德银-中国-公用事业行业-公用事业、再生资源与环境：2018年展望与最佳选择-20171129-Deutsche_Bank-UtilityRenewableEnvironmental_2018_outlook_and_top_picks_42页_1mb

2018 Outlook and Top Picks: Utility/Renewable/Environmental Sector

Core Content Summary

The document outlines the outlook for the utility, renewable, and environmental sectors in China for the year 2018. It highlights that while the overall sector underperformed in 2017, there are positive trends and opportunities emerging in specific sub-sectors.

Main Sectors and Outlook

• Wind: The sector is expected to benefit from the resolution of green certificate (GC) overhangs and accelerated earnings growth. The current share prices have already priced in overly bearish GC scenarios.
• Environmental: With stronger enforcement and improved cash flow, the environmental sector is expected to show better performance. The establishment of the "National Natural Resources and Ecology Administration" is anticipated to support this trend.
• Gas: The gas sector is viewed positively due to sustainable volume growth, manageable margin risks, and improving free cash flows. Coal-to-gas momentum is expected to continue, with a 15% CAGR in gas demand.
• Thermal IPPs: Earnings recovery is anticipated from tariff hikes and lower coal prices. The sector may also benefit from SOE reforms, which could lead to corporate restructuring and improved performance.

Key Companies and Ratings

• Top Buys: Longyuan Power (916 HK), Huadian Fuxin (816 HK), CEI (257 HK), ENN (2688 HK), CR Gas (1193 HK), CR Power (836 HK), CPI (2380 HK)
• Hold-rated: GD Power (601991 SS), China Gas (HKD22.00), HKG (HKD15.26)

Valuation Highlights

• The document uses DCF as the primary valuation method for utilities, with SOTP for multi-business players.
• HK Utilities are considered fully valued, with a dividend yield only slightly above the US yield.
• Gas Distributors are highlighted for their strong performance and potential for further growth.

Risks and Catalysts

• Key Risks:
  • Lower-than-expected volume or margin for coal-to-gas customers
  • Delayed projects or lower-than-expected returns on new environmental PPP orders
  • Further delays in Taishan Nuclear or lower tariff
  • Policy risks, currency fluctuations, and regulatory changes
• Catalysts:
  • Tariff hikes at year-end 2017
  • Continued coal-to-gas conversion
  • Stronger environmental enforcement
  • Improved utilization and cash flow for wind and thermal IPPs

Key Information and Trends

• 2017 Performance:
  • China Gas was the best performer, outperforming the HSCEI by 76%
  • ENN and Towngas China also showed strong gains
  • CT Environmental underperformed due to short-seller reports and earnings misses
• Major Sector Surprises:
  • Natural gas consumption growth reached 18% in 10M17, higher than market expectations
  • Environmental PPP orders hit new highs, though may slow post-November regulations
  • Coal prices remained high, exceeding Rmb600/ton
  • Thermal plant utilization improved due to supply-side reforms
  • SOE reforms progressed faster than expected, including the merger of Shenhua and GD Power

Valuation Table

Top Picks and Key Drivers

• China Everbright Int'l (CEI): Expected to benefit from improved earnings quality and WTE segment performance.
• Longyuan Power: Anticipated to see earnings acceleration due to tariff hikes and reduced curtailment.
• Huadian Fuxin: Positioned to benefit from thermal tariff hikes and reduced grid curtailment.
• ENN Energy: Strong exposure to coal-to-gas momentum and coastal pollution control.
• CR Gas: High-quality player with significant coal-to-gas volume potential.
• CR Power: Expected to recover ROE to 11.7% with stable dividends and strong asset quality.
• CPI: Anticipated ROE recovery to 9.6% and plans to increase clean energy capacity.

Conclusion

The document suggests that while the sector as a whole may not be a strong beneficiary of cyclical recovery, certain sub-sectors such as wind, environmental, and gas are showing promise. The long-term clean and green theme remains intact, and companies with strong fundamentals and potential for growth are highlighted as top buys. The sector is expected to benefit from policy support, improved cash flows, and potential SOE reforms.