Chinese IPPs NEUTRAL. Floating in mid air. China SECTOR RESEARCH. Margin expansion over, lacks earnings drivers

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1 June 11, 214 ` China SECTOR RESEARCH Chinese IPPs Floating in mid air Initiate Chinese IPP sector with NEUTRAL view. BUYs on CPI and CRP for higher hydro and wind exposure respectively; the rest HOLD. IPP margin cycle has peaked, as we see limited downside to spot thermal coal prices. As such, sector lacks investment catalysts to reach new highs. EPS growth tumbles to zero. Div. yield defensive but w/ share price volatility + potentially higher-than-expected tariff cut in near term. Possible margin squeeze from tariff adjustment lag in medium term. Margin expansion over, lacks earnings drivers No growth in 215. We project IPPs average EBIT margin to stay at around 22% in 214E and 215E. Given limited downside to spot coal prices, there is minimal room for further margin expansion. We project average EPS growth for the five IPPs we are initiating will be around 8% in 214E, and % in 215E, vs. 75% in 213. We factor in a 3% and 2% average coal-fire tariff cut for 214E and 215E, largely in line with consensus, and therefore believe these tariff cuts have already been discounted. However, we highlight the potential downside surprise if tariff cuts are higher than expected. High div with risk. Sector s high dividend yield looks appealing, but it could be threatened with lower earnings due to a rebound in spot coal prices and a higher-than-expected tariff cut. Unlike Hong Kong utilities, we believe share price volatility will discount the attractiveness of the IPPs dividend. Neutral view on sector, BUYs on CPI and CRP Share prices of IPPs have rallied significantly since the recent trough in 1Q14, and the sector is trading at 1x FY14E P/B, at about the middle of its recent two-year historic range. As we do not foresee any strong investment catalysts, we initiate the sector with a NEUTRAL view. For those seeking exposure to the sector we recommend CPI and CRP as they have higher exposure to hydropower and wind power, respectively. We believe the potential hydropower tariff hike will boost profitability and cushion the risk of a coal-fire tariff cut. Wind power assets, on the other hand, could contribute to higher multiples for IPPs. Stock Mkt cap Rating Price TP Upside NEUTRAL Analyst Ricky WK Ng, CFA (852) rickyng@kimeng.com.hk IPP share price performance 34, 33, 32, 31, 3, 29, 28, 27, 26, 25, Total market cap. of IPPs (LHS) Relative to HSCEI (RHS) Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Source: Bloomberg, Maybank Kim Eng Note: Using the sum of the 5 IPPs market caps. Share price performance of the 5 IPPs vs. op. margin 1% 5% % Share price performance (LHS) Average operating margin (RHS) -5% Jan 9 Nov 9 Sep 1 Jul 11 May 12 Mar 13 Jan 14 Note: average share price performance of the 5 IPPs from early 29. Our EPS growth forecast for the 5 IPPs (New) 1% 5% % -5% -1% -15% -2% % 25 EPS growth (LHS) YoY Average spot coal price (RHS) CNY/tonne 6% 85 5% 8 4% % 65 2% % 5 % 45-1% E 215E P/E (x) P/B (x) Dividend yld (%) (USD'm) (LC) (LC) (%) 14E 15E 14E 15E 14E 15E Huaneng Power 14,27.2 Hold China Resources Power 13,198.2 Buy Datang Int'l Power 5,426. Hold (2) Huadian Power Int'l 4,212.6 Hold China Power Int'l 2,375.7 Buy SEE PAGE 65 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

2 Chinese IPPs Contents Margin expansion is over, lacks earnings driver... 1 Investment thesis... 4 Our four preferences for stock selection... 5 (1) Margins have peaked... 6 (2) Potential coal-fired on-grid tariff cut... 9 (3) Power output to slow to +7% YoY in 214F Preference #1: moving into hydro / wind power Preference #2: plants located in coastal regions Preference #3: less sensitive to tariff cuts Preference #4: with stronger balance sheet Initiate with NEUTRAL view; BUY CPI & CRP Summary of companies... 2 Ratio-based valuation Company comparisons Peer comparisons Appendix: Major risks China Resources Power Holdings (836 HK) China Power International Development (238 HK) Huaneng Power International (92 HK) Huadian Power International (171 HK)... 5 Datang International Power (991 HK) June 11, 214 2

3 Chinese IPPs Important charts and tables Figure 1: IPPs EPS growth YoY EPS growth (LHS) Average spot coal price (RHS) CNY/tonne 6% 85 5% % 7 3% 65 2% 6 1% 55 5 % 45-1% E 215E We forecast the IPPs average EPS growth will be 8% in 214E and % in 215E, compared to 75% in 213 and 487% in 212. The limited EPS growth is mainly due to margins having peaked, potential coal-fired on-grid tariff cut and lower power generation growth in 214E. Figure 2: Share price performance of 5 IPPs vs. op. margin 8% 6% 4% 2% % -2% -4% Share price performance (LHS) Average operating margin (RHS) -6% Jan 9 Sep 9 May 1 Jan 11 Sep 11 May 12 Jan 13 Sep 13 May 14 Source: Bloomberg, Maybank Kim Eng Note: average 5 IPPs share price performance benchmark with early 29 Figure 3: Average EBIT margin of 5 IPPs Figure 4: Our sensitivity analysis: FY14E net profit vs. different parameters % % 2% 15% 1% 5% % E 215E 6% 4% 2% % -2% -4% -6% -8% -1% 1% decrease in coal cost Huaneng CPI Huadian CRP Datang 1% decrease in average on-grid tariff 1% increase in generation 25bps increase in average interest rate IPP share prices are positively correlated to expectations on operating margins. In our view IPP margins have peaked. Among the 5 IPPs, CRP is the least sensitive to the major parameters, whilst Huadian is the most sensitive to coal prices and tariffs. Figure 5: Criteria for considering stock picks Criteria Huaneng Huadian CRP CPI Datang Higher proportion of hydro or wind ** * ***** ***** **** Higher exposure to coastal regions **** *** ***** ** *** Lower sensitivity to tariff and interest rates ** * ***** **** ** Stronger balance sheet *** ** ***** *** * Lower corporate governance risk *** *** ** * *** Share price laggard ** * *** **** **** Number of stars Ratings HOLD HOLD BUY BUY HOLD Neutral view on sector; BUYs: CPI and CRP June 11, 214 3

4 Chinese IPPs Investment thesis (1) Earnings growth limited We believe IPPs earnings growth potential is limited. We forecast the five IPPs average EPS growth will be 8% in 214E and % in 215E, compared to 75% in 213 and 487% in 212. The limited EPS growth is mainly due to: 1) Margins having peaked. 2) Potential coal-fired on-grid tariff cut. 3) Our lower power generation growth forecast for 214E. Figure 6: EPS growth forecast (the average of 5 IPPs) YoY 6% 5% 4% 3% 2% 1% % -1% EPS growth (LHS) Average spot coal price (RHS) CNY/tonne E 215E (2) Dividend yield looks attractive but. The sector offers high dividend yields and we forecast the five IPPs average FY14E dividend yield will be 5.9%. Operating cash flows of the five IPPs in this report have improved substantially in the past two years. We calculate their operating cash flow had an average rise of 75% YoY in 213. Their average dividend payout ratio was 42% in 213. Figure 7: Our operating cash flow forecasts Figure 8: Our dividend payout ratio forecasts CNYm 5, CPI CRP Datang Huadian Huaneng 8% CPI CRP Datang Huadian Huaneng Average 4, 6% 3, 2, 4% 1, 2% E 215E % E June 11, 214 4

