Prefer FFB and GARP players for 2013
Identifying top picks for 2013
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Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Michael Tong, CFA
Research Analyst
(+852) 2203 6167
michael.tong@db.com
Across our Asian utility coverage, we prefer two camps of stocks for 2013: 1)
Fossil Fuel Beta (FFB) stocks with earnings significantly leveraged on weak
coal, oil & gas prices, including China IPPs, Kepco and Tenaga; 2) Growth at
Reasonable Price (GARP) stocks including Beijing Enterprise, Longyuan and
NTPC. In this report, we summarize stock performance, valuation, key themes
of respective sub-sectors and investment theses of stocks under coverage,
with an aim to provide a one-stop shop for a regionally divergent sector
featured with heterogeneous local contexts.
Top picks camp one: “Fossil Fuel Beta (FFB)” stocks
Looking into 2013, we expect oil prices to edge up only marginally while coal
prices should stay weak. Hence, our first camp of top picks is “Fossil Fuel Beta
(FFß)” stocks including China IPPs, Kepco and Tenaga, i.e. power players with
earnings benefiting from low fossil fuel costs or improving generation mix from
lower priced fuel. In addition, the selection of our top picks also takes into
account progress on the regulatory front, such as tariff hikes, and the
establishment of the “Fuel-tariff pass-through mechanism” and “Tariff
stabilization fund”.
Top picks camp two: Growth at Reasonable Price (GRAP)” stocks
Meanwhile, we continue to like those “Growth at Reasonable Price (GRAP)”
stocks, i.e. attractively valued gas distributors and wind power developers in
China and oversold regulated IPPs in India. In general, their regulatory
environments are better than those of camp one; hence, earnings visibility is
higher. However, valuation is relatively expensive; as such, stock selection is
the key. We prefer Beijing Enterprise, Longyuan Power and NTPC.
What to avoid in 2013
The stocks that we recommend to avoid in 2013 also fall into two camps: 1)
our Sell-rated stocks, including CR Gas, China Everbright Int’l, and Reliance
Power; 2) stocks that we rate with a Hold on an absolute return basis but that
we believe are likely to underperform on a relative basis in 2013, including
HKCG, Power Assets, Adani Power, and Manila Water.
Share price performance over the past 12 months
The Asian utilities sector has been trading in tandem with the market in the
past 12 months. The best performer was the China IPPs utilities sector (+50%
in 12M), driven by a sharp decline in coal price. The worse-performing sector
was the China wind developers due to continued grid curtailment and
collapsing carbon prices although we believe the worst is behind us. The
sector’s valuation is at the low end of its historical band as the share price has
been mainly driven by earnings growth rather than multiple re-rating.
Valuation and risks
Our primary valuation methodology is a discounted cash flow (DCF) analysis
given the relatively high predictability of cash flows. For companies with assets
in multiple countries or across different business lines, we adopt a sum-of-theparts
(SOTP) valuation. The key sector risks are changes in the regulatory
environment, tariffs, commodity price, fuel availabilities, demand growth,
interest rates, FX rates, project delays and upside/downside from acquisitions.