Datang Renewable (1798 HK) BUY · Datang RP, a subsidiary of China Datang Corp., is a leading...

23 February 2011

Datang Renewable (1798 HK) BUY

A leading and fast-growing wind power generator

China Datang Corporation Renewable Power (Datang RP) is the second largest

wind power operator that primarily focuses on the development, management

and operation of wind power generation projects. As of June 30, 2010, its total

installed capacity in China reached 2,717MW with a CAGR of 68.8% from

2007 to 2009. Datang RP aims at further expanding their scale and strengthening

their leading position in PRC’s wind power sector. In addition, Datang RP also

seeks business opportunities in offshore and international markets.

Investment Summary

� A leading wind farm operator in China. In terms of installed capacity, Datang RP ranked second in China with 11.7% market share as of the end of 2009. Its wind power projects are strategically located in diverse areas in China with 50,700MW wind power resources reserve.

� Fast capacity expansion. Capacity growth will be a key growth driver going forward. We expect Datang RP to increase its wind power capacity from 2,619MW in 2009 to 4,000MW by the end of 2010, and to achieve 5,500MW and 7,000MW in 2011 and 2012, respectively. This implies a CAGR of 39% in 09-12.

� Grid constrains to be gradually removed. Since grid companies plan to build Ultra High-voltage (UHV) lines under the 12th Five-Year Plan and upgrade existing grid to smart grid, the transmission limitation problem in Inner Mongolia and Gansu regions caused by poor grid infrastructure can be resolved. This helps (1.) lifting overall utilization hours and (2.) enhancing dispatch ability of wind farms and thus, leads to increase in average generating capacity.

� Strong earnings growth. We project the net profit will achieve robust growth of 73% CAGR during FY10-FY12E, supported by 68% revenue CAGR over the same period of time. Revenue growth is attributed by (1.) A 39% CAGR of capacity growth in FY09-FY12E; (2.) A rising utilization hour; and (3) Faster ramp-up of average generating capacity.

Valuation

We use DCF model to derive our target price of HK$3.04, which translates to

19x PE on FY11E earnings and 15x PE on FY12E earnings. The target price is

derived from the assumptions of 7.8% WACC, debt to equity ratio of 60%:40%

and a terminal growth rate of 4%

Initiation Report

Rating BUY

Target Price HK$3.04

Stock price (23/02/2011) HK$2.20

Upside 38%

Bloomberg code 1798.HK

Website http://www.dtxny.com.cn

52-Wk Range (HK$) 1.85/2.30

52-Wk Avg. Daily Vol (m) -

No. of Shares (m) 7,274

Market Cap (HK$m) 16,031

Major Shareholders (%)

China Datang Corporation 66%

NTA per share (HK$) 1.95

ROE (%) 11%

Net debt per share (HK$) 3.37

Analyst:

Kenneth LI (李勇)

[email protected]

(852) 2235 7619

Castor Pang (彭偉新)

[email protected]

(852) 2235 7127

Year to Turnover EBIT Net Profit EPS EPS Growth PE EV/ EBITDA Dividend 31 Dec (Rmb m) (Rmb m) (Rmb m) (Rmb) (%) (x) (x) Yield %)

2008 860 462 140 n/a n/a n/a n/a n/a

2009 1,428 860 248 n/a n/a n/a n/a n/a

2010E 2,240 1,361 410 0.056 n/a 33.1 17.3 0%

2011E 4,490 2,609 1,002 0.138 144 13.6 11.9 0%

2012E 6,332 3,579 1,233 0.169 23 11.0 10.3 0%

Consensus net profit – FY10: Rmb429m

-- FY11: Rmb1,016m

23 February 2011

Hotline: (852)2235 7789

Email: [email protected] Website: www.cinda.com.hk

Contents

Executive Summary..................................................... 3 Competitive Analysis................................................................. 5 Investment Positives.................................................... 7 Earnings Outlook.......................................................... 13 Valuation…....................................................................... 19 Industry Overview.................................................................. 23 Investment Risks...................................................................... 34 Appendix 1. Group Structure................................................ 36 Appendix 2. Shareholding Structure....................................... 37 Appendix 3. Management Profile....................................... 37 Appendix 4. Financial Statements....................................... 38

23 February 2011

Hotline: (852)2235 7789


Executive Summary

� Datang RP, a subsidiary of China Datang Corp., is a leading renewable energy company focusing on the development, management and operation of wind power generation projects. In terms of installed capacity, Datang RP ranked second in China with 11.7% market share as of the end of 2009.

� Inner Mongolia and northeastern regions, where wind power resources are rich, accounts for 81% of Datang RP’s total installed capacity by 1H10. Inner Mongolia alone accounts for 60% of its total capacity and takes up 17.6% market share in the region. Datang RP has 50.7GW pipeline projects by 1H10, which provides good visibility into its long-term growth prospects.

� Datang RP has a total prospective solar power capacity of 7,655MW and biomass energy capacity of 173MW. Considering wind energy’s better return profile, the company will focus on wind energy development. However, we believe these reserves represent huge long-term growth potential going forward.

� The government has implemented series of supportive policies for wind power industry development, such as (1.) Mandatory dispatch of wind power; (2.) Guided on-grid tariff benchmark and (3.) Favorable tax and lending facilities, etc.

Figure 1: Datang RP’s current and prospective wind power capacity portfolio

Source: Datang RP

Inner Mongolia & Northeastern Central and Western Southeastern Coastline Total

Capacity in service

Geographical coverage Inner Mongolia, Liaoning, Jilin and

Heilongjiang Hebei, Henan and Gansu Shandong and Shanghai

Total installed capacity (MW) 2,198 219 300 2,717

Capacity under construction

Constructing capacity (MW) 836 478 149 1,463

Pipeline Projects

Geographical coverage Inner Mongolia, Liaoning, Jilin and

Heilongjiang

Hebei, Henan, Shanxi,

Shaanxi, Ningxia, Gansu,

Qinghai, Xinjiang,

Chongqing and Yunnan

Shandong, Jiangsu, Anhui,

Fujian, Guangdong, Guangxi

and Hainan

Advanced 50 99 149 298

Intermediate 4,304 794 530 5,628

Early 29,944 12,290 2,550 44,784

Prospective capacity (MW) 34,298 13,183 3,229 50,710

23 February 2011

Hotline: (852)2235 7789


� Due to better return profile of wind energy and its abundant resources in China, wind energy is viewed as one of the key development for PRC Government to fulfill the commitment of 40-45% reductions in the carbon intensity and 15% renewable energy mix by 2020. Therefore, NDRC revised up its wind power capacity target of 30GW set in 2007 to 150GW by 2020, representing a CAGR of 17.3% in 2009-2020, which only accounts for 5% of China’s wind power reserve.

� Datang RP encounters severe transmission limitation in Inner Mongolia and Gansu regions caused by poor grid infrastructure. This leads to significant deduction in utilization hours and weakened grid dispatch ability in 2009 and 2010. According to Datang RP’s estimate, in absence of transmission limitation, the total electricity generated in FY09 would have increased by 17% and 8% in Inner Mongolia and Middle-west regions, respectively.

� We believe that utilization hour and grid dispatch lead time should continue to improve from 2011 onwards in light of having more intra-province grid connection and inter-province transmission lines in place after 2010. In the long run, we believe UHV inter-province transmission lines and smart grid will resolve the problem completely.

� Capacity growth will be a key growth driver going forward. We expect Datang RP to increase its wind power capacity from 2,619MW in 2009 to 4,000MW by the end of 2010, and to achieve 5,500MW and 7,000MW in 2011 and 2012, respectively. This implies a CAGR of 39% in 09-12. Coupled with a rising utilization hour and average generating capacity on the back of improving grid connection, we project 73% net profit CAGR in FY10-12E.

� We use DCF model to derive our target price of HK$3.04, which translate to 19x PE on FY11E earnings and 15x PE on FY12E earnings. The target price is derived from the assumptions of 7.8% WACC, debt to equity ratio of 60%:40% and terminal growth rate of 4%.