5 Chinese IPPs (3).not yet defensive like utilities We think Chinese IPPs are not yet defensive and thus the attractiveness of the dividend yield should be at a discount. Reasons why we think the dividend yield is not attractive enough: (1) Additional fuel costs are not immediately passed on. Time lag for the tariff adjustment will produce margin squeeze risks. Spot coal prices remain the driver for stock prices. (2) Share price volatility of IPPs is generally higher than for defensive utilities such as Hong Kong utilities. (3) Except for CRP, IPPs seldom pay interim dividends. The dividend payout in FY14E will only be paid after ~11 months. (4) Although cash flows have improved substantially in recent years, net gearing levels remain high. At the end of 213, the five IPPs average net gearing was 277%. Our four preferences for stock selection Preference #1: diversifying into hydro & wind power We believe it s a sensible strategy for IPPs to diversify their generation portfolio to wind and hydro power as this could reduce policy risks. Companies with higher exposure to hydropower can buffer against cuts in coal-fired tariffs while benefit from the hike in hydropower rates. We also like companies with a higher or increasing proportion of wind power as the earnings growth potential in the wind power sector is greater. Preference #2: plants located in coastal regions We believe IPPs with more exposure to coastal provinces, such as Guangdong, Jiangsu and Zhejiang, will have a better advantage as the location of a power plant is critical to its utilization hours. Preference #3: less sensitive to tariff cuts We also prefer IPPs that are less sensitive to tariff changes in the coalfired thermal sector. These mainly include companies will a higher or growing exposure to hydropower and wind power, such as CPI and CRP. Preference #4: with stronger balance sheet We also like the power producers with stronger balance sheets as this will give them more flexibility in terms of capacity expansion and will also lower their interest expense burden. June 11, 214 5

6 Chinese IPPs (1) Margins have peaked Share price is correlated to margin expectations We believe IPP share prices are closely correlated to expectations on operating margins. Share prices rolled over from the mid-29 peak due to expectations of a margin squeeze resulting from the coal price hike. On the other hand, share prices started to rally in 212 on expectations of margin expansion due to coal prices softening. Figure 9: Share price performance of 5 IPPs vs. operating margin 8% Share price performance (LHS) Average operating margin (RHS) % 25 6% 4% 2 2% 15 % 1-2% -4% 5-6% Jan 9 Sep 9 May 1 Jan 11 Sep 11 May 12 Jan 13 Sep 13 May 14 Source: Bloomberg, Maybank Kim Eng, average share price performance of the 5 IPPs from early 29. Limited downside to spot coal prices Unlike 213 and 212, we expect there will not be much potential downside to spot coal prices in 214E. Our commodity team forecasts the average Qinhuangdao spot coal price in 214E will be down by around 6% YoY, mainly due to the higher base in early 213. Compared to the 14% and 17% decline in the average spot coal price in 212 and 213, the fuel cost decline in 214 will be less, in our view. After incorporating the potential 3% average coal-fired on-grid tariff cut in 214E and 2% in 215E, we forecast IPPs margins have peaked in 213 and will be relatively stable in 214E and 215E. We forecast the five IPPs average EBIT and gross margins will peak at 22% and 5%. Figure 1: Average EBIT margin of 5 IPPs Figure 11: Average gross margin of 5 IPPs 25% 6% 2% 5% 15% 1% 4% 3% 2% 5% 1% % E 215E % E 215E Coal prices relatively stable but weak Although at the end of 213, the Qinhuangdao spot coal price (Shanxi Premium Blended, 55 kcal/kg) surged to CNY65/tonne from a trough of June 11, 214 6

7 Chinese IPPs CNY52/tonne, the recent spot coal price had been quite steady at CNY53/tonne and is now around CNY525/tonne. The average spot coal price in 213 was CNY587.5/tonne and our commodity team forecasts the average spot coal price in 214E will be CNY553/tonne, down 6% YoY. Generally, the production cost of Shanxi Premium Blended coal is about CNY48/tonne. Thus, compared to the recent CNY525/tonne spot price, we believe further downside potential is small. Figure 12: Qinhuangdao spot coal price (Shanxi Premium Blended, 55 kcal/kg) CNY/tonne 1,1 1, Jan 6 Nov 6 Sep 7 Jul 8 May 9 Mar 1 Jan 11 Nov 11 Sep 12 Jul 13 May 14 Source: Wind, Maybank Kim Eng Figure 13: Average spot coal prices Qinhuangdao (Shanxi Premium Blended,55 kcal/kg) Average spot price Year Average spot coal price YoY change % % % % % % % 214E % Source: Wind, Maybank Kim Eng Coal inventory at a healthy level On 2 May 214, coal inventory at key power plants was 74m tonnes, equating to 23 coal inventory days, which is a high level compared to the peak of 23 days in February 214 and the trough of 15 in August 213. We expect the healthy coal inventory will lower the risk of higher spot coal prices due to the higher stockpiles. Figure 14: Coal inventory days at key power plants Figure 15: Coal inventory levels at key power plants Days 35 Coal inventory days for key power plants Average days Ten thousand tonnes 1, key power plant coal inventory 3 8, , 4, 1 2, 5 Jan 1 Nov 1 Sep 11 Jul 12 May 13 Mar 14 Jan 1 Nov 1 Sep 11 Jul 12 May 13 Mar 14 Source: Wind, Maybank Kim Eng Source: Wind, Maybank Kim Eng June 11, 214 7

8 Chinese IPPs Overseas coal could be option but only for coastal plants Overseas coal imports could provide another option to coastal power plants. We estimate that imported thermal coal has contributed around 1% of the total thermal coal consumed in China. Cheap overseas coal could limit the risk of higher domestic coal prices, in our view. The Newcastle 67kc FOB steam coal spot price is USD72.95/tonne, which is a 37% discount to the USD1.18/tonne domestic coal price. Incorporating the freight rates, we estimate the price discount remains at around 3%-4%. Figure 16: Spot coal prices (Newcastle vs. Qinhuangdao) USD/metric tonne 25 McCloskey Newcastle 67 kc GAD fob Steam Coal Spot Price Qinhuangdao 68 kc GAD fob Steam Coal Spot Price Aug 5 Nov 6 Feb 8 May 9 Aug 1 Nov 11 Feb 13 May 14 Source: McCloskey, Bloomberg, Maybank Kim Eng Huadian is the most sensitive to average coal cost changes Due to the higher operating leverage, Huadian is the most sensitive to changes in the average coal cost. In our estimate, for every 1% fall in the average coal cost, the FY14E net profit will rise 5%. However, it is less sensitive than it was in the past two years due to the larger earnings base. Figure 17: Our sensitivity analysis: FY14E net profits vs. 1% change in average coal cost 6% 5% 4% 3% 2% 1% % Huaneng CPI Huadian CRP Datang June 11, 214 8

