China Power Sector THEME

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1 THEME KEY CONCLUSIONS Equity Research China&Hong Kong Utilities (Utilities CN (Asia)) 29 April 2015 IDEAS ENGINE SERIES The Ideas Engine series showcases Credit Suisse s unique insights and investment ideas. Please contact your Sales person to access the supplemental analysis behind this report. RESEARCH ANALYSTS Dave Dai, CFA dave.dai@credit-suisse.com Reforms bite! New game rules. Safety will become Rule No.1 when investing in the power generators in the coming years amid China's aggressive push for power reforms. Our preliminary analysis of market-based pricing in the recent primer report is now strengthened by the four official documents issued in the past month. Without large demand recovery, electricity will remain a seriously oversupplied commodity, and price war and consolidation could pull the average ROE of national coal-fired IPPs from 17% in 2014 down to 10% by 2020E. With 2Q15 earnings likely marking a meaningful inflection, we recommend investors exit. A painful process before gain. The IPPs tariffs could go down further after the recent 5% cut and IPPs' tariffs for direct supplied contracts in 2014 (10% lower on average) is a very strong early signal of what market forces can do. China aims full liberalisation of power pricing and when it happens, depressed tariffs could force the exit of uncompetitive smaller units together with a large impairment (before full depreciation). Competitive survivors could swell after consolidation but the process could take years and could be painful. Safe waters in the storm. Meanwhile, investors should find much better visibility for demand and prices in: (1) wind operators; (2) low-cost hydro power generators; and (3) A-share listed local IPPs with protective schemes. Nuclear operators are no longer attractive with rising uncertainty on utilisation and technology risks. SELL the national IPPs. With valuation nearing a five-year high plus major industry headwinds, we recommend investors to sell the national IPPs. We cut target prices and ratings (Huadian-H) on lower sustainable ROEs and our top sells are Huaneng (both A/H) and CR Power. We also downgrade CGN to UNDERPERFORM with an unjustified valuation and rising nuclear earnings risks. Areas that are worth buying include wind operators, lowcost hydro power generators and local power utilities (we are initiating on Jingneng and Mengdian with an Outperform). Ran Ma ran.ma@credit-suisse.com Structural ROE trend of the national IPPs 20% 18% 16% 14% 12% 10% 8% 6% 18% 17% Source: Company data, Credit Suisse estimates Switch to the safer sectors! Source: Credit Suisse research 16% 14% 11% The report follows our China Utilities Reform Primer in March 2015 (click here) 9% 10% 10% E 2016E 2017E 2018E 2019E 2020E CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Focus charts Figure 1: Slow demand scenario utilisation trend would continue to weaken without power reforms Figure 2: Slow demand scenario market reform can make consolidation possible Figure 3: IPPs with larger exposure to smaller units could see greater shut-down risks Source: CEIC, Credit Suisse estimates Source: CEIC, Credit Suisse estimates Source: Company data Figure 4: Inner Mongolia enjoys better utilisation hours than the Figure 5: Forward P/B of national IPPs at five-year high despite national average (Hours) 5,400 5,200 5,000 4,800 4,600 4,400 4,200 4,000 5,031 4,559 5,294 5,102 5,043 4,965 5,085 5,012 4, China Inner Mongolia 5,130 upcoming ROE pressure 1.4x Avg+2SD 1.2x Avg+1SD 1.0x Avg (x) x Avg-1SD x Avg-2SD 0.4 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 ROE (RHS) 20% 16% 12% 8% 4% 0% Figure 6: Switch to the safer sectors! Source: CEIC Source: Bloomberg, Credit Suisse estimates, excluding Datang Source: Credit Suisse research The author of this report wishes to acknowledge the contributions made by Gary Zhou, an employee of Evalueserve Research Hong Kong Ltd, a third-party provider to Credit Suisse of research support services. IDEAS ENGINE 2

3 Figure 7: Valuation summary Name Ticker Rating Price TP Mkt cap P/E (x) P/B (x) Yield (%) ROE (%) %EPS CAGR China Wind power sector (US$ bn) 15E 16E 15E 16E 15E 16E 15E 16E 14-16E Huaneng Renewables 0958.HK O Longyuan Power 0916.HK O China Datang Renewables 1798.HK O n.a. Huadian Fuxin Energy 0816.HK O China Suntien Green Energy 0956.HK O Simple average China Hydro power sector SDIC Power SS N China Yangtze Power Co Ltd SS O Sichuan Chuantou Energy SS O Simple average China IPPs sector - A (Local) Inner Mongolia Mengdian SS O Jingneng Power SS O Simple average China Nuclear sector CGN Power 1816.HK U China IPPs sector - H (National) Datang International Power 0991.HK O Huadian Power International 1071.HK U China Resources Power 0836.HK U Huaneng Power International 0902.HK U Simple average China IPPs sector - A (National) Huadian Power International SS U Datang International Power SS U Huaneng Power International SS U Simple average China City Gas sector China Gas Holdings Ltd 0384.HK O Beijing Enterprises Holdings 0392.HK O China Resources Gas 1193.HK O ENN Energy Holdings Ltd 2688.HK O Shenzhen Gas Corporation SS U Kunlun Energy 0135.HK N Hong Kong and China Gas 0003.HK U Simple average Source: Company data, Credit Suisse estimates IDEAS ENGINE 3

