20161223-招商证券_香港_-China_Wind_Sector_Outlook_2017_Ready_to_go,_waiting_for_policy_implementation_20页_1mb_1mb

China Wind Sector Outlook 2017 Summary

Core Views

• Industry Trend: The wind power sector in China remains cautiously optimistic for 2017. While wind curtailment, delayed subsidy distribution, and potential tariff cuts pose uncertainties, the government has introduced supportive policies to address these issues, including the Renewable Portfolio Standard and Guaranteed Utilization Hours.
• Things to Watch in 2017:
  • Potential tariff cuts, which could be driven by subsidy reductions or direct power sales discounts.
  • Implementation of supportive policies and improvement in wind curtailment, which the government is expected to focus on in 2017.

Investment Strategy

• Wind Farm Operators: Preferred due to better fundamentals and profitability compared to 2012. Their current valuation is below historical mean, but expected to benefit from policy implementation and improved utilization hours. Companies with limited exposure to zone I-III areas are more defensive against curtailment and potential tariff cuts.
• Wind Power Equipment Manufacturers: Current valuation is fair, but future profit growth is expected to be limited due to declining new installations and potential price wars from increased competition.

Top Picks

• HNR (958 HK):
  • Rating: BUY
  • Target Price (TP): HK$3.1
  • Reasons: Limited exposure to curtailed areas, high earnings visibility, and focus on zone IV, which has lower tariff cuts and higher power demand.
• HDFX (816 HK):
  • Rating: BUY
  • Target Price (TP): HK$2.1
  • Reasons: Expected improvement in valuation due to higher renewable energy earnings mix and the launch of SZ-HK Connect.

Recommendations

• Datang Renewable (1798 HK):
  • Rating: NEUTRAL
  • Target Price (TP): HK$0.83
  • Reasons: High exposure to zone I-III areas, which are more affected by tariff cuts and curtailment. High debt ratio and low interest coverage increase earnings uncertainty.
• Goldwind (2208 HK):
  • Rating: BUY
  • Target Price (TP): HK$13.0
  • Reasons: Solid installation demand, attractive valuation, and potential for market share gains despite slowing new installations and increased competition.

Earnings and Valuation Insights

• Wind Farm Operators: Expected to outperform equipment manufacturers in 2017 due to improved utilization hours and policy support. Major operators are projected to see 20%-30% annual earnings growth in 2017.
• Equipment Manufacturers: Average 2017E P/E at 8.7x, while wind farm operators have an average P/E of 6.6x. Goldwind is expected to see 10% YoY earnings growth in 2017, driven by market share increase and downstream business expansion.
• HNR: Trading at 6x 2017E P/E, with a TP of HK$3.1 implying 8x P/E. Its wind capacity in zone IV is expected to reach 66% of total capacity in 2016.
• HDFX: Trading at 5x 2017E P/E, with a TP of HK$2.1 implying 6x P/E. Expected to benefit from improved renewable energy installation and nuclear power equity investment.

Performance and Risk Factors

• Operators: Mixed performance in 2016, with HNR showing better growth. Utilization hours and installation pace are key drivers of earnings.
• Datang Renewable: Suffered significant losses in 2016 due to high exposure to curtailed zones and high debt. Its profitability is highly sensitive to interest rates and utilization hours.
• Goldwind: Strong revenue growth in 2015 and 2016, but expects slower installation in 2017. Its valuation is currently 1SD below historical mean.

Investment Ratings

Key Risks and Considerations

• Tariff Cuts: Expected to impact earnings of companies with significant exposure to zone I-III areas.
• Curtailment: Remains a key challenge, particularly for operators with projects in these zones.
• Competition: Increased market competition could lead to price wars and margin pressure for equipment manufacturers.
• Valuation Uncertainty: Companies like Datang Renewable face higher uncertainty due to their financial structure and exposure to market volatility.

Financial Highlights

• HNR: FY14-FY17E Net Profit CAGR of 26%, with strong earnings visibility and lower valuation risk.
• HDFX: FY14-FY17E Net Profit CAGR of 14%, benefiting from diverse revenue streams.
• Goldwind: FY15-FY18E Net Profit CAGR of 8%, with strong market position and downstream expansion.
• Datang Renewable: High debt and low interest coverage make its earnings highly sensitive to macroeconomic factors and policy changes.

Conclusion

The Chinese wind power sector is expected to benefit from policy implementation and improved utilization hours in 2017, with wind farm operators showing more promise than equipment manufacturers. HNR and HDFX are highlighted as top picks due to their strong fundamentals and growth potential, while Datang Renewable is viewed with caution due to its exposure to curtailment and financial risks. The overall outlook remains cautiously optimistic, with the sector expected to outperform the market.