9 Chinese IPPs (2) Potential coal-fired on-grid tariff cut The tariff cut in 213 (ranging between ~2% and ~5%, depending on the province) was in fact not related to the coal-tariff linkage mechanism, in our view. In order to maintain the end-user price of electricity at the same level, the on-grid tariff was cut to offset the rise in the renewable energy surcharge and subsidies for emissions control. At the end of 212, the NDRC reiterated its intention to implement the coal-tariff linkage mechanism. The way it works is that once the yearly coal price changes by more than 5%, 9% of the fluctuation will be passed through. The average spot coal price in 213 was 7.5% lower than the price at the end of 212. If the coal-tariff linkage mechanism is implemented, we forecast the potential tariff cut will be 5%. We factor in average tariff cut of 3% in 214E, 2% in 215E Although there is no announcement about the coal-fired on-grid tariff cut, we believe the market already expects it will happen in 2H14. To be conservative, we also expect a tariff cut of about 5% in 214E. As a result, we forecast the average coal-fired tariff cut will be 3% in 214E and 2% in 215E. What if potential tariff cut is more than expected? We believe the potential coal-fired on-grid tariff cut in 2H14 is expected by the market. If it happens, the magnitude of the cut will be the key. If it is more than expected, it could create downside risk to IPPs. Otherwise, it could clear the overhang and probably be positive to share price, in our view. Huadian is also the most sensitive to tariff changes Among the five IPPs we are initiating in this report, Huadian is also the most sensitive to tariff changes due to the higher operating leverage. We estimate that a 1% decrease in the average on-grid tariff will lead to a 7.5% fall in Huadian s FY14E net profit. Figure 18: Our sensitivity analysis: FY14E net profit decline for every 1% average tariff cut 8% 7% 6% 5% 4% 3% 2% 1% % Huaneng CPI Huadian CRP Datang June 11, 214 9

10 Chinese IPPs Unit coal consumption being mild margin driver We forecast the five IPPs average unit fuel cost will drop 3% YoY in 214E. The downtrend of the unit coal consumption rate could also contribute to the unit fuel cost decline. We expect the downtrend will be due to a greater number of larger and more efficient units to be built. We forecast the average coal consumption rate will decline by 1% in 214E. Figure 19: Our unit fuel cost forecasts CNY/MWh Huaneng CPI Huadian CRP Datang E 215E Figure 2: Our unit coal consumption forecasts g/kwh 33 Huaneng CPI Huadian CRP Datang E 215E June 11, 214 1

11 Chinese IPPs (3) Power output to slow to 7% YoY in 214F We forecast output growth to slow to 7% in 214 from 7.5% in 213 Based on our assumptions of 7% GDP growth for China and a elasticity (generation growth/gdp growth) of 1x in 214E, we forecast China s power generation in 214 will grow 7% YoY (to 5,612bn kwh), slowing from the 7.5% YoY growth in 213 (5,245bn KWh). Figure 21: China s power generation growth and GDP growth x LHS: Elasticity (generation growth/gdp growth) RHS: GDP growth RHS: generation growth % Source: National Bureau of Statistics, CEIC, Maybank Kim Eng Figure 22: Power generation in China bn kwh Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: National Bureau of Statistic, CEIC, Wind, Maybank Kim Eng Figure 23: YoY growth of power generation % Source: National Bureau of Statistic, CEIC, Wind, Maybank Kim Eng Figure 24: Thermal and hydro power generation in China Fig 25: Breakdown of power usage as at end-april 214 bn kwh Thermal Hydro Primary 5 Residential 14% 2% 4 3 Tertiary 12% 2 1 Jan 9 Nov 9 Sep 1 Jul 11 May 12 Mar 13 Jan 14 Source: National Bureau of Statistic, CEIC, Maybank Kim Eng Source: China Electricity Council, CEIC, Maybank Kim Eng Secondary 72% June 11,

12 Chinese IPPs Sluggish capacity growth: forecast +5% in 214 for thermal In 213, China s cumulative thermal power capacity rose by 6% YoY to 862GW. For 214, we forecast growth to slow to 5% YoY to 95GW as investments for the construction of thermal power sources fell 7% YoY in 213 and 12% YoY in 212. Figure 26: Generation capacity in China (MW) 1,6, Generation capacity: Overall YoY growth: Overall (RHS) Generation capacity: Thermal YoY growth:thermal (RHS) 25% 1,4, 1,2, 2% 1,, 8, 6, 15% 1% 4, 2, 5% % E Source: National Bureau of Statistics, CEIC, Maybank Kim Eng Figure 27: Construction investment for power sources Overall Thermal Hydro YoY growth: Overall (RHS) CNYm YoY growth: Thermal (RHS) YoY growth: Hydro (RHS) 5, 4% 4, 3, 2, 1, % 2% 1% % -1% -2% -3% Source: National Bureau of Statistics, CEIC, Maybank Kim Eng We forecast utilization hours to increase 1% for thermal We believe power utilization hours in China will not grow considerably this year too. For thermal power, we forecast utilization hours will rise 1% this year. Our mild growth forecast is mainly due to the smaller increase in new capacity as mentioned, rather than a robust growth in power demand. Thermal power generation grew 6.9% YoY in 213, below the 7.6% YoY growth in overall power generation. We forecast thermal power generation will grow 6% YoY in 214. As we forecast thermal power capacity growth in 214 of 5% YoY as stated above, we forecast the utilization hours for thermal power will increase around 1% YoY in 214. We forecast the thermal utilization rate will increase from 57% in 213 to 58% in 214. June 11,

13 Chinese IPPs Figure 28: Forecasts of utilization hours Hours Overall Thermal Hydro 6,5 6, 5,5 5, 4,5 4, 3,5 3, 2,5 2, Source: National Bureau of Statistics, CEIC, Maybank Kim Eng June 11,

14 Chinese IPPs Preference #1: moving into hydro / wind power We believe it s a sensible strategy for IPPs to diversify their generation portfolio to wind and hydro power as this could reduce policy risks. Benefit from potential hydropower tariff hikes We expect hydropower tariffs to trend up. This should narrow the gap between hydropower tariffs and coal-fired on-grid tariffs. This in turn should improve the profitability of hydropower assets. In Jan-14, the NDRC unveiled a new hydropower on-grid tariff pricing mechanism in which prices will be decided through negotiations between the hydropower operators and the receiving provinces. Previously, the hydropower on-grid tariff was decided centrally based on a cost-plus mechanism by taking the investment and projected operating costs into account. Hydropower tariffs under the NDRC s new mechanism will be based on the average on-grid tariff of all power sources in the receiving province and power transmission costs will be deducted from the on-grid tariff the hydropower generator receives if cross-province transmission is involved. The new pricing mechanism will be applied to the future commissioned hydropower projects and the tariff framework for hydropower plants already commissioned will be gradually adjusted to match the new mechanism. We believe the new policy will lead to higher hydropower tariffs, which in turn should boost the incentive to invest in hydropower development in China. CPI and Datang will benefit more due to their higher hydropower exposure, i.e. 16% and 12% of total attributable capacity as at end-213. Furthermore, hydropower will be given higher priority for dispatching electricity to grids. Hence, if rainfall is heavy, leading to higher growth in hydropower generation, this could help to offset the lower demand from coal-fired generation. Potential expansion of multiple, driven by wind power For wind power, we like the companies with a higher or increasing proportion of wind power as the earnings growth potential in the wind power sector is greater. We believe the lower curtailment ratio and grid connection problem will continue to improve. The 12th Five-Year Plan target is to have 1GW of installed wind power capacity by 215. By the end of 213, 91.4GW had been installed, of which 77.2GW have been connected. We expect the actual installation by the end of 215 will exceed the target. We estimate the curtailment ratio decreased from 17% in 212 to 11% in 213, and the average utilization rate increased from 1,89 hours in 212 to 2,74 hours in 213. Wind power operators are trading at between ~12x and ~17x FY14E P/E, which is higher than 6x to 9x for IPPs. We expect a higher proportion of wind power generation will help increase the multiple of IPPs overall. Among the five IPPs under our universe, CR Power and Datang Power should have a higher proportion of wind power. We expect Huaneng Power will develop more wind power capacity. Although the sister companies of Datang and Huaneng, i.e. Datang Renewables (1798 HK, Not Rated) and Huaneng Renewables (958 HK, Not Rated), are the vehicles of their parent to develop wind power, Huaneng and Datang could also help to boost total wind power installation in China to meet the government s target. June 11,

