中国电力行业研究报告

December 8, 2009China: Utilities: Power - IPPsDecember 8, 2009China: Utilities: Power - IPPsOut of favor shouldnt mean off the radar; Buy Guodian, CRP (CL)Goldman Sachs Global Investment Research16Regulatory/commodities risks shouldnt rule out alpha generation We think the government will continue to slow down coal-fired power generation capacity growth and accelerate development of clean energy in a world which is de-emphasizing carbon. We believe the government may try to rein in undesirable coal-fired capacity growth by delaying approvals of new coal-fired power plants and fuel cost pass-through when coal costs rise. We upgrade Guodian to Buy (from Neutral) and maintain Buys on CRP (C- List) and Yangtze as we think they can better weather coal price hikes.2010 tariff hikes/coal investments help mitigate rising coal prices Coal prices have risen faster than expected lately. We see further rises in 2010 due to: 1) rising coal demand as the economy recovers; 2) temporary consolidation of small mines; and 3) tighter coal supply keeping priceshigh. Goldman Sachs now expects spot/contract prices to rise by 25%/15% yoyin 2010 (to Rmb750/t, Rmb600/t) and 2%/2% yoy in 2011. Adopting these and expecting coal use efficiency gain, we now assume IPP unit coal costs rise byKEY CHANGESRating upgradeTo Buy from Neutral: GuodianRating downgradeTo Sell from Neutral: Huadian (A)To Neutral from Buy: Huadian (H)KEY ASSUMPTIONSTariffs (coal-fired): Rmb0.02 (inclusive 17% VAT) on May 1 and Nov. 1 (or an average 5% yoy in2010E and full-year impact of 5% yoy in 2011E). Unit coal costs: 16% yoy increase in 2010E and no change in 2011E.Utilization: 3% increase in 2010E and 2011Esame-plant utilization.VALUATION SUMMARY16% yoy in 2010E (previously flat) and remain flat in 2011.Stock 12-m targetP/E (X)Company Ticker rating price 2010E 2011EWithout tariff adjustments, we forecast such coal cost hikes would result in a total net loss of almost Rmb1bn by about half of our coverage. Based on the above analysis, we think it is reasonable to assume two tariff hikes each of Rmb0.02 (inclusive 17% VAT) effective May 1 and Nov. 1, 2010 (average 5% yoy in 2010 and full-year impact of another 5% in 2011).We favor IPPs with natural hedges to coal and diversifying fuelCRP 836.HK Buy* Huaneng (H) 902.HK Buy Huadian (H) 1071.HK Neutral CPI 2380.HK Neutral Datang (H) 991.HK Neutral Yangtze Power 600900.SS Buy Guodian 600795.SS Buy Huaneng (A) 600011.SS Neutral Shenergy 600642.SS Neutral Guangdong Electric 000539.SZ Neutral Huadian (A) 600027.SS Sell Datang (A) 601991.SS SellHK$ HK$ HK$ HK$ HK$ Rmb Rmb Rmb Rmb Rmb Rmb Rmb21.006.002.402.303.6016.408.706.9012.008.003.504.3016 1025 1044 940 1143 1619 1919 1550 1923 2225 19132 28136 51Incorporating higher coal prices, tariffs and other smaller adjustments, we revise our stocks 12-month DCF-based target prices by -23% to +24% and2009E-2011E EPS estimates by -80% to +65%. We downgrade Huadian (A)to Sell from Neutral and (H) to Neutral from Buy on risk/reward.Theme 1: well-positioned coal mines profit from rising coal costs. We like CRP (Buy, CL) for its 2010 upside earnings risk to its Shanxi coal mines. Contrarily, we worry about downside risks to Datangs (Neutral) coal/ chemical projects as they lack clarity in terms of execution progress.Theme 2: higher non-coal fuel mix lessens earnings sensitivity to coal costs. We like Guodian (Buy) and Yangtze Power (Buy) as their higher non-coal fuel mix results in lower earnings sensitivity to rising coal costs. Besides this, we think their hydro plants may benefit from the long-term trend of rising hydro power tariffs.