4 New game rules YTD 2015, the national IPPs have mostly underperformed the broader index and most other utilities sub-sectors. However, the names showed strength again in April with lower coal prices and stronger-than-expected 1Q15 results. In our view, the national IPPs are unlikely to enjoy such high profitability as in 1Q15 over the next few years as: (1) cheaper coal prices are likely to be offset by another "cost-plus" tariff cut later this year; (2) the recent 5% tariff cut should reflect legacy costs instead of recent costs; and (3) most importantly, the power reform is likely to trigger huge dynamic changes in this oversupplied industry. With rising uncertainties on the operational environment for power generators, we believe safety should replace growth as the key investment criteria. Figure 8: YTD sub-sector performance P/B-based target prices with lower sustainable ROE (average of a stable demand and slow demand scenario). Figure 9: China IPPs target price and rating changes Company Ticker Prev. New Prev. New U/D Target Underlying Prev. ROE rating rating TP TP P/B ROE HNP-H 0902.HK U U % % 13.5% HDP-H 1071.HK N U % % 14.0% CRP 0836.HK U U % % 14.0% HNP-A SS U U % % 13.5% HDP-A SS U U % % 14.0% Source: Company data, Credit Suisse estimates Coal prices are unlikely to impact post-fy15 profits In 1Q15, some IPPs reported strong profits and the key positive surprises mostly came from cheaper coal prices. However, the recent tariff cut suggested that China has started to base regulated tariff calculations on movements in fuel prices, suggesting any weakness in coal prices could trigger another tariff cut later this year. Therefore, given that it is largely a rule of 90% pass-through, a stronger FY15 net profit would mean more tariff cuts going into FY16. This is why we now base our target price calculations on FY16E P/B which will largely reduce any influence of short-term movements in coal prices. Taking a longer-term view, valuation would become much more stretched vs. history. Figure 10: Three-year forward P/B history Further downgrade of national IPPs Source: Bloomberg With four separate documents issued in the past month, there is little doubt that China is very determined to push for a market-based power economy. This is likely to radically change the dynamics from the current industry structure, whereby every power tariff change has been regulated by the central authority (National Development and Reform Commission or the NDRC) and power plants' utilisation ability is largely planned. In an oversupplied industry (thermal utilisation is nearing a 39-year-low this year), market pricing could pull down sector ROE from 17% in 2014 to about 10% in 2020E in a slow demand scenario. We reflect our Source: Bloomberg, Credit Suisse estimates IDEAS ENGINE 4

5 Why is consolidation needed? Figure 12: The first reform primer report (March 2015) In the following sections, we try to reflect on the "consolidation" and "no consolidation" cases in a "slow demand" scenario. Given the continuing pressure on overall thermal utilisation, the power reforms may make consolidation possible where power generating units compete with each other on generation costs. In a nutshell, with utilisation hours likely touching a 39-year low in 2015 (4,706 in 2014), a large fleet of units need to be phased out for the entire thermal power industry to restore the optimal level of >5,000 hours. In the consolidation scenario, we assume utilisation and tariffs to keep weakening in the next three years, phasing smaller units out but companies that need to shut down before full depreciation may realise impairment losses; however, a recovery may happen in as smaller units would be out of the fray and it would be a more orderly industry. If there is no power reform and consolidation, tariffs may be less destructive but everyone will get hurt with the rising pain of oversupply. Therefore, without assuming additional asset injections, the key loser would be Huaneng with similar ROE in both scenarios while the other three companies will be better positioned post consolidation vs. no consolidation at all. More details are in the following sections. Figure 11: ROE scenarios in the two cases (slow demand scenario) 2014 ROE 2020E ROE Huaneng Power Consolidation 16.2% 10.2% No consolidation 16.2% 10.5% Datang Power Consolidation 4.0% 11.9% No consolidation 4.0% 10.2% Huadian Power Consolidation 21.8% 12.2% No consolidation 21.8% 9.6% CR Power Consolidation 13.6% 12.1% No consolidation 13.6% 9.1% Source: Company data, Credit Suisse estimates The reform is moving quicker than expected Source: Credit Suisse estimates Figure 13: China IPPs ROE (stable demand scenario) In our first primer report published in March 2015, we expected that coal-fired IPPs could face both near-term and longer-term earnings headwinds. In the short run, we forecast an asymmetric cut to on-grid power tariffs: coastal and inland provinces to be impacted by 2.5 fen/kwh (6%) and 1.5 fen/kwh (4%) cuts, respectively. Given that the IPPs could deflect incremental pricing pressure to the coal producers, we expect average unit fuel cost to drop 5% YoY for the IPPs in FY15. However, the cost-plus formula should remain effective going forward, which will trigger another possible tariff cut in early FY16 (we assume further cuts by 1.5 fen and 1.0 fen/kwh for coastal and inland provinces,respectively). Also, our previous analysis of full-blown power reforms was based more on tariff differences whereby high-tariff zones could see much larger tariff pressure than low-tariff locations. This would result in an ROE squeeze of another >100 bp, but this scenario excludes the impact of further utilisation downside. Source: Company data, Credit Suisse estimate IDEAS ENGINE 5

