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4 April 2011
Alan Lau
(852) 2533 2479 alanlau@ccbintl.com
Please read the analyst certification and other important disclosures on last page
4 April 2011
Table of Contents
Taking the wind out of its sales .................................................................................................................3 Executive summary ..................................................................................................................................4 China sees decelerating growth in wind power capacity ...........................................................................9 Grid-related problems remain a serious challenge..................................................................................17 CDM (carbon trading) income uncertainty ..............................................................................................22 Overseas expansion a growth driver from 2012......................................................................................27 Offshore wind power attractive theme by 2012 ....................................................................................34 Competition landscape wind farm operators in China ..........................................................................40 Competition landscape WTG manufacturers in China .........................................................................45 China High Speed Transmission Equipment (658 HK)............................................................................53 Xinjiang Goldwind Science & Technology (2208 HK) ..............................................................................70 China Ming Yang Wind Power (MY US)..................................................................................................89 China Longyuan Power (916 HK) .........................................................................................................107 China Datang Corporation Renewable Power (1798 HK) .....................................................................124 Appendices ..........................................................................................................................................138
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Sector Rating:
Neutral
(initiation)
Aug 10
Sep 10 Goldwind
Oct 10
Nov 10
Dec 10 Longyuan
Jan 11
Feb 11 Datang
Mar 11 HSCEI
Mingyang
Source: Bloomberg
Valuations summary
CHST Goldwind Mingyang Longyuan Datang (MY US) (916 HK) (1798 HK) (658 HK) (2208 HK)
Rating* O O N N U Share price HK$12.54 HK$14.56 US$10.52 HK$8.47 HK$2.38 Target price HK$15.60 HK$16.60 US$11.00 HK$9.10 HK$2.00 Upside/downside (%) 24 14 5 0 (16) PER (x) 2011F 2012F EV/EBITDA(x) 2011F 2012F ROE (%) 2011F 2012F 10.1 9.4 6.9 6.3 16.9 16.2 13.2 12.9 15.2 14.0 17.1 15.4 8.4 7.1 6.6 5.7 22.6 21.0 19.7 15.3 5.7 4.5 8.9 10.1 35 28 14.2 10.9 3.3 2.4 8.6 10.0 122 30
EPS YoY change (%) 2011F (5) 10 48 2012F 7 3 18 * O = Outperfom; N = Neutral; U = Underperform Source: CCBIS estimates Data as of 1 April 2011
Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com
Alan Lau
(852) 2533 2479 alanlau@ccbintl.com
4 April 2011
Executive summary
China faces decelerating growth in wind power capacity
In 2010, China overtook the US to become the country with the largest cumulative wind power capacity globally. Wind installation had an impressive 120% CAGR in 2006-2009. But 2010 represented a major stumbling block for wind installation, when annual installation growth slowed significantly to 37% YoY due mainly to a grid connection bottlenecks in the shape of a lack of physical grid connections and power curtailment. As we do not expect the grid connection problems to be resolved any time soon, we project annual wind installation growth could slow to a paltry 3% YoY for both 2011F and 2012F. Over the five-year period from 2010 to 2015F, we forecast that annual wind installation in China will grow at a CAGR of 1% with cumulative wind installation at a CAGR of 26%. Although our forecasts have factored in drastic growth deceleration for wind power in China going forward, our estimate for wind power capacity, both onshore and offshore, of 245GW by end-2020F is much higher than the governments target of 150GW, which we believe to be far too conservative. In our view, there is a mismatch in Chinas targets for renewable energy capacity and renewable energy consumption. To achieve its goal of having 15% energy consumption from renewable energy sources by 2020F, China needs to take a much more aggressive renewable capacity installation target, in our opinion. Moreover, we believe wind power could be the beneficiary if the Chinese government decides to adopt a more cautious stance on nuclear power development post the nuclear crisis in Fukujima, Japan, earlier this year.