� Capacity growth is the key growth driver in our DCF model. We assume a 1.5GW capacity increment annually to 2020. By then, Datang RP will operate 19GW capacity. As NDRC planned a total 150GW capacity target, assuming no overseas expansion for Datang RP, it will only take up 12.7% market share by 2020 (vs 11.7% in 2009). We believe that our assumption is conservative.

23 February 2011

Hotline: (852)2235 7789


Competitive Analysis

Figure 2: Datang RP – SWOT analysis

Strengths Weaknesses

Second largest operator in China. According to the BTM Report, based on 2009 year-end installed capacity, Datang RP is the second largest wind power operator in China, 69% higher than the third largest wind power operator in China.

Strong industry background. Datang RP’s controlling shareholder, the China Datang Corp., is one of the five largest power groups in China. Besides, Datang RP has launched its first wind farm project in 2005 and cumulated 5 years’ experience in wind power industry.

Abundant and high-quality wind power resources reserves. Datang RP has entered into investment and development agreements with 22 provincial governments in China, with a total prospective capacity of approximately 50.7 GW as of June 30, 2010.

Developed the first offshore wind power project in the PRC. Datang RP has developed the 102MW Shanghai Donghai Bridge Offshore Wind Power Pilot Project, which has commenced full-scale electricity generation in June 2010. Recently, Datang RP was also selected to develop a 300MW offshore project (Yancheng, Jiangsu) in the first round of national offshore wind farm concessions.

� Lack of experience in other renewable energy business. Datang RP plans to explore opportunities to develop other renewable energy projects, such as solar power and biomass energy projects in the future, which Datang RP has no proven track record.

� Rely on third-party during project development. Datang RP generally outsources the process of assessing, designing and constructing wind farms to third-party.

� Relatively stretched Balance Sheet. Datang RP’s net gearing ratio reached 271% in FY09. Given its aggressive expansion plan, balance sheet looks stretched.

Opportunities Threats

Rapid growing wind power capacity in China. According to the BTM report, the cumulative wind power installed capacity in China is expected to grow at a CAGR of 32.3% from 2008 to 2014 and reach 105GW in 2014. “The Development Plan for Strengthening the

New Energy Industry (Draft)” (《新能源產業振興發展

規劃（草案）》) targets to have 15% of total installed

capacity from new energy by 2020, with installed capacity of wind power of 150 GW.

Rich Wind power resources in Inner Mongolia. According to the “2009 China Wind Power Report”, Inner Mongolia has 150GW of technically exploitable wind power resources, the highest among all provinces. 60% of Datang RP’s installed capacity was located in Inner Mongolia as of June 30, 2010.

Growing offshore wind power market. According to preliminary estimates by the China Meteorological Administration, China has around 200 GW of offshore wind power resources available for development. With the Chinese government’s strong support and promotion of offshore wind farms, China has the potential to catch up with Europe in its offshore wind power development in the near future.

Government policy support. The PRC government has implemented series of supportive policies for wind industry development such as: (1.) Priority dispatch; (2.) Benchmark on-grid tariffs by region; and (3.) Favorable tax rate and lending facilities.

� Rely heavily on grid infrastructure. Datang RP must obtain a local grid company’s consent to connect the wind farms to its power grids before constructing the project. Besides, transmission limitations such as grid congestion may curtail Datang RP’s electricity output.

� Expiration of the Kyoto Protocol. Sales of CERs depend on the CDM arrangements under the Kyoto Protocol. If the Kyoto Protocol is not renewed before its expiration on December 31, 2012 or if the PRC government discontinues its support for CDM arrangements, it could have a material adverse impact on Datang RP’s income from sales of CERs.

� Projects are concentrated in Inner Mongolia. As of June 30, 2010, approximately 60% of Datang RP’s total installed capacity is located in Inner Mongolia.

� FX risk. The group’s consolidated financial statements are denominated in RMB. Fluctuations in the value of RMB against foreign currencies may affect the revenue from the sales of CERs, the costs for foreign acquisitions and FX borrowings, and the prices of the imported equipment and materials.

Source: CIRL

23 February 2011

Hotline: (852)2235 7789


Figure 3: Datang RP –Porter’s Five Forces

Threat of substitute products – Medium

� Datang RP’s wind farms may encounter competition from other renewable energy sources. Competition from such producers may increase if the technology used to generate electricity becomes more sophisticated and cost-effective, or if the PRC government chooses to further strengthen its support of other renewable energy sources.

� Wind energy competes with petroleum, coal, natural gas and other conventional energy. A decline in the costs of those fuels could decrease the demand for energy from renewable sources.

Threat of entry of new competitors – Medium to Low

� At the end of 2009, the total installed wind power capacity of the top 9 operators accounted for 57% of the total installed capacity in China, which showed that China’s wind power industry is relatively concentrated. Besides, the capital intensive nature of the industry serves as a barrier to entry.

Intensity of competitive rivalry – High

� Datang RP is expected to face severe competition in many aspects, including the power grid connection, secure of wind power resources reserves, and financing in the future.

� Bidding for offshore wind power projects

Bargaining power of customers – Medium

� Datang RP’s wind farms sell substantially all of their electricity generation to the grid companies to whose grids they are connected, rather than selling directly to any industrial or residential end-users, thus Datang RPhas a narrow range of customers.

� However, as the on-grid tariffs are fixed by the PRC government, the grid companies have little bargaining power on price point.

Bargaining power of suppliers – Low

� From 2007 to 2010, average price of China’s wind turbine experienced a decreasing trend, the foreign brand wind turbines prices has dropped from 8,500 RMB/kW to 6,000 RMB/kW, while the domestic brand wind turbines prices decreased from 6,500 RMB/kW to 4,900 RMB/kW.

� As a sizable number of competitors have entered into the wind turbine market and cause oversupply problem. The bargaining power of the wind turbine manufacturer is relatively low.

Source: CIRL

23 February 2011

Hotline: (852)2235 7789


Investment Positives

� Fast growing wind developer with ample pipeline projects:

China’s wind power industry has experienced exponential growth this decade. Total installed capacity expanded from 1,264MW in 2005 to

25,853MW in 2009，representing a CAGR of 113% in 05-09. Datang RP

started its wind power business since 2005 with only 80MW capacity and outgrew industry by increasing its capacity to 2,619MW by the end of 2009, representing a CAGR of 146% in 05-09. This implies an expanding market share of Datang RP. In terms of installed capacity, Datang RP ranked second in China with 11.7% market share. Given Datang RP’s expansion plan and ample pipeline projects, it is set to grow its capacity aggressively going forward. We expect an installed capacity growth at a CAGR of 39% in 09-12.

Figure 4: Shares of installed wind capacity in China (2009)

Others, 42.9%

Longyuan, 17.5%

ChinaDatang,

11.7%

China Huaneng, 10.4%

China Guandong Nuclear, 5.4%

Shenhua Group, 4.4%

China Huadian, 2.9%

China Power Invest., 2.5%

China Windpower,

2.2%

Source: BTM March 2010

Datang RP has rich wind reserve of 50.7GW (vs Longyuan’s 45GW) as at 1H10, of which 52% and 15% located in Inner Mongolia and Northeast China, respectively, where wind resource are in high quality and thus, lead to better utilization hours.

In our view, huge wind reserve provides high long-term growth visibility. If we assume a 1.5-2.0GW capacity growth per annum, the wind reserve of Datang RP should be able to provide 25-30 years of development. As of June 30, 2010, Datang RP has 1,462MW capacities under construction, which is expected to complete construction before the end of 2010.

23 February 2011

Hotline: (852)2235 7789


Figure 5: Datang RP’s wind reserve distribution (50.7GW)

Inner Mongolia, 52%

Northeast provinces, 15%

Middle-west provinces, 26%

Southeast coastal

provinces, 7%

Source: Datang RP

Pipeline projects

Datang RP possesses ample pipeline projects for which it has already acquired the development rights from local governments. Datang RP classified pipeline projects into “advanced,” “intermediate” and “early” based on the progress made.