6 Jan-Feb 07 May-07 Aug-07 Nov-07 Mar-08 Jun-08 Sep-08 Dec-08 Apr-09 Jul-09 Oct-09 Jan-Feb 10 May-10 Aug-10 Nov-10 Mar-11 Jun-11 Sep-11 Dec-11 Apr-12 Jul-12 Oct-12 Jan-Feb 13 May-13 Aug-13 Nov-13 Mar-14 Jun-14 Sep-14 Dec-14 A painful process before gain We begin this section by looking at how seriously oversupplied electricity is in China. In 2014, China recorded thermal utilisation hours of 4,706 (implying a 54% utilisation rate), which is reportedly the lowest reading in the past 38 years. Utilisation hours of 5,500 are used as a common industry borderline between shortages and surpluses. Figure 14: China power demand/supply/utilisation trend 6,500 6,000 5,500 5,000 4,500 4,000 Source: CEIC Power shortage Power oversupply Thermal power demand Thermal power capacity Thermal utilization hours (LHS) Further downside in utilisation 35.0% 25.0% 15.0% -5.0% The power-gdp intensity factor is a way to gauge the amount of electricity inputs required to support a period of economic activities. Given that the majority of power users in China are industrial users, power intensity tends to overshoot on either side during sudden changes in GDP. For example, during 4Q08 and 1Q09, overall power demand was reported as negative despite quarterly GDP at 7.6% and 6.6%, respectively. Another recent weakness was recorded in 2Q-3Q12, whereby power demand growth was close to zero as a result of continuing GDP slowdown that marked the end of the "8%" growth era. Most recently, we saw a negative growth in power demand in August 2014, the first negative month since % Figure 15: Power demand vs GDP (%) (x) (5) -0.5 (10) -1.0 Power gen YoY GDP growth Power-GDP Intensity factor (RHS) Source: CEIC Figure 16: Monthly power consumption growth (YoY) (%) (5) (10) (15) Source: CEIC IDEAS ENGINE 6

7 Stay in safer waters In a "fire and ice" era, we prefer power producers that can offer better visibility either through government-mandated support or output protection driven by location-specific reasons, coupled with protection of tariff risks. Therefore, the following groups stand out: (1) Renewables such as wind power operators are positioned at sweet spots. (2) Clean energy such as hydro power. Within hydro, we prefer low-cost producers exposed to lower tariff cut risks. (3) Local utilities with protective utilisation and potential to enter new power retail markets. (4) Nuclear operators could face issues of lower utilisation hours with more flexible peak functions. The power of priority Given the high cost and intermittency issues of renewable energy and non-stop features of nuclear power, they are unlikely to be included in the power pool, in our view. China's current power dispatch order protects the on-grid purchases of renewable energy and nuclear energy. According to the policy, power grid companies are required to follow a pecking order of: (1) maximum purchase of renewable energy (wind, solar, marine energy, hydro and renewables with no flexibility in power generation adjustments), (2) hydro, biomass, geothermal and other renewables with flexibility of adjustments, (3) nuclear power, (4) co-generation coal-fired power (power and heat), (5) gas-fired power and coal gasification power, (6) coal-fired power and (7) oil-fired power. Given the high cost and reliability issues of renewable energy and non-stop features of nuclear power, they are unlikely to be included in the power pool, in our view. China's current power dispatch order protects the on-grid purchases of renewable energy and nuclear energy. Potential overhang for nuclear and hydro tariffs Although nuclear and renewables may be free from pooling, tariff risks could emerge with further downside adjustment of coal-fired tariffs, which are usually the benchmark prices. 1. Nuclear tariff The on-grid tariffs of CGN's nuclear projects which commenced operation before 2013 were determined project-by-project in accordance with fixed costs and operating costs. According to NDRC's Circular on Relevant Issues Concerning Improving the On-grid Tariff Mechanism for Nuclear, nuclear generating units (Gen-II) that started operations after 1 January 2013, will be subject to a national benchmark no-grid tariff of Rmb0.43/kWh (including the 17% valueadded tax). However, it is worth noting that the tariff set for Hongyanhe's first two units has been Rmb0.4142/kWh, which is same as the local benchmark tariff for coal-fired power before the adjustment in September Figure 17: China's electricity purchase priority list Source: NDRC, Credit Suisse research 2. Hydro tariff Wind, solar, marine energy, hydro and other renewables (with no flexibility in power generation) Hydro, biomass, geothermal and other renewables (with flexibility in power generation) & waste-to-energy Nuclear power Co-generation coal-fired power Gas-fired power and coal gasification power Coal-fired power (units with lower energy consumption and emissions have higher dispatch priority) Oil-fired power Hydro power tariffs were previously set on a plant-by-plant basis usually based on cost-plus models (reasonable return based on budgeted capex and opex). However, China is working on a different pricing option for hydro power designed for outer transmissions. The so-called retrograde method is calculated by deducting on-grid selling tariff by transmission charges. CYP's parentco's new plants Xiluodu and Xiangjiaba have much higher pricing than the current Gezhouba and Three Gorges units given that the calculation is now benchmarking to the new method. Similarly, the Yalong River projects (owned by SDIC and Chuantou) also enjoy this calculation, although most hydro tariffs are still lower than coal-fired tariff, which is now at Rmb400/MWh including VAT. The differences are slightly smaller, if we take into consideration the hydro VAT rebates currently enforced. IDEAS ENGINE 7