15 Chinese IPPs Figure 29: Peer comparison Bloomberg Market Cap. Closing P/E (x) P/B (x) DY (%) ROE (%) Company Name code (USDm) Price (LC) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E Chinese IPPs China Resources Power 836 HK 13, Huaneng Power 92 HK 13, Datang Power 991 HK 7, Huadian Power 171 HK 3, China Power International 238 HK 2, Average Wind Power Longyuan Power 916 HK 8, Huadian Fuxin 816 HK 4, Huaneng Renewables 958 HK 3, Beijing Jineng Clean Energy 579 HK 3, Datang Renewables 1798 HK 1, China Wind Power 182 HK Average Source: Bloomberg, Maybank Kim Eng, Note: All from Bloomberg consensus. Figure 3: Newly installed capacity in China MW Thermal Hydro Nuclear Wind 1, Figure 31: Breakdown of newly installed capacity in China Others 17.6% 8, 6, 4, 2, Wind 9.4% Nuclear 2.4% Thermal 38.8% Hydro 31.8% Source: China Electricity Council, CEIC, Maybank Kim Eng Source: China Electricity Council, CEIC, Maybank Kim Eng Figure 32: Cumulative installed capacity in China Figure 33: Breakdown of cumulative installed capacity in China MW Thermal Hydro Nuclear Wind 1,, 8, Nuclear 1.2% Wind 6.1% Others 1.2% 6, 4, Hydro 22.4% 2, Thermal 69.1% Source: China Electricity Council, CEIC, Maybank Kim Eng Source: China Electricity Council, CEIC, Maybank Kim Eng June 11,

16 Chinese IPPs Preference #2: plants located in coastal regions The location of a power plant is critical to its utilization hours. For example, for power plants in coastal provinces with strong industrial activities, electricity consumption will ultimately be stronger and utilization rates will likely be higher too. With higher utilization rates, the IPPs could achieve a higher operating margin, supported by a lower unit fixed cost, i.e. depreciation. Among the various provinces in China, we believe IPPs with more exposure in Guangdong, Jiangsu and Zhejiang will have a better advantage, such as CRP. Furthermore, power plants in coastal regions may have the option of switching to using cheaper imported coal for power generation. Figure 34: Proportion of attributable power capacity as end of 213 Province Huaneng Huadian CPI Datang CRP Guangdong 12% 2% 2% 6% 13% Jiangsu 12% 11% 6% 29% Shandong 13% 42% 6% Zhejiang 7% 6% 9% 1% Shanghai 7% 11% Henan 5% 8% 17% 12% Liaoning 8% 2% 6% Hebei 4% 12% 27% 6% Fuijian 5% 3% Sichuan 2% 11% 4% 2% % Tianjin 1% 4% Beijing 1% 3% % Hubei 1% 4% 9% Hunan 3% 12% 2% Anhui 7% 24% 2% Shanxi 3% 9% 9% 1% Jilin Jiangxi 3% 2% Heilongjiang % Inner Mongolia % 2% 15% 2% Shaanxi Guangxi 7% Chongqing 3% 4% Yunnan 6% 5% 1% Xinjiang Gansu 4% 1% 1% Guizhou 6% Ningxia 1% 3% Hainan Qinghai 1% Tibet Figure 35: Proportion of power generation in April 214 9% 8% 7% 6% 5% 4% 3% 2% 1% % Beijing Tianjin Hebei Shanxi Inner Liaoning Jilin Heilongjiang Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong Henan Hubei Source: National Bureau of Statistics, CEIC, Maybank Kim Eng Hunan Guangdong Guangxi Hainan Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang June 11,

17 Chinese IPPs Preference #3: less sensitive to tariff cuts The potential tariff cut is widely expected by the market. The biggest uncertainty or risk for the IPPS is the magnitude of the reduction. To be more conservative, we prefer companies that are less sensitive to tariff changes. Furthermore, considering the interest rate risk, we also prefer companies with lower financial leverage with lower earnings sensitivity to interest rates. Based on these two criteria, we believe CRP will be the best among the five IPPs under our coverage. Figure 36: sensitivity analysis: FY14E net profit vs. different parametres 6% 4% 2% % -2% -4% -6% -8% -1% 1% decrease in coal cost Huaneng CPI Huadian CRP Datang 1% decrease in average on-grid tariff 1% increase of generation 25bps increase of average interest rate Preference #4: with stronger balance sheet We prefer the power producers with a stronger balance sheet as it will give them more flexibility in terms of capacity expansion and will also lower their interest expense burden. Among the five IPPs, CRP has the lowest net gearing level, while Datang has the highest. Figure 37: Our net debt-to-equity forecasts for IPPs 45% 4% 35% 3% 25% 2% 15% 1% 5% % E 215E CPI CRP Datang Huadian Huaneng June 11,

18 Chinese IPPs Initiate with NEUTRAL view; BUY CPI & CRP Initiate coverage of the Chinese IPP sector with a NEUTRAL view as we think there are no visible catalysts to help stocks to surpass their 213 peak. Huadian s share price has recovered considerably and it s just ~4% below its 213 peak. Figure 38: Share-price discount vs the peak in 213 Figure 39: Share price rebound from the trough in 1Q14 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % Huaneng Huadian CPI Datang CRP 45% 4% 35% 3% 25% 2% 15% 1% 5% % Huaneng Huadian CPI Datang CRP Source: Bloomberg, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng In fact, all five IPPs have rallied from the trough in 1Q14. CPI and CRP, our BUY recommendations, have rebounded by the less among the five IPPs. Since bottoming in March 214, Huaneng and Huadian s share prices have outperformed, rebounding by ~27% and ~42%. We believe the corporate governance risk has been reflected into the share prices but the sector lacks drivers, capping upside. Figure 4: Share-price performance since the trough in Mar 214 5% Huaneng Huadian CPI Datang CRP 4% 3% 2% 1% % -1% Source: Bloomberg, Maybank Kim Eng BUY CPI and CRP with DCF-based target prices (NPV=TP) of HKD3.3 and HKD25, respectively. We like CPI as it has a high proportion of hydropower exposure and as its asset quality is improving. We also prefer CRP as we favour its high exposure to wind power, it s less sensitive to tariff reductions and interest rate changes, and it has a relatively stronger balance sheet. June 11,