Figure 6: Datang RP’s pipeline projects

Definition Prospective capacity

(as of 1H10)

Timeline

Advanced Approved by NDRC or the relevant

provincial DRC, for which construction

has not yet begun

297MW Complete construction by the

end of 2011

Intermediate Wind tests have been conducted and

preparation is being made for the

application to NDRC

5,627MW Can complete development

and construction by as early as

2011

Early Only agreements with local

governments and wind tests have

begun

44,784MW At least 12 months for wind

test

Source: Datang RP

The construction lead time normally takes less than a year. The manufacturing lead time of wind turbine have been reduced significantly thanks to a closer partnership with key suppliers. That means it takes less than a year for advanced pipeline projects to complete construction and dispatch. Early pipeline projects should be allowed at least 12 months to do wind test before submitting applications to NDRC.

23 February 2011

Hotline: (852)2235 7789


Apart from wind energy, Datang RP has other prospective renewable energy capacity of 7,828MW as of June 30, 2010, of which 7,655MW are solar power projects and 173.0MW goes to biomass energy projects. Once project return of solar and biomass energy become attractive, this represents a valuable asset for future development.

� Grid connection bottleneck to improve gradually in 2011 & 2012:

Due to underdevelopment of grid capacity and weak domestic electricity demand in Inner Mongolia and Gansu, Datang RP encountered sever transmission limitation in these areas. It causes significant deduction in utilization hours and prolonged dispatch lead time. According to Datang RP’s estimate, in absence of transmission limitation, the total electricity generated in FY09 would have increased by 17% and 8% in Inner Mongolia and Middle-west regions, respectively. However, with the effort from Datang RP and grid company, we anticipate a gradual improvement in grid connection bottleneck.

First of all, take Chifeng area (in East Inner Mongolia, account for 31% of total operating capacity by 1H10) for instance, apart from building intra-province grid network to get wind farm connected to local grid, by the end of 2010, one 220kV and two 500kV tradition high voltage lines will provide additional width to transmit electricity to Liaoning province. Thus, we believe that the utilization hour and dispatch ability in the above regions should improve substantially in 2011.

Figure 7: New transmission lines in Chifeng, Inner Mongolia.

Source: Datang RP

23 February 2011

Hotline: (852)2235 7789


Second, In order to better comply with grid safety standard, Datang RP upgraded the wind turbines in Dongshan area of Chifeng, with a total installed capacity of 249.5MW. Technically, these capacity includes LVRT (Low voltage ride through), enhanced wind prediction power etc., which strengthens grid dispatch ability.

Longer term, by 2012, Ximeng-Shanghai 1000kV UHV (Ultra-high-voltage) line will be built to transmit electric power from East Inner Mongolia to Shanghai, which should largely resolve the inter-province power transmission overloading problem. We expect Datang RP’s overall utilization hours to improve from 2,119 in FY10 to 2,254 and 2,343 in FY11 and FY12, respectively. In August 2010, the State Grid Corporation of China announced its 12th five-year plan to build three high-voltage long distance transmission lines in north, east and central China so as to ease the transmission limitation in areas such as Inner Mongolia by 2015.

Release of grid connection bottleneck will boost electricity generating volume in two ways including (1.) utilization hour will improve directly without transmission limitation and (2.) grid dispatch lead time should be shortened and lead to faster average generating capacity expansion.

Figure 8: Construction plan for intra and inter-province transmission lines

Scale Intra-province Inter-province Scale Intra-province Inter-province

Eastern Inner Mongolia 5,580 5,580 - 10,220 6,560 3,660 Two Inner Mongolia to Liaoning grid cables will be completed

before 2020

A Chifeng to Jiangsu +/- 800kv direct current transmission

construction will be completed in 2017

Western Inner Mongolia 10,850 3,500 7,350 19,450 3,780 15,670 Three UHV and +/- 800kv direct current transmission construction to

Beijing and Jiangsu will be completed before 2015

Two Additional UHV transmission construction to North China

power grid and Northwest power grid will be completed before 2020

Total 16,430 9,080 7,350 29,670 10,340 19,330

AreaConstruction Scale in 2015 (MW) Construction Scale in 2020 (MW)

Note

Source: Datang RP

� A pioneer in offshore wind farm development:

Construction of offshore wind farm requires more sophisticated technology such as building foundations. Datang RP has developed the first 102MW offshore project in Shanghai, which has commenced full-scale electricity generation in June 2010. Recently, Datang RP were selected to develop a 300MW offshore project (Yancheng, Jiangsu) with the highest tariff of Rmb0.737/kWh in the first round of national offshore wind farm concessions on 8 Oct 2010. These two offshore projects demonstrate Datang RP’s superior technology competency and cost control ability.

The cost of building and maintaining offshore wind farm is relatively high when comparing with the onshore wind farm. However, high capital cost is compensated by higher operating utilization hour (e.g. approximately 2600

hours for Shanghai Donghai Bridge) and higher tariff (e.g. Rmb0.975/kWh). Generally speaking, the rate of return of offshore project is similar to that of onshore wind farms. Datang RP still targets more than 10% IRR for offshore projects.

23 February 2011

Hotline: (852)2235 7789


� Close relationship with key wind turbine suppliers:

Datang RP has established a strong relationship with its wind turbine suppliers. Sinovel and Vestas are Datang RP’s major wind turbine providers with combined 66% shares of Datang RP’s purchase in 2007-1H10. Besides, Datang RP is also Vestas’ largest single customer in China. Thus, Datang RP should be a key business partner for Vestas in this fast-growing China wind market. Strong bargaining power should help Datang RP negotiate better contract terms as well as after sales & maintenance services.

Figure 9: Accumulated wind turbine purchase in 2007 - 1H10:

Sinovel

38%

Goldwind

15%

Dongfang

Electric

12%

Shenyang

Huachuang

7%

Vestas

28%

Source: Datang RP

� Overseas market expansion:

Leveraged on its cost control ability, proven track record and economies of scale, Datang RP plans to expand its footprint to overseas market. Datang RP has signed an agreement with Hydro Tasmania, CBD Energy Limited and Baoding Tianwei Group to develop potential wind energy in Australia. Prudently, we do not factor in any overseas project in our earnings model.

� Well-defined project return target:

Datang RP has clearly defined its internal project return target of 10%. Turbine cost accounts for 60-70% total cost of an onshore wind farm project. With the economy of scale in bulk purchase of wind turbine, the average cost for setting up wind farm will be lower. The reduction in turbine cost represents an upside risk to the rate of return.

� CDM as an extra income stream:

CDM related income serves as an extra income stream. This is because that Datang RP doesn’t take CDM into consideration when doing project return forecast. At present, the company had 57 projects approved by NDRC, of which 37 projects were registered CDM projects. The average CERs price

has been relatively stable at a range of €12.4 to €15.9/ton since 9/2005.

23 February 2011

Hotline: (852)2235 7789


Figure 10: CERs price trend:

0

5

10

15

20

25

30

35

2005/9 2006/3 2006/9 2007/3 2007/9 2008/3 2008/9 2009/3 2009/9 2010/3 2010/9

EUR/Metric

tons

Source: Bloomberg

� Government policies to support the development of wind energy:

The government has implemented series of supportive policies for wind energy industry, including: (1.) Mandatory dispatch: grid companies must build interconnection facilities between wind farms and local grids and purchase all electricity generated from renewable energy projects in the coverage of their grids; (2.) Benchmark on-grid tariff: The government set on-grid benchmark tariff by regions, which is expected to remain stable going forward; and (3.) Favorable tax rate and lending facilities: Wind power developers are entitled for 2-year tax exemption and following 3-year 50% off tax rate. The interest rate on its bank borrowings is normally 10% lower than prevailing corporate lending benchmark rate in China.

23 February 2011

Hotline: (852)2235 7789


Earnings outlook

� Earnings outlook: 73% earnings CAGR in FY10-12E:

We project 73% net profit CAGR in FY10-12E, supported by 68% revenue CAGR. Revenue growth is attributed by (1.) 39% CAGR of capacity growth in FY10-FY12E. (2.) A rising utilization hour and (3) faster ramp-up of average generating capacity on the back of better dispatch ability.

Capacity expansion:

We expect Datang RP to increase its wind power capacity from 2,619MW in 2009 to 4,000MW by the end of 2010, and to achieve 5,500MW and 7,000MW in 2011 and 2012, respectively. This represents a CAGR of 39% in 09-12. In view of 1,463MW capacity under construction, Datang RP’s abundant wind reserve and its expansion track record (850MW each in 2008 and 2009), we believe that the expansion execution risk is low.