8 Sell the national IPPs In a world of safety for power gencos, we like: (1) Wind operators (top picks: Huaneng Renewables and Longyuan), (2) Low-cost Hydro (China Yangtze Power) and (3) Local IPPs protected by policies (top pick: Mengdian). We are negative on National IPPs (top sells: Huaneng A/H, China Resources Power). Figure 18: Recommendation summary of China power operators POSITIVE NEGATIVE Wind Huaneng Renewables (0958.HK) Longyuan Power (0916.HK) Low-cost hydro Yangtze Power ( SS) Local IPPs Jingneng ( SS) initiation Mengdian ( SS) initiation Source: Credit Suisse estimates National IPPs Huaneng Power-H (0902.HK) top sell Huaneng Power-A ( SS) top sell CR Power (0836.HK) top sell Datang Power-A ( SS) Huadian Power-H (1071.HK) downgrade to U/P Huadian Power-A ( SS) Nuclear CGN Power (1816.HK) downgrade to U/P Figure 19: Matrix of volume/tariff visibility going into the power reform Unsustainable valuation ahead of major headwinds Following the recent share price strength, national IPPs are now trading at stretched multiples with 12-month forward P/B nearing a five-year high despite likely pressure on future ROE. The 12-month dividend yield is also around 1 standard deviation below the five-year mean at around 4%. The current valuation could weaken the positive thesis of buying these names on the back of near-term dividends. If we adjust the calculation to look at three-year forward multiples (where we could see a meaningful downside in ROE), the multiple could become even more stretched than the 12-month calculation. Figure 20: National IPPs one-year forward P/B history 1.4x Avg+2SD 1.2x Avg+1SD 1.0x Avg (x) x Avg-1SD x Avg-2SD 0.4 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 ROE (RHS) Source: Bloomberg, Credit Suisse estimates, excluding Datang % 16% 12% 8% 4% 0% Source: Credit Suisse estimates IDEAS ENGINE 8

9 Inner Mongolia Mengdian Huaneng ( SS / CH) Improving earnings with additional transmission Dave Dai, CFA / / dave.dai@credit-suisse.com Ran Ma / / ran.ma@credit-suisse.com Initiate coverage with OUTPERFORM. We initiate coverage on Inner Mongolia Mengdian Huaneng (Mengdian) with an OUTPERFORM rating and a DCF-based target price of Rmb7.50. With all generation units (>90% is coal-fired power) located in Inner Mongolia (one of the least oversupplied locations), Mengdian's earnings growth should be driven by: (1) capacity and utilisation supported by outbound transmission; (2) cheaper tariffs leading to marginal benefits of direct supplies or competitive bidding; and (3) strong local background helping it bid in the event of a potential opening-up of local power retail assets. Earnings to improve. While FY15 earnings are likely to be impacted by weak power demand, additional ultra-high voltage transmission lines should help transmit most of the output to other provinces, creating utilisation upside in FY16-17E. We forecast the timeweighted attributable capacity to witness a 13% FY14-16E CAGR with ~4GW capacity under construction, stronger than most national IPPs. Parentco may also inject other local projects (~10% upside on FY16E capacity) but there is no firm timeline yet. A power reform winner. Mengdian is well-positioned to protect its utilisation hours with competitive tariffs for outbound transmission (cheaper than local destination tariff) under reforms. Meanwhile, as a dominant power generator in Western Inner Mongolia, participation in the power retail bidding (we estimate potential annual profit of Rmb1.9 bn at 3% net margin) is possible. Resembling renewable energy. Even without injections and power retail, we expect meaningful earnings turnaround in FY16-17 helped by new transmission. High visibility on utilisation and supreme ROE (21% by FY17E) resemble characteristics of a renewable energy player and justifies its higher multiple than national peers. Key downside risks are lower-than-expected utilisation and tariffs. Rating OUTPERFORM* Price (24 Apr 15, Rmb) 6.11 Target price (Rmb) 7.50¹ Upside/downside (%) 22.7 Mkt cap (Rmb mn) 35,485 (US$ 5,730) Enterprise value (Rmb mn) 60,501 Number of shares (mn) 5, Free float (%) week price range ADTO - 6M (US$ mn) *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance 8 Price (LHS) Rebased Rel (RHS) May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at on 24/04/15 On 24/04/15 the spot exchange rate was Rmb6.19/US$1 Performance over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 12, , , ,435.8 EBITDA (Rmb mn) 4, , , ,892.1 EBIT (Rmb mn) 2, , , ,409.9 Net profit (Rmb mn) 1, , , ,659.7 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates IDEAS ENGINE 9