* This stock is on our regional Conviction list.Up/downside risks to our DCF-based 12-month target prices:tariffs/utilization/coal costs different from our assumed levels.Source: Datastream, Company data, Gao Hua SecuritiesResearch estimates.Franklin Chow, CFA+86(21)2401-8923 | franklin.chow Beijing Gao Hua Securities Company LimitedThe Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.The Goldman Sachs Group, Inc. Global Investment ResearchTable of contentsSnapshot of changes in ratings, target prices, earnings estimates 2CRP and Guodian may weather the coal price hikes better 4Tariff hikes highly likely if coal costs rise by 16% in 2010 5Generation recovery alone is unlikely to offset coal price hikes 6Valuation: 2010E P/B and 2011E P/E highlight select opportunities 8Company summary financials 14Disclosures 24The prices in the body of this report are based on the market close of December 4, 2009. The author would like to thank June Zhu for her valuable contribution to this report.Snapshot of changes in ratings, target prices, earnings estimatesExhibit 1: Changes to ratings, 12-month DCF-based target prices, and 2009E-2011E EPS estimatesRating changes4-Dec-2009Target priceChangePotentialCompanyTickerNewOldClosing priceNewOld(%)up/downsideChina Resources Power 0836.HK Buy* Buy* Huaneng (H) 0902.HK Buy Buy Huadian (H) 1071.HKNeutral Buy China Power International 2380.HK NeutralNeutral Datang (H) 0991.HK NeutralNeutral Yangtze Power600900.SS Buy Buy Guodian600795.SS BuyNeutral Huaneng (A)600011.SS NeutralNeutral Shenergy600642.SS NeutralNeutral Guangdong Electric000539.SZ NeutralNeutral Huadian (A)600027.SS SellNeutral Datang (A)601991.SS Sell SellHuaneng (ADR)HNPNeutralNeutralHK$ HK$ HK$ HK$ HK$ Rmb Rmb Rmb Rmb Rmb Rmb RmbUS$15.204.772.152.093.4513.647.328.2812.188.285.709.5224.7421.022.0(5%)38%6.06.7(10%)26%2.43.1(23%)12%2.32.30%10%3.64.2(14%)4%16.416.40%20%8.77.024%19%6.97.8(12%)(17%)12.013.0(8%)(1%)8.07.113%(3%)3.54.4(20%)(39%)4.34.9(12%)(55%)30.534.0(10%)23%Reporting2009E EPSChange2010E EPSChange2011E EPSChangeCompany currency New Old (%) New Old (%) New Old (%) China Resources Power HK$ 1.06 1.09 (3%) 0.96 1.26 (23%) 1.49 1.43 4% Huaneng (ADR, A and H) Rmb 0.43 0.32 35% 0.17 0.38 (55%) 0.43 0.41 5% Huadian (A and H) Rmb 0.19 0.19 (0%) 0.04 0.21 (80%) 0.20 0.22 (8%) China Power International Rmb 0.07 0.10 (27%) 0.05 0.12 (62%) 0.16 0.15 9% Datang (A and H) Rmb 0.12 0.15 (20%) 0.07 0.18 (61%) 0.19 0.21 (12%) Yangtze Power Rmb 0.54 0.54 0% 0.71 0.71 (0%) 0.72 0.74 (2%) Guodian Rmb 0.33 0.25 34% 0.38 0.29 30% 0.50 0.30 65% Shenergy Rmb 0.58 0.76 (24%) 0.52 0.70 (25%) 0.57 0.62 (8%)Guangdong Electric Rmb 0.46 0.28 60% 0.34 0.29 15% 0.44 0.31 44%Notes: 1) * This stock is on our Conviction list. 2) A-share target prices are subject to assumptions in A-share premium and HK$/Rmb exchange and so their changes are different from changes in Hong Kong shares. 