In light of relatively weak grid connection in Inner Mongolia and Gansu, we expect Datang RP to adopt a more diverse regional expansion layout by adding more capacity in other regions apart from Inner Mongolia regions. We estimate that two-third of its planned FY11-12E new capacity will be located outside Inner Mongolia. As such, the proportion of installed capacity in Inner Mongolia will decline from 50.8% in FY10E to 41.5% in FY12E. We believe that, nonetheless, Datang RP has flexibility to adjust its regional expansion plan in accordance with actual grid conditions.

Figure 11: Wind power capacity expansion year-end (MW)

2,620

4,000

5,500

7,000

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2009 2010E 2011E 2012E

39% 3-year CAGR

Source: CIRL

23 February 2011

Hotline: (852)2235 7789


Figure 12: Year-end capacity breakdown by region (% of total)

61.8%50.8%

45.1% 41.5%

22.0%

22.0%23.1%

24.1%

8.4%

15.1%17.6% 18.5%

7.9% 12.1% 14.2% 15.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2009 2010E 2011E 2012E

Inner Mongolia Northeast China

Middle-west Provinces Southeast coastal Provinces

Source: Datang RP, CIRL

Upturning utilization hours after 2010:

Due to transmission limitation problem, we expect a short-term setback in utilization hours in 2010. We expect the consolidated utilization hours to slide by 1.8% yoy to 2,119 hours in FY10E. Meanwhile, we gauge that Inner Mongolia will see a 4.4% drop in utilization hours. However, thanks to improving grid connection, we reckon that the overall utilization hours should improve from 2,119 in FY10E to 2,254 and 2,343 in FY11E and FY12E, respectively. On regional basis, we expect to see strong utilization hours pick up in Inner Mongolia from 2,128 in FY10E to 2,380 and 2,548 in FY11E and FY12E, respectively. We believe this forecast is reasonable comparing with 2,400 utilization hour achieved in FY08. Middle-west regions (incl. Gansu province) will also see improvement in utilization hours thanks to a new 750kV transmission line (from 2,001 in FY10E to 2,231 in FY11E).

Figure 13: Consolidated utilization hour

2,159 2,119 2,254

2,343

-200

300

800

1,300

1,800

2,300

2,800

2009 2010E 2011E 2012E

Source: CIRL

23 February 2011

Hotline: (852)2235 7789


Ramp-up of average generating capacity:

Stronger dispatch ability will support faster ramp-up of average generating capacity. Normally, a wind power developer will start building wind power station in 2ndQ and finish construction by 3rdQ in northern regions. However, due to insufficient grid capacity, it took a longer period (more than 3 months) to get new capacity dispatched to local grid, which led to a lagged growth of average generating capacity. This situation is notably severe in Inner Mongolia in 2009 and 2010. In anticipation of an improving grid network, dispatch lead time will be shortened and some idle capacities in 2010 will be put in service. Having said that, we expect actual average generating capacity to outgrow new capacity in 2011 and 2012. Based on our forecast, we reckon a CAGR of 58% average generating capacity growth in FY10-FY12E.

Figure 14: 58.0% CAGR of average generating capacity growth

1,401

2,318

4,283

5,786

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2009 2010E 2011E 2012E

58.0% CAGR in 10-12

Source: CIRL

Stable consolidated on-grid tariff:

As for tariff, we expect a stable consolidated tariff range of 0.480-0.486 Rmb/kWh in FY10E-FY12E due to slightly changes of region mix. As mentioned, the proportion of installed capacity in Inner Mongolia is declining. This should help lift overall on-grid tariff on one hand (Inner Mongolia carries lower on-grid tariff). On the other hand, the increase of generated electricity from Inner Mongolia due to upturning utilization hour and increasing average generating capacity should offset part of the tariff increase. Consequently, we expect a stable tariff level in FY10-FY12E. In terms of sensitivity, we forecast 1% increase in wind power tariff rate will lead to 2.7% increase in FY11 EPS and 1% increase in utilization hours will lead to 1.7% change in FY11 EPS ex CDM.

23 February 2011

Hotline: (852)2235 7789


Figure 15: Stable on-grid tariff trend (incl. VAT, Rmb/kWh)

0.4803 0.4800 0.4846 0.4864

0.4000

0.4100

0.4200

0.4300

0.4400

0.4500

0.4600

0.4700

0.4800

0.4900

0.5000

2009 2010E 2011E 2012E

Source: CIRL

CDM Income:

Sales of CERs represent a significant portion of income stream. CDM income accounts for 16% of operating income in FY09. At present, the company has 37 registered CDMs. Based on its pipeline projects, we conservatively assume 12 new CDMs per year in 2011 and 2012 with a

contract CER price of €10/ton. The proportion of CDM income as % of

EBIT will reduce from 14.7% in FY10E to 10.4% in FY12E given faster electricity sales growth.

Figure 16: CDM income and its percentage of total EBIT

71.6

137.4

198.6

285

371.4

15.5% 16.0%14.6%

10.9%

10.4%

0

50

100

150

200

250

300

350

400

2008 2009 2010E 2011E 2012E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

CDM Income (mn Rmb) CDM as % of EBIT

Source: CIRL

23 February 2011

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Figure 17: Operating cost breakdown (FY09)

Depreciation and

amortisation

75%

Labour cost7%

Maintenance and repair

3%

Material cost1%

Other operating expense

14%

Source: Datang RP

Cash Flow and Balance Sheet:

Datang RP’s operating cash flow will improve by a CAGR of 69% in 09-12 driven by strong earnings growth. However, due to intensive capital expenditure, free cash flow will remain negative. We estimate Rmb34.2bn capital expenditure in 10-12, which should be funded by bank borrowings. As of June 30, 2010, Datang RP has an unutilized banking facilities of RMB6.6 billion together with a credit lines agreement of up to RMB45 billion with 5 major commercial banks in China.

As debt level elevates, we believe net gearing ratio will increase from 271% in FY09 to 298% in FY12. Although EBITDA interest coverage ratio will be merely 2.0 in FY10, we believe that the ratio will gradually improve to 2.8 on strong revenue growth in FY12.

23 February 2011

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Figure 18: Operating cash flow and Capex

1,0081,920

2,538

4,851

-8,141

-10,787-11,691 -11,679

-14,000

-12,000

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

2,009 2010E 2011E 2012E

Net cash from operating activities Capex

Source: CIRL

Figure 19: Key assumptions

Capacity Year-End (MW) 2009 2010E 2011E 2012EInner Mongolia 1,618 2,032 2,482 2,902

Northeast 576 879 1,269 1,689

Middle-west 219 605 965 1,295

Southeast coastal 207 483 783 1,113

Total 2,620 4,000 5,500 7,000

chg % 48.2% 52.7% 37.5% 27.3%

Capacity Increment Year-End (MW) 2009 2010E 2011E 2012EInner Mongolia 494 414 450 420

Northeast 249 304 390 420

Middle-west 50 387 360 330

Southeast coastal 59 276 300 330

Total 851.4 1380.5 1500 1500

Capacity breakdown by region Year-End % 2009 2010E 2011E 2012EInner Mongolia 61.8% 50.8% 45.1% 41.5%

Northeast 22.0% 22.0% 23.1% 24.1%

Middle-west 8.4% 15.1% 17.6% 18.5%

Southeast coastal 7.9% 12.1% 14.2% 15.9%

Total 100.0% 100.0% 100.0% 100.0%

Average Generating Capacity (MW) 2009 2010E 2011E 2012EInner Mongolia 846 1,392 2,059 2,496

Northeast 309 547 938 1,332

Middle-west 150 201 706 1,070

Southeast coastal 96 178 581 888

Total 1,401 2,318 4,283 5,786

chg % 125.0% 65.4% 84.8% 35.1%

Utilization hour 2009 2010E 2011E 2012EInner Mongolia 2,227 2,128 2,380 2,548

Northeast 2,164 2,208 2,304 2,352

Middle-west 1,926 2,001 2,116 2,231

Southeast coastal 1,902 1,911 1,892 1,892

Consolidated Utilization hour 2,159 2,119 2,254 2,343

change % -4.3% -1.8% 6.3% 4.0%

Sales of electricity ('000 Rmb) 2009 2010E 2011E 2012EInner Mongolia 1,294,067 2,164,136 2,808,047