10 Beijing Jingneng Power Co Ltd ( SS / CH) Strong asset injection theme Dave Dai, CFA / / dave.dai@credit-suisse.com Ran Ma / / ran.ma@credit-suisse.com Initiate coverage with OUTPERFORM. We initiate coverage on Beijing Jingneng Power (Jingneng) with an OUTPERFORM rating and an SOTP-based target price of Rmb10.0 (including asset injections). Jingneng has a portfolio of high quality coal-fired power units with >60% of attributable capacity located in Inner Mongolia. Similar to Mengdian, Jingneng should enjoy resilient utilisation hours for Inner Mongolia assets but the asset injection angle should be more clear with parentco commitment by Asset injection commitment. The company's output and earnings may be depressed in FY15 given the scheduled shutdown of the Shijingshan (Beijing) project but capacity growth should turn positive again with 6% and 11% in FY16 and FY17, respectively. Additionally, the parentco has committed to inject additional assets before end of FY16 and we believe it should be of the size of 4-5GW (>50%). The transaction should be supported by the light balance sheet. Power retail is only possible. Unlike Mengdian with the local government as one of the indirect shareholders, Jingneng is ultimately controlled by the Beijing SASAC. Therefore, the probability of acquiring local power retail business may be low despite its large capacity exposure to Inner Mongolia. Additionally, Jingneng has 12% of its capacity in Ningxia, which is also listed for the next batch of power reforms. Compared with Mengdian. We have incorporated the injection potential in our SOTP target price but no earnings contribution is built in considering limited details. We prefer Jingneng to Mengdian given similar exposure to Inner Mongolia but better asset growth opportunity with asset injection. Bidding for the power retail business would be a plus. Key downside risks are lower-than-expected utilisation and tariffs. Rating OUTPERFORM* Price (24 Apr 15, Rmb) 8.08 Target price (Rmb) 10.00¹ Upside/downside (%) 23.8 Mkt cap (Rmb mn) 37,308 (US$6,024 mn) Enterprise value (Rmb mn) 47,501 Number of shares (mn) 4, Free float (%) week price range ADTO - 6M (US$ mn) 68.7 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance 10 Price (LHS) Rebased Rel (RHS) Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at on 24/04/15 On 24/04/15 the spot exchange rate was Rmb6.19/US$1 Performance over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 12, , , ,054.1 EBITDA (Rmb mn) 4, , , ,526.4 EBIT (Rmb mn) 3, , , ,364.0 Net profit (Rmb mn) 2, , , ,527.9 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates IDEAS ENGINE 10

11 China Resources Power Holdings (0836.HK / 836 HK) Unattractive risk-reward Dave Dai, CFA / / dave.dai@credit-suisse.com Ran Ma / / ran.ma@credit-suisse.com Maintain UNDERPERFORM. We cut our target price for China Resources Power (CRP) to HK$16.30 (from HK$17.00) based on 1.2x FY16E P/B (previously 1.3x FY15E P/B) as we now use an average of stable- and slow-demand scenario to look at sustainable ROE (12%) as in a slowing-demand scenario. Meanwhile, CRP does not have parent support on further asset injections. A potential survivor post consolidation. China aims for full liberalisation of power pricing and when this happens, depressed tariffs could force the exit of uncompetitive smaller units together with a large impairment (before full depreciation). Based on our calculation, around 16% of CRP's capacity consists of small units (<=300MW) which are not for power and heat co-generation (less competitive and facing shut-down risks), which is much lower than national IPP peers at 19-41%. This could make CRP a post-consolidation survivor but there can be pain before gain with utilisation/tariff risks in the process. Asset injection not a theme for CRP. Unlike other IPPs such as Huadian Power, Datang Power and Huaneng Power, the parent company of CRP has little power generation assets that can be injected into the listco. We expect the organic capacity growth for CRP would also slow down from 11% CAGR in FY12-14 to 7% in FY15-17E given the prevailing weakness in thermal power demand. Valuation. Current FY15E P/B is higher than its past five-year average and may not be sustainable with decreasing ROE (13% in FY17E). Key upside risks to our call include: (1) better-than-expected thermal power utilisation in coastal regions; and (2) less-thanexpected tariff cut for coal-fired power. Rating UNDERPERFORM* Price (24 Apr 15, HK$) Target price (HK$) (from 17.00) 16.30¹ Upside/downside (%) Mkt cap (HK$ mn) 111,810 (US$14,427 mn) Enterprise value (HK$ mn) 204,573 Number of shares (mn) 4, Free float (%) week price range ADTO - 6M (US$ mn) 19.7 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance 40 Price (LHS) Rebased Rel (RHS) Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 05/03/15 On 05/03/15 the spot exchange rate was HK$7.75/US$1 Performance over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/14A 12/15E 12/16E 12/17E Revenue (HK$ mn) 70, , , ,628.2 EBITDA (HK$ mn) 23, , , ,481.1 EBIT (HK$ mn) 15, , , ,976.9 Net profit (HK$ mn) 9, , , ,049.7 EPS (CS adj.) (HK$) Change from previous EPS (%) n.a Consensus EPS (HK$) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates IDEAS ENGINE 11

