China Power：A balancing act of risk, growth and valuation

Deutsche Bank Markets Research Asia China Utilities Periodical China Power Date 21 September 2016 Forecast Change A balancing act of risk, growth and valuation Top picks: Huadian Fuxin, CPI, CR Power, Longyuan ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Michael Tong, CFA Research Analyst (+852 ) 2203 6167 michael.tong@db.com Luka Zhu Research Associate (+852 ) 2203 6173 luka.zhu@db.com Hanyu Zhang Research Associate (+852 ) 2203 6207 hanyu.zhang@db.com Key Changes Company Target Price Rating 0902.HK 7.90 to 6.10(HKD) - 0991.HK 2.70 to 2.50(HKD) - 1071.HK 6.50 to 4.80(HKD) - 0836.HK 18.60 to 18.50(HKD) - 2380.HK 5.00 to 4.70(HKD) - 600886.SS 9.30 to 8.40(CNY) - 600900.SS 17.00 to 17.10(CNY) - 0916.HK 7.30 to 8.00(HKD) - 0958.HK 3.20 to 3.60(HKD) - 600011.SS 6.50 to 5.00(CNY) - 601991.SS 2.20 to 2.05(CNY) - 600027.SS 5.40 to 3.90(CNY) - Source: Deutsche Bank Top picks Huadian Fuxin (0816.HK),HKD1.95 Buy Longyuan Power (0916.HK),HKD6.84 Buy CR Power (0836.HK),HKD14.42 Buy China Power Int'l (2380.HK),HKD3.10 Buy Source: Deutsche Bank This report changes target prices and estimates for several companies under coverage; for a detailed summary please refer to Figure 1 page 4 We revisit the outlook for China power producers following interim results. The renewable and nuclear segments are fundamentally better positioned within the power sector, albeit some outputs are sold on a market basis. Huadian Fuxin and Longyuan Power are our top recommendations within the industry. Conversely, the key dynamics for thermal power operators have been worse than expected, with a negative impact from higher coal costs leading to earnings forecasts cut. Even so, valuations have declined even more sharply offering dividend yields that we argue are sustainable on capex discipline. We remain buyers while preferring CPI and CR Power. Thermal – market liberalization review and higher coal price assumptions We fine-tune our tariff assumptions after reviewing wholesale liberalization at IPP and provincial levels, and tariff upside from ultra-low emission upgrades. With accelerated grid reform, tariff pressure could shift from genco to gridco. After the recent coal price rally, we reduce our coal price decline to 7-8% yoy for 2016 (low end of company guidance). Under NDRC’s control measures, we expect the coal price to normalize in 2017 (flat yoy). If the coal price remains high, a tariff hike would be justified under the fuel pass-through mechanism. Thermal – project delay, utilization trend; expecting relatively stable dividends After a slew of new capacity control policies, some thermal projects have been postponed. IPPs are raising their renewable capacity growth targets. Monthly power consumption growth was stronger than expected in July-August. Nevertheless, we expect a total of 180GW new coal-fired capacity in 2016-18 and incorporate a thermal utilization decline of 97/165 hours in 2017/18. We could see a further delay in new capacity if the new thermal dispatch rule comes into force after Mar’17. CR Power has committed to a stable dividend and we expect other IPPs to maintain a relatively stable dividend (i.e. >=FY14). Relative to their capex/debt, the extra dividend via a higher payout is modest. Wind – still in a policy sweet spot UHV will play a critical role in implementation of a guaranteed-hours policy and hence curtailment reduction. Approval and construction progress are on track with 13 lines operational by 2018 (c.20GW). We expect more utilization upside for Fuxin and Longyuan. Nevertheless, rising wind output is sold at a discount and we have factored in tariff downside for wind projects in Yunnan. Hydro and nuclear – less exposed but not without risks Hydro and nuclear are more defensive than thermal but not without downside. Some hydro projects had in-line tariff cuts recently. Earnings are mitigated by strong water flow this year (despite retreating lately). The scale of direct supply for nuclear is still small but could expand. The proposed guaranteed utilization rule could provide some protection. On-schedule new projects are critical for earnings growth. We prefer Fuxin (nuclear) and CPI (hydro). Earnings revisions; DCF-based target prices;