Northeast 584,975 1,057,886 1,534,207

Middle-west 189,414 709,631 1,134,744

Southeast coastal 171,289 558,767 854,703

Total 1,384,191 2,239,745 4,490,419 6,331,701

chg % - 61.8% 100.5% 41.0%

Average On-grid Tariff 0.4803 0.4800 0.4846 0.4864

Source: CIRL

23 February 2011

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Valuation

We use DCF model to derive our target price of HK$3.04, which translates to 19x PE on FY11E earnings and 15x PE on FY12E earnings. Our valuation assumptions are as follows:

Figure 20: DCF valuation assumptions

DCF assumptions Remarks

Debt Weight (D / (D+E)) 60.00%

Equity Weight (E / (D+E)) 40.00% A target long term debt-equity ratio`

After-tax cost of Debt 5.70% Based on our cost of debt forecast in 11-20

Company Beta 1.00 Average of International peers

Rf 3.50% China's 10-year bond rate

Market return 11.00% Average historical HK market return

WACC 7.82%

Terminal growth rate 4.00% 10% LT ROE and 60% LT dividend payout ratio

Years of explicit cash flow forecast 2010-2020

Source: CIRL estimates

Capacity growth is the key growth driver in our DCF model. We assume a 1.5GW capacity increment annually into 2020. As such, Datang RP will then operate 19GW capacity by 2020. Considering NDRC’s planned target capacity of 150GW and assuming no overseas expansion, Datang RP will only take up 12.7% market share by 2020. We believe that our assumption is conservative.

We use a two-stage approach for consolidated utilization hour. In 2013-2015, utilization hour should remain steady. Post-2015, as most UHV lines will be put into service, we are of the view that utilization hour should edge up again. On prudent basis, we assume a constant CDM income post-2012 in our DCF model.

Figure 21: Datang RP - DCF

2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Net profit 1,002 1,233 1,860 2,418 2,865 3,398 3,822 4,305 4,804 5,314

Add: Dep & Amort 1,622 2,278 2,875 3,445 4,086 4,789 5,397 6,005 6,614 7,222

Less: Changing in WC -1,468 -626 -232 -80 -103 -27 672 947 1,245 329

Less: Capex -11,691 -11,679 -11,186 -9,705 -9,265 -8,750 -7,917 -7,667 -7,583 -7,500

FCF -10,535 -8,794 -6,684 -3,923 -2,417 -590 1,973 3,591 5,079 5,366

PVs -10,535 -8,156 -5,749 -3,130 -1,789 -405 1,256 2,120 2,781 2,725

Discount rate 7.82%

Terminal growth rate 4.0%

Terminal value - FY21 onwards (RMBm) 71,599

Net present value FY10-20 (RMBm) -20,882

Add: net cash (RMBm) -31,920

Net present value (RMBm) 18,798

Net present value (HK$m) 21,805

No. of share 7,274

Fair value per share (RMB) 2.58

Fair value per share (HKD) 3.04

Source: CIRL

23 February 2011

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� Peer comparison :

Datang RP - A pure wind energy play

In terms of operating capacity, market exposure and profitability level, we believe that Longyuan (916.HK) should be the best comparable peer. However, unlike Longyuan, whose 35% revenue and 76% EBIT were generated from wind power in 1H10, Datang RP generates 100% revenue from wind power related income, which provides a more direct exposure to wind power sector.

Wind power deserves a premium valuation to coal-fire IPPs

We believe that wind power deserves a premium valuation to traditional coal fire power plants given that (1.) Wind power’s immunity from coal price fluctuation and thus, it is less cyclical in nature; (2.) Stable income stream underpinned by on-grid tariff certainty and mandatory dispatch policy; (3.) Better profitability: both international wind power operators and Longyuan enjoy higher EBIT and net margins than coal fire IPPs; and (4.) Higher growth prospects: the PRC government aimed to raise the proportion of total non-hydro renewable energies (wind, solar, biomass etc.) from 0.8% to 2.6% by 2020. This implies that wind energy should outgrow traditional coal fire power plant remarkably going forward.

Figure 22 compares consensus PB ratio against ROE of China IPPs. Longyuan is far above the regression line of China IPPs. This shows that Longyuan trades at premium to IPPs in terms of PB ratio.

Figure 22: Wind power developer possesses high valuation premium

Datang Pow erHuaneng Pow er

China Pow er

Longyuan

Huadian Pow er

China Resources

Pow er

Datang Renewable

0.00

0.50

1.00

1.50

2.00

2.50

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0

ROE

PB

Source: Bloomberg, CIRL

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Cross-check with PE

In our view, wind power operators in China should be categorized as growth companies due to aforementioned rosy growth outlook. We use PE to cross check our DCF valuations. If we assign the average China IPPs’ 2011 valuation of 11x PE for Longyuan’s coal fire power business (24% EBIT), the wind power business of Longyuan actually trades at 20x 2011E PE. We believe that Datang RP deserves a higher premium vs Longyuan given the former’s stronger earnings growth ahead. Our DCF based target price of HK$3.04 of translate to 19x FY11E earnings is similar to the Longyuan’s current wind power valuation of 20x. We believe Datang RP deserves to trade atleast at the same valuation level as Longyuan given Datang RP’s strong earnings growth of 73% earnings CAGR for FY10-FY12E and it is a pure wind power play.

Figure 23 compares consensus 11E forward PE ratio against 2010-12 earnings CAGR of international wind farm players, Longyuan and Datang RP valuation.

Figure 23: Global peer comparison

Longyuan

Datang Renewable

IberdrolaEDF Energies

Enel

GDF SuezNextEra

EDP Renovaveis

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0

11E PE

10-12 earnings CAGR %


We argue that PRC wind power operators deserve premium valuation to global peers in light of (1.) higher profitability (higher EBIT & EBITDA margin); (2.) Rosy future growth prospects of China wind power market; and (3.) Strong government support such as fixed on-grid tariff benchmark etc.

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Figure 24: Peer comparison

Name Code

EBITDA

margin %

EBIT

margin %

Net margin

%

Net gearing

%

ROE(11E)

% PB 11E PE09 PE10E PE11E PE12E

10-12 earnings

CAGR %

China IPPs

Datang Power 991 HK 29.7 14.0 3.4 411.8 6.1 0.96 19.8 14.3 11.4 9.8 22.9

China Resources Power 836 HK 32.0 22.3 16.0 112.1 16.4 1.54 10.7 11.8 10.2 7.7 15.3

Huaneng Power 902 HK 24.3 12.9 6.4 244.2 12.5 1.07 10.5 11.6 11.4 10.6 6.3

Huadian Power 1071 HK 34.7 12.1 3.2 321.7 8.4 0.58 8.4 n.a 43.5 14.6 n.a

China Power 2380 HK 20.7 11.1 4.7 219.0 5.1 0.57 11.3 13.6 11.5 9.6 20.6

Average 28.3 14.5 6.7 261.8 9.7 0.94 12.1 12.8 17.6 10.5 16.3

Longyuan 916 HK 56.0 39.6 9.2 71.5 6.9 2.1 41.5 25.1 18.3 14.7 32.6

International Peers

Iberdrola IBR SM 65.1 33.7 18.2 12.7 3.3 1.0 31.2 30.5 25.4 21.1 20.2

NextEra nee us 34.8 21.2 12.8 141.9 14.3 1.6 13.4 12.3 11.5 10.9 6.2

EDP Renovaveis EDPR EU 84.1 35.6 17.6 41.9 2.2 0.7 28.5 45.0 32.7 23.1 39.6

EDF Energies EEN EU 93.6 19.6 6.7 245.3 7.9 1.9 26.3 19.7 16.2 13.2 22.1

Enel ENEL EU 25.0 17.3 8.7 146.8 20.4 1.2 5.9 9.5 9.3 8.9 3.6

GDF Suez GSZ FP 16.7 9.9 5.6 50.1 7.6 1.1 14.5 15.2 13.5 12.4 10.7

Average 53.2 22.9 11.6 106.4 9.3 1.2 20.0 22.0 18.1 14.9 17.0

Datang Renewable 1798 HK 89.2 54.0 22.0 201.0 11.1 1.2 33.1 13.6 11.0 73.0


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Industry Overview

� Basic idea about PRC electricity industry

The electricity sector in PRC is separated into the power generation sector and power grid sector after 2002 reforms. Each of the two sectors needs to operate separately by regulation. For power generation sector, there are five independent large groups which are China Huaneng Group, China Datang Corporation, China Guodian Corporation, China Huadian Corporation and China Power Investment Corporation. For the power grid sector, there are two power grid companies which include the State Grid Corporation of China and China Southern Power Grid Company.