12 Huaneng Power International Inc (0902.HK / 902 HK) The worst is yet to come Dave Dai, CFA / / dave.dai@credit-suisse.com Ran Ma / / ran.ma@credit-suisse.com One of the top sells. We cut our target price for Huaneng Power (HNP) to HK$7.30 (from HK$7.70) based on 1.0x FY16E P/B (previously 1.2x FY15E P/B) as we now use an average of stable- and slow-demand scenario to look at sustainable ROE (10.5%). In the slow demand scenario, ROE can average ~8.7% in FY16-20 given HNP's higher exposure to smaller units (shutdown risks). We have not cut earnings to reflect the slowdemand scenario but further weak signs could impact valuation ahead of earnings. Painful industry consolidation. China aims for full liberalisation of power pricing and when this happens, depressed tariffs could force the exit of uncompetitive smaller units together with a large impairment (before full depreciation). The tariffs for HNP's direct supplied power in 2014 (8-10% lower on average) is a very strong early signal of what market forces can do. Based on our calculation, close to 40% of HNP's capacity consists of small units (<=300MW) and 89% of such units are not for power and heat cogeneration, which may be less competitive and face shutdown risks. Asset injection limited. After the asset injection at end-2014, we expect limited profitable assets to be injected into HNP in the near term, based on our analysis of the parentco's unlisted assets. Besides, the total unlisted thermal capacity represents only 58% of HNP's capacity (2013 data), lower than peers at over 100%. Valuation unattractive. The stock is currently trading at 1.7x 2015E P/B, much higher than its five-year historical average of 1.1x, unjustified given our projected long-term ROE of 11%. The key upside risks to our forecasts are better-than-expected utilisation hours and later-than-expected tariff cuts. Rating UNDERPERFORM* Price (24 Apr 15, HK$) Target price (HK$) (from 7.70) 7.30¹ Upside/downside (%) Mkt cap (HK$ mn) 188,313 (US$24,298 mn) Enterprise value (Rmb mn) 316,747 Number of shares (mn) 14, Free float (%) week price range ADTO - 6M (US$ mn) 37.5 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance 14 Price (LHS) Rebased Rel (RHS) Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 24/04/15 On 24/04/15 the spot exchange rate was HK$7.75/US$1 Performance over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 125, , , ,090.8 EBITDA (Rmb mn) 36, , , ,999.2 EBIT (Rmb mn) 25, , , ,464.7 Net profit (Rmb mn) 10, , , ,558.8 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates IDEAS ENGINE 12

