20140919-高盛-Evolving_opportunities__Huadian_onto_CL-Buy__d_g_Huaneng_to_Neutral_18页_597kb

Summary of China IPPs (Independent Power Producers) Analysis

Core Content

This report provides an analysis of the performance and valuation of China's independent power producers (IPPs), focusing on their financial outlook, earnings projections, and investment ratings. The key factors influencing the industry include coal cost trends, tariff changes, utilization rates, and the impact of capex discipline and asset restructuring.

Main Points

1. Earnings and Valuation Outlook

• Earnings Drivers: The report assumes a modest rise in coal costs and a flat power tariff in 2015, which will impact earnings. However, it highlights the potential for cash flow growth and improved free cash flow (FCF) and dividend yields.
• ROE Normalization: While current ROEs are record-high, they are expected to normalize to mid-teen levels by 2016 due to the impact of higher coal costs and reduced capex.
• Valuation Adjustments: Target prices for the five Hong Kong-listed IPPs are raised by an average of 14%, based on revised earnings estimates and 2015 valuations.

2. Company-Specific Analysis

• Huadian (H): Maintained as a "Buy" and added to the Conviction List. It is expected to benefit from structural transformation and asset injections from its parent. Its potential upside is 24% for H-shares and 28% for A-shares.
• China Resources Power (CRP): Maintained as a "Buy" with a 20% potential upside. Its wind and coal-fired power prospects are expected to offset coal mine issues.
• China Power International (CPI): Maintained as a "Buy" with a 19% potential upside. Its P/B ratio (0.9X) is considered undervalued relative to its 12% ROE.
• Huaneng (H/A/ADR): Downgraded to "Neutral" from "Buy" due to less attractive risk/reward relative to peers. The cash flow and dividend have been largely priced in, and it faces challenges from coal cost increases and carbon emission costs.
• Datang (H/A): Maintained as "Neutral" with an 8% potential upside. Its coal-chemical business disposal may face valuation discounts due to legacy issues and risks.

3. Key Assumptions for 2015

• Coal-fired power tariff: Expected to remain flat after the lower-than-expected 2% cut.
• Unit coal cost: Projected to rise by 3% yoy.
• Utilization rate: Expected to increase by 1% yoy.
• Interest rate: Assumed to affect earnings growth, with Datang being the most sensitive.

4. Sensitivity Analysis

• Most Sensitive: Huadian to coal-fired tariff changes, with the highest potential EPS growth.
• Least Sensitive: CPI to coal cost changes, with lower EPS growth impact.
• Asset Impairments: Expected to shrink, supporting yoy earnings growth.

Key Information

5. Valuation Summary

6. Projected EPS Changes

7. Key Risks

• Spark spread: May be lower or higher than expected.
• Utilization and capacity: Could deviate from assumptions.
• Investment returns: May not meet projections due to market conditions or policy changes.

8. Investment Profile

Conclusion

The report emphasizes that while the Chinese IPPs are expected to continue generating solid cash flows and free cash flow yields, their ROEs are likely to normalize. Huadian is highlighted as the top pick due to its strong performance and potential for structural improvements, while Huaneng is downgraded due to reduced risk/reward. The valuation adjustments reflect the updated assumptions about coal costs, utilization, and market conditions.