Chinese Wind Power Sector - dx2025.com

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This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 44. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Global Research 10 April 2019

Chinese Wind Power Sector No winners in this rush installation era

No one benefits from rush installation; downgrade Goldwind from Buy to Sell We cut our earnings forecasts and price targets for both wind turbine generator (WTG) manufacturers and wind farm operators, taking an anti-consensus cautious view on Goldwind, and being neutral on the operators. We expect new wind farm additions will surge in 2019 and 2020 before subsidy cancellation, as major wind farm operators aggressively raised capacity addition guidance in their 2018 results briefings. Contrary to consensus, we think this can hardly benefit Goldwind, as margin pressure eroded the volume benefits, and may be negative to wind farm operators as curtailment, earnings, subsidy payments, balance sheets, and cash flow will be under substantial pressure for two years. We downgrade Goldwind to Sell as the current high valuation multiples reflect volume upside but not margin pressure. We are neutral on wind farm operators as we think the impact of rush installation is largely priced in.

Rush installation ahead, but Goldwind can hardly benefit We raise our 2019/20 wind power connection forecasts from 22/23GW to above 30GW, suggesting large growth from 21GW in 2018. We think rush installation is justified as, even allowing for delays in grid connection and subsidies, project internal rates of return (IRR) in southern China are still better at 7.4% if installed now, than 5% if installed after 2020. However, we expect Goldwind's gross margin erosion could be worse than we had expected, from 25% in 2017 to 15/17% in 2019/20E. This will lower its WTG EBIT margin to 2-4%.

Two dark years for wind farm operators; downgrade Longyuan and Huaneng We believe wind farm operators will suffer from 1) reduced earnings as curtailment will likely worsen; 2) deteriorating cash flow with larger subsidy deficits and increased capex; 3) increased gearing. We cut our 2019/20 earnings forecasts by cutting utilisation hours from 2,200 to 2,000. We expect they generate negative FCF for 2019/20E from positive FCF in 2018. We downgrade Longyuan and Huaneng Renewable from Buy to Neutral.

What's priced in? We see valuation downside for Goldwind as the implied 2020E PE for its WTG business has already exceeded that of the 2015 upper cycle. For wind farm operators, we estimate that the returns profiles for 2019/20 will be similar to that in 2015. We believe valuations could remain close to the 2015 trough for some time at 0.7x P/BV, close to current valuations. Figure 1: Valuation summary and rating changes

Rating Current Price target Upside 2019E EPS 2020E EPS 2021E EPS

New Old price New Old Chg

New Old Chg New Old Chg New Old Chg

Goldwind-A Sell Buy Rmb13.80 Rmb11.50 Rmb17.00 -32% -17% 0.51 0.66 -22% 0.67 0.82 -19% 0.61 0.88 -31%

Goldwind-H Sell Buy HK$10.28 HK$8.50 HK$12.00 -29% -17% 0.51 0.71 -28% 0.67 0.88 -25% 0.61 0.95 -35%

Longyuan Neutral Buy HK$5.47 HK$6.00 HK$8.70 -31% 10% 0.48 0.80 -40% 0.52 0.88 -41% 0.67 0.97 -30%

HNR Neutral Buy HK$2.24 HK$2.40 HK$3.00 -20% 7% 0.24 0.36 -31% 0.27 0.38 -28% 0.33 0.40 -16% Region Reuters Mkt cap PE P/BV ROE Dividend yield

code Rating Rmb m 19E 20E 19E 20E 19E 20E 19E 20E

Goldwind-A CN 002202.SZ Sell 58,306 26.9x 20.7x 1.9x 1.8x 8.1% 9.0% 1.8% 1.9%

Goldwind-H CN 2208.HK Sell 37,172 17.2x 13.2x 1.2x 1.1x 8.1% 9.0% 2.7% 2.9%

Longyuan CN 0916.HK Neutral 37,621 9.8x 8.9x 0.8x 0.7x 8.4% 8.6% 2.0% 2.2%

HNR CN 0958.HK Neutral 20,257 7.9x 7.1x 0.7x 0.6x 9.1% 9.3% 1.9% 2.1% Source: Company data, UBS estimates. Note: price as of 9 April 2019; Goldwind-A's EPS change contains changes in share outstanding.

Equities

China

Electric Utilities

Abigail Sun Analyst

S1460518040002 [email protected]

+86-213-866 8637

Ken Liu Analyst

[email protected] +852-2971 7516

Simon Powell Analyst


Chinese Wind Power Sector 10 April 2019

2

Contents

OUR THESIS IN PICTURES .................................................................... 4

PIVOTAL QUESTIONS ........................................................................... 5

Q: Will wind power installation volume surge in 2019/20? .......................... 5

Q: Will curtailment continue to ease or turn worse? .................................... 8

Q: Can wind farm operators speed up the collection of subsidy receivables?

.................................................................................................................. 10

WHAT'S PRICED IN? .......................................................................... 13

Company pages .............................................................................. 14

Xinjiang Goldwind Science & Technology .................................................. 15

Xinjiang Goldwind Science & Technology-A ............................................... 28

China Longyuan Power .............................................................................. 29

Huaneng Renewable Corporation .............................................................. 36

Abigail Sun Analyst


+86-213-866 8637

Ken Liu Analyst





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Chinese Wind Power Sector

P2

UBS Research THESIS MAP a guide to our thinking and what's where in this report OUR THESIS IN PICTURES

MOST FAVOURED LEAST FAVOURED

Longyuan Goldwind A/H

PIVOTAL QUESTIONS Q: Will wind power installation volume surge in 2019/20? Yes. We think wind power installation could surge significantly in 2019/20 ahead of the subsidy cancellation at end-2020. We forecast 30/32GW wind power connection and 31GW/33GW wind power installation in 2019/20. more

Q: Will curtailment continue to ease or become worse? Worse. We believe the glut of new wind farm supply is likely to increase the pressure for the grid to absorb the renewable power. Utilization is likely to be suppressed in 2019/20, which would be bad for earnings. We think curtailment may go back to the 2016 level of around 15%. more

Q: Can wind farm operators speed up the collection of subsidy receivables? Unlikely. The rush installation for new wind farms in 2019/20 will likely exacerbate the subsidy deficits from the current one year or eighteen months to almost two years. We expect balance sheets and cash flows for wind farm operators to further deteriorate. more

UBS VIEW We believe the operating environment for wind farm operators will significantly worsen in 2019/20 as most companies rush ahead to install new wind projects. We believe they will suffer from 1) reduced earnings as curtailments will likely worsen; 2) deteriorating cash flows, with larger subsidy deficits and increased capex; and 3) increased gearing.

EVIDENCE 1) Most managements of wind farm operators have increased their guidance for expansion plans in 2019 and 2020; 2) our renewable subsidy funds calculation shows that deficits will escalate in the next two years as capacity expansion is accelerating.

WHAT'S PRICED IN? The implied 2020E PE for Goldwind's WTG business has already gone above the level in 2015 upper cycle; we think market has priced in volume upside but not margin contraction. Trading at 0.7x 12-month forward P/BV for wind farm operators, we believe the market has priced in most of the negatives potentially brought by rush installations. Our 2019/20 ROE forecasts are similar to the levels in 2015. The current valuation multiples are similar to those back in 2015. more

Installation and connection could surge to over 30GW in 2019/20E

Source: Reuters, Company data, UBS estimates

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Chinese Wind Power sector UBS Research

P3

OUR THESIS IN PICTURES return

China's wind power capacity addition should surge in 2019/20E

Rush installation could drive curtailment ratio to increase again

And subsidy receivable days will also increase, leading to deteriorated cash flows for wind farm operators

However, Goldwind can hardly benefit due to significant margin contraction

Sources for exhibits above: Company data, UBS Research

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Sector Q1

PIVOTAL QUESTIONS return

Q: Will wind power installation volume surge in 2019/20? UBS VIEW

Yes. We think wind power installation could surge significantly in 2019/20 ahead of the subsidy cancellation by end-2020. This is because downstream operators have large amounts of projects on hand that have been approved but that are not operated, and they are keen to install as much as possible before approved subsidies expire by end-2020. We forecast 30/32GW wind power connection and 31GW/33GW wind power installation in 2019/20.

EVIDENCE

Major wind farm operators all raised their capacity expansion guidance for 2019/20 during the 2018 result briefings.

Our IRR analysis suggests that projects with a Feed in Tariff (FiT) can generate higher IRR, even considering the impact of higher curtailment, delayed grid connection, and subsidy payments.

WHAT'S PRICED IN?

We think the market has largely priced in bullish installation volume for WTG manufacturers, but has not yet fully factored in the impact for downstream wind farm operators.

Wind power installation likely to surge in 2019/20

We think wind power installation could surge in 2019/20 ahead of the subsidy cancellation. This is because downstream operators have large amounts of projects on hand which that have been approved but that are not operated, and they are keen to install as much as possible before approved subsidies expire by end-2020. We forecast 30/32GW wind power connection and 31GW/33GW wind power installation in 2019/20

Figure 2: Wind power installation and connection in China

Source: National Energy Administration (NEA), Chinese Wind Energy Association (CWEA), UBS estimates

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Large numbers of projects need to be installed in 2019/20

According to the tariff policy (Figure 4), wind farms that have been approved before end-2018 can enjoy the FiT, but will face a potential tariff cut if they do not start construction within two years after the approval.

We think that wind projects displaying the following two criteria will rush to install: 1) projects approved before 2018, which can enjoy the 2016 FiT if starting construction by end-2019; and 2) projects approved in 2018, which can enjoy the 2018 FiT if starting construction by end-2020.

According to Goldwind, there were 42GW projects with financing secured or under construction and 46GW projects being approved but not yet starting construction at end-2018 (Figure 3). We think this suggests a large number of rush installations in 2019/20.

Figure 3: Wind power projects with FiT

Source: Goldwind PPT.

Figure 4: Wind power tariff changes

Tariff Policy

Announcement

time

Average cut

(Rmb/kWh) Criteria

2015 cut 12.2014 (0.02) Approval after 1.1.2015; or approval before 1.1.2015 and connected after 1.1.2016

2016 cut 12.2015 (0.02) Approval after 1.1.2016; or approval before 1.1.2016 but have not started construction by end-2017

2018 cut 12.2016 (0.05) Approval after 1.1.2018; or approval before 1.1.2018 but have not started construction by end-2019

bidding tariff 05.2018 TBC New wind farm projects in provinces that has not published 2018 wind power construction plan by the

announcement day; and all approval after 2019

Grid parity na >0.1 Grid parity projects are encouraged

Source: NEA

IRR analysis: operators will rush to install, especially in southern China

We think rush installation is bad for the industry, as it will cause problems such as delays in grid connection, increases in curtailment ratio, delays in subsidies, and so on. However, our IRR analysis shows that, even with all these concerns, wind farm operators still have incentives to install before the deadlines and secure the FiT, especially in southern China.

Approved 46GW 52%

Financing secured/under construction

42GW 48%


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In Figure 5 and Figure 6, we analyse wind projects’ IRRs under different scenarios, for regions in southern and northern China (we use Inner Mongolia as an example), respectively.

We assume that 1) if the projects are constructed before a deadline, it could enjoy FiT but will face a one-year delay in grid connection and subsidy payment, and a higher curtailment ratio in northern China; 2) if the projects are constructed after 2020, it is applied to local coal-fired tariffs with no subsidy, but they will face no curtailment or delays in grid connection.

Our analysis shows that wind farms in southern China will have large incentives to install in a rush, as their project IRR may drop by 2.4ppts under grid parity. But in areas such as Inner Mongolia, where curtailment is a concern and current subsidies are low, wind farms will not be hurt much under grid parity.

Figure 5: Wind project IRR under different scenarios – South (Region IV)

Capex

(Rmb

m/MW)

Tariff

(Rmb/kWh)

Subsidy

(Rmb/kWh)

Utilization

hours Delay in connection? Delay in subsidy? IRR

Normal case 8.0 0.570 0.180 2,100 No 1 year 9.10%

Constructed by 2020 8.0 0.570 0.180 2,100 1 year 2 year 7.40%

Construct after 2020 7.5 0.390 - 2,100 No No 5.00%

Source: UBS estimates

Figure 6: Wind project IRR under different scenarios – Inner Mongolia (Region I)

Capex

(Rmb

m/MW)

Tariff

(Rmb/kWh)

Subsidy

(Rmb/kWh)

Utilization

hours Delay in connection? Delay in subsidy? IRR

Normal case 7.0 0.400 0.107 3,000 No 1 year 11.00%

Constructed by 2020 7.0 0.400 0.107 2,850 1 year 2 year 8.30%

Construct after 2020 6.5 0.293 - 3,150 No No 8.20%

Source: UBS estimates

Downstream operators have all raised installation targets for 2019/20

Major wind farm operators all raised their installation targets for 2019/20 during the 2018 result briefings (Figure 7), as they all have large number of projects on hand that have been approved but that are not operated yet. And over 50% of these projects are in southern China.

Figure 7: Major operators plan to accelerate installation in 2019/20

Company Projects – approved but not operated Guidance on capacity expansion

Longyuan 7GW 1.2-1.5GW in 2019, more in 2020

Huaneng Renewable 4.2GW 1.6GW in 2019, more in 2020

Huaneng Power Na >2GW in 2019

CR Power 9GW 1.7GW in 2019, 2.3GW in 2020

Source: Company guidance


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Sector Q2


Q: Will curtailment continue to ease or turn worse? UBS VIEW

Worse. We believe the glut of new wind farm supply is likely to increase the pressure for the grid to absorb the renewable power. Utilisation is likely to be suppressed in 2019/20, which would be bad for earnings. We expect the curtailment ratio to go back to the 2016 level of around 15%.

