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Chinese Wind Power Sector Summary

Core Content

The Chinese wind power sector is currently undervalued, with share prices trading at a PEG of ~0.52x, offering a long-term buying opportunity. The sector is expected to benefit significantly from the development of the Ultra High Voltage (UHV) transmission network, which will improve wind utilization hours and reduce curtailment ratios. The report highlights three key wind farm operators: Huaneng Renewables, China Longyuan, and Datang Renewable, with the former two recommended for OVERWEIGHT due to their strong growth prospects and better balance sheets.

Main Points

• UHV Transmission Network: The build-out of the UHV transmission grid is a major structural factor that will improve wind utilization and reduce curtailment, supporting long-term growth for the sector.
• Wind Curtailment Reduction: Wind curtailment is expected to decrease from 10.7% in 2013 to 8.2% in 2015E, as UHV lines become operational.
• Utilization Hours: Utilization hours are projected to improve for all three companies, with Huaneng Renewables expected to see the highest growth due to its strategic project locations.
• IRR (Internal Rate of Return): Even with potential wind tariff cuts, the average IRR for wind power assets of the three companies is estimated at 14.7%, which remains attractive.
• Investment Outlook: The report recommends investors to OVERWEIGHT the wind power sector, citing long-term growth potential, improved utilization, and reduced curtailment.

Key Information

• Share Price Performance: Wind farm operators have seen an average decline of ~25% YTD, with the sector at a two-year low in terms of PEG.
• Company Performance:
  • Huaneng Renewables (958 HK): Expected to benefit from the Zhangbei wind bases, with a target price of HKD3.50 and an upside of 34%.
  • China Longyuan (916 HK): Expected to benefit from the UHV transmission project, with a target price of HKD11.00 and an upside of 33%.
  • Datang Renewable (1798 HK): Recommended for HOLD due to large exposure to high wind curtailment regions, with a target price of HKD1.10 and an upside of -7%.
• Utilization Hours Forecasts:
  • Huaneng Renewables is expected to see a 3.3% increase in utilization hours in 2014.
  • China Longyuan is projected to see a 1.6% increase in 2014.
  • Datang Renewable is forecasted to see a 1.1% increase in 2014.
• EPS CAGR: The report forecasts an average three-year EPS CAGR of 39% for the three companies, driven by a strong pipeline of pre-approved projects.
• Capacity Growth: The average capacity CAGR for the three companies from 2013 to 2016E is expected to reach 17%, with Huaneng Renewables leading at 23%.

Investment Conclusion

• The wind power sector is recommended for OVERWEIGHT, with Huaneng Renewables and China Longyuan as top picks due to their strategic advantages and strong growth potential.
• Investors are advised to look past near-term volatility and focus on the structural growth story, including UHV transmission development and more strategic project approvals.
• The report forecasts a continued improvement in utilization hours and a reduction in wind curtailment over the long term, which will enhance the profitability of wind farm operators.

Strategic Plan for Wind Power Capacity Growth

• The Chinese government has centralized project approvals since 2011, which has slowed the pace of installation but allowed grid infrastructure to catch up with renewable growth.
• Projects are increasingly being approved in regions with high utilization hours and IRRs, such as Guangdong, Yunnan, Guizhou, and Sichuan.
• Developers are expected to wait for the commissioning of UHV transmission lines before embarking on aggressive new developments, ensuring better project locations and higher returns.

Valuation

• China Longyuan: Market cap of USD8,563.9m, P/E of 15.7x (2014E) and 13.4x (2015E), P/B of 1.5x (2014E) and 1.4x (2015E), Dividend yield of 1.2% (2014E) and 1.4% (2015E), 3-year EPS CAGR of 31%, PEG of 0.50.
• Huaneng Renewables: Market cap of USD3,040.3m, P/E of 13.9x (2014E) and 10.3x (2015E), P/B of 1.2x (2014E) and 1.1x (2015E), Dividend yield of 1.5% (2014E) and 2.0% (2015E), 3-year EPS CAGR of 34%, PEG of 0.41.
• Datang Renewable: Market cap of USD1,107.3m, P/E of 33.3x (2014E) and 12.3x (2015E), P/B of 0.7x (2014E) and 0.7x (2015E), Dividend yield of 0.3% (2014E) and 0.7% (2015E), 3-year EPS CAGR of 52%, PEG of 0.64.

UHV Transmission Projects

• The report lists several UHV transmission projects, including:
  • Zhangjiakou 500kV: Expected to be commissioned in 2014, increasing wind power transmission capacity by 1,800MW.
  • Hami - Chongqing DC: Expected to be commissioned in 2015, with a capacity of 8,000MW.
  • Huaidong - Sichuan DC: Expected to be commissioned in 2015, with a capacity of 10,000MW.
  • Jiuquan-Hunan DC: Expected to be commissioned in 2016, with a capacity of 8,000MW.

Wind Curtailment and Utilization

• Wind curtailment in China has been a major issue, with rates as high as 10.7% in 2013.
• The development of UHV transmission lines is expected to reduce this rate to 8.2% by 2015E.
• Utilization hours are expected to improve, with the three companies projected to see increases of 1.6%, 3.3%, and 1.1% in 2014, respectively.

IRR and Tariff Cuts

• The report estimates that the average IRR of wind power assets for the three companies is around 14.7%, which remains attractive even with potential tariff cuts.
• Tariff cuts are expected to occur in regions with high IRRs, such as Fujian and Yunnan, but will not impact existing projects.
• The report suggests that the government is likely to maintain subsidy levels in 2014 due to the increased renewable energy surcharge.

Company Comparisons

• China Longyuan: Strongest beneficiary of UHV transmission build-out, with a higher capacity growth and better balance sheet.
• Huaneng Renewables: Strong capacity growth and strategic project locations, with a higher IRR.
• Datang Renewable: Lower growth potential due to exposure to high wind curtailment regions, and thus recommended for HOLD.

Conclusion

• The Chinese wind power sector is poised for long-term growth, supported by the development of the UHV transmission network.
• Despite near-term volatility, the structural improvements in utilization and IRR make it an attractive investment opportunity.
• Huaneng Renewables and China Longyuan are highlighted as top picks, while Datang Renewable is recommended for HOLD.