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1、Deutsche BankMarkets Research,IndustryChina IPPs,Date26 November 2012AsiaChinaUtilitiesUtilities,Michael Tong,CFAResearch Analyst(+852)2203 6167,Kai-Ting Wong,CFAResearch Analyst(+852)2203 6235,kai-Eric Cheng,CFAResearch Analyst(+852)2203 6202eric-F.I.T.T.for investorsAsset injection back on the age
2、ndaAsset injections to resume in 2013/14;another growth driverGiven our expectation of stable coal prices in 2013/14,the market focus for IPPs will likely shiftfrom margin recovery to volume-led growth.In addition to organic capacity growth,we seeupside potential from the resumption of parentco asse
3、t injections,especially for Huaneng andCPI.This report analyses the potential impact of asset injections and highlights key assets thatmay be injected.The Street has not paid much attention to asset injection over the last threeyears due to the industry downcycle hence the resumption of asset inject
4、ions should be apositive surprise.Given the uncertainty of timing,pricing and scale of asset injections,we are yetto factor them in to our estimates._Deutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports.Thus,investors shouldbe aware tha
5、t the firm may have a conflict of interest that could affect the objectivity of this report.Investors shouldconsider this report as only a single factor in making their investment decision.DISCLOSURES AND ANALYSTCERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P)072/04/2012.,Top picks,Buy,Buy,Buy,Buy,D
6、eutsche BankMarkets Research,AsiaChinaUtilitiesUtilities,IndustryChina IPPs,Date26 November 2012FITT ResearchKai-Ting Wong,CFAMichael Tong,CFA,Asset injection back on the agenda,Research Analyst(+852)2203 6167,Research Analyst(+852)2203 6235,kai-,Asset injections to resume in 2013/14;another growth
7、driverGiven our expectation of stable coal prices in 2013/14,the market focus forIPPs will likely shift from margin recovery to volume-led growth.In addition toorganic capacity growth,we see upside potential from the resumption ofparentco asset injections,especially for Huaneng and CPI.This report a
8、nalysesthe potential impact of asset injections and highlights key assets that may beinjected.The Street has not paid much attention to asset injection over the lastthree years due to the industry downcycle hence the resumption of assetinjections should be a positive surprise.Given the uncertainty o
9、f timing,pricingand scale of asset injections,we are yet to factor them in to our estimates.Why asset injection should start againWe believe the asset injection theme will act as a key driver for the sector inthe years to come in view of 1)a conducive regulatory environment that aimsto resolve horiz
10、ontal competition between parentcos and listcos,2)improvingasset quality under ownership of parentcos following a sharp coal price declinein 2012,3)recovering stock valuation and improving market sentiment,4)slowing organic capacity growth,and 5)the sheer size of available assetsgiven the existence
11、of large parentcos.Across the various sectors listed in HK,China IPPs stand out with the greatest potential for asset injection(listcoassets vs.listco+parentco assets of 40%vs.70-100%for others).,Eric Cheng,CFAResearch Analyst(+852)2203 6202eric-Huaneng Power Intl(0902.HK),HKD6.38China Resources Pow
12、er(0836.HK),HKD17.12Companies FeaturedHuaneng Power Intl(0902.HK),HKD6.38 Buy2011A 2012E 2013EP/E(x)39.59 11.30 7.16EV/EBITDA(x)9.7 7.8 6.0Price/book(x)0.9 1.3 1.1Datang Intl Power(0991.HK),HKD2.73 Buy2011A 2012E 2013EP/E(x)13.77 8.80 5.79,Key features of potential asset injectionsWe envisage a few
13、key features for the potential asset injections ahead:1),EV/EBITDA(x)Price/book(x),10.00.7,8.60.7,7.40.7,assets should mainly involve domestic conventional coal-fired,gas and hydroassets,2)assets located in coastal provinces likely to have priority over those,Huadian Power(1071.HK),HKD2.302011A 2012
14、E 2013E,in inland provinces due to the formers superior earnings power,3)transactions to be partly funded by new share placement,and 4)merger withother listcos within the group seems unlikely in the near term.,P/E(x)EV/EBITDA(x)Price/book(x),11.80.5,9.297.40.7,5.325.80.6,Huaneng and CPI are better p
15、ositioned on asset injection frontBased on our interpretation of corporate strategies,and on the back of our,China Power Intl(2380.HK),HKD2.102011A 2012E 2013E,analysis of the industry environment we believe Huaneng and CPI could belooking for asset injection opportunities in the next year or two.In
16、 particular,we are more positive on Huaneng given the higher quality assets at the,P/E(x)EV/EBITDA(x)Price/book(x),14.3612.50.6,7.689.10.6,5.967.20.6,parentco and a proven asset injection track record.CPI has also beensuccessful in asset injections(eg.2009 Wuling hydro).Huadian is more likelyto focu
17、s on earnings recovery from its existing assets in 2013 though it hasseveral potential targets for acquisitions.Datang may have less chance of anasset injection given its greenfield focus and substantial capex burden.CRPowers parent has limited power assets.For each IPP,we provide a review ofthe ass