EVIDENCE

We looked at the level of curtailment relative to power demand and the new capacity additions for renewables, and believe that curtailment may turn to be as bad as the level of 2016.

WHAT'S PRICED IN?

We believe investors have priced in modest curtailment risks.

The curtailment ratio is usually a function of overall power demand growth and the speed of capacity additions. Weak power demand growth and high capacity additions usually could result in a high curtailment ratio, and vice versa.

Figure 8 and Figure 9 show the historical curtailment ratio for wind farms compared with power demand growth and wind farm additions. As we expect new additions in 2019/20 could reach levels similar to those in 2015 with weakening power demand to potentially 4-5%, we believe the curtailment ratio for 2019/20 could be similar to that in 2016 at around 15%. This is a substantial increase from the latest Q418 curtailment ratio of only 5%.

We therefore believe that utilisation hours for wind farms will be under pressure, at least for two consecutive years. We expect utilisation hours for 2019/20 to be similar to the levels in 2016 for listed companies, at around 2,000 hours.

Figure 8: Curtailment ratio for wind farms Figure 9: National capacity addition for wind farms versus national power demand growth

Source: NEA Source: CEIC, UBS estimates

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Zone IV means no curtailment?

Although most of the new projects added are in Zone IV, where curtailment was almost zero, we believe the inflow of new projects in Zone IV developed regions could likely crowd out the demand of renewable power imports in Zones I to III. This situation could be similar to those in 2015 and 2016, when most of the new projects added were at non-curtailment regions in Zone IV, and the overall wind power curtailment ratio still increased substantially.


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Sector Q3


Q: Can wind farm operators speed up the collection of subsidy receivables? UBS VIEW

Unlikely. The rush installation for new wind farms in 2019/20 is likely to exacerbate the subsidy deficits. We expect balance sheets and cash flows for wind farm operators to further deteriorate.

EVIDENCE

Our calculation shows that the annual subsidy deficit will continue to escalate to around Rmb108bn in 2020E, from Rmb66bn in 2018, with an increase of 63% in two years. It will be increasingly difficult for the wind farm operators to receive subsidies in a timely manner, and we expect receivable days to further increase from the current one year or eighteen months to close to two years.

WHAT'S PRICED IN?

We believe investors have largely priced in long receivable days, but may not have expected this to further exacerbate.

Annual subsidy deficit could increase by 48% from 2018 to 2020

As shown in Figure 2, the annual subsidy deficit grew from Rmb27bn in 2016 to Rmb66bn in 2018. We estimate that the annual deficit could rise to and peak out at Rmb105bn by the end of 2020, before it gradually grinds down to below Rmb100bn by 2025E.

This exercise shows that 1) in 2019/20E, the annual subsidy deficit will increase to Rmb88/98bn p.a., almost 33%/48% increases compared to that of 2018, This implies the subsidy receivable days will likely lengthen from currently around a year or eighteen months to almost two years; 2) cash flow will likely deteriorate substantially for wind farm operators because the capex they spent is unlikely to have cash coming back, at least for the subsidies, until two years later.

Our estimate assumes that the capacity addition will accelerate to 30/32GW p.a. for 2019/20 for wind farms, and that the subsidies for new projects in 2021 and after will be completely gone, such that the subsidy deficit will start to shrink in 2022 as the utilisation rate stabilises in the long term.


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Figure 10: Renewable subsidy account calculation

(Rmb/kWh) 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Surcharge income (cash inflow)

Renewable energy surcharge (Rmb/kWh)

Non-residential/agricultural 0.019 0.019 0.019 0.019 0.019 0.019 0.019 0.019 0.019 0.019

Residential 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001

Agricultural - - - - - - - - - -

Power consumption (kWh bn)

Non-residential/agricultural 5,007 5,323 5,750 6,066 6,339 6,592 6,856 7,130 7,415 7,712

Residential 805 870 969 1,022 1,068 1,110 1,155 1,201 1,249 1,299

Agricultural 108 116 127 134 140 145 151 157 164 170

Implied surcharge income (Rmb bn) 96 102 110 116 122 126 131 137 142 148

Subsidy paid (cash outflow)

Wind power generation (kWh bn) 241 305 366 384 443 523 602 655 708 760

Solar power generation (kWh bn) 68 119 155 244 307 379 456 537 621 708

Wind subsidy (Rmb/kWh) 0.22 0.22 0.21 0.21 0.20 0.18 0.17 0.15 0.14 0.13

Solar subsidy (Rmb/kWh) 0.57 0.51 0.46 0.40 0.33 0.27 0.23 0.19 0.17 0.15

Total subsidy required (91) (127) (148) (175) (189) (197) (204) (205) (206) (207)

Actual surcharge collected 65 71 83 87 91 95 99 103 107 111

Collection rate 68% 69% 75% 75% 75% 75% 75% 75% 75% 75%

Annual surplus / (deficit), based on actual collection rate (27) (56) (66) (88) (98) (102) (105) (103) (100) (96)

Accumulated (51) (107) (173) (261) (359) (462) (567) (670) (769) (865)

Wind capacity - year-end (GW) 151 167 188 218 250 275 300 325 350 375

New additions (GW) 20 16 21 30 32 25 25 25 25 25

Solar capacity - year end (GW) 77 127 172 217 272 332 395 461 529 599

New additions (GW) 35 50 44 45 55 60 63 66 68 70 Source: UBS estimates

A key challenge is the delay of subsidies to renewables in China. China renewable energy operators, wind and solar mostly, are entitled to tariff subsidies that have been in place since 2009 and 2011, respectively. The tariffs that renewable energy operators are entitled to are made of two parts—benchmark coal-fired tariffs (around Rmb0.4/kWh) and the tariff subsidies on top of this, which add up to the total tariffs. The benchmark coal-fired tariffs are settled by the grid company in a timely manner, but the tariff subsidies, which are roughly Rmb0.2/kWh for wind and Rmb0.6/kWh for solar, are settled by the Ministry of Finance via the renewable energy subsidies fund.

According its original plans, the Ministry of Finance was supposed to pass on the tariffs subsidy burden to end-users, as end-users have to pay a renewable energy surcharge whenever they consume a unit of electricity. This surcharge should form an inflow of funds to the renewable energy subsidies fund, while the tariffs subsidies are the outflow of funds from it.

However, over the past few years, the fund has been facing severe deficits. This is because the amount of fund inflow has been growing slowly at the pace of overall power demand growth in the mid-single digits, while the end-user surcharge per one unit of electricity has remained unchanged. On the other hand, the amount of fund outflow has grown significantly, in the double digits, given strong growth in solar and wind capacity. In addition, some end-users have avoided paying the surcharge to the renewable energy fund. These are mostly captive power plants that do not pay electricity bills to the grid companies—thus, they have been able to indirectly avoid the surcharge payments.


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Cash flow for wind farm operators will deteriorate

We believe cash flow for wind farm operators will be under substantial pressure in 2019 and 2020. This is because operating cash flow could be suppressed, as wind farm utilisation hours were reduced and the current subsidies receivable days of around a year to eighteen months could surge to close to two years. In addition, investing cash outflow will increase as most wind farm operators under our coverage have increased their capacity expansion plans for 2019/20 to get their projects completed before the subsidies are cut.

Figure 11 shows the free cash flow projection for wind farm operators; most of them will turn negative in 2019 and 2020 before recovering in 2021 and 2022. Figure 12 shows the accelerated capacity addition plan in 2019/20 for most operators.

Figure 11: Free cash flows for major wind farm operators under UBS coverage (Rmb m)

Source: Company data, UBS estimates

Figure 12: Capacity addition (MW) for major listed wind farm operators


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Sector priced in

WHAT'S PRICED IN? return

For wind equipment makers, please refer to the link below for the separate What's Priced In? section given the A- and H-share valuation differences (link)

Wind farm operators are trading at around 0.7x forward P/BV at around 8-9% ROE; this is similar to the levels when curtailment was relatively a serious issue in 2015-16 and the companies delivered similar ROE. As we forecast ROE for wind farm operators to stay low at least for 2019 and 2020, we believe the current valuations multiples are justified and most of the concerns are largely priced in.

Figure 13: Longyuan 12-month forward P/BV vs ROE Figure 14: Huaneng Renewable 12-month forward P/BV vs ROE

Source: Company data, Bloomberg, UBS estimates Source: Company data, Bloomberg, UBS estimates

Figure 15: Earnings sensitivity of Chinese wind farm operators

Longyuan Huaneng Renewable

2019E 2020E 2019E 2020E

Wind segment

50 hours (0.5ppt) increase in wind utilisation rate 8.0% 7.7% 7.9% 8.1%

1% cut in wind tariffs for new wind farms -0.2% -0.7% -0.4% -0.4%

1% cut in wind tariffs for all wind farms -11.7% -22.9% -12% -12.5%

25bps increase in interest costs -2.7% -5.5% -3.6% -3.8%



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Company pages

abc Global Research 10 April 2019


15

Xinjiang Goldwind Science & Technology No gold from this rush; downgrade to Sell

Downgrade to Sell on WTG margin concerns We downgrade Goldwind-H from Buy to Sell, as we think the market has priced in the wind turbine generator (WTG) volume surge in 2019 but ignored margin contractions. While Goldwind's external WTG sales volume could increase to over 8GW in 2019/20 due to rush installation, we think larger-than-expected margin contraction could fully offset the benefit. We forecast Goldwind's recurring earnings to decline 3% in 2019, and to peak in 2020E with 30% YoY growth. We also think its net gearing could reach 80% in 2020E, from 65% in 2015, due to lower cash inflow from WTG, higher downstream capex and longer subsidy delays. The current valuation of its WTG business has already exceeded that in the 2015 cycle, and we think that risk is skewed to the downside.

2019 WTG gross margin could be lower than expected Goldwind's 2018 WTG gross margin was down 6ppts, larger than our expectation, and we think this trend will continue in 2019. This is because industry average bidding prices for 2.0MW/2.5MW WTG dropped by 14/13% YoY in 2018, and most of these orders will be delivered in 2019. We estimate this will pressure down Goldwind's overall ASP by 6% in 2019E, driving its gross margin to go down by another 4ppts to 15% in 2019E. This suggests its WTG EBIT margin could drop to 2% in 2019E, making any impact from volume growth almost irrelevant.

Valuation for peak year does not look attractive Goldwind-H is now trading at 17x/13x 2019/20E PE. While this still looks reasonable, we think investors need to notice that about 40% of Goldwind's net profit will come from its wind farm business, which deserves a lower PE. Our analysis shows that implied PE for Goldwind's WTG business in 2019/20E is already 28x/18x, much higher than the 15.5x in 2015. That means, even for its peak earnings in 2020E, the PE has already exceeded the historical peak, not mentioning that 1) Goldwind's earnings will decline in 2021E, and 2) its WTG EBIT margin is 2-4% in 2019/20E versus 13% in 2015.

Valuation: downgrade to Sell; lower price target from HK$12.00 to HK$8.50 We base our price target on a sum-of-the-parts (SOTP) methodology, with valuation of each segment based on DCF. We cut our price target by about 30% due to 1) larger WTG margin contraction; 2) higher curtailment and longer subsidy delay in 2019-21. Our price target implies 14.5x 2020E PE for WTG sales, close to the 2015 peak, and 6x 2020E PE for wind farms, similar to other operators.

Equities

China

Electric Components & Equipment

12-month rating Sell Prior: Buy

12m price target HK$8.50

Prior: HK$12.00

Price HK$10.28

RIC: 2208.HK BBG: 2208 HK

Trading data and key metrics 52-wk range HK$13.98-5.30

Market cap. HK$43.4bn/US$5.54bn

Shares o/s 4,225m (ORD)

Free float 85%

Avg. daily volume ('000) 10,252

Avg. daily value (m) HK$93.9

Common s/h equity (12/19E) Rmb30.2bn

P/BV (12/19E) 1.2x

Net debt / EBITDA (12/19E) 4.1x

EPS (UBS, diluted) (Rmb) From To % ch Cons.

