. Nuclear and wind have too short history to draw any conclusion.

Figure 77: Relative annual share price performance

(Relative) Gas Wind IPPs-H IPPs-A Hydro Nuclear HSCEI CSI300

2005 6% n.a. -20% -13% -14% n.a. 12% -8%

2006 -79% n.a. -20% -110% -91% n.a. 94% 121%

2007 35% n.a. -9% 52% 143% n.a. 56% 162%

2008 10% n.a. 6% 5% 29% n.a. -51% -66%

2009 112% n.a. -62% -65% -93% n.a. 62% 97%

2010 -3% -28% -15% -21% -5% n.a. -1% -13%

2011 25% -7% 25% 18% 6% n.a. -22% -25%

2012 23% -26% 32% 3% 22% n.a. 15% 8%

2013 59% 106% 12% -8% 19% n.a. -5% -8%

2014 -21% -34% 38% 38% 64% 10% 11% 52%

2015 YTD -6% 6% -15% -22% -17% 11% 23% 28%


Thoughts on A–H gaps

One of the market phenomenons since 4Q14 has been the close share price movement in

the dual-listed stocks, namely the three dual-listed IPPs (Huaneng, Datang and Huadian).

The A-shares have been historically trading at an average 84% premium over H-shares for

the same companies over the past ten years. That premium soared to 100-200% during

2007 driven by a much stronger rally in the domestic market (CSI 300 Index outperformed

HSCEI by 101% during the year) and then narrowed during 2008 when A-shares

underperformed. Since 2010, the A-share premium for DTP, HNP and HDP has been

relatively more stable than before, and HNP-A has traded at a smaller premium than peers.

Starting 2020, we see a trend of convergence in A/H share prices for HNP and HDP, even

as the recent A-share rally pushed up the A-share premium to a level that is still not

excessive at 10-20%. HNP-A was trading at a discount (<20%) to its H-share during Apr-

Dec 2014. With mutual access of liquidity, we expect the valuation gap to reduce over time,

which suggests a much larger downside in Datang-A, which is still trading at a huge premium

to its H-share.

Figure 78: China IPPs—A/H price gaps


-75%

-25%

25%

75%

125%

-250%

-150%

-50%

50%

150%

250%

350%

450%

Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

Relative performance (A over H) DTP HNP HDP

A share is trading at a premium to H share.

A share is trading at a discount to H share.

Widened A/H premium with A-share market rally. Narrowing A/H

premium

IDEAS ENGINE 30

China Power Sector

Key risks to our bearish call

The near term risks would be better than expected coal-price decline and thermal utilisation

rebound. Based on our sensitivity analysis, HDP is most sensitive to utilisation hours and unit

fuel cost changes. However, as we mentioned in our sector note, any further coal price

changes are likely to be offset by on-grid tariff adjustment at the end of the year. Besides,

for utilisation hours, most IPPs have guided to YoY decline for their thermal power utilisation

in 2015, and weak 1Q15 power output has supported such a view.

Figure 79: China IPPs—FY15E EPS sensitivity to 1% cut in utilization hours


Figure 80: China IPPs—FY15E EPS sensitivity to 1% increase in unit fuel cost


Over the long-run, one mitigating factor for the IPPs is to expand into power retail, which we

estimate as a Rmb100 bn market (annual profit size) if fully opened. However, whether the

large IPPs can win these projects from locally-backed utilities companies is a risk. Plus, city

gas distributors fit in well with their existing track record with local customers and

government. In many western countries, city gas distributors also happen to be power

retailers.

IDEAS ENGINE 31

China Power Sector

Appendix: Sector drivers Figure 81: China IPPs—key assumptions summary

2012A 2013A 2014A 2015E 2016E

Attributable capacity (YoY)

CRP 14% 7% 16% 13% 6%

HNP 5% 5% 7% 18% 3%

DTP 5% 6% 7% 4% 9%

HDP 13% 5% 5% 3% 7%

Mengdian 20% 1% 14% 2% 21%

Jingneng n.a. 18% 5% -11% 6%

Utilisation hours (YoY)

CRP -7% 1% -7% -2% -2%

HNP -8% 0% -9% -5% -2%

DTP -4% 1% -5% 0% 0%

HDP -2% 2% -2% -1% 0%

Mengdian -5% 7% -2% -4% 6%

Jingneng -3% 5% -1% -2% 2%

Net power output (bn kWh)

CRP 4% 8% 5% 15% 12%

HNP (China) -3% 5% -7% 14% 2%

DTP -1% -5% -2% 3% 3%

HDP 4% 12% 3% 4% 7%

Mengdian 6% 8% 21% -1% 31%

Jingneng 240% 31% 6% -8% 6%

Coal-fired on-grid tariff (YoY)

CRP 6% -1% -2% -5% -3%

HNP 6% 0% -3% -7% -3%

DTP 5% 0% -1% -5% -2%

HDP 6% -1% -2% -5% -3%

Mengdian 7% -1% -3% 1% -6%

Jingneng 6% -10% -2% -10% -2%

Unit fuel cost (YoY)

CRP -10% -16% -13% -5% 0%

HNP -9% -14% -8% -5% 0%

DTP -4% -14% -13% -5% 0%

HDP -4% -12% -13% -5% 0%

Mengdian -3% -7% -5% -5% 0%

Jingneng n.a. n.a. -4% -6% 0%

2012A 2013A 2014A 2015E 2016E

EBIT margin (%)

CRP 19.2 25.2 21.5 25.8 23.8

HNP 12.7 18.0 20.2 19.5 17.1

DTP 17.4 20.4 18.6 22.0 22.2

HDP 11.8 18.9 21.7 20.4 18.0

Mengdian 24.3 22.0 20.4 16.4 20.7

Jingneng 14.2 21.8 27.6 24.9 20.7

Net gearing (%)

CRP 110 96 107 97 81

HNP 238 195 167 174 153

DTP 317 288 305 298 273

HDP 405 329 253 242 225

Mengdian 120 123 170 171 141

Jingneng 38 35 26 28 26


IDEAS ENGINE 32

China Power Sector

Inner Mongolia Mengdian Huaneng (600863.SS / 600863 CH)

Improving earnings with additional transmission

Dave Dai, CFA / 852 2101 7358 / [email protected]

Ran Ma / 852 2101 6653 / [email protected]

■ Initiate coverage with OUTPERFORM. We initiate coverage on Inner Mongolia Mengdian

Huaneng (Mengdian) with an OUTPERFORM rating and a DCF-based target price of

Rmb7.50. With all generation units (>90% is coal-fired power) located in Inner Mongolia

(one of the least oversupplied locations), Mengdian's earnings growth should be driven by:

(1) capacity and utilisation supported by outbound transmission; (2) cheaper tariffs leading

to marginal benefits of direct supplies or competitive bidding; and (3) strong local

background helping it bid in the event of a potential opening-up of local power retail assets.

■ Earnings to improve. While FY15 earnings are likely to be impacted by weak power

demand, additional ultra-high voltage transmission lines should help transmit most of the

output to other provinces, creating utilisation upside in FY16-17E. We forecast the time-

weighted attributable capacity to witness a 13% FY14-16E CAGR with ~4GW capacity

under construction, stronger than most national IPPs. Parentco may also inject other local

projects (~10% upside on FY16E capacity) but there is no firm timeline yet.

■ A power reform winner. Mengdian is well-positioned to protect its utilisation hours with

competitive tariffs for outbound transmission (cheaper than local destination tariff) under

reforms. Meanwhile, as a dominant power generator in Western Inner Mongolia,

participation in the power retail bidding (we estimate potential annual profit of Rmb1.9 bn at

3% net margin) is possible.

■ Resembling renewable energy. Even without injections and power retail, we expect

meaningful earnings turnaround in FY16-17 helped by new transmission. High visibility on

utilisation and supreme ROE (21% by FY17E) resemble characteristics of a renewable

energy player and justifies its higher multiple than national peers. Key downside risks are

lower-than-expected utilisation and tariffs.

Rating OUTPERFORM* Price (24 Apr 15, Rmb) 6.11 Target price (Rmb) 7.50¹ Upside/downside (%) 22.7 Mkt cap (Rmb mn) 35,485 (US$ 5,730) Enterprise value (Rmb mn) 60,501 Number of shares (mn) 5,807.74 Free float (%) 32.3 52-week price range 6.26 - 2.37 ADTO - 6M (US$ mn) 102.9 *Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Share price performance

The price relative chart measures performance against the

Shanghai Shenzhen CSI300 index which closed at 4807.59 on

24/04/15

On 24/04/15 the spot exchange rate was Rmb6.19/US$1

Performance over 1M 3M 12M Absolute (%) 32.8 46.5 156.7 Relative (%) 11.6 26.1 113.4

Financial and valuation metrics

Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 12,153.0 13,634.0 13,488.1 16,435.8 EBITDA (Rmb mn) 4,363.5 4,604.8 4,574.5 5,892.1 EBIT (Rmb mn) 2,669.3 2,781.5 2,218.6 3,409.9 Net profit (Rmb mn) 1,375.6 1,359.6 1,037.4 1,659.7 EPS (CS adj.) (Rmb) 0.36 0.23 0.18 0.29 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.36 0.37 — EPS growth (%) -29.2 -34.1 -23.7 60.0 P/E (x) 17.2 26.1 34.2 21.4 Dividend yield (%) 2.4 3.3 3.1 2.3 EV/EBITDA (x) 12.0 13.1 13.4 10.0 P/B (x) 2.2 3.2 3.2 3.0 ROE (%) 13.2 12.4 9.4 14.5 Net debt/equity (%) 122.7 170.2 171.4 141.4

Source: Company data, Thomson Reuters, Credit Suisse estimates.

60

80

100

120

0

2

4

6

8

May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15

Price (LHS) Rebased Rel (RHS)

IDEAS ENGINE 33

China Power Sector

Inner Mongolia Mengdian HuaNeng

Thermal

600863.SS

Per share data 12/13A 12/14E 12/15E 12/16E

Shares (wtd avg.) (mn) 3,872 5,808 5,808 5,808

EPS (Credit Suisse) (Rmb) 0.36 0.23 0.18 0.29

DPS (Rmb) 0.15 0.20 0.19 0.14

BVPS (Rmb) 2.81 1.90 1.90 2.04

Operating CFPS (Rmb) 1.26 0.71 0.73 0.90

Target price scenario

Scenario TP %Up/Dwn Assumptions

Upside 7.90 29.30 Coal price dropped 10% in 2015

Central Case 7.50 22.75 Coal price dropped 5% in 2015

Downside 7.10 16.20

Rating OUTPERFORM*

Price (24 Apr 15, Rmb) 6.11

Target price (Rmb) 7.50¹

Upside/downside (%) 22.7

Mkt cap (Rmb mn) 35,485 (US$ 5,730)

Enterprise value (Rmb mn) 60,501

Number of shares (mn) 5,807.74

Free float (%) 32.3

52-week price range 6.26 - 2.37

Source: Thomson Reuters, company data, Credit Suisse estimates

Income statement (Rmb mn) 12/13A 12/14E 12/15E 12/16E

Sales revenue 12,153 13,634 13,488 16,436

Cost of goods sold 9,272 10,691 11,235 12,984 SG&A 31.3 35.1 34.7 42.3 Other operating exp./(inc.) (1,514) (1,697) (2,356) (2,482) EBITDA 4,364 4,605 4,574 5,892

Depreciation & amortisation 1,694 1,823 2,356 2,482 EBIT 2,669 2,782 2,219 3,410

Net interest expense/(inc.) 1,015 992 1,052 937 Non-operating inc./(exp.) 819.0 743.6 706.1 706.1 Associates/JV — — — — Recurring PBT 2,473 2,533 1,873 3,179

Exceptionals/extraordinaries — — — — Taxes 494.6 533.7 347.5 738.1 Profit after tax 1,978 1,999 1,526 2,441

Other after tax income — — — — Minority interests 602.7 639.8 488.2 781.1 Preferred dividends — — — — Reported net profit 1,376 1,360 1,037 1,660

Analyst adjustments — — — — Net profit (Credit Suisse) 1,376 1,360 1,037 1,660

Cash flow (Rmb mn) 12/13A 12/14E 12/15E 12/16E

EBIT 2,669 2,782 2,219 3,410

Net interest (1,015) (992) (1,052) (937) Tax paid (494.6) (533.7) (347.5) (738.1) Working capital (201.1) (56.6) (0.4) (105.7) Other cash & non-cash items 3,924 2,923 3,403 3,626 Operating cash flow 4,883 4,122 4,222 5,255

Capex (1,022) (3,683) (4,000) (3,000) Free cash flow to the firm 3,860 440 222 2,255

Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments 819.4 748.8 711.4 711.4 Other investment/(outflows) (191.3) — — — Investing cash flow (394) (2,934) (3,289) (2,289)

Equity raised — — — — Dividends paid (568) (1,162) (1,088) (830) Net borrowings (1,520) 1,083 245 311 Other financing cash flow (1,015) (992) (1,052) (937) Financing cash flow (3,103) (1,071) (1,895) (1,456)

Total cash flow 1,386 118 (961) 1,510

Adjustments — — — — Net change in cash 1,386 118 (961) 1,510

Balance sheet (Rmb mn) 12/13A 12/14E 12/15E 12/16E

Cash & cash equivalents 185 347 317 1,827 Current receivables 1,482 1,652 1,635 1,974 Inventories 472.5 530.0 524.4 639.0 Other current assets 50.3 53.6 53.2 59.6 Current assets 2,189 2,583 2,529 4,499

Property, plant & equip. 25,357 34,487 36,449 35,966 Investments 3,340 3,340 3,340 3,340 Intangibles 4,296 4,234 4,173 4,111 Other non-current assets 423.4 423.4 423.4 423.4 Total assets 35,605 45,067 46,913 48,339

Accounts payable 3,725 4,174 4,678 5,243 Short-term debt 6,956 14,757 15,661 14,911 Current provisions — — — — Other current liabilities 57.0 57.0 57.0 57.0 Current liabilities 10,738 18,987 20,396 20,211

Long-term debt 10,231 10,606 10,606 10,606 Non-current provisions — — — — Other non-current liab. 774.2 774.0 774.0 774.0 Total liabilities 21,743 30,368 31,776 31,591

Shareholders' equity 10,861 11,059 11,008 11,838

Minority interests 3,001 3,641 4,129 4,910 Total liabilities & equity 35,605 45,067 46,913 48,339

IDEAS ENGINE 34

China Power Sector

0

1

2

3

4

5

6

2010 2011 2012 2013 2014

12MF P/B multiple

0

5

10

15

20

25

2010 2011 2012 2013 2014

12MF P/E multipleKey ratios and valuation 12/13A 12/14E 12/15E 12/16E

Growth(%) Sales revenue 9.9 12.2 (1.1) 21.9 EBIT (0.9) 4.2 (20.2) 53.7 Net profit 6.2 (1.2) (23.7) 60.0 EPS (29.2) (34.1) (23.7) 60.0 Margins (%)

EBITDA 35.9 33.8 33.9 35.8 EBIT 22.0 20.4 16.4 20.7 Pre-tax profit 20.3 18.6 13.9 19.3 Net profit 11.3 10.0 7.7 10.1 Valuation metrics (x)

P/E 17.2 26.1 34.2 21.4 P/B 2.18 3.21 3.22 3.00 Dividend yield (%) 2.40 3.27 3.07 2.34 P/CF 4.85 8.61 8.40 6.75 EV/sales 4.32 4.44 4.55 3.60 EV/EBITDA 12.0 13.1 13.4 10.0 EV/EBIT 19.7 21.8 27.7 17.4 ROE analysis (%)

ROE 13.2 12.4 9.4 14.5 ROIC 7.07 6.22 4.47 6.42 Asset turnover (x) 0.34 0.30 0.29 0.34 Interest burden (x) 0.93 0.91 0.84 0.93 Tax burden (x) 0.80 0.79 0.81 0.77 Financial leverage (x) 2.57 3.07 3.10 2.89 Credit ratios

Net debt/equity (%) 123 170 171 141 Net debt/EBITDA (x) 3.90 5.43 5.67 4.02 Interest cover (x) 2.63 2.80 2.11 3.64


Source: IBES

IDEAS ENGINE 35

China Power Sector

Initiate coverage with OUTPERFORM We initiate coverage on Inner Mongolia Mengdian Huaneng Thermal Power Corporation (Mengdian)

with an OUTPERFORM rating and a target price of Rmb7.5 (based on the discounted cash flow

method). With all generation units located in Inner Mongolia, Mengdian should enjoy a much stronger

positioning than the national IPPs: (1) capacity growth protected by a less oversupplied power and

outbound transmission; (2) lower potential threat from power reforms (competitive bidding or direct

supplies) given lower generation costs; and (3) strong position to enter the local power retail market

with a dominant local background. In the near term, we estimate a 10% FY14-16E EPS CAGR

supported by the strong (~4GW) capacity pipeline. In addition, local projects (~1.7GW gross or

~10% upside on FY16E capacity) owned by parentco may be injected into Mengdian.

Recovering ROE with higher visibility

Unlike national peers where earnings visibility is subject to greater uncertainties (we value based

on sustainable ROE), we value Mengdian using the discounted cash flow method, same as how

we value clean energy operators (wind, nuclear, hydro and city gas) given much stronger

visibilities.

Figure 82: Mengdian's valuation

Key assumptions

Cost of debt 5.5%

WACC 8.5%

Firm value (Rmb mn) 73,615

Net debt (Rmb mn) 25,950

Equity (Rmb mn) 43,535

Target price (Rmb/share) 7.5


Mengdian is currently trading at a premium to peer groups such as national coal-fired IPPs and

wind farms on forward P/B multiple, but at a similar level as hydro power and city gas

companies. Besides leverage, we believe the multiple difference can be sustained with

expectations of sustainable ROE. For national IPPs, we highlighted in the main section that

there are major uncertainties going into the reform, either "consolidation" or "no consolidation"

scenarios, so the sustainable ROE in the coming years could drift much lower than the current

levels, which would be enough to suppress P/B multiples.

On the other hand, hydro and city gas utilities are highly supported by government's green

efforts and we forecast average ROE to remain at least at the current levels or even recover

slightly. Given that, Mengdian's ROE is likely to be boosted further by utilisation improvement

plus asset injection potential and the opportunity (~10% of FY16E capacity) to get into the retail

business (Western Inner Mongolia may be a business worth an annual profit of Rmb1.9 bn

assuming a 3% net margin. As a result, we believe that Mengdian may continue to trade at

premium valuations given such potential upside.

Figure 83: Historical ROE/leverage

Source: Bloomberg, Credit Suisse estimates.

Figure 84: Forward P/B history


Capacity outlook

Mengdian currently has three projects in the pipeline with total consolidated capacity of ~4GW.

All of the three projects are expected to commence operation in 2015/2016 and will start full-

year contribution from 2017. As a result, we estimate the capacity to grow at 13% over FY14-

16. Also, we believe that the projects under construction should enjoy a decent utilisation rate

as they are either targeting long-distance transmission through Ultra High Voltage line or power

exports to nearby provinces. We forecast the three units to start contributing profit in mid-2015

(Helin), 1H16 (Weijiamao) and later 2016 (Shangdu Phase IV), respectively.

IDEAS ENGINE 36

China Power Sector

Figure 85: Mengdian's time-weighted attributable capacity


Figure 86: Project details of Mengdian

Project name Chinese

name

Location Type Scale

(MW)

Gross

capacity

(MW)

Stake

(%)

Consolidate

d capacity

(MW)

Attributabl

e capacity

(MW)

Haidian

Phase III

海电三期 Wuhai Coal-fired 2×330 660 100% 660 660

Haibowan 蒙华海勃

湾

Wuhai Coal-fired 2×200 400 51% 400 204

Donghua 包头东华 Baotou Co-gen 2×330 660 25% 165

Longyuan 北方龙源

风电

Baotou Wind n.a. 476 19% 89

Baiyun'ebo 白云鄂博

风电

Baotou Wind n.a. 49 100% 49 49

West Inner Mongolia 2,196 1,109 1,168

Two wind

projects

Wind n.a. 99 100% 50 50

East Inner Mongolia 99 99 99

Shangdu 上都 Xinlingol Coal-fired 4×600 2,400 51% 2,400 1,224

Shangdu

Phase II

上都第二 Xinlingol Coal-fired 2×660 1,320 51% 1,320 673

Daihai 岱海 Wulanch

abu

Coal-fired 4×600 2,400 49% 1,176

Tuoketuo 托克托 Hohhot Coal-fired 6×600 3,600 15% 540

Tuoketuo

Phase II

托克托第

二

Hohhot Coal-fired 2×600 1,200 15% 180

Fengzhen #

3-4

丰镇#3-4 Wulanch

abu

Coal-fired 2×200 400 100% 400 400

Fengtai 丰泰 Hohhot Co-gen 2×200 400 45% 400 180

Jingda 京达 Erdos Co-gen 2×330 660 40% 660 264

Juda 聚达 Erdos Co-gen 2×600 1,200 100% 1,200 1,200

Dzungaria 国华准格

尔

Erdos Coal-fired 4×330 1,320 30% 396

Jinglong 京隆 Wulanch

abu

Coal-fired 2×600 1,200 25% 300

Mengda 蒙达 Erdos Coal-fired 4×330 1,320 10% 132

Cross-provincial transmission 17,420 6,380 6,665

Total 19,715 7,588 7,932


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2012 2013 2014 2015E 2016E 2017E

(MW)

IDEAS ENGINE 37

China Power Sector

Figure 87: Project pipelines of Mengdian

Project

Name

Chinese

name

Location Type Destin

ation

Scale

(MW)

Gross

capacity

(MW)

Stake

(%)

Consolida

ted

capacity

(MW)

Attribut

able

capacity

(MW)

Expected

operation

date

Helin 和林电

厂

Hohhot Coal-

fired

UHV

(South

China)

2×660 1,320 100% 1,320 1,320 2015

Weijiam

ao

魏家峁

煤电

Erdos Coal-

fired

UHV

(South

China)

2×660 1,320 100% 1,320 1,320 2016

Shangd

u Phase

IV

上都四

期

Xinlingol Coal-

fired

North

China

2×660 1,320 51% 1,320 673 2016

Total 3,960 3,960 3,511


Based on our forecasts, Mengdian should have a meaningful capacity boost in 2016 with the

completion of all three new units. We forecast average utilisation hours to steadily increase

given the protection by additional transmission lines and a meaningful batch should be

completed by 2016-17.

Figure 88: Summary of key assumptions

2012 2013 2014E 2015E 2016E 2017E

Consolidated capacity (MW) 7,539 7,588 9,308 10,628 13,268 13,268

YoY 1% 23% 14% 25% 0%

Attributable capacity (MW) 7,918 7,996 9,096 9,316 11,309 11,309

YoY 1% 14% 2% 21% 0%

Time-weighted consolidated capacity (MW) 7,539 7,551 9,308 9,638 11,948 13,268

YoY 0% 23% 4% 24% 11%

Time-weighted attributable capacity (MW) 7,918 7,959 9,096 9,426 11,736 12,409

YoY 1% 14% 4% 25% 6%

Average utilisation hours 5,002 5,354 5,223 4,997 5,283 5,310

YoY 7% -2% -4% 6% 1%

Power output (mn kWh) 34,282 36,950 44,614 44,200 57,924 64,663

YoY 8% 21% -1% 31% 12%

Unit fuel cost (Rmb/kWh) 0.107 0.100 0.095 0.090 0.090 0.090

YoY -7% -5% -5% 0% 0%


Asset injection a plus

As the only listed vehicle of its parent company, North China Power Corporation (a subsidiary of

China Huaneng Group), we believe that Mengdian is the key platform to integrate parentco's

remaining assets (power and coal). While the asset injection of coal mines does not seem

reasonable given the current environment, the two power units (Fengzhen and Mengda) make

more sense with similar locations and operational advantages. The two units have a total

capacity of 1.7GW and attributable capacity of 0.97GW. We do not have a view on the possible

timing of the injection but if it takes place, it should create ~10% upside on our attributable

FY16 capacity forecast.

Figure 89: Power assets that could be injected to the listco

Project

name

Chinese

name

Location Type Scale

(MW)

Gross

capacity

(MW)

Stake

(%)

Consolid

ated

capacity

(MW)

Attributa

ble

capacity

(MW)

Status

Fengzhen 丰镇 Wulanch

abu

Coal-fired 2×200 400 100% 1,320 400 In operation

Mengda 蒙达 Dalat Coal-fired 4×330 1,320 43% 568 In operation

Total 1,720 1,320 968


Better utilisation hours

While Inner Mongolia is not without local issues (delayed transmission construction subduing

utilisation of local wind farms and coal-fired power), Mengdian's coal-fired units have

outperformed local and national benchmarks over the past two years, largely thanks to the

status that >80% of its total capacity targets power exports. We estimate the utilisation hours

of Mengdian's units to be ~5,220 in FY14E, 2% higher than the average level of Inner

Mongolia, and 10% higher than the national average.

Figure 90: Utilisation hours comparison of coal-fired units

Source: CEIC, company data, Credit Suisse estimates

4,500

4,700

4,900

5,100

5,300

5,500

5,700

5,900

2011 2012 2013 2014E

MengDian Inner Mongolia National Average

IDEAS ENGINE 38

China Power Sector

Largely due to lower coal price, the current transmission tariff of Mengdian's units targeting

power export, is 2-18% lower than the on-grid tariff of provinces in North China. In the context

of power reform, we believe Mengdian should be well-positioned in the opening up of the power

market given its price advantage and by further improving its utilisation hours. We currently

forecast Mengdian's average utilisation hours to improve by 5.7%/0.5% YoY in 2016 and

2017, respectively.

Figure 91: Comparison of Inner Mongolia's transmission tariff with on-grid tariffs of North

China provinces (Rmb/kWh)—the tariff is eligible starting April 2015

Inner Mongolia cross-provincial transmission (unit to grid) 0.3458

Inner Mongolia cross-provincial transmission (grid to grid) 0.3348

Beijing 0.3754

Tianjin 0.3815

Hebei (North) 0.3971

Hebei (South) 0.3914

Shanxi 0.3538

Shandong 0.4194

Source: NDRC



completion



Shanghaimiao -

Shandong

上海庙-山东 WIM 8,000 2017





WIM total 22,000

EIM total 35,000


Figure 93: Structure of the Inner Mongolia power grid


Lowest exposure to smaller units

Going into progressive power reform, Mengdian also stands out from peers with very low

capacity exposure (7%) to smaller units (<=300MW) that are not for co-generation. This is a

crucial distinction because power portfolios with a significantly smaller fleet could face larger

shut-down risks during a consolidation phase, whereby a large number of power plants need to

be phased out to keep industry profitability recovering.

IDEAS ENGINE 39

China Power Sector

Figure 94: Project size distribution of coal-fired power plants of the listed IPPs


A potential leap into the power retail market

After Shenzhen, we believe the next power retail market that has potential to be opened up

could be the Western Inner Mongolia grid, which is the only provincial level grid, outside the

operating range of State Grid and China Southern Grid.

Power retail is an asset-light and service-driven business. Based on a 3% net margin

(according to Western examples), the retail market (if fully opened) could be a market with

Rmb100 bn in annual profit. The power producers (IPPs) have a natural interest to expand to

downstream markets to hedge long-term risks from a competition-based generation market. In

our view, the IPPs backed by local governments may have stronger advantages than national

IPPs backed by the central government, if the power retail market is governed by the local

government. One of the strategic investors in Mengdian's controlling shareholder, Inner

Mongolia Power Group, has a strong local background and should help Mengdian in bidding for

the retail business in West Inner Mongolia if it is opened up.

Retail markets with high end-user tariffs can be attractive initially but risks could rise with

increasing competition. In general, we believe that it is positive for IPPs such as Mengdian to

invest in a new business but whether the investment is accretive will vary case by case.

Figure 95: China—power retail earnings potential

Note: Listed companies are those under Credit Suisse coverage.


Figure 96: Western Inner Mongolia—power retail earnings potential vs. Mengdian's FY15

net profit


Unlike some of the national IPPs with a net gearing ratio of >250%, we estimate Mengian's

net gearing to be around 200% by 2016E, which provides room for additional debt financing in

case of either buying assets from parentco or bidding for the power retail business.

100

51

17

0

20

40

60

80

100

120

Power retail @ 3% netmargin

Listed IPPs Listed city gas

(Rmb bn)

1.90

1.66

1.50

1.55

1.60

1.65

1.70

1.75

1.80

1.85

1.90

1.95

Western I.M. @3% net margin Mengdian (FY16E net profit)

(Rmb bn)

IDEAS ENGINE 40

China Power Sector

Key risks to our call

More-than-expected cut of coal-fired tariffs and less-than-expected drop of coal prices

We currently forecast another 0.5 fen per kWh tariff cut for coal-fired power units in Inner Mongolia

(lower than coastal provinces with 1 fen per kWh cut). In the last tariff cut in April 2015, Inner

Mongolia also enjoyed a smaller cut (0.67 fen cut in Western Inner Mongolia vs national average at 2

fen cut). We estimate 1% more tariff cut would lead to 4% FY16E EPS downside.

Lower-than-expected utilisation hours

Historically, Inner Mongolia has enjoyed higher utilisation hours than the national average. If the

construction of ultra-high-voltage transmission lines is slower than expected, this could impact

the utilisation of Mengdian’s units.

Delay of the existing project construction

If projects are delayed beyond the expected launch dates, then Mengdian will be impacted.



IDEAS ENGINE 41

China Power Sector

Appendix: Company background Inner Mongolia Mengdian Huaneng Thermal Power Corporation Limited (Mengdian) was

established in 1993 and listed in China A-share market in 1994. The company's main business

has been power generation and heat supply ever since. North United Power Corporation

(currently a subsidiary of China Huaneng Group) has been Mengdian's controlling shareholder

following the power reform of 2004.

As of 2013, the company has consolidated power generation capacity of 7.6GW and

attributable capacity of 8.0GW. About 87% of the company's coal-fired units are targeted as

power export capacity, whose utilisation hours are much more defensive given the low fuel cost

and on-grid tariff of Inner Mongolia compared with other provinces.

Figure 98: The shareholder structure of Mengdian


51.0%

9.3% 56.6% 34.1%

China Citic Group

Inner Mongolia MengDian HuaNeng Thermal Power Corporation Limited (MengDian)

North United Power CorporationStrategic investors Other A share investors

China Huaneng GroupInner Mongolia Power Group China Shenhua Group

IDEAS ENGINE 42

China Power Sector

Beijing Jingneng Power Co Ltd (600578.SS / 600578 CH)

Strong asset injection theme



■ Initiate coverage with OUTPERFORM. We initiate coverage on Beijing Jingneng Power

(Jingneng) with an OUTPERFORM rating and an SOTP-based target price of Rmb10.0

(including asset injections). Jingneng has a portfolio of high quality coal-fired power units

with >60% of attributable capacity located in Inner Mongolia. Similar to Mengdian, Jingneng

should enjoy resilient utilisation hours for Inner Mongolia assets but the asset injection angle

should be more clear with parentco commitment by 2016.

■ Asset injection commitment. The company's output and earnings may be depressed in

FY15 given the scheduled shutdown of the Shijingshan (Beijing) project but capacity growth

should turn positive again with 6% and 11% in FY16 and FY17, respectively. Additionally,

the parentco has committed to inject additional assets before end of FY16 and we believe it

should be of the size of 4-5GW (>50%). The transaction should be supported by the light

balance sheet.

■ Power retail is only possible. Unlike Mengdian with the local government as one of the

indirect shareholders, Jingneng is ultimately controlled by the Beijing SASAC. Therefore,

the probability of acquiring local power retail business may be low despite its large capacity

exposure to Inner Mongolia. Additionally, Jingneng has 12% of its capacity in Ningxia,

which is also listed for the next batch of power reforms.

■ Compared with Mengdian. We have incorporated the injection potential in our SOTP

target price but no earnings contribution is built in considering limited details. We prefer

Jingneng to Mengdian given similar exposure to Inner Mongolia but better asset growth

opportunity with asset injection. Bidding for the power retail business would be a plus. Key

downside risks are lower-than-expected utilisation and tariffs.

Rating OUTPERFORM* Price (24 Apr 15, Rmb) 8.08 Target price (Rmb) 10.00¹ Upside/downside (%) 23.8 Mkt cap (Rmb mn) 37,308 (US$6,024 mn) Enterprise value (Rmb mn) 47,501 Number of shares (mn) 4,617.32 Free float (%) 21.4 52-week price range 8.08–3.23 ADTO - 6M (US$ mn) 68.7 *Stock ratings are relative to the coverage universe in each analyst's or each

team's respective sector.



The price relative chart measures performance against the Shanghai

Shenzhen CSI300 index which closed at 4702.64 on 24/04/15




Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 12,964.0 10,962.0 11,371.6 14,054.1 EBITDA (Rmb mn) 4,899.2 4,055.1 4,135.8 5,526.4 EBIT (Rmb mn) 3,233.0 2,271.8 2,255.0 3,364.0 Net profit (Rmb mn) 2,551.0 2,115.5 2,050.4 2,527.9 EPS (CS adj.) (Rmb) 0.55 0.46 0.44 0.55 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.43 — — EPS growth (%) 6.2 -17.1 -3.1 23.3 P/E (x) 14.6 17.6 18.2 14.8 Dividend yield (%) 2.5 2.0 1.9 2.4 EV/EBITDA (x) 9.5 11.7 11.5 8.3 P/B (x) 2.6 2.4 2.2 2.0 ROE (%) 18.5 14.1 12.5 14.2 Net debt/equity (%) 50.5 50.4 45.9 34.6


80

90

100

110

120

2

4

6

8

10

Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14


IDEAS ENGINE 43

China Power Sector

Beijing Jingneng Power Co Ltd 600578.SS


Shares (wtd avg.) (mn) 4,617 4,617 4,617 4,617 EPS (Credit Suisse) (Rmb) 0.55 0.46 0.44 0.55

DPS (Rmb) 0.20 0.16 0.16 0.19

BVPS (Rmb) 3.10 3.39 3.68 4.04


Target price scenario

Scenario TP %Up/Dwn Assumptions

Upside

Central Case 10.00 23.92

Downside

Rating OUTPERFORM*

Price (24 Apr 15, Rmb) 8.08

Target price (Rmb) 10.00¹

Upside/downside (%) 23.8

Mkt cap (Rmb mn) 37,308 (US$ 6,024)



Free float (%) 21.4

52-week price range 8.08 - 3.23

ADTO - 6M (US$ mn) 68.7

Source: Thomson Reuters, company data, Credit Suisse estimates


Sales revenue 12,964 10,962 11,372 14,054

Cost of goods sold 9,015 8,112 8,517 9,991

SG&A 525.0 416.6 432.1 491.9

Other operating exp./(inc.) (1,475) (1,622) (1,713) (1,955)

EBITDA 4,899 4,055 4,136 5,526

Depreciation & amortisation 1,666 1,783 1,881 2,162

EBIT 3,233 2,272 2,255 3,364

Net interest expense/(inc.) 1,070 871 808 856

Non-operating inc./(exp.) (12.0) 54.0 54.0 54.0

Associates/JV 1,539 1,431 1,345 1,345 Recurring PBT 3,690 2,886 2,846 3,907

Exceptionals/extraordinaries 144.0 — — —

Taxes 639.0 350.1 361.7 626.9

Profit after tax 3,195 2,536 2,484 3,280

Other after tax income — — — —

Minority interests 644.0 420.2 434.0 752.3

Preferred dividends — — — — Reported net profit 2,551 2,116 2,050 2,528



EBIT 3,233 2,272 2,255 3,364

Net interest (1,070) (871) (808) (856)

Tax paid (639.0) (350.1) (361.7) (626.9)

Working capital 816.2 301.8 (75.6) (421.0)

Other cash & non-cash items 1,666 1,783 1,881 2,162 Operating cash flow 4,006 3,135 2,890 3,622

Capex (233) (4,200) (4,200) (4,200) Free cash flow to the firm 3,773 (1,065) (1,310) (578)

Disposals of fixed assets — — — —

Acquisitions — — — —

Divestments 58.0 — — —

Associate investments — — — —

Other investment/(outflows) (694) 1,188 1,120 1,120 Investing cash flow (869) (3,012) (3,080) (3,080)

Equity raised — — — —

Dividends paid (923.5) (740.4) (717.6) (884.8)

Net borrowings (1,315) — — —

Other financing cash flow (1,787) 480 480 480

Financing cash flow (4,025) (260) (238) (405)

Total cash flow (888.1) (136.7) (427.9) 137.0

Adjustments — — — — Net change in cash (888.1) (136.7) (427.9) 137.0


Cash & cash equivalents 3,412 2,408 3,129 4,824

Current receivables 1,661 1,416 1,466 1,794

Inventories 566.8 510.0 535.4 628.1

Other current assets 201.5 201.5 201.5 201.5 Current assets 5,841 4,535 5,331 7,448

Property, plant & equip. 24,310 22,727 23,496 29,829

Investments 6,458 6,755 7,035 7,315

Intangibles 620.5 620.5 620.5 620.5

Other non-current assets 2,784 6,784 8,334 4,039 Total assets 40,014 41,422 44,818 49,252

Accounts payable 4,515 3,848 4,018 4,883

Short-term debt 5,516 4,639 4,972 5,139

Current provisions — — — —

Other current liabilities 350.0 350.0 350.0 350.0 Current liabilities 10,381 8,837 9,341 10,372

Long-term debt 6,963 7,963 8,463 8,463

Non-current provisions — — — —

Other non-current liab. 4,732 4,409 4,554 5,081

Total liabilities 22,076 21,209 22,357 23,916



IDEAS ENGINE 44

China Power Sector

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2010 2011 2012 2013 2014 2015

12MF P/B multiple

Key ratios and valuation 12/14A 12/15E 12/16E 12/17E

Growth(%)

Sales revenue 2.0 (15.4) 3.7 23.6

EBIT (8.0) (29.7) (0.7) 49.2

Net profit 8.6 (17.1) (3.1) 23.3

EPS 6.2 (17.1) (3.1) 23.3 Margins (%)

EBITDA 37.8 37.0 36.4 39.3

EBIT 24.9 20.7 19.8 23.9

Pre-tax profit 28.5 26.3 25.0 27.8

Net profit 19.7 19.3 18.0 18.0 Valuation metrics (x)

P/E 14.6 17.6 18.2 14.7

P/B 2.61 2.38 2.19 2.00

Dividend yield (%) 2.48 1.99 1.93 2.37

P/CF 9.3 11.9 12.9 10.3

EV/sales 3.57 4.33 4.18 3.28

EV/EBITDA 9.5 11.7 11.5 8.3

EV/EBIT 14.3 20.9 21.1 13.7

ROE analysis (%)

ROE 18.5 14.1 12.5 14.2

ROIC 9.6 7.0 6.2 8.4

Asset turnover (x) 0.32 0.26 0.25 0.29

Interest burden (x) 1.14 1.27 1.26 1.16

Tax burden (x) 0.83 0.88 0.87 0.84

Financial leverage (x) 2.23 2.05 2.00 1.94 Credit ratios

Net debt/equity (%) 50.5 50.4 45.9 34.6

Net debt/EBITDA (x) 1.85 2.51 2.49 1.59

Interest cover (x) 3.02 2.61 2.79 3.93


Source: IBES

0

5

10

15

20

25

30

2010 2011 2012 2013 2014 2015

12MF P/E multiple

IDEAS ENGINE 45

China Power Sector

Initiate coverage with OUTPERFORM

We initiate coverage on Beijing Jingneng Power (Jingneng) with an OUTPERFORM rating and

an SOTP-based target price of Rmb10.0 (including asset injections). Jingneng has a portfolio of

high quality coal-fired power units with >60% of attributable capacity located in Inner Mongolia.

Similar to Mengdian, Jingneng should enjoy resilient utilisation hours for Inner Mongolia assets

but the asset injection angle should be clearer with parentco commitment by 2016.

We use a sum-of-the parts valuation methodology to value Jingneng (existing assets + upside

from asset injections). Unlike national peers where earnings visibility is subject to greater

uncertainties, we value Jingneng's existing assets using the discounted cash flow method,

same as how we value clean energy operators (wind, nuclear, hydro and city gas) given much

stronger visibilities. For the asset injections, Jingneng's parent company—Beijing Energy

Investment Holdings (Jingneng Group)—has committed to inject 4–5GW of its coal-fired power

assets into Jingneng before end-2016. We have assumed 4GW power assets to be injected

before end-2016 and we take the average enterprise value (Rmb5,659/kW) of existing assets

and the transaction price of the previous asset injection of Jinglong as reference. The asset

injection part contributes about 10% to our target price.

Figure 99: Details of target price method Rmb mn Rmb/kW

Enterprise value – existing assets (8% WACC, 2% terminal growth) 57,893 5,706

Net debt 11,686 1,152

Equity value 46,207 4,554

Minority interest 4,540

Equity value to shareholders - existing assets 41,666

Value accretion from asset injection 4,824

Target value 46,490

No. of shares 4,617

Target price 10.0

Coal-fired assets that to be injected (MW) 4,000

Enterprise value 22,824 5,706

Transaction price 18,000 *4,500

Value accretion from asset injection 4,824

* Reference to the transaction price of previous asset injection of Jinglong.


Figure 100: Peer P/B multiple comparison (FY16E)


Figure 101: Peer ROE comparison (FY16E)


1.1

1.5

2.42.6

2.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Wind IPPs Hydro Gas Jingneng

(x)

12.013.5

15.816.9

21.3

0.0

5.0

10.0

15.0

20.0

25.0

Wind IPPs Gas Jingneng Hydro

(x)

IDEAS ENGINE 46

China Power Sector

Figure 102: Historical ROE/leverage


Figure 103: Forward P/B history


Capacity pipeline

Jingneng's FY15/16 profit growth could be subdued with the closure of the profitable

Shijingshan co-gen units (one of the last two coal-based power plants to be shut down within

Beijing) in 1Q15 and no capacity addition until 2H 2016. However, we are still positive on the

outlook of the company's growth in the medium term with five projects (total consolidated

capacity of 5.44GW) in the pipeline.

Figure 104: Summary of key assumptions

2013 2014 2015E 2016E 2017E

Consolidated capacity (MW) 7,450 8,150 7,276 7,976 10,346

YoY 9% -11% 10% 30%

Attributable capacity (MW) 7,402 7,759 6,882 7,302 8,724

YoY 5% -11% 6% 19%

Time-weighted consolidated capacity (MW) 7,450 7,975 7,452 7,776 9,328

YoY 7% -7% 4% 20%

Time-weighted attributable capacity (MW) 2,671 2,671 2,675 2,975 3,906

YoY 0% 0% 11% 31%

Average utilization hours 5,712 5,638 5,540 5,628 5,576

YoY -1% -2% 2% -1%

Power output (mn kWh) 42,555 44,964 41,281 43,763 52,010

YoY 6% -8% 6% 19%


Figure 105: Jingneng's power assets as of end-2014

Project

name

Chinese

name

Type Scale Gross

capacity

(MW)

Province Region Stake Consol

capacity(

MW)

Attribut

capacity

(MW)

Shijingshan* 石景山 Co-gen 880 880 Beijing 100% 880 880

Daihai 岱海发电 Coal-fired 600+630

+2x600

2,430

IM

Wulanchabu 51% 2,430 1,239

Ningdong 宁东发电 Coal-fired 2x660 1,320 Ningxia 65% 1,320 858

Jingtai 京泰发电 Coal-fired 2x330 660 IM Erdos 51% 660 337

Jingyu 京玉发电 Coal-fired 2x330 660 Shanxi 51% 660 337

Kangbashi 康巴什热电 Co-gen 2x350 700 IM Erdos 51% 700 357

Jinglong 京隆发电 Coal-fired 2x600 1,200 IM Wulanchabu 75% 1,200 900

Huaning 华宁热电 Co-gen 2x150 300 IM Wulanchabu 60% 300 180

Tuoketuo 托克托发电 Transmissi

on

6x600 3,600

IM

Hohhot 25% 900

Tuoketuo II 托克托第二

发电

Coal-fired 2x600 1,200

IM

Hohhot 25% 300

Datong 大同发电 Coal-fired 2x600 1,200 Shanxi 40% 480

Sanhe 三河发电 Coal-fired 2x350+2

x300

1,300

Hebei

30% 390

Huaneng

Beijing

华能北京热

电

Coal/Gas 845+923 1,768

Beijing

34% 601

Zhuozhou 涿州 Coal-fired 6 6 Hubei 60% 6 4

Total 17,224 8,156 7,762

* The Shijingshan Co-gen coal-fired power plant was shut down in March 2015.

IM = Inner Mongolia.


0%

20%

40%

60%

80%

100%

120%

0%

5%

10%

15%

20%

25%

2010 2011 2012 2013 2014 2015E 2016E 2017E

ROE (LHS) Net gearing (RHS)

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

(x)

1.7x Avg

1.3x Avg-1SD

0.9x Avg-2SD

2.2x Avg+1SD

2.6x Avg+2SD

IDEAS ENGINE 47

China Power Sector

With the closure of Shijingshan in 1Q2015, Jingneng's attributable capacity will drop 11% to

6.9GW in 2015. The company currently has five projects in the pipeline with total gross

capacity of 5.44GW. Among these projects, we expect Phase I of the Shiyan Co-gen project

(2x350MW) which is already approved, to commence commercial operation in 2H 2016. We

expect all the other projects to start profit contribution before 2019.

Figure 106: Jingneng's project pipeline

Project

name

Chinese

name

Type Scale Gross

capacity

(MW)

Province Stake Consol

capacity(

MW)

Attribut

capacity

(MW)

Shiyan 十堰 Co-gen 4x350 1,400 Hubei 60% 1,400 840

Zhuozhou 涿州 Co-gen 2x350 700 Hebei 60% 700 420

Lulin 吕临 Coal-fired 2x350 700 Ningxia 66% 700 462

Jingtai

Phase II

京泰二期 Coal-fired 2x660 1,320 Inner

Mongolia

51% 1,320 673

Zhongning 宁夏中宁 Coal-fired 2x660 1,320 Ningxia 51% 1,320 673

Total 5,040 5,040 3,068

Source: Company data.

> 50% capacity potential from asset injections

According to Jingneng's announcement in May 2014, Jingneng's parentco, Beijing Energy

Investment Holdings (Jingneng Group) had committed to complete the asset injection of all the

group's remaining coal-fired power assets into Jingneng by the end of 2016. According to our

estimates, the parentco had ~4–5GW coal-fired capacity in operation by 2014, implying >50%

upside versus Jingneng's attributable capacity of 7.3GW as of end-2016.

Figure 107: Power assets under Jingneng Group and the two listcos (GW)

Jinneng Group 17.48

Beijing Jingneng Power (600578.SS) 8.15

Beijing Jingneng Clean Energy (0579.HK) 4.44

Remaining assets 4.89


Track record of asset injection

In 2014, Jingneng acquired a 75% stake in Jinglong Power (28.86% stake from Jingneng

Group and 46.14% stake from Jingneng International) for Rmb639 mn. Jinglong has four coal-

fired units with total consolidated capacity of 1.5GW and total attributable capacity of 1.08GW.

The implied valuation (enterprise value of Rmb4,500/kW) provides a benchmark for the

transaction price of future asset injections, in our view, and we use this to calculate our SOTP-

based target price for Jingneng.

Figure 108: Transaction details on the asset injections of Jinglong Power Generation Company

Total consolidated capacity (MW) 1,500

Attributable capacity (MW) 1,080

Transaction price for the 75% stake (Rmb mn) 639

Equity value attributable to shareholders (Rmb mn) 852

Total equity value - including minority interest (Rmb mn) 1,183

Before transaction/revaluation

Liability (Rmb mn) 5,577

Equity value (Rmb mn) 554

Asset value (Rmb mn) 6,130

After transaction/revaluation

Liability (Rmb mn) 5,577

Equity value (Rmb mn) 1,183


Transaction price

Equity value (Rmb/kW) 789

Enterprise value (Rmb/kW) 4,507


Figure 109: Attributable capacity with (without) asset injection


7,7596,882 7,302

8,724

4,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2014 2015E 2016E 2017E

(MW)

IDEAS ENGINE 48

China Power Sector

Superior utilisation hours in Inner Mongolia

Jingneng has 61% of its attributable capacity in Inner Mongolia. While Inner Mongolia is not

without local issues (delayed transmission construction subduing utilisation of local wind farms

and coal-fired power), Jingneng's coal-fired units in Inner Mongolia have outperformed local

and national benchmarks over the past three years. The utilisation hours of the company's units

in other provinces (Ningxia and Shanxi) are not as high as that of Inner Mongolia, but still much

higher than the national average during 2013 and 2014.





completion



Shanghaimiao -

Shandong

上海庙-山东 WIM 8,000 2017





WIM total 22,000

EIM total 35,000


Largely due to lower coal prices, the current transmission tariff of Jingneng's units targeting

power export, is 2–18% lower than the on-grid tariff of provinces in North China.

Figure 112: Comparison of Inner Mongolia's transmission tariff with on-grid tariffs of North

China provinces (Rmb/kWh)—the tariff is eligible starting April 2015

Inner Mongolia cross-provincial transmission (unit to grid) 0.3458

Beijing 0.3754

Tianjin 0.3815

Hebei (North) 0.3971

Hebei (South) 0.3914

Shanxi 0.3538

Shandong 0.4194


A potential leap into the power retail market—not as high a possibility as Mengdian

Similar to our analysis for Mengdian, Jingneng is also a strong candidate to tap into the

Western Inner Mongolia power retail business. We have calculated that the business could

generate annual profit of Rmb1.9 bn assuming a 3% net margin (based on Western examples),

which is lucrative vs Jingneng's annual profit. However, despite its large presence in Inner

Mongolia, we believe Jingneng is not as well-positioned in participating in the downstream

power retail of Inner Mongolia compared with Mengdian, as Jingneng is ultimately controlled by

Beijing SASAC rather than the Inner Mongolia local government. Meanwhile, Jingneng has

currently 12% of its attributable capacity in Ningxia, which is also listed for the next batch of

power reforms.

Figure 113: Attributable capacity comparison

Note: Listed companies are those under Credit Suisse coverage.


4,500

4,700

4,900

5,100

5,300

5,500

5,700

5,900

2012 2013 2014

Jingneng's units in Inner Mongolia Jingneng's units in other provinces

Inner Mongolia National average

12%6%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Mengdian Jingneng Inner Mongolia

(MW)

IDEAS ENGINE 49

China Power Sector

Figure 114: Western Inner Mongolia—power retail earnings potential


Key risks to our call

More-than-expected cut of coal-fired tariffs and less-than-expected drop of coal

prices

We currently forecast another 0.5 fen per kWh tariff cut for coal-fired power units in Inner

Mongolia (lower than coastal provinces with 1 fen per kWh cut). In the last tariff cut in April

2015, Inner Mongolia also enjoyed a smaller cut (0.67 fen cut in Western Inner Mongolia vs

national average at 2 fen cut). We estimate 1% more tariff cut would lead to 3% FY16E EPS

downside.

Lower-than-expected utilisation hours

Historically, Inner Mongolia has enjoyed higher utilisation hours than the national average. If the

construction of ultra-high-voltage transmission lines is slower than expected, this could impact

the utilisation of Jingneng’s units.

Delay of the existing project construction

If projects are delayed beyond the expected launch dates, then Jingneng will be impacted.

Delay of asset injections



1.92.0

1.9

0.0

0.5

1.0

1.5

2.0

2.5

Western I.M. @ 3% netmargin

Mengdian (FY16 net profit) Jingneng (FY16 net profit)

(Rmb bn)

IDEAS ENGINE 50

China Power Sector

Appendix: Company background Beijing Jingneng Power (Jingneng) was established in 2000 and was listed in the China A-

share market in 2002. The company has expanded its power and heat generation business

from Beijing to Inner Mongolia, Hebei, Shanxi, Ningxia, Hubei, etc., over the years. The parent

company (Beijing Energy Investment Holdings, or Jingneng Group) directly and indirectly holds

a 53.8% stake in the listco.

As of 2014, the company had consolidated power generation capacity of 8.2GW and

attributable capacity of 7.8GW. Around 61% of Jingneng's attributable capacity is located in

Inner Mongolia, with relatively more defensive thermal utilisation given the low fuel cost and on-

grid tariff in Inner Mongolia compared with other provinces.

Figure 116: Jingneng's shareholding structure


80.0%

4.0%

62.1% 9.2% 1.6%

Beijing SASAC

Shenergy Company Ltd

Beijing Energy Investment Holding Co., Ltd (Jingneng Group)

Beijing Jingneng International

Energy Co., Ltd. Group

Beijing Jingneng Power (Jingneng)

Shanxi International Power

IDEAS ENGINE 51

China Power Sector

Longyuan Power (0916.HK / 916 HK)

Wind market leader to recover



■ Maintain OUTPERFORM. We remain positive on the outlook of wind operators which

should enjoy a year of earnings recovery, driven by improving utilisation and supportive

policies. We roll over our DCF-based target price to the following year, which results in our

target price increasing to HK$11.50 (from HK$10.50).

■ Recovering wind speeds. Longyuan Power (LYP) has reported a 17% YoY increase in

wind output (3% utilisation recovery) in 1Q15. Given the much weaker wind resources

recorded in 2Q-3Q14, we believe LYP could see stronger growth for the next two quarters

if wind speed continues to stabilise. Our wind speed monitor has suggested a continuing

recovery of wind speeds in MTD April.

■ A clear beneficiary from RQS. Among different locations, we believe that Hebei and

three Northeast provinces should see a reduction in curtailment and improving utilisation

hours helped by the potential launch of Renewables Quotas System (RQS). LYP has ~27%

capacity exposure to these locations. If the new policy is launched within 1H15, we could

see some earnings upside starting 2H15.

■ Valuation. Our target price of Rmb11.50 implies 18x FY15 P/E (lower than the peak

multiple of 22x P/E) which we regard as justified given renewables have the most

favourable position through the upcoming power reform storm with fast changing dynamics.

Key downside risks are lower-than-expected utilisation hours and further delay in the

RQS policies.

Rating OUTPERFORM* Price (24 Apr 15, HK$) 9.65 Target price (HK$) (from 10.50) 11.50¹ Upside/downside (%) 19.2 Mkt cap (HK$ mn) 77,551 (US$10,007 mn) Enterprise value (Rmb mn) 135,496 Number of shares (mn) 8,036.39 Free float (%) 41.6 52-week price range 10.04–7.17 ADTO - 6M (US$ mn) 16.4 *Stock ratings are relative to the coverage universe in each analyst's or each




The price relative chart measures performance against the MSCI CHINA F

IDX which closed at 8549.44 on 24/04/15

On 24/04/15 the spot exchange rate was HK$7.75/US$1

Performance over 1M 3M 12M Absolute (%) 18.8 10.9 14.3 Relative (%) 0.4 -19.4 -102.6


Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 18,207.2 20,804.7 22,689.5 24,345.4 EBITDA (Rmb mn) 11,559.5 14,141.3 15,810.3 17,185.2 EBIT (Rmb mn) 6,558.9 8,613.1 9,846.3 10,808.5 Net profit (Rmb mn) 2,558.0 4,178.1 5,207.9 5,884.7 EPS (CS adj.) (Rmb) 0.32 0.52 0.65 0.73 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.44 0.52 0.61 EPS growth (%) 24.7 63.3 24.6 13.0 P/E (x) 24.2 14.8 11.9 10.5 Dividend yield (%) 0.8 1.3 1.7 1.9 EV/EBITDA (x) 11.2 9.6 8.7 8.1 P/B (x) 1.9 1.7 1.5 1.4 ROE (%) 8.0 12.0 13.5 13.7 Net debt/equity (%) 165.1 162.2 150.4 137.4


80

100

120

140

160

6

8

10

12



IDEAS ENGINE 52

China Power Sector

Huaneng Renewables Corporation (0958.HK / 958 HK)

Strong year ahead



■ Maintain OUTPERFORM. We remain positive on the outlook of wind operators which

should enjoy a year of earnings recovery, driven by improving utilisation and supportive

policies. We roll over our DCF-based target price to the following year, which results in our

target price increasing to HK$4.0 (from HK$3.80).

■ Recovering wind speeds. Huaneng Renewables (HNR) has reported a 25% YoY

increase in wind output (4% utilisation recovery) in 1Q15. Given the much weaker wind

resources recorded in 2Q-3Q14, we believe HNR could see stronger growth over the next

two quarters if wind speed continues to stabilise. Our wind speed monitor has suggested a

continuing recovery in wind speeds in MTD April.

■ One of the biggest beneficiaries from RQS. Among different locations, we believe that

Hebei and three Northeast provinces should see a reduction in curtailment and improving

utilisation hours helped by the potential launch of the Renewables Quotas System (RQS). If

the new policy is launched within 1H15, we could see some earning upside starting 2H15.

■ Valuation. Our target price implies 16x FY15E P/E (lower than the peak multiple of 17x

P/E) which we regard as justified given that renewables have the most favourable position

through the upcoming power reform storm with fast changing dynamics. We prefer HNR to

LYP given higher EPS sensitivity to top line improvement (4% vs 2%). Key downside

risks are lower-than-expected utilisation hours and further delay in RQS policies.








Performance over 1M 3M 12M Absolute (%) 20.9 19.6 25.0 Relative (%) -0.3 -0.9 -18.3


Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 6,151.1 8,190.1 10,121.3 12,047.7 EBITDA (Rmb mn) 5,616.1 7,406.7 9,105.7 10,796.8 EBIT (Rmb mn) 3,345.8 4,589.1 5,672.4 6,789.4 Net profit (Rmb mn) 1,121.0 1,915.8 2,683.8 3,172.4 EPS (CS adj.) (Rmb) 0.12 0.20 0.28 0.33 Change from previous EPS (%) n.a. 0 -0.0 0 Consensus EPS (Rmb) n.a. 0.18 0.22 0.29 EPS growth (%) 16.3 58.9 40.1 18.2 P/E (x) 21.3 13.4 9.6 8.1 Dividend yield (%) 0.9 1.5 2.1 2.5 EV/EBITDA (x) 11.6 10.7 9.9 9.2 P/B (x) 1.5 1.5 1.3 1.1 ROE (%) 7.5 11.4 14.3 15.1 Net debt/equity (%) 234.3 291.7 310.1 318.5


80

100

120

140

160

2

3

4

5

6



IDEAS ENGINE 53

China Power Sector

Huadian Fuxin Energy Corporation Limited (0816.HK / 816 HK)

Reassessing the different moving pieces



■ Maintain OUTPERFORM. We remain positive on Huadian Fuxin (HDF) given: (1) the wind

power segment should benefit from recovering wind resources and favourable policies

(Renewable Quota system) and (2) nuclear earnings to contribute starting FY15 and the

recent approval of Fuqing 5-6 could provide long-term earning support but (3) coal-fired

power could be under pressure with a larger-than-expected tariff cut in Fujian.

■ Short-term pressure on coal-fired units. With the launch of four nuclear units in Fujian

(Ningde 3-4 and Fuqing 3-4) in the next two years, we expect HDF's coal-fired units to

suffer some near-term pressure in utilisation. Additionally, the recent tariff cut (3 fen/kWh)

in Fujian is the largest in China.

■ Larger exposure in nuclear. HDF currently has a 39% stake in Fuqing Phase 1 and we

forecast nuclear earnings to account for 10% and 15% of its overall earnings in FY15E and

FY16E, respectively. With the approval of Fuqing Phase 2 (probably starting operation in 5–

6 years' time) and the purchase of 10% equity interest from parentco in the Sanmen, the

larger nuclear exposure provides long-term earnings upside for the company.

■ Valuation. Our FY15-16 EPS is cut by 3%/1% as a result of the recent coal-fired tariff

cut and lower coal-fired utilisation hours, but largely offset by two more rate cuts and better

hydro output (as shown in 1Q15). Our DCF-based target price is slightly raised to HK$5.50

to incorporate the valuation contribution from Fuqing Phase II. We see valuation upside from

the current 11x FY15 P/E, which is one of the lowest among wind operators.










Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 13,895.4 16,171.5 17,869.4 19,681.4 EBITDA (Rmb mn) 7,608.6 9,788.1 11,088.1 12,480.9 EBIT (Rmb mn) 4,941.5 6,193.3 6,863.6 7,653.3 Net profit (Rmb mn) 1,867.2 2,746.9 3,337.5 3,911.7 EPS (CS adj.) (Rmb) 0.23 0.33 0.40 0.47 Change from previous EPS (%) n.a. -3.0 -1.4 -0.2 Consensus EPS (Rmb) n.a. 0.31 0.37 0.43 EPS growth (%) 21.5 39.6 21.5 17.2 P/E (x) 14.8 10.6 8.7 7.5 Dividend yield (%) 1.3 1.8 2.9 3.4 EV/EBITDA (x) 10.2 9.2 8.8 8.2 P/B (x) 1.8 1.7 1.5 1.3 ROE (%) 14.2 17.0 18.1 18.5 Net debt/equity (%) 274.9 301.4 296.4 274.9


0

100

200

300

400

2

3

4

5

6



IDEAS ENGINE 54

China Power Sector

Huadian Power International (1071.HK / 1071 HK)

The most expensive H-share IPP



■ Downgrade to UNDERPERFORM. We cut our target price for Huadian Power (HDP) to

HK$6.40 from HK$6.60 based on 1.2x FY16E P/B (previously 1.3x FY15E P/B) as we

now use an average of stable- and slow-demand scenarios to look at sustainable ROE

(11%). In the slow demand scenario, ROE can average ~10% in FY16-20. We downgrade

the stock to UNDERPERFORM as it is the most expensive H-share IPP, in our view. We

have not cut earnings to reflect the slow-demand scenario but further weak signs could

impact valuation ahead of earnings.

■ Reform hurts. China aims for full liberalisation of power pricing and when this happens,

depressed tariffs could force the exit of uncompetitive smaller units together with a large

impairment (before full depreciation). Based on our calculation, around 41% of HDP's

capacity consists of small units (<=300MW) which are not for power and heat co-

generation (less competitive and facing shut-down risks), the highest among national IPPs.

■ Good asset injection potential but timeline is uncertain. Apart from the 5GW thermal

power assets injection (13% of HDP's existing capacity) announced at end-2014 (pricing

details not determined yet), further asset injection opportunity is still under review and there

is no near-term timeline, according to management. However, our earlier analysis on the

parentco's unlisted assets suggests that HDP would have the largest earnings upside

among large-scale coal-fired IPPs if all unlisted assets were injected.

■ Valuation. Current FY15E P/B is higher than its past-five-year average, which could be

reflecting expectations of near-term asset injections. Key upside risks to our call include:

(1) earlier-than-expected asset injections; and (2) less-than-expected tariff cut for coal-fired

power.

Rating (from Neutral) UNDERPERFORM* Price (24 Apr 15, HK$) 8.70 Target price (HK$) (from 6.60) 6.40¹ Upside/downside (%) -26.4 Mkt cap (HK$ mn) 92,043 (US$11,876 mn) Enterprise value (Rmb mn) 189,999 Number of shares (mn) 8,807.29 Free float (%) 50.0 52-week price range 8.98–4.06 ADTO - 6M (US$ mn) 14.5 *Stock ratings are relative to the coverage universe in each analyst's or each









Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 67,781.8 67,447.0 69,395.0 72,600.5 EBITDA (Rmb mn) 22,789.2 22,850.3 22,481.6 23,351.5 EBIT (Rmb mn) 14,723.5 13,769.9 12,471.4 12,465.1 Net profit (Rmb mn) 5,959.0 5,541.2 4,963.8 5,034.3 EPS (CS adj.) (Rmb) 0.68 0.63 0.56 0.57 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.67 0.67 0.67 EPS growth (%) 21.7 -7.0 -10.4 1.4 P/E (x) 10.3 11.0 12.3 12.2 Dividend yield (%) 3.9 3.7 3.3 3.3 EV/EBITDA (x) 8.0 8.3 8.5 8.0 P/B (x) 1.9 1.7 1.6 1.5 ROE (%) 21.8 16.6 13.6 12.8 Net debt/equity (%) 253.3 242.2 224.5 197.4


60

110

160

2

4

6

8

10



IDEAS ENGINE 55

China Power Sector

Huadian Power International (600027.SS / 600027 CH)

Victim of power reform



■ Maintain UNDERPERFORM. We cut our target price for Huadian Power (HDP) to

Rmb5.10 (from Rmb5.20) based on 1.2x FY16E P/B (previously 1.3x FY15E P/B) as we

now use an average of stable- and slow-demand scenario to look at sustainable ROE

(11%). In the slow demand scenario, ROE can average ~10% in FY16-20. We downgrade

the stock to UNDERPERFORM. We have not cut earnings to reflect the slow-demand

scenario but further weak signs could impact valuation ahead of earnings.

■ Reform hurts. China aims for full liberalisation of power pricing and when this happens,

depressed tariffs could force the exit of the uncompetitive smaller units together with a large

impairment (before full depreciation). Based on our calculation, around 41% of HDP's

capacity consists of small units (<=300MW) which are not for power and heat co-

generation (less competitive and facing shut-down risks), the highest among national IPPs.

■ Good asset injection potential but timeline is uncertain. Apart from the 5GW thermal

power assets injection (13% of HDP's existing capacity) announced at end-2014 (pricing

details not determined yet), further asset injection opportunity is still under review and there

is no near-term timeline, according to management. However, our earlier analysis on the

parentco's unlisted assets suggests that HDP would have the largest earnings upside

among large-scale coal-fired IPPs if all unlisted assets were injected.

■ Valuation: Current FY15E P/B is higher than its past-five-year average, which could be

reflecting expectations of near-term asset injections. Key upside risks to our call include:

(1) earlier-than-expected asset injections; (2) less-than-expected tariff cut for coal-fired

power.

Rating UNDERPERFORM* Price (24 Apr 15, Rmb) 8.69 Target price (Rmb) (from 5.20) 5.10¹ Upside/downside (%) -41.3 Mkt cap (Rmb mn) 73,551 (US$ 11,876) Enterprise value (Rmb mn) 189,999 Number of shares (mn) 8,807.29 Free float (%) 50.0 52-week price range 8.94 - 2.94 ADTO - 6M (US$ mn) 14.5 *Stock ratings are relative to the coverage universe in each analyst's or each









Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 67,781.8 67,447.0 69,395.0 72,600.5 EBITDA (Rmb mn) 22,789.2 22,850.3 22,481.6 23,351.5 EBIT (Rmb mn) 14,723.5 13,769.9 12,471.4 12,465.1 Net profit (Rmb mn) 5,959.0 5,541.2 4,963.8 5,034.3 EPS (CS adj.) (Rmb) 0.68 0.63 0.56 0.57 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.70 0.72 0.81 EPS growth (%) 21.7 -7.0 -10.4 1.4 P/E (x) 12.8 13.8 15.4 15.2 Dividend yield (%) 3.1 2.9 2.6 2.7 EV/EBITDA (x) 8.0 8.3 8.5 8.0 P/B (x) 2.4 2.2 2.0 1.9 ROE (%) 21.8 16.6 13.6 12.8 Net debt/equity (%) 253.3 242.2 224.5 197.4


60

80

100

120

140

2

4

6

8

10



IDEAS ENGINE 56

China Power Sector

China Resources Power Holdings (0836.HK / 836 HK)

Unattractive risk-reward



■ Maintain UNDERPERFORM. We cut our target price for China Resources Power (CRP) to

HK$16.30 (from HK$17.00) based on 1.2x FY16E P/B (previously 1.3x FY15E P/B) as

we now use an average of stable- and slow-demand scenario to look at sustainable ROE

(12%) as in a slowing-demand scenario. Meanwhile, CRP does not have parent support on

further asset injections.

■ A potential survivor post consolidation. China aims for full liberalisation of power pricing

and when this happens, depressed tariffs could force the exit of uncompetitive smaller units

together with a large impairment (before full depreciation). Based on our calculation, around

16% of CRP's capacity consists of small units (<=300MW) which are not for power and

heat co-generation (less competitive and facing shut-down risks), which is much lower than

national IPP peers at 19-41%. This could make CRP a post-consolidation survivor but there

can be pain before gain with utilisation/tariff risks in the process.

■ Asset injection not a theme for CRP. Unlike other IPPs such as Huadian Power, Datang

Power and Huaneng Power, the parent company of CRP has little power generation assets

that can be injected into the listco. We expect the organic capacity growth for CRP would

also slow down from 11% CAGR in FY12-14 to 7% in FY15-17E given the prevailing

weakness in thermal power demand.

■ Valuation. Current FY15E P/B is higher than its past five-year average and may not be

sustainable with decreasing ROE (13% in FY17E). Key upside risks to our call include:

(1) better-than-expected thermal power utilisation in coastal regions; and (2) less-than-

expected tariff cut for coal-fired power.

Rating UNDERPERFORM* Price (24 Apr 15, HK$) 23.30 Target price (HK$) (from 17.00) 16.30¹ Upside/downside (%) -30.0 Mkt cap (HK$ mn) 111,810 (US$14,427 mn) Enterprise value (HK$ mn) 204,573 Number of shares (mn) 4,798.70 Free float (%) 36.5 52-week price range 24.5–18.2 ADTO - 6M (US$ mn) 19.7 *Stock ratings are relative to the coverage universe in each analyst's or each









Year 12/14A 12/15E 12/16E 12/17E Revenue (HK$ mn) 70,680.6 78,232.2 84,629.3 88,628.2 EBITDA (HK$ mn) 23,819.7 29,621.4 30,656.3 31,481.1 EBIT (HK$ mn) 15,220.2 20,219.2 20,101.7 19,976.9 Net profit (HK$ mn) 9,214.9 12,150.2 12,064.1 12,049.7 EPS (CS adj.) (HK$) 1.92 2.53 2.51 2.51 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (HK$) n.a. 2.50 2.59 2.60 EPS growth (%) -17.3 31.9 -0.7 -0.1 P/E (x) 12.1 9.2 9.3 9.3 Dividend yield (%) 3.3 3.5 3.8 3.8 EV/EBITDA (x) 8.5 6.9 6.4 6.1 P/B (x) 1.6 1.4 1.3 1.2 ROE (%) 13.6 16.2 14.5 13.3 Net debt/equity (%) 106.5 96.8 81.2 69.0


40

60

80

100

120

0

10

20

30

40



IDEAS ENGINE 57

China Power Sector

Huaneng Power International Inc (0902.HK / 902 HK)

The worst is yet to come



■ One of the top sells. We cut our target price for Huaneng Power (HNP) to HK$7.30

(from HK$7.70) based on 1.0x FY16E P/B (previously 1.2x FY15E P/B) as we now use

an average of stable- and slow-demand scenario to look at sustainable ROE (10.5%). In

the slow demand scenario, ROE can average ~8.7% in FY16-20 given HNP's higher

exposure to smaller units (shutdown risks). We have not cut earnings to reflect the slow-

demand scenario but further weak signs could impact valuation ahead of earnings.

■ Painful industry consolidation. China aims for full liberalisation of power pricing and

when this happens, depressed tariffs could force the exit of uncompetitive smaller units

together with a large impairment (before full depreciation). The tariffs for HNP's direct

supplied power in 2014 (8-10% lower on average) is a very strong early signal of what

market forces can do. Based on our calculation, close to 40% of HNP's capacity consists

of small units (<=300MW) and 89% of such units are not for power and heat co-

generation, which may be less competitive and face shutdown risks.

■ Asset injection limited. After the asset injection at end-2014, we expect limited profitable

assets to be injected into HNP in the near term, based on our analysis of the parentco's

unlisted assets. Besides, the total unlisted thermal capacity represents only 58% of HNP's

capacity (2013 data), lower than peers at over 100%.

■ Valuation unattractive. The stock is currently trading at 1.7x 2015E P/B, much higher

than its five-year historical average of 1.1x, unjustified given our projected long-term ROE

of 11%. The key upside risks to our forecasts are better-than-expected utilisation hours

and later-than-expected tariff cuts.

Rating UNDERPERFORM* Price (24 Apr 15, HK$) 11.30 Target price (HK$) (from 7.70) 7.30¹ Upside/downside (%) -35.4 Mkt cap (HK$ mn) 188,313 (US$24,298 mn) Enterprise value (Rmb mn) 316,747 Number of shares (mn) 14,420.38 Free float (%) 48.7 52-week price range 11.66–7.57 ADTO - 6M (US$ mn) 37.5 *Stock ratings are relative to the coverage universe in each analyst's or each







Performance over 1M 3M 12M Absolute (%) 28.7 0.5 46.0 Relative (%) 7.5 -19.9 2.7


Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 125,406.9 137,510.3 137,490.2 143,090.8 EBITDA (Rmb mn) 36,921.3 39,820.2 37,649.0 38,999.2 EBIT (Rmb mn) 25,274.6 26,748.9 23,560.7 24,464.7 Net profit (Rmb mn) 10,672.2 12,067.0 10,816.0 11,558.8 EPS (CS adj.) (Rmb) 0.75 0.84 0.75 0.80 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.92 0.94 0.91 EPS growth (%) 1.6 11.0 -10.4 6.9 P/E (x) 12.0 10.8 12.0 11.3 Dividend yield (%) 4.2 5.1 4.6 4.9 EV/EBITDA (x) 7.9 8.0 8.2 7.6 P/B (x) 1.8 1.7 1.6 1.5 ROE (%) 16.1 16.6 13.8 13.9 Net debt/equity (%) 167.4 174.3 152.6 132.4


60

80

100

120

6

8

10

12

14



IDEAS ENGINE 58

China Power Sector

Huaneng Power International Inc (600011.SS / 600011 CH)

Stay negative



■ Maintain UNDERPERFORM. We cut our target price for Huaneng Power-A (HNP-A) to

Rmb5.80 (from Rmb6.20) based on 1.0x FY16E P/B (previously 1.2x FY15E P/B) as we

now use an average of stable- and slow-demand scenario to look at sustainable ROE

(10.5%). In the slow demand scenario, ROE can average ~8.7% in FY16-20 given HNP's

higher exposure to smaller units (shutdown risks). We have not cut earnings to reflect the

slow-demand scenario but further weak signs could impact valuation ahead of earnings.

■ Painful industry consolidation. China aims for full liberalisation of power pricing and

when this happens, depressed tariffs could force the exit of uncompetitive smaller units

together with a large impairment (before full depreciation). The tariffs for HNP's direct

supplied power in 2014 (8-10% lower on average) is a very strong early signal of what

market forces can do. Based on our calculation, close to 40% of HNP's capacity consists

of small units (<=300MW) and 89% of such units are not for power and heat co-

generation, which may be less competitive and face shut-down risks.

■ Asset injection limited. After the asset injection at end-2014, we expect limited profitable

assets to be injected into HNP in the near term, based on our analysis of the parentco's

unlisted assets. Besides, the total unlisted thermal capacity represents only 58% of HNP's

capacity (2013 data), lower than peers at over 100%.

■ Valuation unattractive. The stock is currently trading at 2.0x 2015E P/B, much higher

than its five-year historical average of 1.1x, unjustified given our projected long-term ROE

of 11%. The key upside risks to our forecasts are better-than-expected utilisation hours

and later-than-expected tariff cuts.

Rating UNDERPERFORM* Price (24 Apr 15, Rmb) 10.96 Target price (Rmb) (from 6.20) 5.80¹ Upside/downside (%) -47.1 Mkt cap (Rmb mn) 150,480 (US$ 24,298) Enterprise value (Rmb mn) 316,747 Number of shares (mn) 14,420.38 Free float (%) 48.7 52-week price range 10.96 - 5.27 ADTO - 6M (US$ mn) 37.5 *Stock ratings are relative to the coverage universe in each analyst's or each









Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 125,406.9 137,510.3 137,490.2 143,090.8 EBITDA (Rmb mn) 36,921.3 39,820.2 37,649.0 38,999.2 EBIT (Rmb mn) 25,274.6 26,748.9 23,560.7 24,464.7 Net profit (Rmb mn) 10,672.2 12,067.0 10,816.0 11,558.8 EPS (CS adj.) (Rmb) 0.75 0.84 0.75 0.80 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.92 0.95 0.93 EPS growth (%) 1.6 11.0 -10.4 6.9 P/E (x) 14.5 13.1 14.6 13.7 Dividend yield (%) 3.5 4.2 3.8 4.0 EV/EBITDA (x) 7.9 8.0 8.2 7.6 P/B (x) 2.2 2.1 2.0 1.8 ROE (%) 16.1 16.6 13.8 13.9 Net debt/equity (%) 167.4 174.3 152.6 132.4


60

80

100

120

4

6

8

10

12



IDEAS ENGINE 59

China Power Sector

China Yangtze Power Co Ltd (600900.SS / 600900 CH)

Low-cost hydro deserves a premium


■ Preferred hydro play. We moved China Yangtze Power (CYP) back to our top pick among

hydro (previous top pick: Sichuan Chuantou) with lower tariff risks and more competitive

advantage going into the power reform era. We revised up our FY15-16E EPS by 2-4%

following a very strong hydro output in 1Q15 and possible further interest rate cuts (CS

expects two more cuts totalling 50 bp in 2015). We have raised our new DCF-based target

price to Rmb14.80 (Rmb4.10 from injection) with higher profit forecasts and lower cost of

debt assumption (down 50 bp).

■ Decent hydro output in 1Q15. Despite flat YoY generation capacity, CYP's 1Q15 power

output increased 7.4% YoY (Three Gorges power plants registered an 8.1% YoY growth),

mainly driven by stronger-than-expected hydro resources (+17.5% YoY). As a result, we

raised our utilisation hour assumption for Three Gorges from 4,150 hours to 4,250 hours,

but still 3% below the utilisation in 2014 when CYP achieved record high power generation

since listing, to be conservative.

■ Limited tariff risk. With China's recent decision to cut average coal-fired tariff by 5%,

hydro power with retrospective tariff calculation is exposed to tariff risks vs cost-based units

like CYP's existing hydro plants. CYP's average hydro tariff is Rmb0.26/kWh, much lower

than the average coal tariff of Rmb0.4/kWh and peers at Rmb0.32-0.35/kWh.

■ Valuation. The stock is currently trading at 2.4x FY15E P/B, still 23% below peers'

average. We expect strong EPS and DPS upside from potential assets injection of Xiluodu

and Xiangjiaba hydro power plants, which would boost CYP's attributable capacity by 56%.

Maintain OUTPERFORM.

Rating OUTPERFORM* Price (24 Apr 15, Rmb) 12.60 Target price (Rmb) (from 12.20) 14.80¹ Upside/downside (%) 17.5 Mkt cap (Rmb mn) 207,900 (US$ 33,570) Enterprise value (Rmb mn) 262,786 Number of shares (mn) 16,500.00 Free float (%) 20.7 52-week price range 13.26 - 5.68 ADTO - 6M (US$ mn) 129.8 *Stock ratings are relative to the coverage universe in each analyst's or each









Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 22,697.6 26,059.4 25,244.7 24,289.3 EBITDA (Rmb mn) 18,414.2 21,796.5 21,072.3 20,320.1 EBIT (Rmb mn) 12,128.6 15,645.6 15,184.8 14,683.3 Net profit (Rmb mn) 9,070.8 11,604.4 11,825.1 11,203.5 EPS (CS adj.) (Rmb) 0.55 0.70 0.72 0.68 Change from previous EPS (%) n.a. 0 4.4 2.3 Consensus EPS (Rmb) n.a. 0.72 0.69 0.65 EPS growth (%) -12.4 27.9 1.9 -5.3 P/E (x) 22.9 17.9 17.6 18.6 Dividend yield (%) 2.2 2.8 2.9 2.7 EV/EBITDA (x) 14.9 12.1 11.9 11.9 P/B (x) 2.7 2.5 2.3 2.2 ROE (%) 11.9 14.3 13.6 12.1 Net debt/equity (%) 84.2 65.4 48.8 34.8


80

90

100

110

120

4

9

14



IDEAS ENGINE 60

China Power Sector

CGN Power Co., Ltd. (1816.HK / 1816 HK)

Downgrade to UNDERPERFORM with rising risks



■ Downgrade rating. We downgrade CGN Power (CGN) to UNDERPERFORM from

Neutral with China's introduction of peaking functions and possible delays in the Taishan

project. The stock is now trading at 26x FY15 P/E with little yield and one of the most

expensive large-cap global utilities names. We incorporated the newly approved Hongyanhe

Phase II project but the revised DCF-based target price of HK$3.40 still implies significant

downside.

■ Expectations are rich. We believe that the market is forecasting stable utilisation hours

across different locations but the recent reform document suggests the possibility of

peaking functions going forward, which implies possible utilisation downside. China has

started to investigate the equipment risks of the Taishan EPR project (10% of FY17E

attributable capacity) after receiving a warning from the French nuclear authority. We cut

our FY16-17 EPS forecasts by 4-6% on lower utilisation for Hongyanhe (very oversupplied)

after FY16 and delayed operation of Taishan by 12 months.

■ Not a lot left for immediate earnings upside. After Taishan, the parentco still owns the

Fangchenggang (Guangxi) project, if the project is injected, it could create ~9% attributable

capacity upside. Any new approval (such as the case of Hongyanhe Phase II) will take 5-6

years of construction time and contribute no earnings in the medium term. If Taishan is

delayed, it could push back the capacity growth beyond our forecast 2H16.

■ Rarity has a price. As the only listed pure nuclear operator in China, CGN is enjoying a

large scarcity premium, which we see as unjustified with rising earnings risks. Upside

investment risks are higher utilisation hours.

Rating (from Neutral) UNDERPERFORM* [V] Price (24 Apr 15, HK$) 4.48 Target price (HK$) (from 3.20) 3.40¹ Upside/downside (%) -24.1 Mkt cap (HK$ mn) 203,610 (US$ 26,272) Enterprise value (Rmb mn) 276,716 Number of shares (mn) 45,448.75 Free float (%) 41.6 52-week price range 4.65 - 3.07 ADTO - 6M (US$ mn) 86.6 *Stock ratings are relative to the coverage universe in each analyst's or each



[V] = Stock considered volatile (see Disclosure Appendix).





Performance over 1M 3M 12M Absolute (%) 40.9 43.1 — Relative (%) 20.1 22.7 —


Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 20,793.3 21,760.8 26,248.4 32,901.2 EBITDA (Rmb mn) 12,446.3 13,402.2 15,786.2 19,452.9 EBIT (Rmb mn) 9,826.3 10,523.1 12,318.5 14,714.1 Net profit (Rmb mn) 5,712.2 6,185.8 7,151.2 8,193.2 EPS (CS adj.) (Rmb) 0.13 0.14 0.16 0.18 Change from previous EPS (%) n.a. -0.4 -5.5 -4.1 Consensus EPS (Rmb) n.a. 0.14 0.17 0.20 EPS growth (%) -18.0 8.3 15.6 14.6 P/E (x) 28.5 26.3 22.8 19.9 Dividend yield (%) 0.1 1.3 1.5 1.7 EV/EBITDA (x) 17.2 20.6 17.9 14.2 P/B (x) 3.2 3.0 2.7 2.5 ROE (%) 15.5 11.7 12.5 13.1 Net debt/equity (%) 85.5 151.7 145.9 127.4


80

90

100

110

120

2

3

4

5

6

Dec-14 Apr-15


IDEAS ENGINE 61

China Power Sector

CGN Power Co. 1816.HK


Shares (wtd avg.) (mn) 45,449 45,449 45,449 45,449

EPS (Credit Suisse) (Rmb) 0.13 0.14 0.16 0.18

DPS (Rmb) 0.00 0.04 0.05 0.06

BVPS (Rmb) 1.12 1.21 1.31 1.43


Key earnings drivers 12/14A 12/15E 12/16E 12/17E

Time weighted attributable capacity (MW) 7,888 9,943 12,037 13,778

Net generation (bn kWh) 73.9 90.3 116.0 138.6

Target price scenario Scenario TP %Up/Dwn Assumptions

Upside 3.70 (17.31) Average utilization hours of 7,900 for Guangdong, Fujian and Liaoning

Central Case 3.40 (24.11) Average utilization hours of 7,900 for Guangdong; 7,500 for Fujian and

7,000 for Liaoning

Downside 2.10 (53.07) Average utilization hours of 7,000 for Guangdong, Fujian and Liaoning

Rating (from Neutral) UNDERPERFORM* [V]

Price (24 Apr 15, HK$) 4.48

Target price (HK$) (from 3.20) 3.40¹

Upside/downside (%) -24.1

Mkt cap (HK$ mn) 203,610 (US$ 26,272)



Free float (%) 41.6 52-week price range 4.65 - 3.07

ADTO - 6M (US$ mn) 85.3

Source: Credit Suisse Estimates


Sales revenue 20,793 21,761 26,248 32,901

Cost of goods sold 10,703 11,613 14,447 18,786 SG&A 1,469 1,351 1,628 2,060 Other operating exp./(inc.) (3,825) (4,605) (5,613) (7,398) EBITDA 12,446 13,402 15,786 19,453

Depreciation & amortisation 2,620 2,879 3,468 4,739 EBIT 9,826 10,523 12,319 14,714

Net interest expense/(inc.) 3,204 3,198 3,538 4,452 Non-operating inc./(exp.) 715.8 — — — Associates/JV 461 1,307 1,474 1,750 Recurring PBT 7,799 8,632 10,254 12,013

Exceptionals/extraordinaries — — — — Taxes 925 1,119 1,353 1,602 Profit after tax 6,874 7,513 8,901 10,410

Other after tax income — — — — Minority interests 1,162 1,327 1,749 2,217 Preferred dividends — — — — Reported net profit 5,712 6,186 7,151 8,193



EBIT 9,826 10,523 12,319 14,714

Net interest (3,204) (3,198) (3,538) (4,452) Tax paid (925) (1,119) (1,353) (1,602) Working capital (4,859) 203 (562) (1,204) Other cash & non-cash items 6,769 6,382 7,329 9,526 Operating cash flow 7,608 12,791 14,194 16,982

Capex (9,755) (17,409) (11,167) (5,348) Free cash flow to the firm (2,147) (4,617) 3,027 11,634

Disposals of fixed assets — — — — Acquisitions (569) (11,042) — — Divestments — — — — Associate investments — — — — Other investment/(outflows) (60) 653 (2,336) 875 Investing cash flow (10,384) (27,797) (13,504) (4,473)

Equity raised 25,681 — — — Dividends paid (114) (2,041) (2,360) (2,704) Net borrowings 597 4,877 3,626 (3,531) Other financing cash flow (12,222) (6,606) (3,538) (4,452)

Financing cash flow 13,943 (3,771) (2,273) (10,686)

Total cash flow 11,167 (18,777) (1,582) 1,823

Adjustments — — — — Net change in cash 11,167 (18,777) (1,582) 1,823


Cash & cash equivalents 26,712 6,811 5,229 7,052 Current receivables 2,346 2,408 2,903 3,674 Inventories 9,337 9,635 12,181 15,852 Other current assets 3,754 3,754 3,754 3,754 Current assets 42,150 22,608 24,067 30,333

Property, plant & equip. 93,983 169,794 177,255 177,613 Investments 15,026 14,840 18,566 19,357 Intangibles 730 1,747 1,663 1,579 Other non-current assets 5,037 9,012 9,108 9,205 Total assets 156,926 218,001 230,659 238,087

Accounts payable 6,166 6,362 8,044 10,468 Short-term debt 7,341 9,216 12,283 9,754 Current provisions 1,212 1,212 1,212 1,212 Other current liabilities 8,841 8,841 8,841 8,841 Current liabilities 23,559 25,632 30,380 30,275

Long-term debt 70,200 111,606 112,165 111,164 Non-current provisions 2,811 3,195 4,005 4,833 Other non-current liab. 939 2,403 2,403 2,403 Total liabilities 97,510 142,837 148,954 148,675



IDEAS ENGINE 62

China Power Sector

Key ratios and valuation 12/14A 12/15E 12/16E 12/17E

Growth(%) Sales revenue 19.7 4.7 20.6 25.3 EBIT 14.2 7.1 17.1 19.4 Net profit 36.2 8.3 15.6 14.6 EPS (18.0) 8.3 15.6 14.6 Margins (%)

EBITDA 59.9 61.6 60.1 59.1 EBIT 47.3 48.4 46.9 44.7 Pre-tax profit 37.5 39.7 39.1 36.5 Net profit 27.5 28.4 27.2 24.9 Valuation metrics (x)

P/E 28.5 26.3 22.8 19.9 P/B 3.20 2.96 2.72 2.49 Dividend yield (%) 0.07 1.25 1.45 1.66 P/CF 21.4 12.7 11.5 9.6 EV/sales 10.3 12.7 10.7 8.4 EV/EBITDA 17.2 20.6 17.9 14.2 EV/EBIT 21.7 26.3 22.9 18.8 ROE analysis (%)

ROE 15.5 11.7 12.5 13.1 ROIC 8.07 6.12 5.48 6.31 Asset turnover (x) 0.13 0.10 0.11 0.14 Interest burden (x) 0.79 0.82 0.83 0.82 Tax burden (x) 0.88 0.87 0.87 0.87 Financial leverage (x) 2.64 2.90 2.82 2.66 Credit ratios

Net debt/equity (%) 86 152 146 127 Net debt/EBITDA (x) 4.08 8.51 7.55 5.85 Interest cover (x) 3.07 3.29 3.48 3.31


Source: IBES

0

5

10

15

20

25

30

Dec-14 Jan-15 Feb-15 Mar-15 Apr-15

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-14 Jan-15 Feb-15 Mar-15 Apr-15

12MF P/B multiple

IDEAS ENGINE 63

China Power Sector

Companies Mentioned (Price as of 27-Apr-2015)

Beijing Enterprises Holdings (0392.HK, HK$71.65) Beijing Jingneng Power Co Ltd (600578.SS, Rmb8.11, OUTPERFORM, TP Rmb10.0) CGN Power Co., Ltd. (1816.HK, HK$4.55, UNDERPERFORM[V], TP HK$3.4) CLP Holdings Limited (0002.HK, HK$68.25) Cheung Kong Infrastructure (1038.HK, HK$65.1) China Datang Renewables Power (1798.HK, HK$1.31) China Gas Holdings Ltd (0384.HK, HK$14.12) China Resources Gas (1193.HK, HK$27.15) China Resources Power Holdings (0836.HK, HK$23.75, UNDERPERFORM, TP HK$16.3) China Suntien Green Energy Corporation (0956.HK, HK$2.07) China Yangtze Power Co Ltd (600900.SS, Rmb13.09, OUTPERFORM, TP Rmb14.8) Datang International Power Generation Co. Ltd. (0991.HK, HK$4.89) Datang International Power Generation Co. Ltd. (601991.SS, Rmb8.35) ENN Energy Holdings Ltd (2688.HK, HK$58.8) Hong Kong Electric Investments (2638.HK, HK$5.22) Hong Kong and China Gas (0003.HK, HK$18.68) Huadian Fuxin Energy Corporation Limited (0816.HK, HK$4.37, OUTPERFORM, TP HK$5.5) Huadian Power International (600027.SS, Rmb8.89, UNDERPERFORM, TP Rmb5.1) Huadian Power International (1071.HK, HK$8.73, UNDERPERFORM, TP HK$6.4) Huaneng Power International Inc (600011.SS, Rmb11.5, UNDERPERFORM, TP Rmb5.8) Huaneng Power International Inc (0902.HK, HK$11.36, UNDERPERFORM, TP HK$7.3) Huaneng Renewables Corporation (0958.HK, HK$3.4, OUTPERFORM, TP HK$4.0) Inner Mongolia MengDian HuaNeng Thermal (600863.SS, Rmb6.13, OUTPERFORM, TP Rmb8.0) Longyuan Power (0916.HK, HK$9.93, OUTPERFORM, TP HK$11.5) Power Assets Holdings Limited (0006.HK, HK$78.5) SDIC Power Holdings (600886.SS, Rmb12.9) Shenzhen Gas Corporation Ltd. (601139.SS, Rmb12.31) Sichuan Chuantou Energy (600674.SS, Rmb25.94)

Disclosure Appendix

Important Global Disclosures

The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for CGN Power Co., Ltd. (1816.HK)

1816.HK Closing Price Target Price

Date (HK$) (HK$) Rating

13-Jan-15 3.31 3.20 N

* Asterisk signifies initiation or assumption of coverage.

N EU T RA L

IDEAS ENGINE 64

China Power Sector

3-Year Price and Rating History for China Resources Power Holdings (0836.HK)



21-Aug-12 17.06 19.00 O

03-Oct-12 16.78 19.70

19-Mar-13 22.65 23.00

11-Apr-13 23.90 28.00

27-Nov-13 18.78 22.00 *

18-Mar-14 19.24 23.50

21-Apr-14 21.00 23.50 N

18-Aug-14 22.20 25.00

14-Oct-14 20.80 22.00

11-Mar-15 19.22 17.00 U


O U T PERFO RM

N EU T RA L

U N D ERPERFO RM

3-Year Price and Rating History for China Yangtze Power Co Ltd (600900.SS)

600900.SS Closing Price Target Price

Date (Rmb) (Rmb) Rating

30-Apr-12 6.48 8.30 O

01-Nov-12 6.46 8.50

02-May-13 7.13 8.60

02-Sep-13 6.71 8.30

21-May-14 5.97 7.60

22-May-14 6.04 *

26-Sep-14 7.79 9.50 O

13-Jan-15 10.55 12.20

* Asterisk signifies initiation or assumption of coverage. O U T PERFO RM

IDEAS ENGINE 65

China Power Sector

3-Year Price and Rating History for Huadian Fuxin Energy Corporation Limited (0816.HK)



03-Mar-14 4.24 5.20 O *

25-Mar-14 3.80 5.30


O U T PERFO RM

3-Year Price and Rating History for Huadian Power International (600027.SS)



15-Oct-14 3.97 4.92 O

13-Jan-15 6.18 5.70 U

11-Mar-15 5.80 5.10

31-Mar-15 6.80 5.20


O U T PERFO RM

U N D ERPERFO RM

IDEAS ENGINE 66

China Power Sector

3-Year Price and Rating History for Huadian Power International (1071.HK)



15-Oct-14 5.49 6.20 O

13-Jan-15 6.45 7.10

11-Mar-15 6.39 6.40 N

31-Mar-15 6.45 6.60


O U T PERFO RM

N EU T RA L

3-Year Price and Rating History for Huaneng Power International Inc (600011.SS)



14-Oct-14 6.20 5.95 N *

13-Jan-15 8.25 6.90 U

11-Mar-15 7.58 6.20


N EU T RA L

U N D ERPERFO RM

IDEAS ENGINE 67

China Power Sector

3-Year Price and Rating History for Huaneng Power International Inc (0902.HK)



02-Aug-12 5.62 5.85 O

03-Oct-12 5.88 7.10

10-Apr-13 8.37 9.00

24-Apr-13 8.80 9.40

27-Nov-13 7.43 6.40 U *

30-Jul-14 8.73 7.40

14-Oct-14 8.90 7.50 *

13-Jan-15 10.84 8.60

11-Mar-15 8.89 7.70


O U T PERFO RM

U N D ERPERFO RM

3-Year Price and Rating History for Huaneng Renewables Corporation (0958.HK)



03-Mar-14 3.45 4.05 O *

10-Apr-14 2.63 3.65

19-Mar-15 2.79 3.55

10-Apr-15 3.20 3.80


O U T PERFO RM

IDEAS ENGINE 68

China Power Sector

3-Year Price and Rating History for Longyuan Power (0916.HK)



13-May-12 5.84 6.95 O

29-Aug-12 5.08 6.32

05-Nov-12 5.08 6.19

17-Dec-12 5.23 6.10

12-Mar-13 6.51 7.08 N

25-Nov-13 10.10 12.30 O *

03-Mar-14 9.61 12.60

18-Mar-14 7.93 11.90

20-Aug-14 8.57 10.50


O U T PERFO RM

N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutra ls the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional ben chmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe . For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

IDEAS ENGINE 69

China Power Sector

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 43% (53% banking clients)

Neutral/Hold* 38% (50% banking clients)

Underperform/Sell* 16% (44% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to B uy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objective s, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for CGN Power Co., Ltd. (1816.HK)

Method: Our target price of HK$3.40 for CGN Power is based on discounted cash flow method with a WACC of 7% (cost of equity of 11% and cost of debt of 4.5%, debt to equity ratio of 1.5x) as well as zero

terminal growth.

Risk: Key risks to our target price of HK$3.40 for CGN Power includes: (1) drop of utilisaiton hours; (2) change of national nuclear policies; (3) nuclear accidents worldwide; (4) increase in the fuel costs and other costs

as well as (5) delay of construction schedule of nuclear

Price Target: (12 months) for China Yangtze Power Co Ltd (600900.SS)

Method: We arrive at our target price for China Yangtze Power by using DCF model, as we believe operating cash flow best captures the company's mid- to long-term growth profile. Our WACC of 8.3% with

terminal growth of 0% suggest a fair price of Rmb10.7 for the stock (without injection), and a target price of Rmb14.8 (with injection).

Risk: The following are the risks to our target price: (1) volatilities in hydro resources, (2) changes in interest rate (3) a delay in asset injection or no injection would surprise the market negatively.

Price Target: (12 months) for Huaneng Power International Inc (600011.SS)

Method: Our target price of Rmb5.8 for Huaneng Power International Inc (A) is based on a P/B (price-to-book) of 1.0x backed by a sustainable ROE (return on equity) of 10.5%..

Risk: Risks that could cause the share price to diverge from our Rmb5.8 target price for Huaneng Power International Inc include: (1) worse-than-expected thermal utilisation in coastal areas; and (2) coal price rebound.

Price Target: (12 months) for Huadian Power International (600027.SS)

Method: Our target price of Rmb5.1 for Huadian Power International (A) is based on a P/B (price-to-book) of 1.2x backed by a sustainable ROE (return on equity) of 11%.

Risk: Risks that could impede achievement target price of Rmb5.1 for Huadian Power International (A) include: (1) thermal utlisation; and (2) uncertainty on asset injections.

IDEAS ENGINE 70

China Power Sector

Price Target: (12 months) for Huaneng Power International Inc (0902.HK)

Method: We use P/B (price-to-book) valuation to derive our target price of HK$7.30 for Huaneng Power International Inc (H). We assume a long-term ROE (return on equity) of 11.1%, which implies a FY16 P/B of

1.0x.

Risk: Risks to our HK$7.30 target price for Huaneng Power International Inc (H) include: (1) faster-than-expected capacity growth; (2) lower-than-expected coal prices; (3) better-than expected utilisation hours.

Price Target: (12 months) for China Resources Power Holdings (0836.HK)

Method: Our target price of HK$16.30 for CRP is based on the sum-of-the-parts valuation. We use 1.2x FY16 P/B (price-to-book) ratio for the power generation business and DCF (discounted cash flow)

methodology for coal mining.

Risk: Risks to our target price of HK$16.30 for CRP include: (1) Better-than-expected thermal power utilisation in coastal regions; and (2) less-than-expected tariff cuts for coal-fired power.

Price Target: (12 months) for Huadian Power International (1071.HK)

Method: Our target price of HK$6.4 for Huadian Power International (H) is derived from a price-to-book (P/B) methodology with a target P/B of 1.2x backed by a sustainable ROE (return on equity) of 12%.

Risk: Risks that could impede achievement of our target price of HK$6.4 for Huadian Power International include: (1) coal price increase in 2015; (2) worse-than-expected thermal power utlisation in 2015-16; (3)

uncertain details for asset injections.

Price Target: (12 months) for Huaneng Renewables Corporation (0958.HK)

Method: Our HK$ 4.00 target price for Huaneng Renewables is based on discounted cash flow method with a WACC of 7% and terminal growth rate of 2%. We use 12% cost of equity and 5% after tax cost of

debt. The terminal value takes up 90% in our total DCF valuation.

Risk: Key investment risks to our target price of HK$4.00 for Huaneng Renewables include: (1) slower-than-expected capacity growth; (2) volatile wind resources and utilisation hours; and (3) further impairment of

assets.

Price Target: (12 months) for Longyuan Power (0916.HK)

Method: Our HK$11.5 for Longyuan Power Group is based on DCF. Our WACC of 8% is based on a cost of equity of 12% and a post-tax cost of debt of 4%. The terminal growth we assume is 2%.

Risk: Key risks to our target price of HK$11.5 for Longyuan Power include: (1) lower-than-expected capacity growth; (2) worse-than-expected utilisation hours; and (3) potential wind power tariff cut in 2015 or later.

Price Target: (12 months) for Huadian Fuxin Energy Corporation Limited (0816.HK)

Method: Our HK$5.50 target price for Huadian Fuxin Energy Corp. is based on discounted cash flow method with a WACC of 8% and terminal growth rate of 1%. We use 12% cost of equity and 5.5% after tax

cost of debt. The terminal value takes up 80% in our total DCF valuation.

Risk: Key risks to our target price of HK$5.50 for Huadian Fuxin Energy Corp. include: (1) slower-than-expected wind power capacity growth; (2) volatile wind and hydro resources; and (3) more-than-expected cut of

coal-fired tariff.

IDEAS ENGINE 71

China Power Sector

Price Target: (12 months) for Inner Mongolia MengDian HuaNeng Thermal (600863.SS)

Method: The target price of Rmb 8.0 for Inner Mongolia MengDian HuaNeng Thermal is based on discounted cash flow method. We use 8% WACC and zero terminal growth.

Risk: Key risks to our target price of Rmb 8.0 for Inner Mongolia MengDian HuaNeng Thermal includes: (1) lower tariff and (2) lower utilisation hours.

Price Target: (12 months) for Beijing Jingneng Power Co Ltd (600578.SS)

Method: The target price of Rmb 10.0 for Beijing Jingneng Power Co Ltd is based on sum-of-the-parts method. We values existing pipeline at Rmb 8.90/share and asset injection at Rmb 1.00/share.

Risk: Key risks to our SOTP-based target price of Rmb 10.0 for Beijing Jingneng Power Co Ltd includes: (1) lower-than-expected tariff; (2) lower-than-expected utilisation hours; (3) delay of asset injections.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (1816.HK, 0902.HK, 0836.HK, 1071.HK, 0958.HK, 0916.HK, 0816.HK, 600863.SS, 0002.HK, 0006.HK, 0392.HK, 0991.HK, 1038.HK, 1798.HK, 601139.SS, 601991.SS) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (1816.HK, 0958.HK, 600863.SS, 0392.HK, 601139.SS) within the past 12 months.

Credit Suisse has managed or co-managed a public offering of securities for the subject company (1816.HK, 0958.HK, 600863.SS) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (1816.HK, 0958.HK, 600863.SS, 0392.HK, 601139.SS) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (1816.HK, 600900.SS, 600027.SS, 0902.HK, 0836.HK, 1071.HK, 0958.HK, 0916.HK, 0816.HK, 600863.SS, 0002.HK, 0003.HK, 0006.HK, 0392.HK, 0991.HK, 1038.HK, 1193.HK, 1798.HK, 2688.HK, 601139.SS) within the next 3 months.

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (0902.HK, 0916.HK, 0991.HK).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (1816.HK, 600900.SS, 0902.HK, 0836.HK, 1071.HK, 0958.HK, 0916.HK, 0816.HK, 600863.SS, 600578.SS, 0002.HK, 0003.HK, 0006.HK, 0384.HK, 0392.HK, 0956.HK, 0991.HK, 1038.HK, 1193.HK, 1798.HK, 2638.HK, 2688.HK, 600674.SS, 600886.SS, 601139.SS) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (1816.HK, 600011.SS, 0902.HK, 0958.HK, 600863.SS) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

IDEAS ENGINE 72

China Power Sector

Credit Suisse (Hong Kong) Limited ................................................................................................................................... Dave Dai, CFA ; Ran Ma

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

IDEAS ENGINE 73

China Power Sector

References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This information is being distributed by Credit Suisse AG, Dubai Branch, duly licensed and regulated by the Dubai Financial Services Authority (DFSA), and is directed at Professional Clients or Market Counterparties only, as defined by the DFSA. The financial products or financial services to which the information relates will only be made available to a client who meets the regulatory criteria to be a Professional Client or Market Counterparty only, as defined by the DFSA, and is not intended for any other person. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Copyright © 2015 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

UT0400.docx

https://www.credit-suisse.com/who_we_are/en/

Documents

China Power Sector