18、et injection record and highlight key assets that we believe could be,China Resources Power(0836.HK),HKD17.12P/E(x)EV/EBITDA(x)Price/book(x),Buy2011A 2012E 2013E18.36 12.63 9.318.9 8.5 6.71.3 1.4 1.2,injected by 2015.DCF-based target prices;key risks are coal price and acquisitionsWe remain positive
19、 on the China IPPs which we value using DCF through2020E,assuming WACCs of 8.8-9.4%.Huaneng is one of our top picks(32%implied upside to target price)partly due to the asset injection theme exploredin this report.Major risks include a coal price rebound,lower-than-expectedutilization and value-destr
20、uctive acquisitions._Deutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports.Thus,investors shouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors shouldconsider this report
21、as only a single factor in making their investment decision.DISCLOSURES AND ANALYSTCERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P)072/04/2012.,26 November 2012UtilitiesChina IPPsTable Of ContentsExecutive summary.3Asset injection back on the agenda.3Huaneng and CPI are better positioned on asset in
22、jection front.3Potential to pay too much is a downside risk.3Key figures.4Asset injection to resume.5IPPs have reaffirmed asset injection intentions.5Improving profitability of assets.5Recovering valuation and improving sentiment.6Sheer size of parentco.7Asset injection is necessary amid slowing org
23、anic growth.8IPPs asset injection outlook.9Huaneng and CPI are better positioned on asset injection front.9Assets unlikely to be unrelated to power.9Assets more likely to be in coastal provinces.10Fuel mix mainly coal,hydro and gas.10Assets excluding those listed separately.11Likely new share placem
24、ent to fund asset injections.11Mainly operating assets but also likely to include those under construction.12Case study and a hypothetical scenario.13Recent case study:Guangdong Electric Power(GED).13A hypothetical asset injection for Huaneng Power.14Risks of asset injections.16Assets injected may b
25、e overvalued and of inferior quality.16Share placement overhang.16Uncertainty over the execution of asset injection.16Huaneng Power group has high-quality assets.17A proven asset injection record.17Resumption of injections looks increasingly likely.18Overview of China Huaneng Group.19What are the po
26、ssible injection targets?.19Huaneng Groups coal business.20China Power Intl assets at direct parentco could be near-termoptions for injection.22Review of previous asset injections.22Overview of China Power Investment Group.23What are the possible injection targets?.24Huadian Power Share placement re
27、quired for acquisition.27Review of previous asset injections.27Overview of China Huadian Group.28What are the possible injection targets?.28Other long-term options.30IPPs with less asset injection upside.31Datang Power continued focus on greenfield.31CR Power limited asset injection potential.31Inve
28、stment outlook,valuation methodology,and risks.33,Page 2,Deutsche Bank AG/Hong Kong,26 November 2012UtilitiesChina IPPsExecutive summaryAsset injection back on the agendaThe asset injection story has long been forgotten by the market as returns in the sectorhave been disappointing over the last few
29、years due to sharply higher coal prices andinadequate tariff hikes.The negative macroeconomic environment makes it difficult toinject high-quality assets into the listcos.At the same time,China IPPs share prices andvaluations have been also low,with the majority trading below book value,hinderingthe
30、 prospects of equity financing.Nonetheless,amid a stable coal price environment in2013/14,we believe the asset injection theme is back on the agenda and will acceleratein 2013 and 2014.Our rationale stems from the following arguments.First,the regulatory environment has become more conducive to asse
31、t injection as thegovernment wants to resolve the horizontal competition between parentco and listcos.Since 2010,the CSRC has required IPP listcos to issue statements regarding thetimeline and scope of their targeted asset injections.Subsequently,four out of the fiveChina national IPPs have announce
32、d plans to inject their traditional assets by 2015.Second,following a sharp coal price decline in 2012,the quality of parentco assets hasimproved significantly,which increases the scope of assets that are suitable for assetinjection.Third,with improving market sentiment and recovering stock valuatio
33、n,theIPPs have more flexibility to receive minority shareholders approval for asset injectionsand finance the purchase through equity issuance.Lastly,and most importantly,acrossthe various sectors listed in HK,the China IPPs stand out in terms of having the greatestpotential for asset injection as l