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At present, local governments of five coastal provinces plan to achieve a total of 15GW and 33GW in offshore wind power capacity by 2015F and 2020F, respectively, while Chinas cumulative offshore capacity was merely 120MW by the end of 2010 based on our estimate. Our forecast for Chinas offshore wind power capacity in 2015 is more conservative at 5GW, still implying a 90% CAGR in 2010-2015F, significantly higher than the overall wind capacity CAGR of 1% in China over the same period. Despite rapid growth potential, we highlight that offshore demand will remain less than 3% and 7% of annual wind power capacity in China by 2012F and 2015F, respectively. This is much smaller than the contribution from overseas. According to our estimates overseas demand will be c.13% of leading WTG manufacturer 2012F shipments. Overall, offshore development is an attractive theme though it lacks material business impact, at least for the next few years.
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China Longyuan Power Group (Longyuan, 916 HK, Neutral) is the largest wind farm operator in China. By 2010 it owned 15% of domestic installed wind capacity. While we like Longyuans leading industry position and earnings CAGR of 31% for 2010-2012F, and we expect the companys ROE to remain low at 8-10%. Longyuan has underperformed the HSCEI by 13% over the past 12 months and we believe industry concerns are priced in. Nonetheless, we would have to see near-term catalysts before turning positive on the stock. In the meantime, we initiate coverage with a Neutral rating and target price of HK$9.10. Datang Renewable (Datang, 1798 HK, Underperform) is the second-largest wind farm operator in China. By 2010 it had a 9% share of Chinas wind installed capacity. In our view, Datangs net gearing ratio of 270-290% for 2011F-2012F is a major concern, as it entails high equity refinancing risk. Its ROE range of 9% to 10% in 2011F-2012F also falls short of peers, particularly considering Datang is a pure play wind project operator, with ostensibly higher ROE than coal-fired power operators. We initiate coverage on Datang with an Underperform rating and target price of HK$2.00. Valuation comparison
Stock code 658 HK HSN LN 044490 KS 053660 KS Market EPS Share price cap PER (x) growth PEG PBV (x) ROE (%) Rating (local currency) (US$m) 2010A 2011F 2012F (%) 2011F 2010A 2011F 2012F 2010A 2011F 2012F O NR NR NR O NR NR N NR NR NR NR NR NR NR NR NR NR 12.54 49.50 52,300 17,100 14.56 20.65 74.14 10.52 223.30 7.37 145.00 8.26 44.60 26.70 3.96 17.17 41.85 8.58 2,217 534 796 232 7,858 7,857 11,381 1,315 8,685 2,576 1,900 786 1,778 8,237 13,355 580 1,278 383 9.6 N/A 42.7 N/A 14.6 N/A 23.4 12.3 38.9 18.6 22.9 26.6 N/A 17.3 15.2 44.0 35.5 N/A 10.1 N/A 22.3 10.9 13.2 16.9 20.6 8.4 20.2 18.6 25.7 27.9 N/A 14.0 13.3 27.4 23.5 N/A 9.4 N/A 16.0 7.6 12.9 13.4 17.0 7.1 15.8 18.6 21.5 21.0 24.3 11.8 12.0 21.7 16.9 N/A 15.3 10.9 10.5 8.2 22.3 15.6 25.7 17.7 29.1 N/A 8.5 (5) N/M 79 N/M 10 24 14 48 93 31 (11) (5) N/M 24 15 61 51 N/M 35 122 33 32 4 N/M 19 24 36 N/M N/M (2.1) N/M 0.3 N/M 1.3 0.7 1.5 0.2 0.2 0.6 (2.3) (6.2) N/M 0.6 0.9 0.5 0.5 N/M 0.6 0.1 0.4 0.3 7.8 N/M 1.7 0.9 1.2 N/M N/M 1.8 0.6 2.1 1.3 2.4 N/A 13.9 2.4 2.2 1.1 2.8 1.5 1.1 2.4 1.6 8.1 3.8 N/A 1.9 1.4 0.9 1.6 0.8 0.4 1.1 2.1 0.8 0.4 0.7 1.7 0.6 2.0 1.2 2.3 3.6 4.1 1.9 2.0 1.1 2.7 1.5 1.1 3.0 1.4 N/A N/A N/A 1.7 1.2 0.8 1.5 0.8 0.3 1.1 1.9 0.8 0.4 0.5 1.5 0.6 1.8 1.0 2.0 2.8 3.3 1.5 1.8 1.0 2.5 1.4 1.1 2.4 1.3 N/A N/A N/A 1.5 1.1 0.7 1.3 0.8 0.3 1.1 1.8 0.8 0.4 0.4 18.7 (1.7) 2.9 (12.8) 16.9 (1.5) 5.5 (1.0) 16.2 0.9 9.3 10.8 15.4 21.9 20.5 21.0 12.7 5.6 11.5 6.0 3.8 23.0 11.0 N/A N/A N/A 10.1 10.0 7.1 16.7 4.0 2.4 4.0 10.8 2.6 (2.9) 5.2