Figure 25: Major Player in PRC Electricity Sector

Source: Companies, CIRL

� Power shortage still exists

With the rapid economic development and urbanization in China, the secondary and tertiary industry shared the major portions of economic activities in China. The secondary industry and tertiary industry shared 45.9% and 39% of total GDP in 2000, respectively. These figures further increased to 46.3% and 43.3% in 2009. With the GDP size continued to expand among these two industries, the total demand for electricity increased from 1,355 kWh billion in 2000 to 3,681 kWh billion in 2009, representing a CAGR of 11.74%. The electricity shortage in 2006 amounted to 6.9 kWh billion and further widened to 21 kWh billion in 2009.

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Figure 26: Total Demand and Total Supply of Electricity in PRC

1,355 (D)

3,681 (D)

1,347 (S)

3,659 (S)

-21

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,0002

00

0

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Electricity Demand (LHS) Electricity Supply (LHS) Excess Demand (RHS)

KWH bn KWH bn

Source: CEIC & CIRL

� Aggressive wind power expansion plan set by NDRC

Due to better return profile vs other renewable energies such as solar, together with abundant wind power resources in China, wind energy development is viewed as one of the key factors for Chinese Government to fulfill its commitment on 40-45% reductions in the carbon intensity and 15% renewable energy mix by 2020.

Figure 27: Energy cost of different types of renewable energy

Types of Renewable Energy Energy Cost (UScents/kWh)

On-shore wind 5 --9

Off-shore wind 10 --14

Biomass 5 --12

Geothermal 4 --7

Rooftop solar PV 20 --50

Utility-scale solar PV 15 --30

Concentrating solar thermal power (CSP) 14 --18

Source: Renewable 2010 Global Status Report

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The Chinese Government started to accelerate its development plan on wind power sector. China’s current wind power capacity has already exceeded its original short-term target of 5 GW by 2010 set in 2007. In addition, since the speed for developing wind power never slows down, the target capacity of 30 GW wind power capacity by 2020 which was set in 2007 is likely to be exceeded in advance. As such, NDRC revised upwards the target to 150 GW by 2020 which represents almost 3.3 to 5 folds of the original target.

� Favorable Government Policies towards Wind Power Industry

Mandatory dispatch:

Under the Renewable Energy Law promulgated by the Central Government of China, local grid companies must provide dispatch priority and full purchase of electricity generated by renewable energy sources. Local grid companies are also required to provide grid connection, transmission services and related technical support to renewable energy companies. As such, proximity of wind farms to electricity grid is no longer a major issue to wind power companies.

Benchmark on-grid tariff:

The On-grid Pricing Policy issued by NDRC came into effect on 1 August 2009 has applied to all onshore wind power projects thereafter. The wind power companies are only required to follow the tariff announced by NDRC and not required to negotiate with the power grid companies. To promote the development of wind power industry, Central Government provides favorable on-grid tariffs to the renewable energy projects. For those wind power projects that are approved by the NDRC or provincial DRCs after 31 December 2005, the on-grid tariff enjoyed is higher than the benchmark tariff for coal-fired.

On regional basis, regions with relative lesser wind power resources, such as Guangdong, Zhejiang and Shanghai, can enjoy a higher benchmark on grid tariff comparing with regions with abundant wind power resources and higher utilization hours, such as Qinghai, Inner Mongolia, Ningxia and Xinjiang.

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Figure 28: Premium of Wind Power Tariff against Coal-fired Power Tariff in China in 2010

Wind Power Tariff

Benchmark Tariff for Coal-fired

Generation Area

RMB/kWh (incl. VAT) RMB/kWh (incl. VAT)

Premium

Guangdong 0.61 0.5 22.0%

Zhejiang 0.61 0.46 32.6%

Shanghai 0.61 0.46 32.6%

Guangxi 0.61 0.44 38.6%

Jiangsu 0.61 0.43 41.9%

Fujian 0.61 0.41 48.8%

Anhui 0.61 0.4 52.5%

Shangdong 0.61 0.4 52.5%

Sichuan 0.61 0.39 56.4%

Henan 0.61 0.39 56.4%

Liaoning 0.61 0.39 56.4%

Hebei Zone 2 0.54 0.39 38.5%

Hebei Zone 4 0.61 0.39 56.4%

Chongqing 0.61 0.39 56.4%

Beijing 0.61 0.38 60.5%

Jilin Zone 3 0.58 0.37 56.8%

Jilin Zone 4 0.61 0.37 64.9%

Qinghai 0.61 0.29 110.3%

Inner Mongolia Zone 1 0.51 0.28 82.1%

Inner Mongolia Zone 2 0.54 0.3 80.0%

Gansu Zone 2 0.54 0.28 92.9%

Gansu Zone 3 0.58 0.28 107.1%

Ningxia 0.58 0.27 114.8%

Xinjiang Zone 1 0.51 0.22 131.8%

Xinjiang Zone 3 0.58 0.22 163.6%

Source: NDRC

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� Clean Development Mechanism

Clean Development Mechanism (CDM) is a system that is designed to help developing countries to meet their emission reduction commitments with minimal impact on their economies. The CDM was introduced by the US government to the Kyoto Protocol and is currently administered by United Nations CDM executive board.

China ratified the Kyoto Protocol in 2002 as a non-Annex Country and committed to the responsibility on the emission reduction target for the period from 2008 to 2012. An emission-reduction project can be applied for CDM. Once a project is approved by the CDM Executive Board, credits call Certified Emission Reductions will be issued to the project and the Certified Emission Reductions (CERs) can be sold to third parties.

Figure 29: CDM registered projects by country

Source: UNFCCCC website

Since the CDM generates additional source of revenue for wind power companies once they get the CER from CDM Executive Board, this becomes another incentive for the power companies to invest in wind farm. Investors are concerned with CDM income post-2012 when the Kyoto Protocol expires. We believe that, however, there will always be a market for emission credits.

� Mismatch of wind power resources and power demand in PRC

In terms of the geographical location, wind power resources are spread unevenly across China. Northern and southeastern parts of China are rich in wind power resources. These areas generally offer the highest development potential for wind power. Provinces with rich wind power resources include Hebei, Inner Mongolia, Jilin, Liaoning, Heilongjiang, Shandong, Gansu, Ningxia, Xinjiang, Jiangsu, Zhejiang, Fujian, Guangdong, Guangxi and Hainan.

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There is a 200 km-wide belt which is rich in wind energy, spaning from the northeastern provinces of Liaoning, Jilin and Heilongjiang, via Inner Mongolia, Gansu and Ningxia to Xinjiang in the northwest. The wind power intensity in these areas is usually between 200 and 300 W/ m2. In Xinjiang and Inner Mongolia, the wind power intensities can reach a maximum of 500 W/m2.

Figure 30: Distribution of Wind Power Density in the PRC

Source: BCSE/CREIA

China’s wind farms are highly concentrated in those regions with abundant wind power resources. Major wind farms in China are located in the northern part and coastal areas.

Heavy power loads concentrate in the economic centers along eastern coastal provinces where the wind power resources are relatively scarce. However, areas with rich wind power resources are mostly less developed with lower power demand. This creates a mismatch between wind power supply and demand. Figure 35 shows the excess demand for power occurs in the coastal areas of China while the excess supply of power occurs in the in-land areas of China.