34、istco assets account for only 40%of total parentcoassets vs.70-100%for others sectors.Huaneng and CPI are better positioned on asset injection frontAmong the IPPs,we believe Huaneng and CPI have the largest upside to assetinjection,as these companies could be looking for high-quality assets in their
35、 respectiveparentcos project portfolios.In addition,Huaneng has a proven track record in thisarea,as it has completed a dozen asset injections on favorable terms since 1997 andc.40%of its current capacity has been sourced from acquisitions.Further,Huanengsparentco has a list of high-quality assets t
36、hat could potentially be injected,includingHuaneng Shandong,Lancangjiang Hydro,Sichuan Hydro and a unique integrated coal-power venture Huaneng Hu Lun Bei Er Company.For CPI,prospective candidatesinclude Wuhu in Anhui,Qinghe in Liaoning,Yellow River Upstream and ShanghaiPower.For Huadian,potential t
37、argets include Huadian Jiangsu,Huadian Xinjiang,Huadian Sichuan and Guizhou Wujiang Hydro.However,we believe Huadian iscurrently more focused on earnings recovery from its existing assets.Datang and CRPhave fewer asset injection opportunities:the former is focused on greenfield projectsand faces an
38、extremely large capex outlay for its coal chemistry projects,while thelatters parentco lacks sizable power assets.Potential to pay too much is a downside riskWhile we believe asset injection is generally positive for the China IPP sector,there is arisk that the potential assets to be injected are of
39、 inferior quality and the price paid forthese assets might be too high.Consequently,shareholders returns would be diluted.Nonetheless,this risk is mitigated as only the minority shareholders have the votingrights to approve the transaction.In addition,over the last few years,the parentcoshave develo
40、ped some high-quality power assets that are well suited for asset injection.,Deutsche Bank AG/Hong Kong,Page 3,26 November 2012UtilitiesChina IPPsKey figuresFigure 1:Percentage of non-listed assets,70%60%50%40%,30%,60%,30%20%10%,0%,5%,8%,10%,10%,15%,15%,20%,0%Source:Deutsche BankFigure 2:Capacity of
41、 listcos and parentcos,end 2011,GWCapacity of the groupCapacity of core HK listcoCapacity excl.HK core listcoCapacity excl.HK core listco/HK renewable listco and other A share listcoMaximum asset injection upside,Huaneng11961582845%,CPI72135955425%,Huadian94316346147%,Datang106396754138%,Source:Deut
42、sche BankFigure 3:Summary of IPP listcos statements on parentco asset injections,CompanyGuodian Power,ParentcoChina Guodian,Date31-Oct-12,Scope of asset injectionPower generation assets(asset in Xinjiang to,Timeline2010-2015,Sourcehttp:/,Group,be injected in 1H13),gg/ssgs/2012-10-31/600795_20121031_
43、1.pdf,Huadian Power,China Huadian,13-Nov-12,Non-listed conventional power,generation,2012-2017,http:/,Group,assets(excl.assets in Fujian),gg/ssgs/2012-11-14/600027_20121114_1.pdf,Huaneng Power China HuanengGroup,31-Oct-12,Non-listed conventional thermal and hydropower generation assets,with asset in
44、,2010-2015,http:/,Shandong as near-term priority,31/600011_20121031_1.pdf,Datang Power,China Datang,2-Nov-12,Non-listed coal-fired power assets which,2010-2018,http:/,GroupSource:Deutsche Bank,Company dataFigure 4:IPPs asset injection potential,meets the requirement;coal-fired powerassets in Hebei p
45、rovince within 5 years,gg/ssgs/2012-11-03/601991_20121103_1.pdf,Company,Scale of asset,Potential targets(DB estimate),Potential timeline of,Financing(DB estimate),injection(DBestimates),asset injection(DBestimates),HuanengCPIHuadianCR PowerDatang,510GW1-3GW3-5GW0.5GW2-3GW,Thermal assets in Shandong
46、and hydro assetsThermal assets in Anhui/LiaoningThermal assets in Jiangsu/Xinjiang and hydro assetsWind power assetsThermal assets in Hebei,Likely in 2013Likely in 2013Likely in 2014Likely in 2013-14Likely in 2014-15,Shares+CashShares+CashShares+CashCashShares+Cash,Source:Deutsche Bank,Page 4,Deutsc
47、he Bank AG/Hong Kong,26 November 2012UtilitiesChina IPPsAsset injection to resumeGiven our expectation of a stable coal price environment in 2013/14,we believe themarket focus for IPPs will shift from margin recovery to volume-led growth.In additionto organic capacity buildup,we see upside potential
48、 from the resumption of parentcoasset injections.Although the story is not new,the Street has not paid much attentionto it over the last three years due to the industry downcycle.We believe the acquisition-led growth trend should resume on the back of the following arguments.IPPs have reaffirmed ass
49、et injection intentionsIn the China IPP sector,the horizontal competition between the parentco and listco hasbeen an issue since the unbundling of power generation and transmission assets in2002 and formation of the big five national gencos.The listed IPPs are only part of thebroad groupcos and face
50、 direct competition in areas where asset location overlaps.Inthis regard,asset injection acts as a solution to resolve such a pitfall within the IPPgroup.Since 2010,China Security Regulatory Committee(CSRC)has required IPP listcos toissue statements regarding the timeline and scope of their asset in
