New constitution likely to help safeguard returns; FY17 results preview

9 March 2018UtilitiesChina WindUtilitiesUtilitiesCoverage ChangeAsiaChinaIndustryChina WindDate9 March 2018Deutsche BankMarkets ResearchNew constitution likely to helpsafeguard returns; FY17 results previewNew constitution likely to help safeguard returnsChina's recent proposal to add "ecological civilization" to its constitution,President Xi's strong will to clean up China's environment, China's commitmentto the Paris agreement and our recent trip to Beijing all make us believe that themandatory green certificate (GC) scheme, with details to be released in 2018,is unlikely to be very detrimental to the sector. With ROE and BVPS unlikelyto be substantially impacted, we see value in the wind operators, with stockstrading at ~0.7x PB in 2019e while generating sustainable ROE of ~10% with adeclining curtailment outlook. Our top pick is Longyuan Power, which we like forits relatively low gearing, positive free cashflow and potentially higher dividenddistribution and we believe a relief rally is likely when the GC detail is announced.This report marks coverage transfer from Michael Tong to Thomas Zhu.FY17 results preview and earnings revisionWe review our earnings forecasts ahead of the FY17 results reporting season.Our revised earnings are in line with consensus for 2017e but generally below in2018/19e - we are more conservative than consensus in relation to wind capacityaddition and more aggressive on finance cost hikes in 2018/19e. Other factors thatinvestors should look out for during the results season include GC, receivables,gearing, finance costs, free cashflow and dividend outlook.ROE/BVPS sensitivities under different scenarios for GC inclusionDownside risks for wind IPPs: aworse-than-expected green certificatepolicy, lower-than-expected utilization orcapacity additions, and higher-than-expected financing costs. Additional risksfor Goldwind: higher-/lower-than-expectedwind turbine sales delivery, higher-/lower-than-expected ASP/margins for windturbine.We have examined company ROE and book value (in case power tariff subsidyimpairment is needed) sensitivities to GC prices under different scenarios, byassuming different capacities to be included in GC. Sensitivities are not massive:1) when only capacities connected since 2018 are included, or 2) when onlycapacities connected since Mar 2015 are included. If all capacities connectedby end-2014 are included (i.e., capacities that are close to paying off/have paidoff bank loans), ROE sensitivities rise significantly - as the capacities involvedrepresent over 30% of total capacities. Under this scenario, however, we believepolicy makers will probably put a high renewable energy mix requirement in theRenewable Portfolio Standard and/or floor prices for GC, to avoid low GC prices.Valuation: 10% discount to DCF for wind IPPs; target PB for GoldwindTarget prices for wind IPPs are based on a 10% discount to DCF (9.1%-9.4%WACC and TGR of 2%), using the discount to factor in GC uncertainty. Ourtarget price for Goldwind is based on target P/B of 1.4x, which is justified by theThomas Zhu, CFAResearch Analyst+852-2203 6235Michael Tong, CFAResearch Analyst+852-2203 6167Luka ZhuResearch Analyst+852-2203 6173Key ChangesCompanyTarget PriceRating0958.HK3.20 to 3.00-0916.HK7.40 to 6.70-2208.HK9.10 to 11.70-002202.SZ8.10 to 9.60-Source: Deutsche BankTop picksLongyuan Power (0916.HK),HKD5.18BuySource: Deutsche BankCompanies featuredHuaneng Renewables (0958.HK),HKD2.62BuyLongyuan Power (0916.HK),HKD5.18BuyChina SuntienGreen Energy(0956.HK),HKD1.84BuyGoldwind Sci & Tech(2208.HK),HKD11.84HoldGoldwind Sci & Tech(002202.SZ),CNY16.87SellSource: Deutsche BankDeutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should considerthis report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONSARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. THE CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE ’ SREPUBLIC OF CHINA (“THE PRC”) (EXCEPT IN COMPLIANCE WITH THE APPLICABLE LAWS AND REGULATIONS OFPRC), EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAU.Distributed on: 08/03/2018 21:03:09 GMT7T2se3r0Ot6kwoPa 9 March 2018UtilitiesChina Windcompany's ROE, its historical trading average and sum-of-the-parts cross-check(see Fig 3 for details of TP changes).Page 2Deutsche Bank AG/Hong Kong 9 March 2018UtilitiesChina WindEarnings and target price revisionsFigure 1: Recurring earnings and target price revisions2017E2018E2019ECompanyTickerBeforeCurrent%chg.BeforeCurrent%chg.BeforeCurrent%chg.BeforeCurrent%chg.HNR0958.HK3,190 3,1980%3,573 3,389-5%4,036 3,737-7%3.23.0-6%Longyuan0916.HK3,887 3,805-2%4,893 4,252-13%5,606 4,934-12%7.46.7-9%Suntien0956.HKn.a896n