19 Chinese IPPs Figure 41: Share-price performance of Chinese IPPs (12 months) 2% Huaneng Huadian CPI Datang HSI CRP 1% % -1% -2% -3% May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Source: Bloomberg, Maybank Kim Eng Figure 42: Share price performance Huaneng Huadian CPI Datang CRP 1 month 2% 6% 6% 1% 12% 3 months 19% 47% 12% 6% 18% 6 months 8% 35% 3% -12% 14% 1 year 4% 23% 1% 2% 13% Source: Bloomberg, Maybank Kim Eng Research NEUTRAL sector view We believe upside to Chinese IPP margins is largely capped given the limited downside to coal prices at the current level. We forecast the average EBIT margin of IPPs will stabilise at 22%. While a coal-fired tariff cut is widely expected by the market, the magnitude of the reduction is the biggest uncertainty. A steeper-thanexpect reduction would represent downside risk to IPPs. The trend of diversifying into hydropower and wind power could help to lower the risk from coal-fired tariff reduction and the fluctuation in coal prices. The potential hike in hydropower tariffs and the growth potential in wind power could benefit IPPs. Potential sector catalysts With stronger balance sheets, we believe potential asset injections could help improve asset quality, and probably injected at a more favourable valuation to listed companies, in our view. Potential hydropower tariff hike to increase the profitability of hydropower generation. Potential coal-fired tariff cut to remove the sector overhang. More renewable energy capacity to be developed. How we differ from consensus? We will prefer the laggards, i.e. CPI and CRP, due to their stronger balance sheet and higher exposure to either hydropower or wind power. We believe the corporate governance risk has been reflected in their share price. The sector is trading at a low P/E, which is warranted given the limited earnings growth potential. High dividend is good but we expect companies will only pay a dividend once a year, except CRP. June 11,

20 Chinese IPPs Summary of companies Huaneng Power (92 HK, HOLD, TP: HKD8.5) Potential tariff cuts priced in, but magnitude an unknown We expect short-term weakness in its Singapore business Increasing focus on wind power Dividend-yield play Huadian Power (171 HK, HOLD, TP HKD4.8) Margins appear to have peaked Potential tariff cut factored in, but concern is magnitude Rapid improvement in its balance sheet China Power International (238 HK, BUY, TP HKD3.3) Hydropower potential upside Improving asset quality Redeem CBs, lower non-cash profit/loss China Resources Power (836 HK, BUY, TP HKD25) Wind power is a key strength Uncertainties about Shanxi coal mines and corporate governance seem priced in Datang International Power (991 HK, HOLD, TP HKD3.1) Burden from non-core business Diversified generation portfolio High net gearing Valuation DCF-based methodology We used the DCF valuation method as the basis to calculate our target prices (NPV=TP) given the robust cash flow nature of utilities compared to other sectors. We assumed the long-term terminal growth rate to be 1.5% with a WACC of between 8.2% and 8.9% for the IPPs under our coverage. June 11, 214 2

21 Chinese IPPs Ratio-based valuation P/E and P/B bands Figure 43: (Huaneng) rolling P/E HKD x 2 2x 15 15x 1 1x 5 5x Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 Source: Bloomberg, Maybank Kim Eng Figure 44: (Huaneng) rolling P/B HKD x x 1 1.5x x 4 2 Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 Source: Bloomberg, Maybank Kim Eng Figure 45: (Huadian) rolling P/E HKD x x x 8 1x 6 4 5x 2 Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 Source: Bloomberg, Maybank Kim Eng Figure 46: (Huadian) rolling P/B HKD 9 2.x x x 3.5x 2 1 Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 Source: Bloomberg, Maybank Kim Eng Figure 47: (CPI) rolling P/E (HKD) 14 25x x 8 1x 6 15x 4 2 5x Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 Source: Bloomberg, Maybank Kim Eng Figure 48: (CPI) rolling P/B HKD 8 2.x x x 3 2.5x 1 Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 Source: Bloomberg, Maybank Kim Eng June 11,

22 Chinese IPPs Figure 49: (Datang) rolling P/E Figure 5: (Datang) rolling P/B HKD 12 HKD x 2x x 6 15x 6 1.5x 4 1x 4 1.x 2 5x 2.5x Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 Source: Bloomberg, Maybank Kim Eng Figure 51: (CRP) rolling P/E HKD Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 Source: Bloomberg, Maybank Kim Eng Dividend yield Figure 53: (Huaneng) Forward dividend yield (%) Dividend yield Average dividend yield Price (HKD) Jan 2 Oct 3 Jul 5 Apr 7 Jan 9 Oct 1 Jul 12 Apr 14 Source: Bloomberg, Maybank Kim Eng Figure 55: (CPI) Forward dividend yield (%) Dividend yield Average dividend yield Price Source: Bloomberg, Maybank Kim Eng 25x 2x 15x 1x Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 5x (HKD) Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 Source: Bloomberg, Maybank Kim Eng Figure 52: (CRP) rolling P/B HKD x x 3 2.x 2 1.x 1 Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 Source: Bloomberg, Maybank Kim Eng Figure 54: (Huadian) Forward dividend yield Dividend yield Average dividend yield Price (%) (HKD) Jan 2 Oct 3 Jul 5 Apr 7 Jan 9 Oct 1 Jul 12 Apr 14 Source: Bloomberg, Maybank Kim Eng Figure 56: (Datang) Forward dividend yield Dividend yield Average dividend yield Price (%) (HKD) Jan 2 Oct 3 Jul 5 Apr 7 Jan 9 Oct 1 Jul 12 Apr 14 Source: Bloomberg, Maybank Kim Eng June 11,

23 Chinese IPPs Figure 57: (CRP) Forward dividend yield Dividend yield Average dividend yield Price (%) (HKD) Jan 4 Sep 5 May 7 Jan 9 Sep 1 May 12 Jan 14 Source: Bloomberg, Maybank Kim Eng Figure 58: FY14E P/B against ROE (Bloomberg consensus) (214E P/B) (X) y =.896x R² =.8428 CRP Huaneng.8 Datang Huadian.6 CPI (214E ROE) (%) Source: Bloomberg, Maybank Kim Eng Figure 59: FY14E P/B against ROE (Maybank Kim Eng) (214E P/B) (X) y =.836x CRP R² =.878 Huaneng 1..8 Datang Huadian.6 CPI (214E ROE) (%) June 11,

24 Chinese IPPs Company comparisons Figure 6: Our ROE forecasts 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % E 215E CPI CRP Datang Huadian Huaneng Figure 61: Gross margin forecasts 6% 55% 5% 45% 4% 35% 3% CPI CRP Datang Huadian Huaneng E 215E Figure 62: EBIT margin forecasts 3% 25% 2% 15% 1% CPI CRP Datang Huadian Huaneng E 215E Figure 63: Net debt/equity 45% 4% 35% 3% 25% 2% 15% 1% 5% % E 215E CPI CRP Datang Huadian Huaneng June 11,