3) For important disclosures, please go to Source: Datastream, Gao Hua Securities Research estimates.Exhibit 2: We generally assume higher 2009E/2010E unit coal costs and 2010E/2011E coal-fired tariffsUnit coal costCoal-fired tariffs2009E yoy change (%)Change2010E yoy change (%)Change2010E yoy change (%)Change2011E yoy change (%)ChangeCompany New Old (% point) New Old (% point) New Old (% point) New Old (% point) China Resources Power (14%) (15%) 1% 16% 0% 16% 4% 0% 3% 5% (0%) 5% Huaneng (15%) (13%) (2%) 16% 0% 16% 5% 1% 4% 5% (0%) 5% Huadian (14%) (14%) 0% 16% 0% 16% 3% (1%) 4% 5% (1%) 6% China Power International 0% 0% 0% 16% 0% 16% 6% 1% 5% 6% 0% 6% Datang (5%) (9%) 4% 16% 0% 16% 4% (0%) 5% 6% (0%) 6% Guodian (15%) (11%) (4%) 16% 0% 16% 8% (1%) 9% 6% (1%) 7% Shenergy (6%) (10%) 4% 16% 0% 16% 3% 0% 3% 5% 0% 5%Guangdong Electric (14%) (12%) (2%) 16% 0% 16% 3% 0% 3% 3% (1%) 4%Note: We assume both tariff hikes of Rmb0.02/kWh (inclusive of 17% VAT) happen on May 1 and Nov. 1, 2010. The 2011 tariff changes represent the full-year impact of those two 2010 hikes. “Old” 2010E and 2011E tariff changes merely represent changes to averages from plant additions/removals rather than government-mandated tariff adjustments.Source: Gao Hua Securities Research estimates.2010E and 2011E Reuters consensus EPS estimates for the five Hong Kong-listed shares have fallen by an average 10% since Sept. 14, 2009. The average 2010E and2011E revisions are: Huaneng up 7%, CRP flat, and Datang down 24%. Yet, we still suspect consensus EPS estimates are too high our revised 2010E and 2011E EPS estimates are now on average 60% and 15% below Reuters consensus estimates.Exhibit 3: Our 2010E and 2011E earnings estimates are generally below Reuters consensus estimatesWe think our generally lower EPS estimates are due to our more conservative assumptions for coal costs, utilization and capacityGH estimates Consensus DifferenceCompany Currency 2010E 2011E 2010E 2011E 2010E 2011E CRP HK$ 0.96 1.49 1.26 1.47 (24%) 2% Huaneng (H) Rmb 0.17 0.43 0.41 0.46 (59%) (8%) Huadian (H) Rmb 0.04 0.20 0.21 0.24 (79%) (14%) CPI Rmb 0.05 0.16 0.19 0.22 (76%) (26%)Datang (H) Rmb 0.07 0.19 0.20 0.28 (65%) (33%) Yangtze Power Rmb 0.71 0.72 0.71 0.73 (0%) (1%) Guodian Rmb 0.38 0.50 0.36 0.42 5% 18% Shenergy Rmb 0.52 0.57 0.65 0.70 (19%) (19%)Guangdong Electric Rmb 0.34 0.44 0.32 0.47 4% (5%)Source: Reuters, Gao Hua Securities Research estimates.CRP and Guodian may weather the coal price hikes betterUpgrade Guodian toBuy from NeutralDowngrade Huadian(A) to Sell from NeutralDowngrade Huadian(H) to Neutral from BuyWe upgrade Guodian to Buy from Neutral as we think its fuel diversification and earnings growth is undervalued. Guodian is the only coal-fired IPP under coverage with yoy increases in both 2010E and 2011E EPS estimates despite rising coal costs in our forecast. We estimate up to 30% of its attributable 2010E capacity is non-coal-fired vs. coverage average of 20% (excluding Yangtze Power which is hydro). We raise our 12- month DCF-based target price by 24% to Rmb8.7 and 2009E-2011E EPS estimates by 34%-65%. We now assume higher unit coal costs and tariffs. Key downside risks include higher- than-expected unit coal costs, and lower-than-expected tariffs and utilization.We downgrade Huadian (A) shares to Sell from Neutral as we think its near-term earnings are the most vulnerable to coal price increases. We think Huadians coal mine investments may take time to develop to significantly offset higher coal costs. We also see39% potential downside implied by our 12-month