德意志银行--中国独立发电商研究报告2008年1月

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Investment thesis
Outlook
The China IPP stocks have declined by 30~50% over the last three months, versus a c.25%
decline for HSCEI over the same period. Clearly, this across-the-board weakness can partly
be attributed to higher contract coal price in ’08 without an expected immediate tariff hike
which has pushed the sector to an almost one-year record low. In addition, we believe the
market seems to be valuing the IPPs with no tariff hike expected in perpetuity. This report
elaborates our views on the China IPP sector as follows:
􀂄 The tariff hike will come through once inflation issue moderates, which is likely over the
next couple of months.
􀂄 In spite of inflation pressure, the on-grid tariff hike is still possible in some regions while
gridcos enjoy high returns and are capable of sharing part of the upstream pressure.
􀂄 The tariff hike has been far from adequate since 2003 given rising coal prices. This
shortfall would enlarge in ’08 and would likely be recovered to some extent.
True, 1Q/1H08 results are under pressure but seem to be fully priced in after the drastic
share price slump. Excluding CR Power, the 4 IPPs now trade at low-teen ’08E P/E and below
their respective replacement cost. Our revised demand and supply forecast indicates that the
country will see an inflection point on utilization with notable yoy utilization improvements
reported.
Our investment thesis for China IPPs is a Buy on deep share price corrections, as we believe
the delay in approving an on-grid tariff hike is not indefinite. In our view, it is highly likely in
2H08. Moreover, some short-term growth drivers for IPPs can be expected such as asset
injection from parentcos. We reiterate our asset injection theme in this report.
We have cut our FY08-09E earnings and TP for IPPs primarily on higher coal price and delay in
tariff hike. We upgrade Datang to Buy (from Hold) as we think the sharp correction is
overdone given its defensiveness to coal price strength through diversification. Despite lower
earnings/TP, we upgrade Huadian to Buy (from Hold) as we see value emerging after share
price halved to book value. Plus, there is a potential ST catalyst from asset injection. Maintain
Buy on CPI as stock now trades below book while offering hydro acquisition upside. We also
upgrade CR Power to Hold (from Sell) as it now trades close to its fair value with less
downside risk should the tariff freeze persist to 2H08. Maintain Hold on Huaneng.
Valuation
Our valuations of power businesses are based on DCF assuming WACCs ranging from 8.3%-
8.6% and no growth in cashflows in calculating terminal values. For CPI, Huadian, Huaneng
and CR Power, our TPs incorporate some of the upside potential from likely acquisitions. For
Datang and CR Power, our TP is based on sum-of-parts (SOP) method which comprises the
value of coal mines and the coal chemistry business.
Risks
There is a downside risk across the sector if the 5% tariff hike in 2H08 does not come
through, although we think this scenario is unlikely (Huadian and CPI would be the most
affected given their slim margins while Datang and CR Power would be least affected).

Table of Contents
China IPP valuation table.................................................................. 3
Investment thesis .............................................................................. 5
Outlook ....................................................................................................................................5
Valuation ..................................................................................................................................5
Risks ........................................................................................................................................5
A 10% yoy coal price rise looks set.................................................. 6
Another year of further fuel cost pressure ................................................................................6
Tariff hike will come through ........................................................... 8
A big shortfall since 2003..........................................................................................................8
Further delay, but likely in 2H 2008...........................................................................................9
Alarming fuel supply .................................................................................................................9
Gridcos to share the upstream cost pressure...........................................................................9
Tariff hike – worst/best scenarios ...........................................................................................11
Supply and demand outlook .......................................................... 12
2007 review ............................................................................................................................12
New demand and supply forecasts ........................................................................................13
New rules to benefit national IPPs..........................................................................................17
Asset injection continues................................................................ 19
A benign environment for asset injection ...............................................................................19
Asset injection outlook............................................................................................................20
Appendix A: China IPPs in charts ................................................... 21
Appendix B: List of approved projects .......................................... 25
Appendix C: Power sector guidelines............................................ 27
Datang Int'l Power........................................................................... 28
Assumption/earnings/TP change.............................................................................................30
Overview of coal mine investment .........................................................................................31
Overview of propylene investment.........................................................................................32
Key operating assumptions.....................................................................................................33
China Power Int'l ............................................................................. 34
Assumption/Earnings/TP changes...........................................................................................36
What are the possible options? ..............................................................................................37
Key operating assumptions.....................................................................................................38
Huadian Power ................................................................................ 40
Assumption/Earnings/TP changes...........................................................................................42
NPV upside from a hypothetical acquisition scenario .............................................................43
Key operating assumptions.....................................................................................................44
Huaneng Power Intl......................................................................... 46
Assumption/Earnings/TP changes...........................................................................................48
Parent asset injection resumes...............................................................................................49
Key operating assumptions.....................................................................................................50
CR Power.......................................................................................... 52
Assumption/Earnings/TP changes...........................................................................................54
Medium-term downside from higher tax rate .........................................................................55
Key operating assumptions.....................................................................................................56

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