23 February 2011

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Figure 31: Geographical Distribution of Wind Farms in China in 2008

Source: China Wind Association

Figure 32: Imbalance of Power Production and Consumption in the PRC

Source: IEA

23 February 2011

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� Ultra High-voltage transmission and large wind farm development

Due to above-mentioned mismatch in wind power demand and supply, inter-province transmission lines are in demand to send out electricity to regions with high power demand like Beijing and Shanghai.

On 28 May 2010, State Grid announced a development plan for improving the connection between the electricity grids and 7 major wind power production regions (including Xinjiang, Gansu, Jilin, Hebei, Jiansu, western Inner Mongolia and eastern Inner Mongolia). The development plan is divided into two phases and will be completed in 2015 and 2020 respectively. In addition, State Grid also announced an investment plan for building Ultra High-voltage Transmission Lines under the 12th Five-year Plan in 12 August 2010. Under this plan, State Grid will invest RMB 270 billion to build 3 Ultra High-voltage Transmission Lines in northern part, eastern part and central part of China. After completion, excess supply of wind power in Inner Mongolia can be sent to eastern part of China.

By completion of phase one of the above-mentioned plans, 7,350MW of electricity generated in Inner Mongolia will be transmitted to Beijing and Jiangsu in 2015. By the completion of phase two in 2020, 19,330MW of electricity generated in Inner Mongolia will be sold to Liaoning, Jiangsu, Beijing, grids in northern and northwestern part of China.

Figure 33: Imbalance of Power Production and Consumption in the PRC

Route Voltage/type Distance (km)Investment (RMB

billion)Completion

Yunnan-Guangdong +-800kV/DC 1,438 15 2010/6

Ningdong-Shandong +-660kV/DC 1,335 10.4 2010

Xiangjiaba-Shanghai 800kV/AC 1,907 17.9 2010

Huainan-Shanghai 1000kV/AC 2 X 656 20.5 2011

Shabei-Changsha 1000kV/AC 1,371 17.3 2012

Jinping-Sunan +-800kV/DC 2,078 20 2012

Sximeng-Shanghai 1000kV/AC 2 X 2,288 75.6 2012

Source: NDRC

Figure 34: Planned 7 large wind power bases in China

Wind base 2020E Capacity (GW)

West Inner Mongolia 30

East Inner Mongolia 20

Harmi, Xinjing 11

Jiuquan, Guansu 17

Hebei 14

Jilin 18

Jiangsu 10

Total (GW) 120

Source: State Grid

�

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� Introduction of Smart Grid

Apart from the plan to build Ultra High-voltage Transmission Lines to solve the grid connection problem, Central Government announced the development of smart grids and upgraded its grid infrastructure in July 2009. The State Grid sets a “Strong” and “Smart” Grid plan as their top priority. The State Grid has budgeted RMB 4 trillion as total expenditure for the period from 2011 to 2020. With the smart grid in service, it helps to transmit and distribute electricity automatically to balance regional power supply and demand. This arrangement also helps power companies to dispatch electricity more efficiently.

� Decline in turbine price due to oversupply

Cost of turbine accounts for 60-70% of total wind power construction cost. Due to oversupply of wind turbine manufacturing capacity and increasing number of players, the overall costs charged on the wind turbine dropped notably since 2007. The average cost per kW for local producer dropped from RMB 6,500 to 5,200 in 2009Q4 and is also estimated to drop to RMB 4,900 in 2010. For foreign producer, the average cost per kW dropped from RMB 8,000 to 6,500 in 2009Q4 and it is expected to drop to RMB 6,000 in 2010.

Figure 35: Price Movement of Wind Power Equipment from 2007 to 2010

Source: PRC Agricultural and Industrial Machinery Association – Wind Energy Association

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The development of the local wind turbine industry also explains part of the price decline as competition became more intense. In 2007, it was the first time for domestic wind turbine manufacturers to capture a bigger share of wind turbine market. Since then, the local wind turbine manufacturers have shared a major portion of the local market. The market share increased from 25% in 2004 to 75.4% in 2008. With the help of decreasing turbine cost, there’s upside potential for new investment return on wind farm.

� China’s Offshore Wind Power – still in its infancy

As the technology know-how of building offshore wind farms is less mature than that of onshore wind farms, the initial capital cost and maintenance cost are much higher. However, it doesn’t mean that the potential for offshore wind energy is limited in the future. Since the offshore wind farms have abundant wind power resources (around 200 GW in China), there is a great development potential in the long run.

European countries such as UK and Denmark are the leaders in offshore wind power. For China, offshore wind power is still in its infancy. The cumulative offshore capacity of wind power in 2009 was only 63MW which only represented 7% and 10% capacities of UK and Denmark, respectively. According to preliminary estimates by the China Meteorological Administration, China has around 200 GW of offshore wind power resources.

Figure 36: 2009 Cumulative Offshore Capacity of Major Wind Power Countries

Source: BTM (2010 Mar)

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According to BTM, the total global cumulative wind installed capacity in 2009 was 160,084MW. The offshore wind installed capacity was only 2,110 MW which represented 1.3% of the total global installed capacity. It was estimated that offshore wind capacity would increase at a faster rate than onshore wind to capture 3.5% of global total wind installed capacity by 2014. However, we believe that most of the growth will goes to European countries with more mature offshore technology.

Figure 37: Offshore Cumulative Wind Capacity and Contribution towards Global Total Wind Installed Capacity

Source: BTM (2010 Mar)

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Investment Risks

� Transmission limitation - a near-term bottleneck:

Poor grid infrastructures cause grid congestion. Some wind farms are idle in regions like Inner Mongolia and Gansu due to insufficient power grid capacity. Even the State Grid announced a power grid improvement and the introduction of the smart grid, the autonomy of Datang RP to improve the bottleneck is still low. The development of Datang RP largely depends on the progress of the grid building.

� Intensifying competition among wind power developers:

We witness an intensifying competition among wind power developers in different ways, including: (1.) Project approval: Due to grid constrains, NDRC will probably slow down the speed of approving wind project in accordance with grid construction progress. As such, there’s increasing competition for wind farm developers to get prior project approvals from NDRC; (2.) Offshore wind power projects: NDRC adopts more commercial approach in offshore project bidding, wind power developers will have to compete with cost control abilities. Intense competition may erode project profitability, in our view; and (3.) Compete for financial resources: like IPPs, most wind developers are in high gearings, we see needs for equity finance to unloosen balance sheet.

� Potential policy risk:

The profitability of wind power operator depends largely on government support such as tax benefit and mandatory dispatch. However, there may be changes in government policies, such as on-grid tariff, tax rate and lending terms. Withdrawal or change of favorable policy by the government represents a potential downside risk to the company’s target rate of return.

� Uncertainty of CDM post 2012:

CDM income accounts for a significant portion of operating income (16% of EBIT in FY09). Selling emission credits depends on CDM guidance under the Kyoto Protocol which will expire in 2012. There’s potential risk that Kyoto protocol cannot be renewed after 2012 and there might be delay in the project approval process by the CDM Executive board of United Nations.

� Lack of extended track record of domestic wind turbines:

Although the overall quality of wind turbines made in China is respectable, the wind turbine manufacturing industry is relative new and is in its infant stage. The operating track record of domestic wind turbines is too short to tell their overall qualities and life span. Most domestic wind turbine makers have track record of less than 10 years. If the operating life time for wind turbine is shorter than expected, it may cause an unexpected surge in O&M cost and drags project profitability.

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Appendix 1: Group Structure

Source: Company

23 February 2011

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Appendix 2: Shareholding Structure After IPO

Appendix 3: Management Profile

China Datang

Corporation Other public H share holders

66% 21%

(1798 HK)

NSSF

3%

Cornerstone investors

10%

Name Position Profile

Mr. Chen Jin Hang (陳進

行)

Chairman Joined the company in 2010. Prior to joining the company, Mr.

Chen served as the Vice President of State Grid Corporation of

China from 2002 to 2010, the Vice President of Shanxi Electric

Power Corporation.

Mr. Wu Jing (吳靜) Vice Chairman Joined the company in 2010, Mr. Wu has been the Chief

Economist of Datang since 2006 as well as the Chief of

Development and Planning Department of Datang from 2003.

Mr. Yin Li (殷立) Non-Executive

Director

Joined the company in 2010, Mr. Yin has been the chief of

Strategic Planning and Development of Datang since 2006 and the

president of the Tibet Branch of Datang since 2009.