DCF-based target price.We downgrade Huadian (H) shares to Neutral from Buy based on the same fundamental reasons as listed above for the Huadian (A) shares. Since we added it to the Buy List on September 25, 2009, Huadian (H)s share price has fallen by 12% while theMSCI China has risen by 11% (Exhibit 4). We think the call did not work as well as expected because coal prices have been rising faster than expected.We cut Huadians 12-month DCF-based target price by 20% to Rmb3.5 and by 23% to HK$2.4 for the A- and H-shares, respectively. We cut our 2009E-2011E EPS estimates (both A- and H-shares) by up to 80%, mostly due to our assumed higher 2010E unit coal costs with delayed fuel cost pass-through (Exhibit 2). Key upside/downside risks includeunit coal costs, tariff and utilization different from our assumed levels.Exhibit 4: Share price performance of Huadian (H) versus peer groupPrices as of the close on December 4, 2009CompanyTickerPrimary analystPrice currencyPrice as of12/04/09Price performance since 09/25/093 month price performance6 month price performance12 month price performanceAsia Pacific Utilities Peer GroupHuadian Power International (H)1071.HKFranklin Chow, CFAHK$ 2.15(12%)(17%) (1%) 39% Beijing Capital600008.SSFranklin Chow, CFARmb 7.61 24% 21% 16% 39% China Power International2380.HKFranklin Chow, CFAHK$ 2.09 (6%) (8%)(12%) 24% China Resources Power0836.HKFranklin Chow, CFAHK$ 15.20(15%)(21%)(14%)8% China Yangtze Power600900.SSFranklin Chow, CFARmb 13.64 3% 2% (4%) (7%) CLP Holdings0002.HKFranklin Chow, CFAHK$ 52.15 0% (0%)2% (0%) Datang International Power Generation0991.HKFranklin Chow, CFAHK$ 3.45(17%)(21%)(20%) (7%) Datang International Power Generation (A)601991.SSFranklin Chow, CFARmb 9.52 9% (1%) 18% 27% GD Power Development600795.SSFranklin Chow, CFARmb 7.32 11%8% 10% 17% Guangdong Electric Power Development000539.SZFranklin Chow, CFARmb 8.28 11%6% 13% 27% Guangdong Investment0270.HKFranklin Chow, CFAHK$ 4.36 15% 15%8% 65% Hong Kong & China Gas0003.HKFranklin Chow, CFAHK$ 18.42 (3%)1% 15% 53% Hong Kong Electric Holdings0006.HKFranklin Chow, CFAHK$ 42.15 (1%) (2%)1% (0%) Huadian Power International (A)600027.SSFranklin Chow, CFARmb 5.70 16% 11% 15% 37% Huaneng Power International (A)600011.SSFranklin Chow, CFARmb 8.28 17% 10%7% 11% Huaneng Power International (ADR)HNPFranklin Chow, CFA $ 24.74 (7%)(15%)(12%)3% Huaneng Power International (H)0902.HKFranklin Chow, CFAHK$ 4.77 (8%)(15%)(12%)1% Lanco InfratechLAIN.BODurga DathRs593.65 24% 44% 47%363% NTPCNTPC.BODurga DathRs209.65 (1%)2% (6%) 27% Power GridPGRD.BODurga DathRs103.90 (7%) (3%)(17%) 33% Reliance InfrastructureRLIN.BODurga DathRs1,066.05(12%) (7%)(16%) 95% Reliance PowerRPOL.BODurga DathRs150.15(10%) (7%)(21%) 39% Shanghai Chengtou Holding600649.SSFranklin Chow, CFARmb 13.89 24% 20%3% 62% Shenergy600642.SSFranklin Chow, CFARmb 12.18 12%8% 24% 85% Tata Power CompanyTTPW.BODurga DathRs1,356.256%5% 30% 98% Tianjin Capital Environmental Protection (A)600874.SSFranklin Chow, CFARmb 7.87 29% 36% 14% 38% Tianjin Capital Environmental Protection (H)1065.HKFranklin Chow, CFAHK$ 2.89 41% 43% 36%147% Xinjiang Goldwind Science & Technology002202.SZFranklin Chow, CFARmb 29.77 7% 4% (8%) 84%MSCI China6711%13%22%80%Note: Prices as of most recent available close, which could vary from the price date indicated above.This table shows movement in