Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Thematic (Sector/Industry)

China Independent power and renewable electricity producers / Thematic (Sector/Industry)

China’s launch of carbon trading in the power sector due to rising emission costs will accelerate the sector’s supply side reform, helping to phase out low-efficient coal-fired generation capacity, . We think market leaders, including Huaneng, Datang and China Resources Power, with high efficiencies and low emissions will stand to benefit from the improving supply demand balance over a longer term. By the first half of 2017, more than 80% of <a href="https://www.smartkarma.com/entities/28" target="_blank" data-smartkarma-citation="entities:28:1">Huaneng Power Intl Inc H (902 HK)</a>, <a href="https://www.smartkarma.com/entities/3664" target="_blank" data-smartkarma-citation="entities:3664:1">Datang Intl Power Gen Co H (991 HK)</a> and <a href="https://www.smartkarma.com/entities/5385" target="_blank" data-smartkarma-citation="entities:5385:1">China Resources Power Holdings Co. Ltd. (836 HK)</a>’s generation units were upgraded to ultra-low emission units, and these company’s unit coal consumption rates are well below the national average. With annual CO2 emissions over 3 billion tons, power is the first sector to be included in the carbon trading market. Quota allocations are still being finalized, and we expect limited near-term impacts to our earnings forecasts and fair value estimates of the companies we cover.We maintain our fair value estimate of HKD 6.30 per share for Huaneng, HKD 2.86 per share for Datang and HKD 16.0 per share for China Resources Power. We think the shares of China Resources Power, trading at 1 times price/book, are fairly valued, while the shares of Datang and Huaneng, which are trading at 0.7 times and 0.8 times price/book, are undervalued, with the market underestimating the potential long-term positive cash flows under rationalized coal prices and a more comprehensive coal-power price linkage mechanism.The weekly average Bohai-Rim Steam-Coal Price Index continued its weakening trend and closed at CNY 579 per ton in the fourth quarter, falling 0.5% sequentially and 2.6% year-over-year. This, however, represents a 27% year-over-year rise from 2016 level. This increases the possibility for a tariff hike for the coming reset cycle in January 2018, which would help to lift coal-fired power plants’ margins and returns. In addition, nationwide coal production rose 5.7% sequentially in November, echoing the government’s price-cooling measure to increase coal supply. While the current peak heating season should keep coal price relatively stable at its current level in the coming two months, we expect the government’s further actions to control coal inventory and production, along with the country’s shift toward clean and renewable energy sources and less energy-intensive economy growth mode, should continue to pressure coal prices. We maintain our forecasts of 10% coal price decline in 2018, as well as our mid-cycle coal price forecast of CNY 565 per ton.Analyst: Jennifer Song

China’s launch of carbon trading in the power sector due to rising emission costs will accelerate the sector’s supply side reform, helping to phase out low-efficient coal-fired generation capacity, . We think market leaders, including Huaneng, Datang and China Resources Power, with high efficiencies and low emissions will stand to benefit from the improving supply demand balance over a longer term. By the first half of 2017, more than 80% of Huaneng Power Intl Inc H (902 HK), Datang Intl Power Gen Co H (991 HK) and China Resources Power Holdings Co. Ltd. (836 HK)’s generation units were upgraded to ultra-low emission units, and these company’s unit coal consumption rates are well below the national average. With annual CO2 emissions over 3 billion tons, power is the first sector to be included in the carbon trading market. Quota allocations are still being finalized, and we expect limited near-term impacts to our earnings forecasts and fair value estimates of the companies we cover.We maintain our fair value estimate of HKD 6.30 per share for Huaneng, HKD 2.86 per share for Datang and HKD 16.0 per share for China Resources Power. We think the shares of China Resources Power, trading at 1 times price/book, are fairly valued, while the shares of Datang and Huaneng, which are trading at 0.7 times and 0.8 times price/book, are undervalued, with the market underestimating the potential long-term positive cash flows under rationalized coal prices and a more comprehensive coal-power price linkage mechanism.The weekly average Bohai-Rim Steam-Coal Price Index continued its weakening trend and closed at CNY 579 per ton in the fourth quarter, falling 0.5% sequentially and 2.6% year-over-year. This, however, represents a 27% year-over-year rise from 2016 level. This increases the possibility for a tariff hike for the coming reset cycle in January 2018, which would help to lift coal-fired power plants’ margins and returns. In addition, nationwide coal production rose 5.7% sequentially in November, echoing the government’s price-cooling measure to increase coal supply. While the current peak heating season should keep coal price relatively stable at its current level in the coming two months, we expect the government’s further actions to control coal inventory and production, along with the country’s shift toward clean and renewable energy sources and less energy-intensive economy growth mode, should continue to pressure coal prices. We maintain our forecasts of 10% coal price decline in 2018, as well as our mid-cycle coal price forecast of CNY 565 per ton.Analyst: Jennifer Song

Carbon Trading Will Help to Phase Out Inefficient Coal-Fired Generation Capacity in Power Sector