25 Chinese IPPs Our major assumptions and forecasts Figure 64: Our major assumptions and forecasts E 215E Huaneng Total Installed capacities (MW) 62,756 66,795 69,467 7,856 Attributable capacities (MW) 56,572 59,993 62,393 63,641 Coal-fired Utilizaiton hours 5,114 5,36 4,935 4,985 Consolidated gross power generation (GWh) 32, , ,74 332,831 Consolidated net power generation (GWh) 285,455 3,3 36,92 316,189 Average on-grid tariff (Rmb/MWh)(Net VAT) Unit fuel cost (Rmb/MWh) Average coal consumption rate (g/kwh) CPI Total Installed capacities (MW) 12,588 14,437 16,279 17,23 Attributable capacities (MW) 11,731 14,822 16,593 17,359 Consolidated gross power generation (GWh) 51,859 55,582 65,885 73,384 Consolidated net power generation (GWh) 49,23 52,795 62,375 69,45 Coal-fired Utilizaiton hours 4,959 4,998 4,998 5,48 Average coal-fired on-grid tariff (Rmb/MWh)(Net VAT) Unit fuel cost (Rmb/MWh) Average coal consumption rate (g/kwh) Huadian Total Installed capacities (MW) 33,579 35,641 39,25 42,342 Attributable capacities (MW) 29,262 31,895 35,85 37,891 Consolidated gross power generation (GWh) 156,94 175,46 185,649 22,56 Consolidated net power generation (GWh) 146,72 164,35 173,56 189,319 Coal-fired Utilizaiton hours 5,111 5,127 5,178 5,23 Average on-grid tariff (Rmb/MWh)(Net VAT) Unit fuel cost (Rmb/MWh) Average coal consumption rate (g/kwh) CRP Total Installed capacities (MW) 26,319 28,37 3,28 33,38 Attributable capacities (MW) 25,271 26,921 31,767 36,532 Consolidated gross power generation (GWh) 121,35 133, , ,576 Consolidated net power generation (GWh) 114,6 125,448 15,37 165,41 Coal-fired Utilizaiton hours 5,725 5,747 5,632 5,632 Average on-grid tariff (Rmb/MWh)(Net VAT) Unit fuel cost (Rmb/MWh) Average coal consumption rate (g/kwh) Datang Total Installed capacities (MW) 39,147 39,187 41,146 43,24 Attributable capacities (MW) 27,833 29,99 3,554 32,82 Consolidated gross power generation (GWh) 22, ,867 27,66 219,593 Consolidated net power generation (GWh) 191, , ,794 27,64 Coal-fired Utilizaiton hours 5,212 5,316 5,369 5,423 Average on-grid tariff (Rmb/MWh)(Net VAT) Unit fuel cost (Rmb/MWh) Average coal consumption rate (g/kwh) Figure 65: Our sensitivity analysis: FY14E net profit vs. different parameters 6% 4% 2% % -2% -4% -6% -8% -1% 1% decrease in coal cost Huaneng CPI Huadian CRP Datang 1% decrease in average on-grid tariff 1% increase in generation 25bps increase in average interest rate June 11,

26 Chinese IPPs Peer comparisons Figure 66: Peer comparisons (comparing with other sub-sectors) (all based on consensus forecasts) Bloomberg Market Cap. Closing P/E (x) P/B (x) DY (%) ROE (%) Company Name code (USDm) Price (LC) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E Chinese IPPs China Resources Power* 836 HK 13, Huaneng Power* 92 HK 13, Datang Power* 991 HK 7, Huadian Power* 171 HK 3, China Power International* 238 HK 2, Average City gas distributors HK & China Gas 3 HK 23, Beijing Enterprise 392 HK 12, China Gas* 384 HK 8, China Resources Gas* 1193 HK 6, ENN Energy* 2688 HK 7, Towngas China* 183 HK 3, Average HK power utilities CLP 2 HK 2, Power Assets* 6 HK 18, HKE Trust 2638 HK 5, Average Solar Power GCL-Poly* 38 HK 4, Hanergy Solar 566 HK 4, N/A N/A N/A N/A N/A N/A N/A N/A Singyes Solar 75 HK United PV 686 HK N/A N/A Comtec Solar 712 HK Solargiga 757 HK N/A.2 N/A N/A N/A N/A N/A N/A Average Wind Power Longyuan Power 916 HK 8, Huadian Fuxin 816 HK 4, Goldwind 228 HK 3, Huaneng Renewables 958 HK 3, Beijing Jineng Clean Energy 579 HK 3, Datang Renewables 1798 HK 1, China High Speed Transmission 658 HK 1, China Wind Power 182 HK Average Environmental protection and water utilities China Everbright Int'l 257 HK 6, Guangdong Investment 27 HK 7, Beijing Water Enterprise 371 HK 5, Guodian Science and Technology 1296 HK 1, Tianjin Capital Environment 165 HK 1, CT Environmental 1363 HK Average Power equipment Shanghai Electric 2727 HK 6, Dongfang Electric 172 HK 3, Harbin Electric 1133 HK Average Source: Bloomberg, Maybank Kim Eng, *Covered by Kim Eng June 11,

27 Chinese IPPs Appendix: Major risks Higher than expected reduction in coal-fired tariffs will negatively surprise in terms of IPPs profit margins. Spot coal price increases substantially, squeezing margins. Lower growth in power demand due to economic slowdown. More capex requirement to meet higher environmental standards for reducing air pollution. Corporate governance risk. CNY depreciation. June 11,

28 June 11, 214 COMPANY RESEARCH Initiation China Resources Power Holdings (836 HK) Share Price: HKD21.35 MCap (USD): 13.2B China Target Price: HKD25.(+17%) ADTV (USD): 19M Utilities Strong fundamentals: BUY Initiate at BUY with DCF-based TP of HKD25. CRP s strong exposure to wind power could contribute to a higher multiple. Potential spin-off of wind-power portfolio could be a catalyst. Other attributes include less sensitivity to coal price and tariff cuts, and relatively low gearing. We believe the uncertainties surrounding Mr. Song Lin s case and the possible asset impairment of the three Shanxi coal mines have been priced in. What s Our View CRP s key strength is its wind-power portfolio as it has already gained a relatively large size of 2.9GW, the biggest among the five IPPs under our coverage. We think its higher proportion of wind power not only diversifies its power-generation portfolio but also contributes to a relatively high multiple. CRP is trading at 8.6x FY14E P/E, while the average P/E of the pure wind-farm operators is around 14x. A catalyst could be the possible spin-off of the windpower segment, in our view. The quality of its power assets is relatively good compared with its peers as it has a sizeable percentage of its capacity in Guangdong Province, where power plants utilization rates are relatively high, which can boost operating margins. We also like CRP s lower sensitivity to coal prices and tariffs, and healthier balance sheet. We believe the corporate-governance risk from the Mr. Song Lin (former chairman of China Resources Holdings) case has been reflected in the share price. Compared to Huaneng and Huadian, CRP s share price has rebounded by only around 19% from the recent trough, compared with Huaneng s 27% and Huadian s 42%. Initiate at BUY with DCF-based TP of HKD25. We recommend buying into this laggard. Key Data BUY 52w high/low (HKD) 3m avg turnover (USDm) Free float (%) Issued shares (m) Market capitalization Major shareholders: Share Price Performance Maybank vs Market (New) 21.95/ ,792 HKD12.3B -China State-Owned Assets Supervision & A 63.1% -The Vanguard Group, Inc. 1.1% -Comgest SA.8% Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 China Resources Power - (LHS, HKD) China Resources Power / Hang Seng Index - (RHS, %) Mth 3 Mth 12 Mth Absolute(%) Relative to index (%) Positive Neutral Negative Market Recs Maybank Consensus % +/- Target Price (HKD) '14 PATMI (HKDm) 11,812 11,728.7 '15 PATMI (HKDm) 12,128 12,79 (4.6) Source: FactSet; Maybank FYE Dec (HKD m) FY12A FY13A FY14E FY15E FY16E Revenue 62, , , , ,531.2 EBITDA 18, , , , ,332.6 Core net profit 7, , , , ,53.3 Core EPS (HKD) Core EPS growth (%) Net DPS (HKD) Core P/E (x) P/BV (x) Net dividend yield (%) ROAE (%) ROAA (%) EV/EBITDA (x) Net debt/equity (%) Ricky WK Ng, CFA (852) rickyng@kimeng.com.hk SEE PAGE 65 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