12/19E 0.71 0.51 -28 0.81 12/20E 0.88 0.67 -25 0.99 12/21E 0.95 0.61 -35 1.18

Abigail Sun Analyst


+86-213-866 8637

Wenzhuo Du Analyst


+86-213-866 8960

Alex Liu Analyst


+86-213-866 8857

Highlights (Rmbm) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Revenues 26,174 24,971 28,590 36,857 40,161 33,060 34,957 35,756 EBIT (UBS) 3,685 3,310 3,360 3,423 4,381 4,388 4,784 5,103 Net earnings (UBS) 2,681 2,271 2,241 2,166 2,810 2,581 2,933 3,208 EPS (UBS, diluted) (Rmb) 0.70 0.60 0.59 0.51 0.67 0.61 0.69 0.76 DPS (Rmb) 0.15 0.20 0.30 0.24 0.26 0.39 0.43 0.46 Net (debt) / cash (11,320) (15,650) (18,779) (20,741) (30,230) (28,007) (26,727) (25,147)

Profitability/valuation 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E EBIT margin % 14.1 13.3 11.8 9.3 10.9 13.3 13.7 14.3 ROIC (EBIT) % 14.9 10.7 9.3 8.0 8.3 7.5 8.2 8.7 EV/EBITDA (core) x 7.5 8.8 9.9 10.6 9.3 9.4 8.4 7.7 P/E (UBS, diluted) x 9.9 13.1 13.9 17.2 13.2 14.4 12.7 11.6 Equity FCF (UBS) yield % (9.2) (6.6) (8.9) (14.7) (21.5) 10.6 9.3 10.4 Net dividend yield % 2.1 2.6 3.6 2.8 2.9 4.4 4.8 5.2 Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of HK$10.28 on 09 Apr 2019 18:27 HKT


16

Goldwind - H Sell (Price target HK$8.50)

CO1 P2

UBS-S Research THESIS MAP

a guide to our thinking and what's where in this report

PIVOTAL QUESTIONS Q: Will wind power installation volume surge in 2019/20? Yes. We think wind power installation could surge significantly in 2019/20 ahead of the subsidy cancellation. We forecast 30/32GW wind power connection and 31GW/33GW wind power installation in 2019/20. We expect Goldwind's external WTG sales volume to reach 8.4GW and 8.9GW in 2019E and 2020E, respectively. more

Q: Will WTG margin contraction fully offset the impact from volume growth in 2019? Likely. We think Goldwind's 2019 WTG gross margin faces large pressure because the industry average WTG bidding price dropped by over 10% YoY in 2018, and most of these orders will be delivered in 2019. We estimate the price pressure will bring down its WTG gross margin to around 15% and EBIT margin to around 2% in 2019E. more

Q: Will curtailment continue to ease or worsen? Worsen. We believe the glut of new wind farm supply is likely to increase the pressure for the grid to absorb the renewable power. Utilisation is likely to be suppressed in 2019/20 which is bad for earnings. We expect receivable days to surge from a year or eighteen months to almost two years. more

UBS-S VIEW

We downgrade Goldwind-H to Sell on margin concerns. We expect its external WTG sales volume to increase to over 8GW in 2019/20E due to rush installation, but larger-than-expected margin contraction could fully offset the benefit. Its wind farm business should face strong growth in capacity, but higher curtailment ratios and subsidy delays. We forecast Goldwind's recurring earnings to decline 3% in 2019, and to peak in 2020E with 30% YoY growth.

EVIDENCE

Our IRR analysis shows that even with delays in subsidy and grid connection, the operators are still incentivized to rush install to secure the FiT. Our margin analysis shows that Goldwind's WTG sales volume growth in 2019E will be fully offset by a margin squeeze.

WHAT'S PRICED IN? Current share price-implied PE for WTG business is 18x for 2020E peak earnings, much higher than the 15x in 2015, suggesting the market has priced in the upside in volume but not downside in margin.

more

UPSIDE / DOWNSIDE SPECTRUM

Value drivers 2019

WTG external sales volume

WTG gross margin

Wind farm utilization hours

Wind farm attributable capacity addition

HK$12.50 upside 9.5GW 17% 2,300 1.5GW HK$8.50 base 8.4GW 15% 2,244 1.1GW HK$6.50 downside 7.5GW 13% 2,150 0.8GW Source: UBS estimates

more

COMPANY DESCRIPTION Xinjiang Goldwind Science & Technology (Goldwind) is a leading manufacturer of wind turbine generators (WTG) in China. Goldwind was established in 1998 and had the largest WTG market share in China over 2011-18. more

Abigail Sun, Analyst, S1460518040002, [email protected], +86-213-866 8637


17

Goldwind – H UBS-S Research CO1 Q1


Q: Will WTG margin contraction fully offset the impact from volume growth in 2019?

UBS-S VIEW

Likely. We think Goldwind's 2019 WTG gross margin faces large pressure because the industry average WTG bidding price dropped by over 10% YoY in 2018, and most of these orders will be delivered in 2019. We estimate the price pressure will bring down its WTG gross margin to around 15% and EBIT margin to around 2% in 2019E. We expect Goldwind's WTG EBIT to drop 11% YoY in 2019E, despite a 43% increase in WTG sales volume.

EVIDENCE

WTG industry average bidding price dropped over 10% in 2018, and our analysis shows that it is highly related to Goldwind's WTG ASP with a one-year lag.

Our sensitivity analysis shows that Goldwind's net profit is not sensitive to WTG sales volume with WTGs’ current low margin.

WHAT'S PRICED IN?

We think investors know that Goldwind's gross margin will drop in 2019E, but do not expect it to fully offset the impact of WTG volume growth.

WTG margin drop could be larger than expected.

Goldwind's 2018 WTG gross margin dropped 6ppts to 19% due to the ASP drop and cost increases. We expect ASP pressure to push down its gross margin by another 4ppts, to 15% in 2019E, and gradually recover afterwards.

Figure 16 shows that historically Goldwind's WTG ASP is highly correlated to industry average bidding prices, with a one-year lag. The 2018 industry average bidding price for 2.0MW WTG dropped 14% YoY (Figure 17), and we estimate this could transfer to a 10% decline in its 2019 ASP, leading to a 6% decline in Goldwind's average WTG ASP.

Figure 16: Goldwind's WTG ASP vs. industry average bidding price (2.0MW, assuming a one-year lag)

Rmb/kw 2015 2016 2017 2018 2019E

Goldwind's WTG ASP – excl. VAT 3,709 3,568 3,476 3,302 2,972

YoY -4% -3% -5% -10%

Goldwind's WTG ASP – incl. VAT 4,340 4,174 4,067 3,830 3,358

Pre-year bidding average 4,170 4,244 4,144 3,847 3,323

Difference 4% -2% -2% 0% 1%

Note: We assume 17% VAT in 2015-17, 16% VAT in 2018 and 13% VAT in 2019. Source: Company data, UBS-S estimates


18

Figure 17: Historical industry average bidding price

Source: Company data.

Decline in margin fully offsets increase in volume

We estimate Goldwind's 2019 WTG gross margin may drop to 15%, suggesting an EBIT margin of 2%. This margin squeeze should fully offset the 43% increase in volume, leading to an 11% YoY decline in its WTG EBIT. We expect the margin to gradually recover in 2020 to 17%, but the implied EBIT margin is still low at 4%.

Our sensitivity analysis in Figure 18 shows that at such low margins, Goldwind's net profit changes are not sensitive to WTG sales volume changes, but are highly sensitive to WTG ASP changes. We estimate a 5% (about 400MW) increase in WTG sales volume would lead to only 2% increase in its 2019/20E net profit, while a 1% decline in WTG ASP could lead to 7-10% decline in net profit. We think that in this case the company's risk rewards are skewed to the downside.

Figure 18: Sensitivity analysis for Goldwind's earnings

2019E 2020E

5% increase in turbine sales volume 1.9% 2.3%

1% decline in WTG ASP -9.5% -7.7%

50-hour increase in wind utilisation rate 5.2% 4.8%

25bp increase in interest costs -2.4% -2.1%

Source: UBS-S estimates

2019/20 upcycle does not look equal to the 2015 upcycle

Investors may compare the 2019/20 rush installation to what happened in 2015, when nationwide annual installation reached 30GW and Goldwind's external sales volume reached 7GW. This may make investors excited about the volume acceleration story in 2019/20, as share prices surged during that period.

However, we think the two upcycle are not comparable, because Goldwind's WTG gross margin was 24% in 2015 but we estimate will be only 15-17% in 2019/20, suggesting its WTG earnings are unlikely to recover to 2015 levels even in the 2020E peak. Goldwind's WTG EBIT was Rmb3.3bn in 2015, but we estimate it could just reach Rmb1.5bn in 2020.

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Figure 19: Goldwind’s WTG sales volume and margin changes

Note: Margin includes sales of spare parts. Source: Company data, UBS estimates

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20

Goldwind – H UBS-S Research CO1 WPI

WHAT'S PRICED IN? return

PE for WTG sales is already higher than the 2015 level

We think investors are likely to compare Goldwind's valuation for 2019/20 to that of the last upper cycle in 2015, when national installation exceeded 30GW.

Goldwind-H is now trading at 17x/13x 2019/20E PE, versus its 2015 peak PE of 15-16x. It looks like 2020E PE is not too expensive and still has some upside, but we need to consider that 40% of its 2019E net profit actually comes from the wind farm business, which is usually traded at a lower PE.

In Figure 20, we calculated the current share price implied PE for the WTG business, and compare it with that in 2015, by assuming its wind farm business is trading at the same level as other operators, such as Longyuan and Huaneng Renewable.

Our analysis shows that implied PE for Goldwind's WTG business in 2019/20E is already 28x/18x, much higher than the 15.5x in 2015. That means, even for its peak earnings in 2020E, the PE has already exceeded historical peak, not mentioning that 1) Goldwind's earnings will decline after 2021E, and 2) its WTG margins are much lower in this time's upper cycle.

Figure 20: PE comparison – 2019/20E vs. 2015

Rmb m 2015 2019E 2020E

Price date 6/1/2015 4/9/2019 4/9/2019

Market cap 42,431 36,905 36,905

Wind farm net profit 70 1,078 1,197

Wind farm PE 6.0 6.0 6.0

Wind farm market cap 420 6,468 7,182

Implied WTG market cap 42,011 30,437 29,723

WTG net profit 2,719 1,088 1,613

Implied WTG PE 15.5x 28.0x 18.4x

Source: Company data, Reuters, UBS-S estimates

Figure 21: Goldwind-H's forward PE Figure 22: Goldwind-H's forward P/BV vs. ROE

Source: Reuters, Company data, UBS-S estimates Source: Reuters, Company data, UBS-S estimates

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Figure 23 shows our revenue and earnings forecast versus consensus.

We are different from consensus in that: 1) our revenues are 23% below consensus in 2021E, because the market may expect rush installation to last to 2021, but we think it is unlikely that the grid/government can afford a three-year continuous rush installation; and 2) our earnings are much below consensus’s because we look at the recurring earnings, excluding disposal gains, while consensus may look at the reported earnings. Since about 30% of Goldwind's 2018 earnings are from disposal-related gains, we think this makes a big difference.

Figure 23: UBS versus consensus net profit (Rmb m)

Consensus UBS Difference

2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

Revenue 37,696 43,141 43,899 36,857 40,161 33,060 -2% -7% -25%

Net profit 3,311 4,231 4,702 2,166 2,810 2,581 -35% -34% -45%

Source: Reuters, UBS-S estimates


22

Goldwind - H UBS-S Research CO1 UD

UPSIDE / DOWNSIDE SPECTRUM return

Value drivers 2019

WTG external sales volume

WTG gross margin

Wind farm utilization hours

Wind farm attributable capacity addition

HK$12.50 upside 9.5GW 17% 2,300 1.5GW HK$8.50 base 8.4GW 15% 2,244 1.1GW HK$6.50 downside 7.5GW 13% 2,150 0.8GW Source: UBS estimates

Goldwind is trading at HK$10.28 (as of 9 April 2019)

Risk to the current share price is skewed (1:1.7) to the downside

Goldwind-H is trading at HK$10.28 (as of 9 April 2019).

Upside (HK$12.50): In our upside scenario, we assume the total wind power installation in 2019 is higher than our expectation and reaches 38GW, suggesting about 9.5GW external sales for Goldwind given a 25% market share. The surge in volume may lead to some recovery in Goldwind's WTG gross margin, and we assume the margin contraction narrows to 2ppts YoY in 2019E. For wind farm operations, we factor in: 1) higher utilisation hours, assuming the curtailment issue in western China is solved; and 2) a higher capacity addition plan. In this scenario, we derive a valuation of HK$12.50 per share, implying 15x 2020E PE.

Base (HK$8.50): In our base case, we assume Goldwind's WTG volume could increase by 43%/7% to 8.4GW/8.9GW in 2019/20E, due to the rush installation of downstream operators. But we expect its WTG gross margin to contract by another 4ppts in 2019E and recover by 2ppts in 2020E, due to the delivery of 2018 cheap orders. For wind farms, we assume utilization hours can remain flattish in 2019E but drop to 2,200/2,100 in 2020/21E, as a result of rush installation in 2019/20E. We also assume Goldwind will accelerate its downstream investment, leading to 1.1/1.4GW net increases in its wind farm attributable capacity in 2019/20E.

Downside (HK$6.50): In our downside scenario, we assume wind power installation is lower than our expectation, at 30GW, as the power grid/government cannot support so much installation in one year. This will lead to 7.5GW external sales volume for Goldwind. We also assume Goldwind's WTG unit cost does not change in 2019, leading to a 5ppt drop in the WTG gross margin. For the wind farms, we assume higher curtailment ratio and smaller installations in 2019. In this case, we derive a downside valuation of HK$6.50 per share, implying 9x 2020E PE.