13 Huaneng Power International Inc ( SS / CH) Stay negative Dave Dai, CFA / / dave.dai@credit-suisse.com Ran Ma / / ran.ma@credit-suisse.com Maintain UNDERPERFORM. We cut our target price for Huaneng Power-A (HNP-A) to Rmb5.80 (from Rmb6.20) based on 1.0x FY16E P/B (previously 1.2x FY15E P/B) as we now use an average of stable- and slow-demand scenario to look at sustainable ROE (10.5%). In the slow demand scenario, ROE can average ~8.7% in FY16-20 given HNP's higher exposure to smaller units (shutdown risks). We have not cut earnings to reflect the slow-demand scenario but further weak signs could impact valuation ahead of earnings. Painful industry consolidation. China aims for full liberalisation of power pricing and when this happens, depressed tariffs could force the exit of uncompetitive smaller units together with a large impairment (before full depreciation). The tariffs for HNP's direct supplied power in 2014 (8-10% lower on average) is a very strong early signal of what market forces can do. Based on our calculation, close to 40% of HNP's capacity consists of small units (<=300MW) and 89% of such units are not for power and heat cogeneration, which may be less competitive and face shut-down risks. Asset injection limited. After the asset injection at end-2014, we expect limited profitable assets to be injected into HNP in the near term, based on our analysis of the parentco's unlisted assets. Besides, the total unlisted thermal capacity represents only 58% of HNP's capacity (2013 data), lower than peers at over 100%. Valuation unattractive. The stock is currently trading at 2.0x 2015E P/B, much higher than its five-year historical average of 1.1x, unjustified given our projected long-term ROE of 11%. The key upside risks to our forecasts are better-than-expected utilisation hours and later-than-expected tariff cuts. Rating UNDERPERFORM* Price (24 Apr 15, Rmb) Target price (Rmb) (from 6.20) 5.80¹ Upside/downside (%) Mkt cap (Rmb mn) 150,480 (US$ 24,298) Enterprise value (Rmb mn) 316,747 Number of shares (mn) 14, Free float (%) week price range ADTO - 6M (US$ mn) 37.5 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance 12 Price (LHS) Rebased Rel (RHS) Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 The price relative chart measures performance against the Shanghai Shenzhen CSI300 index which closed at on 24/04/15 On 24/04/15 the spot exchange rate was Rmb6.19/US$1 Performance over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 125, , , ,090.8 EBITDA (Rmb mn) 36, , , ,999.2 EBIT (Rmb mn) 25, , , ,464.7 Net profit (Rmb mn) 10, , , ,558.8 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates IDEAS ENGINE 13

14 CGN Power Co., Ltd. (1816.HK / 1816 HK) Downgrade to UNDERPERFORM with rising risks Dave Dai, CFA / / dave.dai@credit-suisse.com Ran Ma / / ran.ma@credit-suisse.com Downgrade rating. We downgrade CGN Power (CGN) to UNDERPERFORM from Neutral with China's introduction of peaking functions and possible delays in the Taishan project. The stock is now trading at 26x FY15 P/E with little yield and one of the most expensive large-cap global utilities names. We incorporated the newly approved Hongyanhe Phase II project but the revised DCF-based target price of HK$3.40 still implies significant downside. Expectations are rich. We believe that the market is forecasting stable utilisation hours across different locations but the recent reform document suggests the possibility of peaking functions going forward, which implies possible utilisation downside. China has started to investigate the equipment risks of the Taishan EPR project (10% of FY17E attributable capacity) after receiving a warning from the French nuclear authority. We cut our FY16-17 EPS forecasts by 4-6% on lower utilisation for Hongyanhe (very oversupplied) after FY16 and delayed operation of Taishan by 12 months. Not a lot left for immediate earnings upside. After Taishan, the parentco still owns the Fangchenggang (Guangxi) project, if the project is injected, it could create ~9% attributable capacity upside. Any new approval (such as the case of Hongyanhe Phase II) will take 5-6 years of construction time and contribute no earnings in the medium term. If Taishan is delayed, it could push back the capacity growth beyond our forecast 2H16. Rarity has a price. As the only listed pure nuclear operator in China, CGN is enjoying a large scarcity premium, which we see as unjustified with rising earnings risks. Upside investment risks are higher utilisation hours. Rating (from Neutral) UNDERPERFORM* [V] Price (24 Apr 15, HK$) 4.48 Target price (HK$) (from 3.20) 3.40¹ Upside/downside (%) Mkt cap (HK$ mn) 203,610 (US$ 26,272) Enterprise value (Rmb mn) 276,716 Number of shares (mn) 45, Free float (%) week price range ADTO - 6M (US$ mn) 86.6 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Share price performance Dec-14 Price (LHS) Rebased Rel (RHS) The price relative chart measures performance against the MSCI CHINA F IDX which closed at on 24/04/15 On 24/04/15 the spot exchange rate was HK$7.75/US$1 Performance over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/14A 12/15E 12/16E 12/17E Revenue (Rmb mn) 20, , , ,901.2 EBITDA (Rmb mn) 12, , , ,452.9 EBIT (Rmb mn) 9, , , ,714.1 Net profit (Rmb mn) 5, , , ,193.2 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. Apr IDEAS ENGINE 14

15 Companies Mentioned (Price as of 27-Apr-2015) Beijing Enterprises Holdings (0392.HK, HK$71.65) Beijing Jingneng Power Co Ltd ( SS, Rmb8.11, OUTPERFORM, TP Rmb10.0) CGN Power Co., Ltd. (1816.HK, HK$4.55, UNDERPERFORM[V], TP HK$3.4) CLP Holdings Limited (0002.HK, HK$68.25) Cheung Kong Infrastructure (1038.HK, HK$65.1) China Datang Renewables Power (1798.HK, HK$1.31) China Gas Holdings Ltd (0384.HK, HK$14.12) China Resources Gas (1193.HK, HK$27.15) China Resources Power Holdings (0836.HK, HK$23.75, UNDERPERFORM, TP HK$16.3) China Suntien Green Energy Corporation (0956.HK, HK$2.07) China Yangtze Power Co Ltd ( SS, Rmb13.09, OUTPERFORM, TP Rmb14.8) Datang International Power Generation Co. Ltd. (0991.HK, HK$4.89) Datang International Power Generation Co. Ltd. ( SS, Rmb8.35) ENN Energy Holdings Ltd (2688.HK, HK$58.8) Hong Kong Electric Investments (2638.HK, HK$5.22) Hong Kong and China Gas (0003.HK, HK$18.68) Huadian Fuxin Energy Corporation Limited (0816.HK, HK$4.37, OUTPERFORM, TP HK$5.5) Huadian Power International ( SS, Rmb8.89, UNDERPERFORM, TP Rmb5.1) Huadian Power International (1071.HK, HK$8.73, UNDERPERFORM, TP HK$6.4) Huaneng Power International Inc ( SS, Rmb11.5, UNDERPERFORM, TP Rmb5.8) Huaneng Power International Inc (0902.HK, HK$11.36, UNDERPERFORM, TP HK$7.3) Huaneng Renewables Corporation (0958.HK, HK$3.4, OUTPERFORM, TP HK$4.0) Inner Mongolia MengDian HuaNeng Thermal ( SS, Rmb6.13, OUTPERFORM, TP Rmb8.0) Longyuan Power (0916.HK, HK$9.93, OUTPERFORM, TP HK$11.5) Power Assets Holdings Limited (0006.HK, HK$78.5) SDIC Power Holdings ( SS, Rmb12.9) Shenzhen Gas Corporation Ltd. ( SS, Rmb12.31) Sichuan Chuantou Energy ( SS, Rmb25.94) Important Global Disclosures Disclosure Appendix The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for CGN Power Co., Ltd. (1816.HK) 1816.HK Closing Price Target Price Date (HK$) (HK$) Rating 13-Jan N * Asterisk signifies initiation or assumption of coverage. N EU T RA L IDEAS ENGINE 15

16 3-Year Price and Rating History for China Resources Power Holdings (0836.HK) 0836.HK Closing Price Target Price Date (HK$) (HK$) Rating 21-Aug O 03-Oct Mar Apr Nov * 18-Mar Apr N 18-Aug Oct Mar U * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM N EU T RA L U N D ERPERFO RM 3-Year Price and Rating History for China Yangtze Power Co Ltd ( SS) SS Closing Price Target Price Date (Rmb) (Rmb) Rating 30-Apr O 01-Nov May Sep May May * 26-Sep O 13-Jan * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM IDEAS ENGINE 16

17 3-Year Price and Rating History for Huadian Fuxin Energy Corporation Limited (0816.HK) 0816.HK Closing Price Target Price Date (HK$) (HK$) Rating 03-Mar O * 25-Mar * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM 3-Year Price and Rating History for Huadian Power International ( SS) SS Closing Price Target Price Date (Rmb) (Rmb) Rating 15-Oct O 13-Jan U 11-Mar Mar * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM U N D ERPERFO RM IDEAS ENGINE 17

18 3-Year Price and Rating History for Huadian Power International (1071.HK) 1071.HK Closing Price Target Price Date (HK$) (HK$) Rating 15-Oct O 13-Jan Mar N 31-Mar * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM N EU T RA L 3-Year Price and Rating History for Huaneng Power International Inc ( SS) SS Closing Price Target Price Date (Rmb) (Rmb) Rating 14-Oct N * 13-Jan U 11-Mar * Asterisk signifies initiation or assumption of coverage. N EU T RA L U N D ERPERFO RM IDEAS ENGINE 18

19 3-Year Price and Rating History for Huaneng Power International Inc (0902.HK) 0902.HK Closing Price Target Price Date (HK$) (HK$) Rating 02-Aug O 03-Oct Apr Apr Nov U * 30-Jul Oct * 13-Jan Mar * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM U N D ERPERFO RM 3-Year Price and Rating History for Huaneng Renewables Corporation (0958.HK) 0958.HK Closing Price Target Price Date (HK$) (HK$) Rating 03-Mar O * 10-Apr Mar Apr * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM IDEAS ENGINE 19

20 3-Year Price and Rating History for Longyuan Power (0916.HK) 0916.HK Closing Price Target Price Date (HK$) (HK$) Rating 13-May O 29-Aug Nov Dec Mar N 25-Nov O * 03-Mar Mar Aug * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM N EU T RA L The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutra ls the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional ben chmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the % and % levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock s total return relative to the average total return of the relevant cou ntry or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: Overweight : The analyst s expectation for the sector s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst s expectation for the sector s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst s expectation for the sector s fundamentals and/or valuation is cautious over the next 12 months. *An analyst s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors. IDEAS ENGINE 20