29 China Resources Power Holdings Wind power is a key strength CRP s wind-power attributable capacity has grown 77% YoY to 2,872MW as of the end of FY13. We forecast the total attributable capacity will reach 3.5GW at the end of FY14E. At the end of 213, the company obtained state approvals for an additional wind-generation capacity of 1,7MW, and 827MW is under construction. CRP signed wind power investment and development agreements with 24 provinces and autonomous regions in China, with reserves of a total contracted capacity of 48GW. The enlarged portfolio will not only help diversify the risk of a potential coal-fired tariff cut but also help it enjoy higher earnings growth. In FY13, operating earnings of the renewable-energy segment (mainly wind power) rose 42% YoY to HKD2.1b. CRP has wind-power capacity in relatively good locations, with a high percentage in Guangdong and Shandong provinces, which in our view have lower risk of wind curtailment. We think the potential spin-off of the wind-power business could be a positive catalyst for CRP. Also its wind-power capacity could contribute to a higher multiple. Figure 67: Attributable wind-power capacity breakdown at the end of 213 Heilongjiang 1.5% Gansu 7.1% Hunan 1.2% Hubei 5.3% Shanxi 1.6% Jiangsu.1% Guangdong 18.8% Henan 3.% Hebei 8.7% Inner Mongolia 8.5% Shandong 22.6% Liaoning 12.6% Figure 68: Trading multiple comparisons, IPPs vs wind power operators Bloomberg Market Cap. Closing P/E (x) P/B (x) Div Yield (%) ROE (%) Company code (USDm) Price (LC) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E Chinese IPPs China Resources Power 836 HK 13, Huaneng Power 92 HK 13, Datang Power 991 HK 7, Huadian Power 171 HK 3, China Power International 238 HK 2, Average Wind Power Longyuan Power 916 HK 8, Huadian Fuxin 816 HK 4, Huaneng Renewables 958 HK 3, Beijing Jineng Clean Energy 579 HK 3, Datang Renewables 1798 HK 1, China Wind Power 182 HK Average Source: Bloomberg, Maybank Kim Eng, Note: (all from Bloomberg consensus estimates June 11,

30 China Resources Power Holdings Uncertainties about Shanxi coal mines and corporate governance seem priced in Regarding the Song Lin case, we believe the market is also concerned whether CRP overpaid for the Shanxi CR Taiyuan coal mines and the possible impairment charge. However, we think these are already reflected in the share price. The three coal mines are Yuanxiang, Zhongshe and Hongyatou. In fact, CRP had already obtained a 2-year mining permit for Yuanxiang in April 213. In September 213, CRP received the detail exploration permit for Hongyatou effective from 3 September 213 to 25 July 215 and the precise survey exploration permit for Zhongshe. Initiate at BUY with DCF-based TP of HKD25 Initiate coverage on CRP at BUY with a DCF-based TP of HKD25. We think CRP s strengths include the attractive asset quality and good location of its power plants, better management of coal costs, lower operating and financial leverage, and lower sensitivity to coal prices and coal-fired tariffs. On top of that, its wind-power development is also a key strength. CRP is trading at FY14E P/E of 8.6x and P/B of 1.4x. Figure 69: DCF valuation Terminal Value (HKDm) Terminal Growth Rate 1.5% Terminal WACC 8.2% Estimated Free Cash Flow 2,534.5 Terminal Value 36,724.7 NPV of Terminal Value 169,8.5 DCF Valuation NPV of Forecasts 56,895.8 NPV of Terminal Value 169,8.5 Enterprise Value 225,976.3 Less: Net Debt (86,1.5) Less: Minority interest (2,142.8) Equity Value 119,823. No. Shares (millions) 4,792.8 Per Share Equity Value HKD25. Figure 7: Sensitivity analysis, WACC against terminal growth Terminal growth.5% 1.% 1.5% 2.% 2.5% 7.2% % % % % WACC June 11, 214 3

31 China Resources Power Holdings Figure 71: Rolling P/E HKD x 5 2x 4 15x 3 2 1x 1 5x Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 Source: Bloomberg, Maybank Kim Eng Figure 72: Rolling P/B HKD x 5 3.x x 2 1.x 1 Jan 5 Mar 6 May 7 Jul 8 Sep 9 Nov 1 Jan 12 Mar 13 May 14 Source: Bloomberg, Maybank Kim Eng Figure 73: Forward dividend yield (%) Dividend yield Average dividend yield Price (HKD) Jan 4 Sep 5 May 7 Jan 9 Sep 1 May 12 Jan 14 Source: Bloomberg Maybank Kim Eng Figure 74: Our major assumptions Major assumptions FY12 FY13 FY14E FY15E Total Installed capacities (MW) 26,319 28,37 3,28 33,38 Attributable capacities (MW) 25,271 26,921 31,767 36,532 Coal-fired Utilization hours 121,35 133, , ,576 Consolidated gross power generation (GWh) 114,6 125,448 15,37 165,41 Consolidated net power generation (GWh) 5,725 5,747 5,632 5,632 Average on-grid tariff (Rmb/MWh)(Net VAT) Unit fuel cost (Rmb/MWh) Figure 75: Sensitivity analysis (estimate of FY14E net profit changes) 3% 2% 1% % -1% -2% -3% -4% 1% decrease in coal cost 1% decrease in average on-grid tariff 1% increase of generation 25bps increase of average interest rate June 11,

32 China Resources Power Holdings Figure 76: Attributable capacity breakdown 35% 3% 25% 2% 15% 1% 5% % Figure 77: Breakdown of revenue (213) Figure 78: Segment profit breakdown (213) Heat supply 3.6% Sales of coal 7.74% Renewable energy 11.45% Coal mining 1.97% Sales of renewable energy 5.23% Sales of coal-fired electricity 83.42% Coal-fired power 86.59% Figure 79: Attributable capacity breakdown at end of 213 Oil-fired.29% Hydro 1.4% Wind 1.67% Coal-fired 88.1% June 11,