Company Wind turbine component CHST Hansen Transmissions Taewoong Hyunjin Materials
Wind turbine Xinjiang Goldwind H- share 2208 HK Xinjiang Goldwind A-share 002202 CH Sinovel 601558 CH Mingyang MY US Vestas VWS DC Gamesa GAM SM Repower RPW GR Nordex NDX1 GR Suzlon SUEL IN Dongfang Electric 1072 HK Shanghai Electric 2727 HK Blade Jiangsu Miracle 002009 CH Sinoma Science & Technology 002080 CH Tianjin Xinmao 000836 CH
16.7 17.1 39.1 24.6 77.5 19.9 19.8 22.6 5.9 11.1 3.1 4.2 11.6 10.6 5.9 4.6 (12.9) (12.2) 33.0 24.5 11.3 11.0 13.8 11.8 N/A 7.3 4.3 5.1 13.4 2.9 (21.2) 3.0 7.9 1.5 (11.1) (24.9) N/A N/A N/A 8.9 8.6 5.9 14.8 3.3 (3.8) 3.5 9.2 1.8 (6.4) 4.7
Wind Farm Operator China Longyuan 916 HK N 8.47 8,128 26.5 19.7 Datang Renewable 1798 HK U 2.38 2,230 31.4 14.2 China Power New Energy 735 HK NR 0.65 659 17.7 13.3 China WindPower 182 HK NR 0.84 798 14.4 10.9 Acciona ANA SM NR 77.21 6,986 28.3 27.3 Theolia TEO FP NR 1.33 211 N/A N/A Iberdrola Renovables IBR SM NR 3.09 18,553 36.2 30.5 EDF Energies Nouvelles EEN FP NR 37.18 4,106 27.1 21.9 EDP Renovaveis EDPR PL NR 5.01 6,222 55.7 41.1 Infigen Energy IFN AU NR 0.37 293 N/A N/A Greentech GES DC NR 17.30 175 N/A 9.8 All prices are as at 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS Source: Bloomberg, CCBIS
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wind capacity installation still increased by an impressive 124% YoY to 14GW, making China the worlds largest wind power market, 36% bigger than the second-largest player, the US, at 10GW. Chinas annual wind power installation and YoY growth
MW 20,000 160%
16,000
130%
12,000
100%
80% 60%
8,000
70%
40% 20% 0%
4,000
40%
0 2004 2005 2006 China annual wind capacity (LHS) 2007 2008 2009 China YoY growth (RHS) 2010
10%
(20)% 2004 2005 2006 2007 2008 2009 2010 China YoY growth Global YoY growth
In 2010, Chinas annual wind power installation continued to surpass that of other countries, according to CWEA. Moreover, Chinas cumulative wind power capacity overtook that of the US for the first time in 2010. Based on data from CWEA and GWEC, Chinas annual and cumulative wind power capacity installation reached 19GW and 45GW, respectively, in 2010, against 5GW and 40GW for the US, the second largest wind power player worldwide. 2010 top-ten wind power countries by annual installation 2010 top-ten wind power countries by cumulative capacity
Denmark Canada UK France Italy India Spain Germany USA China 0 3,300 6,600 9,900 MW 13,200 16,500 19,800 0 7,000 14,000 21,000 MW 28,000 35,000 42,000
We believe that the robust growth within Chinas wind power industry so far is due mainly to the Chinese governments commitment in developing renewable energy and the fact that wind power, among various types of renewable energy, is the most effective tool for China to achieve its renewable energy targets, given wind powers lower generation cost and better scalability.