absolute share price and not total shareholder return. Results presented should not and cannot be viewed as an indicator of future performance.Source: FactSet, Quantum database.December 8, 2009China: Utilities: Power - IPPsTariff hikes highly likely if coal costs rise by 16% in 2010Faster-than-expected spike in coal prices. Qinhuangdao spot coal prices have surged by21% to Rmb700/t on Nov. 30, 2009 over the last three months. Our Goldman Sachs coal analyst now expects spot prices to rise by 25% yoy in 2010E (to Rmb750/t) and 2% yoy in2011E, and for contract prices to rise by 15% yoy in 2010E (to Rmb600/t) and 2% yoy in2011E. Using these estimates and expecting further efficiency gains in coal consumptionby power plants, we now assume IPP unit coal costs will rise by 16% yoy in 2010E (was flat previously) and remain flat in 2011.Without any tariff adjustments, large coal price spike could spell another round of substantial financial losses. According to Xinhua News, the Big Five IPPs collectively incurred a total net loss of Rmb32.5bn in 2008, primarily due to higher coal prices. For reference, in 2008 the Qinhuangdao spot coal price rose by 57% yoy. The hike was only partially offset by the delayed fuel cost pass-through in July and August 2008 (a total of 6% increases, on average). In our forecasts, if the unit coal cost were to rise by 16% yoy in2010, we believe CPI, Datang, Huadian, and Huaneng would lose a total Rmb941mn in2010E and generate an overall average ROE of -1% in 2010E.We believe the market expects only an average 3.5% yoy hike in 2010 unit coal costs for the five Hong Kong-listed IPPs. In Exhibit 5, we deduce the implied coal cost forecasts by the market assuming no tariff hikes for the five Hong Kong-listed IPPs. A-share analysis has not been done as we think it is difficult to isolate the impact from the so-called A-share premium (or liquidity premium). Nonetheless, we think the H-share analysis should still be illustrative for A-share investors. A negative implied increase in unit coal costs may suggest that Datang (H) is over-valued.Exhibit 5: Average 3.5% hike in 2010E unit coal costs for the five Hong Kong-listed IPPs implied by current share prices, assuming no tariff hikesImplied yoy increases in 2010E unit coal costs8.0%8%7%6%5%4%3.5%3%2%1%3.1%2.0%1.3%0%-1%(0.7%) CRPAverageHuaneng (H)CPIHuadian (H)Datang (H)CRP Huaneng (H) CPI Huadian (H) Datang (H)4-Dec-09 closing price of shares (HK$) 15.20 4.77 2.09 2.15 3.45Source: Datastream, Gao Hua Securities Research estimates.Exhibit 6: Profitability in 2010 continues to fall on 16% higher coal costs if we also assume higher tariffs in 20102003-2010E average EBIT margin for coal-fired IPPs under coverage vs. Qinhuangdao coal spot price(Rmb/t)1,000IPP average EBIT margin (right scale) Qinhuangdao coal spot price (left scale)29%30%90080070060050024%Tariff hike inMay 200519%Tariff hike inJuly 2008Tariff hike inJune 200619%18%Tariff hike inAug. 2008Tariff adjustments in Nov. 200973015%12%25%20%15%10%4003004% 5%200Jan-03Jul-03Jan-04Jul-04Jan-05Jul-05Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-100% Jan-11Source: Company data, China Coal Information Center, Gao Hua Securities Research estimates.Generation recovery alone is unlikely to offset coal price hikesWe see continued power generation recovery in 4Q09 and expect possible upside surprises int