23

Figure 24: Changes in key assumptions

2019E 2020E 2021E

Rmb m Before After Change Before After Change Before After Change

Revenue 30,512 36,857 20.8% 33,008 40,161 21.7% 33,057 33,060 0.0%

WTG manufacturing 22,599 29,393 30.1% 23,880 31,494 31.9% 22,801 23,657 3.8%

-External sales (MW) 6,504 8,360 28.5% 6,899 8,931 29.5% 6,670 6,447 -3.4%

-Average selling price (Rmb/kW, ex. VAT) 3,373 3,375 0.1% 3,364 3,392 0.8% 3,315 3,480 5.0%

Wind power services (EPC and R&M) 2,720 1,895 -30.3% 3,128 2,179 -30.3% 3,597 2,506 -30.3%

Wind farm operation 4,839 4,655 -3.8% 5,629 5,528 -1.8% 6,269 5,889 -6.1%

-Installed attributable capacity at year-end (MW) 5,468 5,820 6.4% 6,318 7,220 14.3% 6,718 7,620 13.4%

-Wind farm average utilisation hours 2,300 2,244 -2.4% 2,300 2,200 -4.3% 2,300 2,100 -8.7%

Gross profits 8,606 8,176 -5.0% 9,774 9,580 -2.0% 10,093 8,688 -13.9%

WTG manufacturing 4,469 4,447 -0.5% 5,008 5,298 5.8% 4,806 4,272 -11.1%

Wind power services (EPC and R&M) 435 369 -15.2% 500 424 -15.2% 576 488 -15.2%

Wind farm operation 3,483 2,964 -14.9% 4,035 3,441 -14.7% 4,470 3,492 -21.9%

Gross margin 28.2% 22.2% -6.0ppt 29.6% 23.9% -5.8ppt 30.5% 26.3% -4.3ppt

WTG manufacturing 19.8% 15.1% -4.6ppt 21.0% 16.8% -4.1ppt 21.1% 18.1% -3.0ppt

Wind power services (EPC and R&M) 16.0% 19.5% 3.5ppt 16.0% 19.5% 3.5ppt 16.0% 19.5% 3.5ppt

Wind farm operation 72.0% 63.7% -8.3ppt 71.7% 62.2% -9.4ppt 71.3% 59.3% -12.0ppt

Selling and distribution costs (2,365) (1,978) -16.4% (2,479) (2,124) -14.3% (2,341) (1,839) -21.5%

Administrative expenses (2,470) (3,345) 35.5% (2,672) (3,645) 36.4% (2,676) (3,000) 12.1%

Finance costs (1,082) (1,121) 3.6% (1,199) (1,296) 8.1% (1,291) (1,466) 13.6%

PBT 3,888 3,584 -7.8% 4,743 3,924 -17.3% 5,050 3,956 -21.7%

Net profits - reported 3,288 3,118 -5.2% 4,032 3,308 -18.0% 4,224 3,338 -21.0%

Net profits - recurring 2,992 2,166 -27.6% 3,736 2,810 -24.8% 4,003 2,581 -35.5%


Figure 25: Contributions to DCF-based enterprise value (Rmb m)


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Figure 26: Valuation summary – Wind farm Figure 27: Valuation summary – WTG & others

Source: UBS-S estimates Source: UBS-S estimates


25

Goldwind - H UBS-S Research CO1 Co des

COMPANY DESCRIPTION return

Xinjiang Goldwind Science & Technology (Goldwind) is a leading manufacturer of wind turbine generators (WTG) in China. Goldwind was established in 1998 and had the largest WTG market share in China in 2011-18. It developed and began operating its own wind farm in 2012 and had 4.7GW of attributable connected wind farms as of end-2018. The company was listed on the Shenzhen Stock Exchange in December 2007 and on the Hong Kong Stock Exchange in October 2010.

Industry outlook

We think wind power installation will accelerate in 2019-20E to over 30GW p.a. because wind projects with fixed tariffs were all approved before end-2018 and need to start construction within two years. In the longer term, we think annual installation may maintain at an average of 24GW under bidding tariff/grid parity, as we expect development of large wind farms in north China together with UHV lines to drive future demand growth.

We expect WTG manufacturers' margins will trough in 2019E, and further downside under bidding tariff /grid parity is limited, as: 1) the already-published bidding tariff rule suggests regulators do not encourage fierce price competition; 2) downstream operators will focus more on LCOE instead of WTG price; and 3) WTG manufacturers' profitability under the current price environment is already thin, leaving them no incentive for another price war, in our view.

For downstream wind farm operators, we think they will suffer from reduced earnings as curtailment will likely worsen, deteriorating cash flow with larger subsidy deficit and increased capex as well as increasing gearing.

Revenues by segment (%)

Source: Company data, UBS-S estimates

EBIT by product segment

Rmb m 2016 2017 2018 2019E 2020E

WTG manufacturing 2,690 1,455 958 848 1,529

Wind farm operation 1,040 2,227 2,687 2,979 2,727

Others 239 341 620 477 552

Total EBIT 3,969 4,023 4,265 4,304 4,808

Non-recurring item (285) (713) (904) (882) (427)

Adjusted EBIT 3,685 3,310 3,360 3,423 4,381

Source: Company data, UBS-S estimates

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26

Xinjiang Goldwind Science & Technology (2208.HK)

Income statement (Rmbm) 12/16 12/17 12/18 12/19E % ch 12/20E % ch 12/21E 12/22E 12/23E Revenues 26,174 24,971 28,590 36,857 28.9 40,161 9.0 33,060 34,957 35,756 Gross profit 7,558 7,466 7,344 8,176 11.3 9,580 17.2 8,688 9,264 9,630 EBITDA (UBS) 4,609 4,434 4,741 5,086 7.3 6,407 26.0 6,707 7,246 7,707 Depreciation & amortisation (924) (1,124) (1,381) (1,663) 20.4 (2,026) 21.8 (2,319) (2,461) (2,604) EBIT (UBS) 3,685 3,310 3,360 3,423 1.9 4,381 28.0 4,388 4,784 5,103 Associates & investment income 192 210 266 314 18.0 354 12.5 323 334 344 Other non-operating income 0 0 0 0 - 0 - 0 0 0 Net interest (609) (743) (849) (1,035) -21.9 (1,238) -19.7 (1,441) (1,359) (1,283) Exceptionals (incl goodwill) 0 0 0 0 - 0 - 0 0 0 Profit before tax 3,267 2,778 2,778 2,703 -2.7 3,497 29.4 3,270 3,760 4,164 Tax (446) (342) (400) (387) 3.1 (522) -34.7 (519) (651) (777) Profit after tax 2,821 2,436 2,378 2,315 -2.6 2,975 28.5 2,751 3,108 3,387 Preference dividends and Minorities (140) (165) (137) (150) -8.9 (164) -9.9 (171) (175) (179) Extraordinary items 285 713 904 882 -2.5 427 -51.6 686 673 661 Net earnings (local GAAP) 2,966 2,984 3,145 3,047 -3.1 3,237 6.2 3,267 3,606 3,869 Net earnings (UBS) 2,681 2,271 2,241 2,166 -3.4 2,810 29.8 2,581 2,933 3,208 Tax rate (%) 13.7 12.3 14.4 14.3 -0.4 14.9 4.1 15.9 17.3 18.7

Per share (Rmb) 12/16 12/17 12/18 12/19E % ch 12/20E % ch 12/21E 12/22E 12/23E EPS (UBS, diluted) 0.70 0.60 0.59 0.51 -12.9 0.67 29.8 0.61 0.69 0.76 EPS (local GAAP, diluted) 0.78 0.78 0.83 0.72 -12.7 0.77 6.2 0.77 0.85 0.91 EPS (UBS, basic) 0.70 0.60 0.59 0.51 -12.9 0.67 29.8 0.61 0.69 0.76 Net DPS (Rmb) 0.15 0.20 0.30 0.24 -18.5 0.26 6.2 0.39 0.43 0.46 Book value per share 4.85 5.56 6.16 7.15 16.1 7.69 7.6 8.23 8.71 9.22 Average shares (diluted) 3,809.40 3,809.40 3,809.40 4,225.07 10.9 4,225.07 0.0 4,225.07 4,225.07 4,231.88

Balance sheet (Rmbm) 12/16 12/17 12/18 12/19E % ch 12/20E % ch 12/21E 12/22E 12/23E Cash and equivalents 8,267 7,730 5,050 6,560 29.9 1,179 -82.0 1,906 1,765 1,995 Other current assets 24,830 25,352 27,867 36,424 30.7 38,070 4.5 29,823 30,588 30,151 Total current assets 33,097 33,081 32,918 42,984 30.6 39,249 -8.7 31,729 32,353 32,146 Net tangible fixed assets 19,479 22,838 25,509 32,455 27.2 40,699 25.4 41,947 43,029 43,945 Net intangible fixed assets 1,250 2,752 3,965 3,830 -3.4 3,695 -3.5 3,561 3,426 3,291 Investments / other assets 10,612 14,116 18,973 19,287 1.7 19,641 1.8 19,964 20,298 20,642 Total assets 64,437 72,788 81,364 98,556 21.1 103,285 4.8 97,201 99,106 100,024 Trade payables & other ST liabilities 21,991 23,601 28,130 35,043 24.6 33,315 -4.9 26,413 27,629 27,691 Short term debt 2,672 5,999 3,470 3,470 0.00 3,470 0.00 3,470 3,470 3,470 Total current liabilities 24,663 29,600 31,601 38,513 21.9 36,786 -4.5 29,883 31,099 31,161 Long term debt 15,419 15,886 18,865 22,336 18.4 26,443 18.4 24,948 23,527 22,177 Other long term liabilities 3,656 3,827 4,424 4,424 0.0 4,424 0.0 4,424 4,424 4,424 Preferred shares 1,495 1,495 1,495 1,495 0.00 1,495 0.00 1,495 1,495 1,495 Total liabilities (incl pref shares) 45,233 50,808 56,384 66,768 18.4 69,148 3.6 60,749 60,545 59,257 Common s/h equity 18,481 21,192 23,466 30,221 28.8 32,506 7.6 34,756 36,800 38,937 Minority interests 723 788 1,514 1,567 3.5 1,631 4.1 1,695 1,761 1,830 Total liabilities & equity 64,437 72,788 81,364 98,556 21.1 103,285 4.8 97,201 99,106 100,024

Cash flow (Rmbm) 12/16 12/17 12/18 12/19E % ch 12/20E % ch 12/21E 12/22E 12/23E Net income (before pref divs) 3,003 3,055 3,217 3,118 -3.1 3,308 6.1 3,338 3,677 3,940 Depreciation & amortisation 924 1,124 1,381 1,663 20.4 2,026 21.8 2,319 2,461 2,604 Net change in working capital (807) (885) (856) (1,759) -105.5 (3,374) -91.8 1,345 451 499 Other operating (18) (270) (588) 708 - 858 21.2 1,065 984 908 Operating cash flow 3,103 3,023 3,153 3,730 18.3 2,818 -24.4 8,066 7,573 7,951 Tangible capital expenditure (5,501) (4,843) (5,943) (9,177) -54.4 (10,795) -17.6 (4,135) (4,105) (4,075) Intangible capital expenditure (152) (63) (83) 0 - 0 - 0 0 0 Net (acquisitions) / disposals (1,405) (2,313) (4) 864 - 714 -17.3 724 717 711 Other investing 47 120 (84) 178 - 178 - 178 178 178 Investing cash flow (7,011) (7,098) (6,114) (8,136) -33.1 (9,903) -21.7 (3,234) (3,210) (3,186) Equity dividends paid (1,313) (547) (711) (1,056) -48.5 (1,023) 3.1 (1,087) (1,633) (1,803) Share issues / (buybacks) 1,495 0 0 4,693 - 0 - 0 0 0 Other financing (699) (883) 304 (1,193) - (1,380) -15.72 (1,522) (1,450) (1,381) Change in debt & pref shares 5,763 4,812 1,609 3,472 115.81 4,107 18.30 (1,496) (1,421) (1,350) Financing cash flow 5,247 3,382 1,201 5,916 392.4 1,704 -71.2 (4,105) (4,504) (4,534) Cash flow inc/(dec) in cash 1,338 (693) (1,759) 1,510 - (5,381) - 727 (141) 230 FX / non cash items 628 156 (920) 0 100.0 0 - 0 0 0 Balance sheet inc/(dec) in cash 1,966 (537) (2,679) 1,510 - (5,381) - 727 (141) 230 Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.


27

Xinjiang Goldwind Science & Technology (2208.HK)

Valuation (x) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E P/E (local GAAP, diluted) 9.0 9.9 9.9 12.2 11.5 11.4 10.3 9.6 P/E (UBS, diluted) 9.9 13.1 13.9 17.2 13.2 14.4 12.7 11.6 P/CEPS 7.4 8.7 8.6 9.7 7.7 7.6 6.9 6.4 Equity FCF (UBS) yield % (9.2) (6.6) (8.9) (14.7) (21.5) 10.6 9.3 10.4 Net dividend yield (%) 2.1 2.6 3.6 2.8 2.9 4.4 4.8 5.2 P/BV x 1.4 1.4 1.3 1.2 1.1 1.1 1.0 1.0 EV/revenues (core) 1.3 1.6 1.6 1.5 1.5 1.9 1.7 1.7 EV/EBITDA (core) 7.5 8.8 9.9 10.6 9.3 9.4 8.4 7.7 EV/EBIT (core) 9.4 11.8 13.9 15.8 13.6 14.3 12.7 11.6 EV/OpFCF (core) 7.7 9.0 10.1 10.9 9.4 9.5 8.5 7.8 EV/op. invested capital 1.4 1.3 1.3 1.3 1.1 1.1 1.0 1.0

Enterprise value (Rmbm) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Market cap. 27,859 28,461 32,375 37,179 37,179 37,179 37,179 37,179 Net debt (cash) 8,757 13,485 17,215 19,760 25,486 29,118 27,367 25,937 Buy out of minorities 676 755 1,151 1,541 1,599 1,663 1,728 1,795 Pension provisions/other 0 0 0 0 0 0 0 0 Total enterprise value 37,291 42,701 50,741 58,480 64,264 67,960 66,274 64,912 Non core assets (2,622) (3,693) (3,974) (4,326) (4,748) (5,198) (5,674) (5,674) Core enterprise value 34,669 39,008 46,767 54,155 59,516 62,763 60,600 59,237

Growth (%) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Revenue -12.3 -4.6 14.5 28.9 9.0 -17.7 5.7 2.3 EBITDA (UBS) 17.4 -3.8 6.9 7.3 26.0 4.7 8.0 6.4 EBIT (UBS) 8.9 -10.2 1.5 1.9 28.0 0.2 9.0 6.7 EPS (UBS, diluted) -2.4 -15.3 -1.3 -12.9 29.8 -8.2 13.7 9.2 Net DPS -58.2 37.5 48.5 -18.5 6.2 50.2 10.4 7.3

Margins & Profitability (%) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Gross profit margin 28.9 29.9 25.7 22.2 23.9 26.3 26.5 26.9 EBITDA margin 17.6 17.8 16.6 13.8 16.0 20.3 20.7 21.6 EBIT margin 14.1 13.3 11.8 9.3 10.9 13.3 13.7 14.3 Net earnings (UBS) margin 10.2 9.1 7.8 5.9 7.0 7.8 8.4 9.0 ROIC (EBIT) 14.9 10.7 9.3 8.0 8.3 7.5 8.2 8.7 ROIC post tax 12.7 9.3 7.8 6.7 6.9 6.2 6.6 6.9 ROE (UBS) 15.2 11.4 10.0 8.1 9.0 7.7 8.2 8.5

Capital structure & Coverage (x) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Net debt / EBITDA 2.5 3.5 4.0 4.1 4.7 4.2 3.7 3.3 Net debt / total equity % 58.9 71.2 75.2 65.2 88.6 76.8 69.3 61.7 Net debt / (net debt + total equity) % 37.1 41.6 42.9 39.5 47.0 43.4 40.9 38.2 Net debt/EV % 32.7 40.1 40.2 38.3 50.8 44.6 44.1 42.5 Capex / depreciation % NM NM NM NM NM 189.4 176.5 165.1 Capex / revenue % 21.0 19.4 20.8 24.9 26.9 12.5 11.7 11.4 EBIT / net interest 6.0 4.5 4.0 3.3 3.5 3.0 3.5 4.0 Dividend cover (UBS) 4.8 3.0 2.0 2.1 2.6 1.6 1.6 1.7 Div. payout ratio (UBS) % 20.7 33.6 50.5 47.3 38.7 63.3 61.5 60.3

Revenues by division (Rmbm) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Wind turbine generator business and others

22,264 19,346 22,169 29,393 31,494 23,657 24,866 24,924

Wind farm development 2,414 3,247 3,904 4,655 5,528 5,889 6,152 6,408 Others 1,496 2,377 2,518 2,808 3,138 3,513 3,939 4,424 Total 26,174 24,971 28,590 36,857 40,161 33,060 34,957 35,756

EBIT (UBS) by division (Rmbm) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Wind farm development 562 1,191 1,590 1,852 2,076 2,066 2,140 2,211 Wind turbine generator business and others 2,802 1,450 845 660 1,319 1,282 1,476 1,598

Others 321 669 925 911 987 1,041 1,168 1,295 Total 3,685 3,310 3,360 3,423 4,381 4,388 4,784 5,103 Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.

abc Global Research 10 April 2019

Chinese Wind Power Sector 10 April 2019 28

Xinjiang Goldwind Science & Technology-A No gold from this rush; downgrading to Sell

Downgrading to Sell on concern over wind turbine generator margins We downgrade Goldwind-A [Link] from Buy to Sell, as we think the market has priced in the wind turbine generator (WTG) volume surge in 2019E but ignored the margin contraction. While Goldwind's external WTG sales volume could increase to over 8GW pa in 2019/20E due to an installation rush, we think larger than expected margin contraction will fully offset the benefit. We forecast recurring earnings to decline 3% YoY in 2019 and reach peak growth of 30% YoY in 2020E. We expect net gearing to rise to 80% in 2020 from 65% in 2015 due to lower cash inflow from WTGs, higher downstream capex and longer subsidy delays. The valuation of its WTG business has exceeded that of the 2015 peak cycle, and we believe risk is skewed to the downside.

2019 WTG gross margin could be lower than expected Goldwind's 2018 WTG gross margin was down 6ppt, a stepper decline than we expected, and we think this trend will continue in 2019. The industry average bidding price for 2.0/2.5MW WTG dropped by 14/13% YoY in 2018, and most of these orders will be delivered in 2019. We estimate this will lower overall WTG ASP by 6% and GPM by 4ppt to 15% in 2019. This suggests Goldwind's WTG EBIT margin could decline to 2% in 2019E, making any impact from volume growth almost irrelevant.

Valuation for peak year does not look attractive Goldwind - A is trading at 27x/21x 2019/20E PE. While this valuation looks reasonable, we note that c.40% of Goldwind's net profit will come from its wind farm business, which deserves a lower PE. Our analysis shows the implied 2019/20E PE of Goldwind's WTG business is already 44x/29x, much higher than the 24x seen in 2015. This means that its PE even for peak earnings in 2020E has already exceeded the historical peak. On top of that, we estimate: 1) Goldwind's earnings will decline in 2021; and 2) its 2019/20E WTG EBIT margins will be 2-4% versus 13% in 2015.

Valuation: Downgrading to Sell with new price target of Rmb11.50 Our PT is based on sum-of-the-parts methodology, with the valuation of each segment based on DCF. We cut our 2019-21E earnings by 19-31% and PT by c.30% due to: 1) larger than expected WTG margin contraction; and 2) higher curtailment and a longer subsidy delay in 2019-21E. Our PT implies 24x 2020E PE for WTG, close to the 2015 peak, and 8x 2020E PE for wind farms, close to other operators.

Equities

China

Electric Components & Equipment

12-month rating Sell Prior: Buy

12m price target Rmb11.50

Prior: Rmb17.00

Price Rmb13.80

RIC: 002202.SZ BBG: 002202 CH

Trading data and key metrics 52-wk range Rmb17.05-8.05

Market cap. Rmb58.3bn/US$8.68bn

Shares o/s 4,225m (ORDA )

Free float 49%


Avg. daily value (m) Rmb552.9


P/BV (12/19E) 1.9x



12/19E 0.66 0.51 -22 0.86 12/20E 0.82 0.67 -19 1.07 12/21E 0.88 0.61 -31 1.31

Abigail Sun Analyst


+86-213-866 8637

Wenzhuo Du Analyst


+86-213-866 8960

Alex Liu Analyst


+86-213-866 8857


Profitability/valuation 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E EBIT margin % 14.1 13.3 11.8 9.3 10.9 13.3 13.7 14.3 ROIC (EBIT) % 14.9 10.7 9.3 8.0 8.3 7.5 8.2 8.7 EV/EBITDA (core) x 11.1 12.9 13.4 14.6 12.4 12.4 11.2 10.5 P/E (UBS, diluted) x 16.6 20.5 22.5 26.9 20.7 22.6 19.9 18.2 Equity FCF (UBS) yield % (5.7) (4.0) (5.7) (9.3) (13.7) 6.7 5.9 6.6 Net dividend yield % 1.2 1.6 2.2 1.8 1.9 2.8 3.1 3.3 Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of Rmb13.80 on 09 Apr 2019 18:35 HKT

https://neo.ubs.com/shared/d27qXzpdjH



29

China Longyuan Power Waiting for cash and returns to normalise

Taking a break; downgrade from Buy to Neutral We downgrade Longyuan from Buy to Neutral with a new price target of HK$6.00. We are cutting our 2019-21 earnings forecasts significantly to reflect the 1) FY18 earnings miss, 2) reduced utilisation hours assumption from 2,200 to 2,000, and 3) longer receivable days and weaker free cash flows. This makes our current forecasts about 20% below consensus. Trading at around 0.7x forward P/BV at 8.5% ROE, we believe investors have largely priced in the lacklustre outlook. For the shares to re-rate, we believe it may happen after the rush installation programme when utilisation, cash flows, and balance sheets recover.

Raised capacity expansion target after two years of subdued growth Longyuan has substantially increased its capacity addition target to 1.2GW and 1.8GW of new onshore wind farms for 2019 and 2020, respectively, compared with around 0.4GW of additions in 2017-18 p.a. The majority of these projects are located in southern China, but we think curtailment could still exacerbate as this may crowd out the demand from importing renewable powers from other regions.

What are the catalysts ahead? We believe shares could range trade for a while as balance sheets, earnings, and cash flows all remain under pressure. We believe the upside catalysts would be 1) subsidy receivables would finally be eased with a sustainable, new source of financing; 2) reduced capacity expansion; and 3) better utilisation hours.

Valuation: downgrade to Neutral; lower price target from HK$8.70 to HK$6.00 We base our price target on a DCF valuation, assuming 7.7% WACC, 7.4% terminal ROIC, and 3.0% terminal growth. Our price target implies 10x 2019E PE and 0.8x 2019E P/BV, similar to the level in the last rush installation cycle in 2015-16.

Equities

China

Electric Utilities

12-month rating Neutral Prior: Buy


Prior: HK$8.70

Price HK$5.47





Free float 93%




P/BV (12/19E) 0.8x



12/19E 0.80 0.48 -40 0.62 12/20E 0.88 0.52 -41 0.69 12/21E 0.97 0.67 -30 0.75

Ken Liu Analyst


Abigail Sun Analyst


+86-213-866 8637




Profitability/valuation 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E EBIT margin % 33.8 33.9 37.0 36.9 37.7 40.5 43.2 44.0 ROIC (EBIT) % 6.8 7.1 8.1 7.5 7.5 8.5 9.5 10.0 EV/EBITDA (core) x 8.5 7.8 7.2 6.8 6.7 6.0 5.5 5.2 P/E (UBS, diluted) x 12.0 10.5 8.5 9.8 8.9 6.9 5.6 5.0 Equity FCF (UBS) yield % (7.9) 0.0 6.2 (7.5) (10.0) 5.1 15.3 20.3 Net dividend yield % 1.7 1.8 1.9 2.0 2.2 2.9 3.6 4.0 Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of HK$5.47 on 09 Apr 2019 18:34 HKT


30

China Longyuan Power Neutral (Price target HK$6.00)

CO1 P2

UBS Research THESIS MAP a guide to our thinking and what's where in this report

PIVOTAL QUESTIONS Q: Will wind power installation volume surge in 2019/20?

Yes. We think wind power installation could surge significantly in 2019/2020 ahead of the subsidy cancellation by end-2020. We forecast 30/32GW wind power connection and 31GW/33GW wind power installation in 2019/20.

more

Q: Will curtailment continue to ease or become worse?

Worse. We believe the glut of new wind farm supply is likely to increase the pressure for the grid to absorb the renewable power. Utilisation is likely to be suppressed in 2019/20, which would be bad for earnings. We expect curtailment ratio to go back to the 2016 level of around 15%.

more


Unlikely. The rush installation for new wind farms in 2019/20 will likely exacerbate the subsidy deficits. We expect balance sheet and cash flows for wind farm operators to further deteriorate. We think subsidy receivable days may increase from one year or eighteen months to almost two years.

more

UBS VIEW We believe the operating environment for Longyuan will significantly worsen in 2019/20 as most companies rush ahead to install new wind projects. We believe it will suffer from 1) reduced earnings as curtailment will likely worsen; 2) deteriorating cash flow with larger subsidy deficit and increased capex; and 3) increased gearing.

EVIDENCE 1) Most managements of wind farm operators have increased their guidance for expansion plans in 2019 and 2020; and 2) our renewable subsidy funds calculation shows that deficits will escalate in the next two years as capacity expansion is accelerating.

WHAT'S PRICED IN? Trading at around 0.7x forward P/BV at 8.5% ROE, we believe investors have largely priced in the lacklustre outlook. For shares to re-rate, we believe it may happen after the rush installation programme when utilisation, cash flows, and balance sheets recover.


Value drivers 2019E

Onshore wind farm utilization hour

Subsidy receivable days Average finance costs

HK$7.00 upside 2,100 500 days 5.0% HK$6.00 base 2,000 546 days 5.3% HK$4.50 downside 1,900 600 days 5.6% Source: UBS estimates

more

COMPANY DESCRIPTION China Longyuan is the largest wind power developer and operator in China and one of the largest wind power operators in the world. more

Ken Liu, Analyst, [email protected], +852-2971 7516


31

China Longyuan Power UBS Research CO1 UD


Value drivers 2019E

Onshore wind farm utilization hour



Longyuan is trading at HK$5.47 (as of 9 April)

Risk to the current share price is skewed 1.6:1 to the upside

Longyuan is trading at HK$5.47 (as of 9 April).

Upside (HK$7.00): In our upside-case scenario, we assume better utilisation hours of 2,100 from 2019E onwards. In addition, we assume subsidy receivable days just increase from 476 days in 2018 to 500 days. We also factor in lower interest costs of 5.0%. In this case, we derive a valuation of HK$7.00 per share, implying 1.0x 2019E P/BV.

Base (HK$6.00): In our base case, we expect utilization hours to decline to 2,000 hours in 2019, with subsidy receivable days increasing by 80 days to 546 days. We assume interest rate will maintain flattish at 5.3%.

Our price target is based on a DCF methodology and implies 0.9x 2019E P/BV.

Downside (HK$4.50): In our downside-case scenario, we assume the rush installation could lead to a larger decline in utilization hours to 1,900. We also assume subsidy receivable days will surge to 600 days. In addition, we factor in higher interest costs given the company's worse financial situation. In this case, we derive a valuation of HK$4.50 per share, implying 0.7x 2019E P/BV.


32

Figure 28: Longyuan – DCF valuation

WACC derivation

Risk-free rate 4.3%

Equity risk premium 5.0%

Beta 1.1

Cost of equity 9.7%

Cost of debt 5.0%

Effective tax rate 23.0%

After tax cost of debt 3.8%

Long-term debt to total capital ratio (%) 35%

WACC 7.7%

Long-term growth rate 3.0%

Explicit forecasts

Dec fiscal year-ends 2018 2019E 2020E 2021E 2022E 2023E 2024E TV

Years ahead - - 1 2 3 4 5 5

Discount factor 1.00 1.00 0.93 0.86 0.80 0.74 0.69 0.69

(Rmb m)

EBIT 9,756 9,409 10,136 11,997 13,795 14,633 15,466

Tax rate 19% 25% 24% 23% 23% 23% 23%

NOPAT 7,903 7,093 7,681 9,244 10,675 11,326 11,940

Depreciation and amortisation 7,286 7,757 8,260 8,993 9,448 9,901 10,348

Fixed assets investment and acquisition (7,751) (13,760) (15,077) (12,317) (10,924) (10,910) (10,758)

Change in net working capital (2,307) (1,517) (1,646) (1,193) (807) (53) (9)

Net enterprise cash flow 5,131 (426) (783) 4,728 8,392 10,265 11,520

Discounted free cash flow 5,131 (426) (727) 4,078 6,723 7,639 7,962

Terminal year

Invested capital in first year of Stage 2 154,639

Long-term ROIC 7.4%

NOPAT in first year of Stage 2 11,277

NOPAT multiple 12.7x

Terminal value (undiscounted) 143,636

Discount factor 0.69

Terminal value (discounted) 99,272

Summary

Per share

(HK$)

Explicit FCF 25,675 3.8

Dividends and interest received 4,634 0.7

Discounted terminal value (Stage 2 DCF) 99,272 14.8

Total enterprise value 129,582 19.4

- net debt (76,587) (11.4)

- perpetual bond (4,991) (0.7)

- minority interest (7,957) (1.2)

NPV (Rmb m) 40,047 6.0

NPV (HK$ m) 48,081 6.0



33

China Longyuan Power UBS Research CO1 Co des


China Longyuan is the largest wind power developer and operator in China and one of the largest wind power operators in the world. In most provinces of China that have significant wind resources, Longyuan is the market leader. The company also owns minority stakes in two coal-fired power plants.

Industry outlook

The wind power industry in China may face another round of rush installations in 2019/20 ahead of the subsidy cancellation. We expect overall wind power capacity additions to surge to 30/32GW in 2019/20E. We believe that the operating environment for wind farm operators will significantly worsen in 2019/20 as most companies rush ahead to install new wind projects. We believe they will suffer from 1) reduced earnings as curtailment will likely worsen; 2) deteriorating cash flow with larger subsidy deficit and increased capex; and 3) increased gearing.

NPV by segment – 2019E (%)


Net profit by product segment

Rmb m 2016 2017 2018 2019E 2020E

Wind 3,067 3,877 4,413 3,746 4,117

Coal power and others 257 103 42 93 90

Total 3,324 3,979 4,455 3,839 4,207


Wind 89%

Coal 11%


34

China Longyuan Power (0916.HK)

Income statement (Rmbm) 12/16 12/17 12/18 12/19E % ch 12/20E % ch 12/21E 12/22E 12/23E Revenues 22,304 24,591 26,388 25,509 -3.3 26,869 5.3 29,638 31,902 33,229 Gross profit 13,718 15,243 16,623 15,587 -6.2 16,406 5.3 18,441 20,252 21,125 EBITDA (UBS) 13,890 15,135 17,043 17,166 0.7 18,396 7.2 20,991 23,243 24,535 Depreciation & amortisation (6,342) (6,798) (7,286) (7,757) 6.5 (8,260) 6.5 (8,993) (9,448) (9,901) EBIT (UBS) 7,548 8,337 9,756 9,409 -3.6 10,136 7.7 11,997 13,795 14,633 Associates & investment income 485 843 911 442 -51.4 496 12.1 601 755 960 Other non-operating income 0 0 0 0 - 0 - 0 0 0 Net interest (2,974) (3,423) (3,724) (3,524) 5.4 (3,837) -8.9 (4,120) (4,159) (4,187) Exceptionals (incl goodwill) 103 (291) (531) 0 - 0 - 0 0 0 Profit before tax 5,161 5,465 6,411 6,327 -1.3 6,795 7.4 8,478 10,392 11,406 Tax (660) (916) (976) (1,330) -36.3 (1,391) -4.6 (1,680) (2,064) (2,277) Profit after tax 4,501 4,550 5,436 4,997 -8.1 5,404 8.1 6,798 8,327 9,129 Preference dividends and Minorities (1,074) (862) (997) (1,158) -16.1 (1,196) -3.3 (1,377) (1,570) (1,653) Extraordinary items 0 0 0 0 - 0 - 0 0 0 Net earnings (local GAAP) 3,427 3,688 4,438 3,839 -13.5 4,207 9.6 5,421 6,757 7,476 Net earnings (UBS) 3,324 3,979 4,970 3,839 -22.8 4,207 9.6 5,421 6,757 7,476 Tax rate (%) 12.8 16.8 15.2 21.0 38.1 20.5 -2.6 19.8 19.9 20.0


Balance sheet (Rmbm) 12/16 12/17 12/18 12/19E % ch 12/20E % ch 12/21E 12/22E 12/23E Cash and equivalents 1,905 5,072 2,861 4,512 57.7 8,418 86.6 13,582 22,082 31,882 Other current assets 11,427 12,051 14,925 15,896 6.5 17,588 10.6 18,787 19,600 19,659 Total current assets 13,333 17,122 17,786 20,408 14.7 26,006 27.4 32,369 41,683 51,541 Net tangible fixed assets 105,603 109,484 110,010 114,999 4.5 124,154 8.0 127,075 129,559 131,608 Net intangible fixed assets 10,935 10,857 10,262 9,911 -3.4 9,554 -3.6 9,191 8,821 8,446 Investments / other assets 8,790 8,172 8,446 8,487 0.5 8,867 4.5 8,634 8,314 7,953 Total assets 138,661 145,635 146,504 153,805 5.0 168,581 9.6 177,269 188,377 199,547 Trade payables & other ST liabilities 11,296 11,339 11,391 9,411 -17.4 11,457 21.8 10,420 10,812 11,033 Short term debt 44,511 35,820 28,390 30,545 7.59 33,852 10.83 35,578 37,241 38,845 Total current liabilities 55,807 47,159 39,780 39,956 0.4 45,310 13.4 45,997 48,053 49,877 Long term debt 31,788 42,035 47,006 50,554 7.5 55,998 10.8 58,839 61,577 64,217 Other long term liabilities 3,279 3,141 3,152 3,048 -3.3 2,945 -3.4 2,841 2,737 2,634 Preferred shares 2,991 4,991 4,991 4,991 0.00 4,991 0.00 4,991 4,991 4,991 Total liabilities (incl pref shares) 93,865 97,327 94,930 98,549 3.8 109,244 10.9 112,668 117,359 121,718 Common s/h equity 37,899 41,135 44,245 47,299 6.9 50,738 7.3 55,318 60,990 67,114 Minority interests 6,896 7,173 7,329 7,957 8.6 8,598 8.1 9,283 10,029 10,715 Total liabilities & equity 138,661 145,635 146,504 153,805 5.0 168,581 9.6 177,269 188,377 199,547

Cash flow (Rmbm) 12/16 12/17 12/18 12/19E % ch 12/20E % ch 12/21E 12/22E 12/23E Net income (before pref divs) 3,560 3,846 4,680 4,081 -12.8 4,449 9.0 5,663 6,999 7,718 Depreciation & amortisation 6,342 6,798 7,286 7,757 6.5 8,260 6.5 8,993 9,448 9,901 Net change in working capital 483 (2,065) (2,307) (1,517) 34.3 (1,646) -8.5 (1,193) (807) (53) Other operating 234 530 805 622 -22.7 256 -58.9 759 1,060 980 Operating cash flow 10,619 9,109 10,465 10,944 4.6 11,319 3.4 14,222 16,699 18,546 Tangible capital expenditure (13,941) (9,097) (7,751) (13,760) -77.5 (15,077) -9.6 (12,317) (10,924) (10,910) Intangible capital expenditure 0 0 0 0 - 0 - 0 0 0 Net (acquisitions) / disposals (62) (87) 0 0 - 0 - 0 0 0 Other investing 2,652 550 (993) 79 - 235 - 227 233 239 Investing cash flow (11,351) (8,634) (8,744) (13,681) -56.5 (14,842) -8.5 (12,090) (10,690) (10,671) Equity dividends paid (443) (525) (723) (785) -8.6 (768) 2.2 (842) (1,085) (1,352) Share issues / (buybacks) 147 273 0 0 - 0 - 0 0 0 Other financing (578) (664) (572) (530) 7.24 (555) -4.64 (692) (824) (966) Change in debt & pref shares 739 3,502 (2,606) 5,703 - 8,751 53.45 4,566 4,401 4,243 Financing cash flow (135) 2,585 (3,901) 4,388 - 7,428 69.3 3,032 2,492 1,925 Cash flow inc/(dec) in cash (867) 3,060 (2,180) 1,651 - 3,906 136.6 5,164 8,501 9,799 FX / non cash items (114) 106 (30) 0 100.0 0 - 0 0 0 Balance sheet inc/(dec) in cash (981) 3,166 (2,210) 1,651 - 3,906 136.6 5,164 8,501 9,799 Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.


35

China Longyuan Power (0916.HK)

Valuation (x) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E P/E (local GAAP, diluted) 11.7 11.3 9.5 9.8 8.9 6.9 5.6 5.0 P/E (UBS, diluted) 12.0 10.5 8.5 9.8 8.9 6.9 5.6 5.0 P/CEPS 4.1 3.9 3.5 3.2 3.0 2.6 2.3 2.2 Equity FCF (UBS) yield % (7.9) 0.0 6.2 (7.5) (10.0) 5.1 15.3 20.3 Net dividend yield (%) 1.7 1.8 1.9 2.0 2.2 2.9 3.6 4.0 P/BV x 1.1 1.0 1.0 0.8 0.7 0.7 0.6 0.6 EV/revenues (core) 5.3 4.8 4.6 4.6 4.6 4.3 4.0 3.9 EV/EBITDA (core) 8.5 7.8 7.2 6.8 6.7 6.0 5.5 5.2 EV/EBIT (core) 15.6 14.2 12.5 12.4 12.1 10.5 9.2 8.8 EV/OpFCF (core) 8.7 7.9 7.3 6.9 6.8 6.1 5.5 5.3 EV/op. invested capital 1.1 1.0 1.0 0.9 0.9 0.9 0.9 0.9

Enterprise value (Rmbm) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Market cap. 41,875 40,039 44,049 37,629 37,629 37,629 37,629 37,629 Net debt (cash) 76,074 77,580 77,580 77,580 84,001 86,125 86,125 86,125 Buy out of minorities 6,896 7,173 7,329 7,957 8,598 9,283 10,029 10,715 Pension provisions/other 1,456 1,426 1,538 1,538 1,538 1,538 1,538 1,538 Total enterprise value 126,302 126,219 130,496 124,704 131,766 134,575 135,321 136,007 Non core assets (8,640) (8,002) (8,300) (8,341) (8,720) (8,488) (8,167) (7,807) Core enterprise value 117,662 118,217 122,197 116,363 123,046 126,087 127,153 128,200

Growth (%) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Revenue 13.5 10.3 7.3 -3.3 5.3 10.3 7.6 4.2 EBITDA (UBS) 9.5 9.0 12.6 0.7 7.2 14.1 10.7 5.6 EBIT (UBS) 5.9 10.5 17.0 -3.6 7.7 18.4 15.0 6.1 EPS (UBS, diluted) 2.0 19.7 24.9 -22.8 9.6 28.8 24.6 10.6 Net DPS 18.5 8.0 6.4 -2.2 9.6 28.8 24.6 10.6

Margins & Profitability (%) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Gross profit margin 61.5 62.0 63.0 61.1 61.1 62.2 63.5 63.6 EBITDA margin 62.3 61.5 64.6 67.3 68.5 70.8 72.9 73.8 EBIT margin 33.8 33.9 37.0 36.9 37.7 40.5 43.2 44.0 Net earnings (UBS) margin 14.9 16.2 18.8 15.0 15.7 18.3 21.2 22.5 ROIC (EBIT) 6.8 7.1 8.1 7.5 7.5 8.5 9.5 10.0 ROIC post tax 5.9 5.9 6.9 5.8 5.9 6.8 7.6 7.9 ROE (UBS) 9.1 10.1 11.6 8.4 8.6 10.2 11.6 11.7

Capital structure & Coverage (x) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Net debt / EBITDA 5.6 5.1 4.5 4.8 4.7 4.1 3.5 3.1 Net debt / total equity % 172.8 161.0 150.3 147.6 145.7 132.9 115.1 97.9 Net debt / (net debt + total equity) % 63.3 61.7 60.1 59.6 59.3 57.1 53.5 49.5 Net debt/EV % 65.8 65.8 63.4 70.1 70.2 68.1 64.3 59.4 Capex / depreciation % NM 143.8 115.0 190.9 195.7 146.1 123.0 117.0 Capex / revenue % NM NM 29.4 NM NM NM NM NM EBIT / net interest 2.5 2.4 2.6 2.7 2.6 2.9 3.3 3.5 Dividend cover (UBS) 4.9 5.4 6.3 5.0 5.0 5.0 5.0 5.0 Div. payout ratio (UBS) % 20.6 18.5 15.8 20.0 20.0 20.0 20.0 20.0

Revenues by division (Rmbm) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Wind 14,491 16,072 18,424 17,915 19,155 21,850 24,038 25,285 Coal 7,270 7,990 7,314 6,885 6,941 6,947 6,953 6,959 Others 543 530 650 709 774 841 911 985 Total 22,304 24,591 26,388 25,509 26,869 29,638 31,902 33,229

EBIT (UBS) by division (Rmbm) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Wind 6,609 7,963 9,549 8,827 9,586 11,460 13,272 14,123 Coal 896 508 392 721 685 687 689 692 Others 42 (134) (186) (140) (135) (150) (165) (182) Total 7,548 8,337 9,756 9,409 10,136 11,997 13,795 14,633 Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.



36

Huaneng Renewable Corporation Deeply valued but lacking catalysts

Taking a break; downgrade from Buy to Neutral We downgrade Huaneng Renewable from Buy to Neutral with a new price target of HK$2.40. We are cutting our 2019-21 earnings forecasts significantly to reflect the 1) FY18 earnings miss, 2) reduced utilisation hours assumption from 2,200 to 2,000, and 3) longer receivable days and weaker free cash flows. This makes our current earnings estimates about 30% below consensus. Trading at around 0.7x forward P/BV at 9% ROE, we believe investors have largely priced in the lacklustre outlook. For shares to re-rate, we believe this may happen after the rush installation programme when utilisation, cash flows, and balance sheets recover.

Raised capacity expansion target after two years of subdued growth Huaneng Renewable has substantially increased its capacity additions target to 1.6GW and 2.0GW of new onshore wind farms for 2019 and 2020, respectively, compared with around 0.4GW of additions in 2017-18 p.a. The majority of these projects are located in southern China, but we think curtailment could still exacerbate as this may crowd out the demand from importing renewable powers from other regions.

What are the catalysts ahead? We believe shares could range trade for a while as balance sheets, earnings, and cash flows all remain under pressure. We believe the upside catalysts would be 1) subsidy receivables would finally be eased with a sustainable, new source of financing; 2) reduced capacity expansion; and 3) better utilisation hours.

Valuation: downgrade to Neutral; lower price target from HK$3.00 to HK$2.40 We base our price target on a DCF methodology, assuming 7.5% WACC, 7.0% ROIC, and 3% terminal growth. Our price target implies 8x 2019E PE and 0.7x 2019E P/BV, close to the level in the last rush installation cycle in 2015-16.

Equities

China

Electric Utilities

12-month rating Neutral Prior: Buy


Prior: HK$3.00

Price HK$2.24





Free float 90%




P/BV (12/19E) 0.7x



12/19E 0.36 0.24 -31 0.35 12/20E 0.38 0.27 -28 0.39 12/21E 0.40 0.33 -16 0.42

Ken Liu Analyst




Abigail Sun Analyst


+86-213-866 8637


Profitability/valuation 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E EBIT margin % 53.1 55.5 54.2 48.4 47.6 47.9 51.2 51.1 ROIC (EBIT) % 7.2 8.1 8.4 6.6 6.6 7.1 7.8 8.0 EV/EBITDA (core) x 8.4 7.3 7.2 7.4 7.4 6.8 6.3 6.1 P/E (UBS, diluted) x 7.8 6.8 6.2 7.8 7.1 5.7 4.7 4.5 Equity FCF (UBS) yield % (2.6) 13.4 20.0 (23.4) (31.4) 2.0 38.3 42.4 Net dividend yield % 2.0 1.9 2.0 1.9 2.1 2.6 3.2 3.3 Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of HK$2.24 on 09 Apr 2019 18:25 HKT


37

Huaneng Renewable Corporation Neutral (Price target HK$2.40)

CO1 P2

UBS Research THESIS MAP a guide to our thinking and what's where in this report

PIVOTAL QUESTIONS Q: Will wind power installation volume surge in 2019/20?

Yes. We think wind power installation could surge significantly in 2019/20 ahead of the subsidy cancellation at end-2020. We forecast 30/32GW wind power connection and 31GW/33GW wind power installation in 2019/20.

more

Q: Will curtailment continue to ease or become worse?

Worse. We believe the glut of new wind farm supply is likely to increase the pressure for the grid to absorb the renewable power. Utilisation is likely to be suppressed in 2019/20, which would be bad for earnings. We expect curtailment to go back to the 2016 level of around 15%.

more


Unlikely. The rush installation for new wind farms in 2019/20 will likely to exacerbate the subsidy deficits. We expect balance sheets and cash flows for wind farm operators to further deteriorate. We think receivable days may increase from one year or eighteen months to almost two years.

more

UBS VIEW We believe the operating environment for Huaneng Renewable will significantly worsen in 2019/20 as most companies rush ahead to install new wind projects. We believe it will suffer from 1) reduced earnings as curtailment will likely worsen; 2) deteriorating cash flow with larger subsidy deficit and increased capex; and 3) increased gearing.

EVIDENCE 1) Most managements of wind farm operators have increased their guidance for expansion plans in 2019 and 2020; and 2) our renewable subsidy funds calculation shows that deficit will escalate in the next two years as capacity expansion is accelerating.

WHAT'S PRICED IN? Trading at around 0.7x forward P/BV at 9% ROE, we believe investors have largely priced in the lacklustre outlook. For shares to re-rate, we believe this may happen after the rush installation programme when utilisation, cash flows, and balance sheets recover.


Value drivers 2019E Wind farm utilization hour



more

COMPANY DESCRIPTION Huaneng Renewable Power is an independent power producer in China that focuses on generating power from wind farms, supplemented by power from solar resources. more

Ken Liu, Analyst, [email protected], +852-2971 7516


38

Huaneng Renewable Corporation UBS Research CO1 UD


Value drivers 2019E

Wind farm utilization hour Subsidy receivable days Average finance costs


Huaneng Renewable is trading at HK$2.24 (as of 9 April)

Risk to the current share price is skewed 1.3:1 to the upside

Huaneng Renewable is trading at HK$2.24 (as of 9 April).

Upside (HK$3.10): In our upside scenario, we assume better utilisation hours of 2,100 from 2019 onwards. In addition, we assume subsidy receivable days are shorter than our expectation, at 365 days. We also assume interest costs could be lower at 4.0%. In this case, we would derive a valuation of HK$3.10 per share, implying 0.9x 2019E P/BV.

Base (HK$2.40): In our base case, we assume rush installation will push Huaneng Renewable's utilization hours to 2,000 hours with subsidy receivable days of 414 days. We assume interest costs could remain flattish at 4.5%. Our price target is based on a DCF methodology, and implies 0.7x 2019E P/BV.

Downside (HK$1.60): In our downside scenario, we assume rush installation will push Huaneng Renewable's utilization hours further, to 1900 hours, and lead to longer subsidy receivable days, to 465 days. We also factor in higher finance costs of 5.0% in view of a worse balance sheet. In this case, we would derive a valuation of HK$1.60 per share, implying 0.5x 2019E P/BV.


39

Figure 29: DCF valuation

WACC derivation

Risk-free rate 4.3%

Equity risk premium 5.0%

Beta 1.0

Cost of equity 9.4%

Cost of debt 5.6%

Effective tax rate 17.4%

After tax cost of debt 4.6%

Long-term debt to total capital ratio (%) 40%

WACC 7.5%

Long-term growth rate 3.0%

Explicit forecasts

Dec fiscal year-ends 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E TV

Years ahead - - - 1 2 3 4 5 5

Discount factor 1.00 1.00 1.00 0.93 0.86 0.80 0.75 0.69 0.69

(Rmb m)

EBIT 5,651 5,896 5,255 5,807 6,894 7,968 8,223 8,527

Tax rate 10% 15% 17% 16% 15% 17% 18% 20%

NOPAT 5,071 5,041 4,361 4,854 5,828 6,611 6,710 6,849

Depreciation and amortisation 3,798 3,973 4,163 4,747 5,469 5,676 5,882 6,089

Fixed assets investment and acquisition (5,117) (3,125) (12,807) (14,199) (11,525) (4,307) (4,308) (4,482)

Change in net working capital (1,643) (1,841) (766) (2,214) 79 (980) (386) (385)

Net enterprise cash flow 2,109 4,048 (5,048) (6,811) (149) 7,000 7,898 8,072

Discounted free cash flow 2,109 4,048 (5,048) (6,336) (129) 5,636 5,916 5,625

Terminal year

Invested capital in first year of Stage 2 104,190

Long-term ROIC 7.0%

NOPAT in first year of Stage 2 7,187

NOPAT multiple 12.7x

Terminal value (undiscounted) 91,461

Discount factor 0.70

Terminal value (discounted) 63,736

Summary of DCF (Rmb m)

Per share

(HK$)

Explicit FCF 10,712 1.2

Dividends and interest received - -

Discounted terminal value (Stage 2 DCF) 63,736 7.4

Total enterprise value 74,448 8.7

- net debt (52,814) (6.1)

- minority interest (853) (0.1)

NPV (Rmb m) 20,780 2.40

NPV (HK$ m) 23,513 2.40



40

Huaneng Renewable Corporation UBS Research CO1 Co des


Huaneng Renewable Power is an independent power producer in China that focuses on generating power from wind farms, supplemented by power from solar resources. At the end of H118, the company had 11.6GW of total installed capacity, of which 10.7GW came from wind power and 0.9GW from solar power.

Industry outlook

The wind power industry in China may face another round of rush installations in 2019/20 ahead of the subsidy cancellation. We expect overall wind power capacity additions to surge to 30/32GW in 2019/20E. We believe that the operating environment for wind farm operators will significantly worsen in 2019/20 as most companies rush ahead to install new wind projects. We believe they will suffer from 1) reduced earnings as curtailment will likely worsen; 2) deteriorating cash flow with larger subsidy deficit and increased capex; and 3) increased gearing.

Revenues by segment – 2019E (%)


EBIT by product segment

Rmb m 2017 2018 2019E 2020E 2021E

Wind Power 5,269 5,575 4,454 4,913 5,907

Solar Power 586 742 802 894 987

Total 5,651 5,896 5,255 5,807 6,894


Wind, 89%

Solar, 11%


41

Huaneng Renewable Corporation (0958.HK)

Income statement (Rmbm) 12/16 12/17 12/18 12/19E % ch 12/20E % ch 12/21E 12/22E 12/23E Revenues 9,239 10,554 11,650 10,856 -6.8 12,201 12.4 14,400 15,557 16,102 Gross profit 5,776 6,756 7,677 6,693 -12.8 7,454 11.4 8,931 9,882 10,219 EBITDA (UBS) 8,370 9,654 10,290 9,419 -8.5 10,554 12.1 12,363 13,644 14,106 Depreciation & amortisation (3,462) (3,798) (3,973) (4,163) 4.8 (4,747) 14.0 (5,469) (5,676) (5,882) EBIT (UBS) 4,908 5,855 6,317 5,255 -16.8 5,807 10.5 6,894 7,968 8,223 Associates & investment income (97) 139 296 0 - 0 - 0 0 0 Other non-operating income 0 0 0 0 - 0 - 0 0 0 Net interest (1,995) (2,238) (2,189) (2,159) 1.4 (2,406) -11.4 (2,727) (2,797) (2,781) Exceptionals (incl goodwill) 94 (144) (307) 0 - 0 - 0 0 0 Profit before tax 2,910 3,612 4,117 3,097 -24.8 3,401 9.8 4,167 5,171 5,442 Tax (202) (346) (567) (480) 15.3 (502) -4.4 (585) (810) (923) Profit after tax 2,708 3,266 3,550 2,617 -26.3 2,899 10.8 3,582 4,361 4,520 Preference dividends and Minorities (49) (50) (42) (35) 16.2 (39) -9.8 (47) (59) (62) Extraordinary items 0 0 0 0 - 0 - 0 0 0 Net earnings (local GAAP) 2,659 3,216 3,508 2,581 -26.4 2,861 10.8 3,534 4,302 4,458 Net earnings (UBS) 2,564 3,360 3,815 2,581 -32.3 2,861 10.8 3,534 4,302 4,458 Tax rate (%) 6.9 9.6 13.8 15.5 12.6 14.7 -4.9 14.0 15.7 17.0


Balance sheet (Rmbm) 12/16 12/17 12/18 12/19E % ch 12/20E % ch 12/21E 12/22E 12/23E Cash and equivalents 2,570 2,503 3,415 4,043 18.4 1,900 -53.0 36 3,534 10,435 Other current assets 6,126 8,739 11,168 12,418 11.2 15,718 26.6 13,993 14,793 15,000 Total current assets 8,696 11,242 14,582 16,461 12.9 17,618 7.0 14,029 18,328 25,435 Net tangible fixed assets 72,107 71,406 70,812 80,272 13.4 92,335 15.0 91,728 90,914 89,894 Net intangible fixed assets 1,005 978 858 865 0.8 885 2.4 854 822 790 Investments / other assets 3,638 2,722 2,420 2,699 11.6 3,159 17.0 2,982 2,779 2,576 Total assets 85,445 86,349 88,671 100,297 13.1 113,997 13.7 109,592 112,843 118,695 Trade payables & other ST liabilities 7,520 6,381 6,945 8,239 18.6 12,208 48.2 3,634 3,859 3,972 Short term debt 22,998 20,705 22,086 24,418 10.56 27,297 11.79 28,124 28,951 29,778 Total current liabilities 30,517 27,086 29,031 32,657 12.5 39,506 21.0 31,758 32,810 33,749 Long term debt 29,955 30,682 29,341 32,439 10.6 36,264 11.8 37,363 38,461 39,559 Other long term liabilities 3,978 3,138 2,086 4,823 131.2 5,312 10.1 4,327 1,697 1,681 Preferred shares 0 0 0 0 - 0 - 0 0 0 Total liabilities (incl pref shares) 64,451 60,907 60,458 69,919 15.6 81,082 16.0 73,448 72,967 74,990 Common s/h equity 20,137 24,602 27,408 29,525 7.7 31,997 8.4 35,168 38,869 42,679 Minority interests 857 840 805 853 6.0 918 7.6 977 1,006 1,027 Total liabilities & equity 85,445 86,349 88,671 100,297 13.1 113,997 13.7 109,592 112,843 118,695

Cash flow (Rmbm) 12/16 12/17 12/18 12/19E % ch 12/20E % ch 12/21E 12/22E 12/23E Net income (before pref divs) 2,659 3,216 3,508 2,581 -26.4 2,861 10.8 3,534 4,302 4,458 Depreciation & amortisation 3,462 3,798 3,973 4,163 4.8 4,747 14.0 5,469 5,676 5,882 Net change in working capital (793) (1,643) (1,841) (766) 58.4 (2,214) -189.0 79 (980) (386) Other operating 2,011 2,513 2,455 2,092 -14.8 2,450 17.1 2,843 3,065 2,940 Operating cash flow 7,338 7,885 8,095 8,070 -0.3 7,844 -2.8 11,925 12,062 12,894 Tangible capital expenditure (7,877) (5,117) (3,125) (12,807) -309.9 (14,199) -10.9 (11,525) (4,307) (4,308) Intangible capital expenditure 0 0 0 0 - 0 - 0 0 0 Net (acquisitions) / disposals 0 0 0 0 - 0 - 0 0 0 Other investing 507 927 (1,276) 2,839 - 563 - (950) (2,581) 137 Investing cash flow (7,370) (4,191) (4,400) (9,968) -126.5 (13,636) -36.8 (12,475) (6,888) (4,171) Equity dividends paid (292) (433) (454) (465) -2.3 (389) 16.4 (431) (532) (648) Share issues / (buybacks) 0 1,909 0 0 - 0 - 0 0 0 Other financing (2,198) (2,285) (2,358) (2,439) -3.47 (2,667) -9.32 (2,875) (3,001) (3,099) Change in debt & pref shares 632 (1,718) 1,507 5,430 260.32 6,704 23.47 1,925 1,925 1,925 Financing cash flow (1,858) (2,527) (1,305) 2,526 - 3,649 44.5 (1,381) (1,609) (1,822) Cash flow inc/(dec) in cash (1,889) 1,167 2,389 628 -73.7 (2,143) - (1,932) 3,566 6,901 FX / non cash items (44) (1,234) (1,477) 0 100.0 0 -166.7 68 (68) 0 Balance sheet inc/(dec) in cash (1,934) (67) 912 628 -31.1 (2,143) - (1,864) 3,498 6,901 Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.


42

Huaneng Renewable Corporation (0958.HK)

Valuation (x) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E P/E (local GAAP, diluted) 7.5 7.1 6.8 7.8 7.1 5.7 4.7 4.5 P/E (UBS, diluted) 7.8 6.8 6.2 7.8 7.1 5.7 4.7 4.5 P/CEPS 3.3 3.2 3.1 3.0 2.7 2.3 2.0 2.0 Equity FCF (UBS) yield % (2.6) 13.4 20.0 (23.4) (31.4) 2.0 38.3 42.4 Net dividend yield (%) 2.0 1.9 2.0 1.9 2.1 2.6 3.2 3.3 P/BV x 1.0 1.0 0.9 0.7 0.6 0.6 0.5 0.5 EV/revenues (core) 7.6 6.7 6.3 6.4 6.4 5.9 5.5 5.3 EV/EBITDA (core) 8.4 7.3 7.2 7.4 7.4 6.8 6.3 6.1 EV/EBIT (core) 14.4 12.1 11.7 13.2 13.5 12.3 10.7 10.4 EV/OpFCF (core) 8.5 7.4 7.2 7.4 7.5 6.9 6.3 6.1 EV/op. invested capital 1.0 1.0 1.0 0.9 0.9 0.9 0.8 0.8

Enterprise value (Rmbm) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Market cap. 21,001 20,710 24,805 20,261 20,261 20,261 20,261 20,261 Net debt (cash) 48,899 49,634 48,449 48,449 57,238 63,556 64,664 64,664 Buy out of minorities 857 840 805 853 918 977 1,006 1,027 Pension provisions/other 0 0 0 0 0 0 0 0 Total enterprise value 70,756 71,184 74,058 69,563 78,417 84,794 85,931 85,952 Non core assets (206) (354) (301) (301) (301) (301) (301) (301) Core enterprise value 70,550 70,830 73,757 69,262 78,116 84,492 85,629 85,650

Growth (%) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Revenue 25.6 14.2 10.4 -6.8 12.4 18.0 8.0 3.5 EBITDA (UBS) 22.1 15.3 6.6 -8.5 12.1 17.1 10.4 3.4 EBIT (UBS) 19.2 19.3 7.9 -16.8 10.5 18.7 15.6 3.2 EPS (UBS, diluted) 60.8 24.3 10.2 -32.3 10.8 23.5 21.7 3.6 Net DPS 36.7 4.9 2.3 -16.4 10.8 23.5 21.7 3.6

Margins & Profitability (%) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Gross profit margin 62.5 64.0 65.9 61.7 61.1 62.0 63.5 63.5 EBITDA margin NM NM NM NM NM NM NM NM EBIT margin 53.1 55.5 54.2 48.4 47.6 47.9 51.2 51.1 Net earnings (UBS) margin 27.8 31.8 32.7 23.8 23.4 24.5 27.7 27.7 ROIC (EBIT) 7.2 8.1 8.4 6.6 6.6 7.1 7.8 8.0 ROIC post tax 6.7 7.3 7.4 5.6 5.6 6.1 6.6 6.6 ROE (UBS) 13.5 15.0 14.7 9.1 9.3 10.5 11.6 10.9

Capital structure & Coverage (x) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Net debt / EBITDA 6.0 5.1 4.7 5.6 5.8 5.3 4.7 4.2 Net debt / total equity % 240.0 192.1 170.2 173.9 187.3 181.1 160.2 134.8 Net debt / (net debt + total equity) % 70.6 65.8 63.0 63.5 65.2 64.4 61.6 57.4 Net debt/EV % 71.4 69.0 65.1 76.3 78.9 77.5 74.6 68.8 Capex / depreciation % NM 134.7 78.6 NM NM NM 75.9 73.2 Capex / revenue % NM NM 26.8 NM NM NM 27.7 26.8 EBIT / net interest 2.5 2.6 2.9 2.4 2.4 2.5 2.8 3.0 Dividend cover (UBS) 6.4 7.6 8.2 6.6 6.6 6.6 6.6 6.6 Div. payout ratio (UBS) % 15.6 13.1 12.2 15.1 15.1 15.1 15.1 15.1

Revenues by division (Rmbm) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Wind power 8,430 9,587 10,557 9,667 10,872 12,928 13,940 14,336 Solar power 802 962 1,089 1,184 1,324 1,467 1,612 1,760 Others 6 6 5 5 5 5 5 5 Others 0 0 0 0 0 0 0 0 Total 9,239 10,554 11,650 10,856 12,201 14,400 15,557 16,102

EBIT (UBS) by division (Rmbm) 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E 12/23E Wind power 4,421 5,269 5,575 4,454 4,913 5,907 6,887 7,047 Solar power 487 586 742 802 894 987 1,081 1,176 Others 0 0 0 0 0 0 0 0 Others 0 0 0 0 0 0 0 0 Total 4,908 5,855 6,317 5,255 5,807 6,894 7,968 8,223 Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.


43

Valuation Method and Risk Statement

We base our Goldwind A & H price targets on a sum-of-the-parts (SOTP) methodology, with valuation of each segment based on DCF. We base our Longyuan price target on a DCF valuation, assuming 7.7% WACC, 7.4% terminal ROIC, and 3.0% terminal growth. We base our Huaneng Renewable price target on a DCF methodology, assuming 7.5% WACC, 7.0% ROIC, and 3% terminal growth. The main risks for wind power equipment manufacturers include: better-than-expected WTG sales margin; higher WTG sales volume; and larger-than-expected increase in operating efficiency, i.e., lower SG&A costs. The main downside risks for China’s wind farm operators include: lower-than-expected utilisation rates; reduced levels of policy support for wind power (including VAT privileges, concessionary income tax treatments and special feed-in tariffs); and lower-than-expected prices for the sale of carbon-certified emission reduction credits.


44

Required Disclosures

This report has been prepared by UBS Securities Asia Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 10 April 2019 09:05 AM GMT. UBS has designated certain Research department members as Derivatives Research Analysts where those department members publish research principally on the analysis of the price or market for a derivative, and provide information reasonably sufficient upon which to base a decision to enter into a derivatives transaction. Where Derivatives Research Analysts co-author research reports with Equity Research Analysts or Economists, the Derivatives Research Analyst is responsible for the derivatives investment views, forecasts, and/or recommendations.

Analyst Certification:Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, 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 by that research analyst in the research report.

UBS Investment Research: Global Equity Rating Definitions

12-Month Rating Definition Coverage1 IB Services2

Buy FSR is > 6% above the MRA. 47% 25%

Neutral FSR is between -6% and 6% of the MRA. 39% 22%

Sell FSR is > 6% below the MRA. 14% 19%

Short-Term Rating Definition Coverage3 IB Services4

Buy Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. <1% <1%

Sell Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. <1% <1%

Source: UBS. Rating allocations are as of 31 March 2019. 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months.

KEY DEFINITIONS:Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. In some cases, this yield may be based on accrued dividends. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months.

http://www.ubs.com/disclosures


45

EXCEPTIONS AND SPECIAL CASES:UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows.

UBS Securities Co. Limited: Abigail Sun. UBS AG Hong Kong Branch: Ken Liu; Simon Powell.

Company Disclosures

Company Name Reuters 12-month rating Short-term rating Price Price date

China Longyuan Power16 0916.HK Buy N/A HK$5.47 09 Apr 2019

Huaneng Renewable Corporation13 0958.HK Buy N/A HK$2.24 09 Apr 2019

Xinjiang Goldwind Science & Technology13, 18 2208.HK Buy N/A HK$10.28 09 Apr 2019

Xinjiang Goldwind Science & Technology-A13, 18 002202.SZ Buy N/A Rmb13.80 09 Apr 2019

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity

securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end).

16. UBS Securities Hong Kong Limited is a market maker in the Hong Kong-listed securities of this company. 18. Market capitalisation is calculated by multiplying the current share price by the sum of A and H shares.

Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research.

China Longyuan Power (HK$)

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Date Stock Price (HK$) Price Target (HK$) Rating

2016-01-08 5.25 - No Rating 2016-02-06 4.01 9.5 Buy 2016-07-21 6.4 8.5 Buy 2016-11-08 6.2 8.4 Buy 2017-01-13 6.33 8.3 Buy 2017-04-12 6.04 7.7 Buy 2017-08-17 6.0 7.6 Buy 2017-10-26 6.23 7.5 Buy 2018-03-26 5.8 8.0 Buy 2018-04-11 6.8 8.5 Buy 2018-04-26 6.96 9.0 Buy 2018-11-02 6.16 8.7 Buy

Source: UBS; as of 09 Apr 2019

Huaneng Renewable Corporation (HK$)

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2016-01-08 2.08 3.8 Buy 2016-07-21 2.47 3.4 Buy 2016-09-07 3.1 3.5 Buy 2017-06-12 2.47 3.3 Buy 2017-08-17 2.39 3.2 Buy 2018-03-26 2.94 3.5 Buy 2018-04-11 3.17 4.1 Buy 2018-11-02 2.19 3.0 Buy



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Xinjiang Goldwind Science & Technology (HK$)

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2016-01-08 9.25 - No Rating 2016-02-19 6.87 6.89 Sell 2017-01-27 9.36 - No Rating 2017-04-20 7.89 10.49 Buy 2017-07-17 7.85 10.28 Buy 2017-10-31 9.22 10.97 Buy 2018-01-05 12.7 15.3 Buy 2018-04-03 11.65 15.35 Buy 2018-08-14 8.24 12.14 Buy 2018-11-13 7.56 9.98 Buy 2019-01-22 6.75 9.99 Buy 2019-02-18 8.94 12.0 Buy


Xinjiang Goldwind Science & Technology-A (Rmb)

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Date Stock Price (Rmb) Price Target (Rmb) Rating

2016-01-08 14.51 - No Rating 2017-04-20 11.37 12.84 Buy 2017-07-17 10.38 12.5 Buy 2017-10-31 13.44 14.23 Neutral 2018-01-05 17.48 19.41 Neutral 2018-04-03 15.82 17.89 Neutral 2018-08-14 12.03 13.13 Neutral 2018-10-17 8.58 12.06 Buy 2018-11-13 10.61 11.96 Buy 2019-01-22 10.24 12.81 Buy 2019-02-18 13.07 17.0 Buy



49

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