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Energy conservation
Emission reduction
Carbon emissions per GDP to decline by 40-45% from 2005 level by end-2020 Source: National Development and Reform Commission (NDRC), CCBIS
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Overall, we expect Chinas cumulative wind power capacity, both onshore and offshore, to reach 145GW and 245GW by the end of 2015F and 2020F, respectively. Our 2020F wind power capacity estimate is much higher than the governments unofficial target of 150GW, which we believe is far too conservative. In our view, there is a mismatch between Chinas renewable energy capacity target and renewable energy consumption. To achieve the governments goal of 15% energy consumption from renewable energy sources by 2020F, China needs to take a much more aggressive renewable capacity installation target, in our opinion. Wind power stands to benefit greatly should the Chinese government decide to adopt a more cautious stance on nuclear power development. Post nuclear crisis in Fukujima, Japan, the Chinese State Council announced that the nation will temporarily suspend approvals for new nuclear projects until official guidelines on nuclear security are published in China. The Chinese government will also initiate strict safety examinations of its nuclear projects in operation and under construction. CCBIS China power capacity forecast model
2009 Power capacity (MW) Renewable energy: Small hydro (50MW) Large hydro (>50MW) Wind energy Biomass energy Solar PV Total renewable energy Nuclear power Total alternative energy Thermal coal power Overall power capacity Power capacity (%) Renewable energy: Small hydro (50MW) Large hydro (>50MW) Wind energy Biomass energy Solar PV Total renewable energy Nuclear power Total alternative energy Thermal coal power Overall power capacity Source: CCBIS estimates 55,120 141,670 25,828 4,500 240 227,358 9,078 236,436 651,076 887,512 62,000 151,400 44,751 5,200 800 264,151 10,820 274,971 706,630 981,601 80,000 204,000 144,566 10,000 9,000 447,566 42,940 490,506 900,000 1,390,506 100,000 330,000 244,964 20,000 47,000 741,964 90,000 831,964 1,000,000 1,831,964 2010 2015F 2020F
6.2 16.0 2.9 0.5 0.0 25.6 1.0 26.6 73.4 100.0
6.3 15.4 4.6 0.5 0.1 26.9 1.1 28.0 72.0 100.0
5.8 14.7 10.4 0.7 0.6 32.2 3.1 35.3 64.7 100.0
5.5 18.0 13.4 1.1 2.6 40.5 4.9 45.4 54.6 100.0
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* Assume lead time for capacity ramp up at three months Source: CCBIS estimates
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Listing of government-owned wind farm operators: In our view, this is a complementary factor to the grid connection bottleneck factor, as state-owned wind operators, which we estimate to aggregately dominate 70-80% of wind installations in China, start monitoring their projects return more closely. Since the listing of China Longyuan Power Group (Longyuan, 916 HK) in December 2009, there has been a trend for major state-owned independent power producers (IPPs) to list their wind farm subsidiaries, including China Datang Corporation Renewable Power (Datang Renewable, 1798 HK) listed in December 2010, Huaneng Renewables (planning to list 2011), and Huadian New Energy (planning to list in 2011). In the past, lacking grid connection did not seem to be a constraining factor to Chinas wind capacity growth. State-owned IPPs have been aggressively increasing their wind capacity as they are required to have 3% and 8% installed capacity slated for non-hydro renewable sources by 2010 and 2020, respectively. Since the regulatory target is set for capacity installation, not power generation, we believe some of the state-owned operators were purely pursuing the scale of their wind assets instead of caring about project returns. As a result, we estimate that 33% of wind capacity installed at the end of 2010 was sitting idle due to a lack of physical grid connection. Nonetheless, since more and more state-owned wind farm operators have become or would like to become publicly listed companies, we expect wind farm operators in China to start slowing down their capacity growth to meet the expansion pace of grid operators as their shareholders would not tolerate low project ROEs and waste of capital investments. Large base effect: After four years of exponential growth, Chinas annual wind capacity installation already accounted for 36% and 49% of global market size in 2009 and 2010, respectively, making the country the worlds largest wind market in terms of annual new installations. Another implication was that such a pace of development made it difficult for the nation to continue doubling its installation every year, particularly when we expect global annual wind capacity installations to grow at only a 9% CAGR over the next five years (2010-2015F). Chinas cumulative wind capacity and global share
MW 145,000 33% 30% 27% 87,000 24% 58,000 21% 29,000 18% 15% 2009 2010 2011F 2012F 2013F 2014F 2015F China cumulative wind installation (LHS) China global share (RHS) 9,000 6,000 10% 3,000 0 2009 2010 2011F 2012F China annual wind installation (LHS) 2013F 2014F 2015F China global share (RHS) 0% 20%
116,000
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* Assuming lead time to reach full capacity at three months Source: CCBIS estimates
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Northwestern 12%
Electricity not sold to grid (LHS) As % of total wind electricity generation in the region (RHS)
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Regions with richer wind resources tend to have stronger heat demands due to severe weather conditions in winter, while coal-fired power plants also get priority as they generate heat at the same time. Therefore, when power supply exceeds system demand, grid operators in these regions will request wind farms to stop feeding power into the grid. To resolve this issue, the Chinese government has been exploring the possibility of establishing or relocating high energy consumption industry bases to provinces with rich wind resources. Moreover, the government has plans to construct ultra-high-voltage grid lines to transmit power from northern, northwestern and northeastern China to Beijing, Tianjin, Tanggu and the middle of China. Electricity delivery from the main wind power bases
Source: CWEA
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Lack of a centralized plan to match grid networks and wind farm construction Due to poor economics, grid operators normally have less incentive to construct networks in remote provinces, where wind resources are richer. The difference of construction lead time between grid operators (over two years) and wind farm operators (one year) intensifies a mismatch in the construction of grid networks and wind farms, in our view. To incentivize grid operators to provide connection to wind farms, NDRC announced Temporary Measures for Renewable Energy Surcharge Distribution, through which grid construction to renewable energy projects, including wind farms, would be refunded. Nonetheless, the measures were not very effective given it took a year for grid operators to receive deserved refund. Subsidies for wind farm grid construction, sourcing from renewable energy surcharge
RMB m 300 250 200 150 100 50 0 2006 2007 2008 2009 1Q-3Q10 Subsidy for grid construction to wind farms (LHS) As % of total grid construction subsidy (RHS) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
As grid operators have less incentive to construct networks in remote provinces, wind farm operators started several years ago to finance grid construction to connect their projects to the grid. Based on the statistics from CEC, in 1H10 approximately 43-49% of grid construction in China was funded by grid operators, 50-56% by wind farm operators and 1-2% jointly funded by grid operators and wind farm operators.
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At the national level, the Chinese government revised the Renewable Energy Law in 2H09. The law came into effect in April 2010, stating that the nation ought to have centralized planning for grid network and wind farm construction. At the provincial level, each province will have near-term and medium-term planning, while the central government would provide long-term, bigger picture guidance and ensure consistency between the plans of different provinces. Grid quality and operating technology need upgrade to handle wind power effectively The intermittence of wind power generation has increased the difficulty for grid operators to manage and utilize wind power effectively. As major grid operators in China lack adequate experience handling wind power and the quality of grid networks in remote areas (with abundant wind resources) is poorer, wind farm operators will be told at times by grid operators to halt feeding power into the grid for the sake of grid network safety. To resolve this issue, the Chinese government stated in the updated Renewable Energy Law that grid operators are responsible for enhancing grid quality and establishing a smart grid network to better utilize power generated by renewable energy projects. More importantly, the government specified that relevant government agencies would soon announce minimum requirements on renewable energy purchases (in terms of a percentage of overall power purchases) for grid operators to ensure there is no waste of renewable energy.
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30%
Based on our forecasts, 17% and 18% of Longyuans profit before tax will derive from carbon credit income in 2011F and 2012F, respectively; while we forecast Datang Renewable share of profit before tax deriving from carbon credit income will be 34% and 35% in 2011F and 2012F, respectively.
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According to the European Parliament, the use of emission credits from CDM projects would greatly contribute to the emission reduction targets of 2020. They state that CDM and Joint Implementation (JI) together would equal a third of the reduction effort required in 2020 (defining a 10% reduction from 2005 level in 2020 as the reduction effort, where 3% from CDM and JI are roughly a third). Share of CDM/JI use in non EU ETS sectors
Source: EU Parliament The EUs emission reduction target, intended use of CDM and its + 2C
We believe China is likely to establish a domestic carbon emission trading system over the next few years, which would enhance carbon credit income of Chinese wind farm operators. According to China Securities Journal and Xinhua News, officials from the National Coordination Committee on Climate Change of the National Development and Reform Commission (NDRC) disclosed that in 2009 the Chinese government started drafting temporary management measures for voluntary GHG emission trading activities in China and the regulation could be announced in 2011. Chinas energy and environmental targets
Field Energy conservation Chinas targets Energy consumption per unit of GDP by end- 2010 to decline by 20% from 2005 level Energy consumption per unit of GDP will become one of the ten major new indicators the Chinese government closely monitors in the 12th Five-Year Plan period Carbon emission per unit of GDP by end-2020 to decline by 40-45% from 2005 level Carbon emission per unit of GDP, sulfur dioxide emission, chemical oxygen demand (COD), ammonia nitrogen, and nitrogen oxides will become among the ten major new indicators the Chinese government closely monitors in the 12th Five-Year Plan period Renewable energy to account for 10% of total energy consumption by end-2010 Renewable energy to account for 15% of total energy consumption by end-2020 We expect the Chinese government to include a new target in the 12th Five-Year Plan: Renewable energy to account for 11.4% of total energy consumption by end-2015
Emission reduction
Energy structure
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Risks post-2012
Although we expect Chinese wind farm operators to maintain a certain level of income from carbon credit sales post-2012 due to existence of EU ETS and a potential domestic carbon market in China, we believe that such income stream remains at risk in terms of volume and price, for the following reasons: (1) EU has set a legally binding emission reduction target for member states by 2020 regardless of whether other countries are reducing emissions aggressively. We feel this could potentially hinder EU enterprise competitiveness in international markets over the long term. Consequently, it might be risky to assume that EU governments will continue to support EU ETS post-2020, when other countries do not make meaningful efforts and commitment to carbon reduction. EU emission projections and target by 2020
(2) We believe it would take several years for the Chinese carbon market to mature and reach meaningful transaction volume. The Chinese government is currently only drafting regulations on voluntary emission reduction trades, which have little trading volume in other countries. Moreover, we expect the Chinese government to implement a real cap and trade system only gradually to avoid any pressure to the cost competitiveness of Chinese enterprises with their international peers. (3) The price of carbon credits could be lower in the Chinese carbon market than in international markets as we expect carbon credit buyers in China (energy suppliers, power utilities or other high emission manufacturers) to have larger bargaining power than sellers in China (clean energy project owners, etc).
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In addition to registration risk of extended approval lead time, wind operators in China also started facing rejection risk as of December 2009. During the CDM EBs 51st meeting, which ended on 4 December 2009, ten Chinese wind projects were rejected for CDM registration, as CDM EB believed that the Chinese government intentionally kept wind power tariffs too low for Chinese wind projects to qualify for the CDM application. In February 2010, another six projects were rejected although a green light was given to 32 Chinese wind farms at the same time. We believe that Chinese wind farm operators will continue to face challenges registering additional capacity under CDM. Longyuans wind capacity registered under CDM
MW 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1H09 2H09 1H10 Registered capacity (LHS) 2H10 1H11F 2H11F % of capacity registered (RHS) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0 1H09 2H09 1H10 CDM income (LHS) 2H10 1H11F 2H11F As % of total revenue (RHS) 0% 50 100 5% 150 200 10%
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In our view, the slow progress in wind equipment exports is mainly due to three reasons: Robust domestic demand growth historically. