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We remain bullish on the China wind sector following our recent visit with
Longyuan’s 100MW inter-tidal wind farm in Rudong (Jiangsu). Key
positive takeaways from Longyuan management include:
• There are signs of easing grid connection problems: The State Grid
Corp has formulated plans for grid connection and power T&D for seven
major wind power provinces, and are stepping up efforts in cross-
regional grid connection and construction of ultra-high-voltage power
grid network. Recent power data also showed such trends, whereby 1)
new on-grid capacity additions in Jan-May 2010 increased by 160%
Y/Y, and 2) Y/Y wind power output growth in Jan-May 2010 (102%
Y/Y) has outpaced Y/Y on-grid wind capacity growth (91% Y/Y).
• Direct drive: Contrary to market belief, gearless direct drive turbines do
not have any “notable” differences in operating performance when
compared to other conventional turbines with gearboxes. Hence, it will
not be able to eliminate the latter technology and demand for gearboxes.
• Wind turbine prices continued to fall, but at a slower pace.
Specifically, ASP for turbines has stabilized at Rmb4,500-4,600/kw over
the past two months. But we expect further downside on turbine prices
might be limited as current prices might just be 10-15% above
production costs. ASP cuts by foreign players in China might imply more
market opportunities for CHSTE as a cheaper and reliable replacement.
• CDM market, off-shore wind farms: Longyuan believes China might
consider setting up its own emission trading market should the Kyoto
Protocol not be extended, which might imply higher demand for
renewable capacities by IPPs. Also, off-shore wind farms might present
more market opportunities to CHSTE as they are the only domestic
player who can produce gearboxes for 3MW turbines.
• CHSTE is our top pick in the China wind space. The stock is still
trading at a discount (12x 2011E PER) against other listed China wind
plays (15x-20x for Goldwind & Longyuan) while having a lower risk
profile (i.e. over-capacity and grid connections). Key near-term catalysts
are China wind capacity additions & interim results (Sep).
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