Mr. Jian Yingjun (簡英俊) Non-Executive

Director

Joined the company in 2010, Mr. Jian was the President of Datang

Jilin since 2005, as well as the President of Anhui Electric Power

Corporation since 2005.

Mr. Hu Yong Sheng (胡永

生)

President Joined the company and became the President in 2004. Prior to

joining the company, Mr. Hu was the Deputy Chairman of Trade

Union of Yuanbaoshan Power Plant from 2002 to 2003.

Mr. Zhang Xun Kui (張勛

奎)

Vice President Joined the company in 2009, Mr. Zhang served as Chief of Safety

Supervision Division of Safety Production Department of Datang

from 2003 to 2009.

Source: Company

23 February 2011

Hotline: (852)2235 7789


Appendix 4: Financial Statements

Income Statement (Rmb mn) 2007 2008 2009 2010E 2011E 2012E

Total revenue 451 981 1,635 2,518 4,845 6,773

Electricity sales 286 613 1,384 2,240 4,490 6,332

Revenue from CDM projects 33 72 137 199 285 371

Operating Expense 244 519 775 1,158 2,236 3,194

Depreciation and amortisation 117 213 553 887 1,622 2,278

Labour cost 10 20 53 81 150 203

Maintenance and repair 3 7 20 32 92 151

Material cost 2 3 9 16 31 47

Other operating expense 21 42 102 142 341 515

EBITDA 324 674 1,412 2,247 4,231 5,857

Operating Profit 207 462 860 1,361 2,609 3,579

Interest on bank borrowings -9 -61 -146 -1,137 -1,372 -2,085

(capitalised interest expenses) 64 192 267 409 274 313

Finance expense -110 -224 -481 -728 -1,098 -1,772

Profit before taxation 97 240 384 633 1,511 1,807

Income tax -7 -22 -17 -79 -175 -206

Effective tax rate (%) 7 9.0 4.5 12.4 11.6 11.4

Net Profit 90 218 367 555 1,336 1,601

Equity owner of the Company 56 140 248 410 1,002 1,233

Non-controlling interests 34 79 118 144 334 368

Dividend 0 29 129 0 0 0

Dividend payout ratio(%) 0 21 52 0 0 0

Source: Company, CIRL estimates

23 February 2011

Hotline: (852)2235 7789


Balance Sheet (Rmb mn) 2007 2008 2009 2010E 2011E 2012E

Property, plant and equipment 6,091 13,714 21,415 31,159 42,320 53,469

Rights to use land 8 19 57 224 359 380

Intangible assets 91 384 410 410 410 410

Total non-current assets 6,191 14,118 21,951 31,866 43,169 54,345

Inventories 0 1 6 9 16 19

Trade debtors and bills receivable 196 438 862 1,254 2,425 3,292

Prepayments and other current assets 133 479 1,178 1,680 3,233 4,242

Income tax prepayment 0 0 12 18 31 41

Cash 148 545 531 5,190 5,070 6,121

Total current assets 677 1,463 2,589 8,151 10,776 13,716

Total assets 6,868 15,581 24,540 40,017 53,945 68,060

LT Borrowings 3,203 7,574 14,290 23,459 33,134 42,587

Deferred tax liabilities 0 69 64 85 126 158

Total non-current liabilities 3,203 7,643 14,354 23,544 33,260 42,745

ST Borrowings 541 1,172 1,528 2,590 3,856 5,254

Trade creditors and bills payable 2 9 6 8 13 16

Tax payable 4 26 28 41 72 95

Other payables 917 2,420 2,978 3,462 4,702 5,941

Total current liabilities 1,464 3,627 4,540 6,102 8,643 11,305

Total liabilities 4,668 11,270 18,894 29,646 41,903 54,050

Total equity attributable to the shareholders 1,247 2,826 3,852 8,434 9,770 11,371

Non-controlling interests 953 1,485 1,793 1,937 2,271 2,640

Total equity 2,200 4,311 5,645 10,371 12,041 14,010


23 February 2011

Hotline: (852)2235 7789


Cash Flow (Rmb mn) 2007 2008 2009 2010E 2011E 2012E

Cash flows from operating activities

Profit before taxation 97 240 384 633 1,511 1,807

Depreciation & Amortisation 117 213 553 1,042 1,573 2,103

Changes in working capital -172 -194 -374 -404 -1,468 -626

Net cash from operating activities 150 481 1,008 1,920 2,538 4,851

Cash flows from investing activities

CAPEX -3,474 -5,493 -8,141 -10,787 -11,691 -11,679

Acquisition of subsidiary 0 -275 -163 0 0 0

Disposal 0 1 83 0 0 0

Net cash used in investing activities -3,477 -5,957 -8,253 -10,787 -11,691 -11,679

Cash flows from financing activities

Change in share capital 1,265 1,837 1,092 4,300 0 0

Net change in debt 1,936 4,182 7,071 10,007 9,165 8,724

Dividend paid 0 -22 -98 -129 0 0

Others 245 -126 -834 -653 -132 -846

Net cash from financing activities 3,445 5,871 7,231 13,525 9,033 7,878

Net increase in cash and cash equivalents 117 395 -14 4,658 -119 1,050

Cash and cash equivalents Year-end 148 545 531 5,190 5,070 6,121


23 February 2011

Hotline: (852)2235 7789


Key Ratios 2007 2008 2009 2010 2011 2012

Growth

Revenue 117.6% 66.7% 54.0% 92.4% 39.8%

EBIT 123.0% 86.2% 58.3% 91.7% 37.2%

EBITDA 108.0% 109.5% 59.1% 88.3% 38.4%

Net profit 149.0% 77.6% 65.2% 144.1% 23.0%

Net profit (exclue other income) 149.0% 77.6% -81.6% 1330.8% 75.4%

Margins

EBIT 45.9% 47.1% 52.6% 54.0% 53.8% 52.8%

EBITDA margin 71.9% 68.7% 86.4% 89.2% 87.3% 86.5%

EBITDA excl. CDM 69.7% 66.3% 85.1% 88.3% 86.5% 85.7%

Net profit 20.0% 22.3% 22.4% 22.0% 27.6% 23.6%

Net profit (exclue other income) 19.6% 22.8% 17.9% 2.0% 14.6% 18.1%

Return

ROAE 6.7% 7.4% 6.9% 11.9% 12.3%

ROE 4.1% 5.1% 6.5% 5.3% 11.1% 11.4%

ROA 1.5% 1.5% 1.7% 1.7% 3.1% 2.9%

FCF yield - - - - - -

Gearing

Net gearing 163.5% 190.2% 270.8% 201.1% 265.1% 297.8%

Interest coverage ratio 1.1 1.0 1.0 1.2 1.9 1.7

EBITDA Interest coverage ratio 1.8 1.4 1.6 2.0 3.1 2.8

Debt-to-Equity ratio 2.1 2.6 3.3 2.9 3.5 3.9


23 February 2011

Hotline: (852)2235 7789


Rating Policy

RatiRatiRatiRating ng ng ng DefinitionDefinitionDefinitionDefinition

Buy Outperform HSI by 15%

Neutral Between -15% ~ 15% of the HSI Stock Rating

Sell Underperform HSI by -15%

Accumulate Outperform HSI by 10%

Neutral Between -10% ~ 10% of the HSI Sector Rating

Reduce Underperform HSI by -10%

Analysts List

Castor Pang Research Director (852) 2235 7127 [email protected]

Hayman Chiu Senior Research Analyst (852) 2235 7677 [email protected]

Kenneth Li Research Analyst (852) 2235 7619 [email protected]

Lewis Pang Research Analyst (852) 2235 7847 [email protected]

Analyst Certification

We, Kenneth Li and Castor Pang hereby certify that all of the views expressed in this report accurately reflect my personal

views about the subject company or companies and its or their securities. We also certify that no part of my compensation

was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report

/ note.

Disclaimer

This report has been prepared by the Cinda International Research Limited. Although the information and opinions

contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International cannot

and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded

by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the

investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment

decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future

political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Any

opinions expressed in this report are subject to change without notice. The report is published solely for information

purposes, it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda

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