33 China Resources Power Holdings FYE 31 Dec FY12A FY13A FY14E FY15E FY16E Key Metrics P/E (reported) (x) Core P/E (x) P/BV (x) P/NTA (x) Net dividend yield (%) FCF yield (%) 8.2 nm EV/EBITDA (x) EV/EBIT (x) INCOME STATEMENT (HKD m) Revenue 62, , , , ,531.2 Gross profit 26, , , , ,99.3 EBITDA 18, , , , ,332.6 Depreciation (6,183.1) (7,371.5) (9,198.9) (1,285.7) (11,263.) Amortisation..... EBIT 12,5.9 17, , , ,69.6 Net interest income /(exp) (3,835.8) (3,328.2) (3,476.5) (3,476.5) (3,476.5) Associates & JV 1, ,96.9 2,38.5 2,81.2 2,188.6 Exceptionals..... Other pretax income..... Pretax profit 9, , , , ,781.7 Income tax (1,179.2) (3,551.9) (3,88.9) (3,91.8) (4,354.1) Minorities (1,245.6) (1,569.8) (1,683.3) (1,728.4) (1,924.3) Discontinued operations..... Reported net profit 7, , , , ,53.3 Core net profit 7, , , , ,53.3 BALANCE SHEET (HKD m) Cash & Short Term Investments 4, ,35. 1, , ,285. Accounts receivable 14, ,345. 2, , ,659.2 Inventory 3, , , , ,68.3 Property, Plant & Equip (net) 13, , , , ,812.6 Intangible assets 3, , , , ,126.9 Investment in Associates & JVs 2, , , , ,398.5 Other assets 27,1.8 36, , , ,539.8 Total assets 177, , , , ,52.3 ST interest bearing debt 2, , , , ,313.3 Accounts payable..... LT interest bearing debt 59, , , , ,438.3 Other liabilities 28, , ,38. 48, ,119.4 Total Liabilities 18, , , , ,871. Shareholders Equity 54,43. 64, , , ,674.7 Minority Interest 14, , , , ,956.5 Total shareholder equity 68, , , , ,631.3 CASH FLOW (HKD m) Pretax profit 9, , , , ,781.7 Depreciation & amortisation 6, , , , ,263. Adj net interest (income)/exp 3,65.7 3,132. 3,33.2 3,41.4 3,324.9 Change in working capital 2, , , Cash taxes paid (1,23.2) (3,382.6) (3,563.1) (3,813.3) (3,93.1) Other operating cash flow (41.1) 2, ,48.7 2, ,111.2 Cash flow from operations 18, , , ,54.1 3,294.8 Capex (1,67.1) (23,258.3) (23,44.2) (2,739.8) (18,665.8) Free cash flow 8,294.9 (7.6) 2, ,8.3 11,629. Dividends paid (2,297.2) (5,673.3) (3,814.2) (3,916.2) (4,36.2) Equity raised / (purchased) Change in Debt (3,571.8) 3, Other invest/financing cash flow (2,67.6) 3,676.8 (2,779.) (2,851.3) (2,757.8) Effect of exch rate changes Net cash flow (99.3) 1,637.8 (4,293.9) ,511.1 June 11,

34 China Resources Power Holdings FYE 31 Dec FY12A FY13A FY14E FY15E FY16E Key Ratios Growth ratios (%) Revenue growth EBITDA growth EBIT growth Pretax growth Reported net profit growth Core net profit growth Profitability ratios (%) EBITDA margin EBIT margin Pretax profit margin Payout ratio DuPont analysis Net profit margin (%) Revenue/Assets (x) Assets/Equity (x) ROAE (%) ROAA (%) Liquidity & Efficiency Cash conversion cycle nm nm nm nm nm Days receivable outstanding Days inventory outstanding Days payables outstanding nm nm nm nm nm Dividend cover (x) Current ratio (x) Leverage & Expense Analysis Asset/Liability (x) Net debt/equity (%) Net interest cover (x) Debt/EBITDA (x) Capex/revenue (%) Net debt/ (net cash) 75, , ,1.5 85, ,466.6 June 11,

35 June 11, 214 COMPANY RESEARCH Initiation China Power Int l Development (238 HK) Share Price: HKD2.86 MCap (USD): 2.4B China Target Price: HKD3.3(+15%) ADTV (USD): 6M Utilities An undervalued, hydropower proxy Initiate at BUY (DCF-based TP HKD3.3) for its exposure to potential hydropower tariff hikes and attractive valuations. CPI has the highest proportion of hydropower capacity among the 5 IPPs we cover. Also, we think the company s asset quality is improving with a strengthening balance sheet. Trading at only.7x P/B and 5.7x P/E FY14F. CPI lags peers as its shares rebounded only ~17% from the 1Q14 trough level versus Huaneng s ~27% and Huadian s ~42% recovery. What s Our View We expect the rising trend of hydropower tariffs could further enhance CPI s earnings and its higher exposure to hydropower could also reduce the risk from potential cuts in coal-fired tariffs. CPI has the highest exposure to hydropower among the five IPPs under our coverage. Around 16% of its total attributable capacity was from hydropower in end of FY13. FY13 earnings from hydropower rose 112% YoY to CNY1,631m, contributing around 5% of CPI s total profit. The average hydropower tariff was CNY288.56/MWh in FY13, up 3.5% YoY. We are also positive on CPI s strategy to build more large coal-fired generation units to improve efficiency. Its coal consumption rate in FY13 fell by 1.86g/kWh YoY to g/kWh. Higher efficiency could help to reduce the unit-fuel cost. After the asset injection of the Wuhu Power Plant (2x6MW), we expect CPI will continue to develop large power plants, such as CP Shentou (2x1MW) and Pingwei III (2x1MW). We forecast the coal consumption rate will further drop to 313g/kWh in 214E, down 2g/kWh. CPI is trading at only 5.7x P/E and.7x P/B for FY14F, which looks attractive. Initiate at BUY and DCF-based target price of HKD3.3. Key Data BUY 52w high/low (HKD) 3m avg turnover (USDm) Free float (%) Issued shares (m) Market capitalization Major shareholders: Share Price Performance Maybank vs Market (New) 3.26/ ,439 HKD18.4B -China State-Owned Assets Supervision & A 63.2% -HSBC Global Asset Management (Hong Ko 4.8% -Capital International, Inc. 2.5% Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb China Power Int'l - (LHS, HKD) China Power Int'l / Hang Seng Index - (RHS, %) 9 1 Mth 3 Mth 12 Mth Absolute(%) Relative to index (%) (.7) 7.1 (6.3) Positive Neutral Negative Market Recs 15 Maybank Consensus % +/- Target Price (HKD) (12.1) '14 PATMI (CNYm) 2,484 2,483. '15 PATMI (CNYm) 2,652 2, Source: FactSet; Maybank FYE Dec (CNY m) FY12A FY13A FY14E FY15E FY16E Revenue 17, , , , ,397.8 EBITDA 5, ,39.4 8, , ,827.1 Core net profit 1, , , , ,98.3 Core EPS (CNY) Core EPS growth (%) Net DPS (CNY) Core P/E (x) P/BV (x) Net dividend yield (%) ROAE (%) ROAA (%) EV/EBITDA (x) Net debt/equity (%) Ricky WK Ng, CFA (852) rickyng@kimeng.com.hk SEE PAGE 65 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

36 China Power International Development Hydropower potential upside Hydropower tariff is still about 3% lower than coal-fired on-grid tariff. We expect hydropower tariffs to steadily rise to encourage investments as this renewable energy source is supported by the government. We expect the gap between coal-fired tariff and hydropower tariff to narrow. Apart from upside from higher hydropower tariffs, the impact from potential cut in coal-fired power tariffs will also be smaller for CPI, in our view. In FY13, CPI had 14.8GW of total attributable capacity, 16.3% of which was hydropower. The hydropower capacity was mainly due to CPI s 63% stake in Wu Ling Power. In FY13, CPI sold Heimifeng Power Plant to the State grid. The disposal was due to provisions of the national power system and market-oriented electricity pricing mechanism reform issued by the National Energy Administration requiring that all pumped storage power plants should be developed, owned and operated solely by the State s grid enterprises. Despite disposal of the Heimifeng plant, we expect CPI will continue to develop hydropower projects, including the 83-MW Tuokou project in Hunan. In fact, CPI expects half of the newly installed capacity will be clean energy and one-third of the total capacity by 22 will be clean energy. Figure 8: CPI s attributable wind power capacity breakdown (end-213) CNY/MWh Coal-fired Hydro Figure 81: Hydrologic data of Yuanjiang River Source: Company presentation, Maybank Kim Eng June 11,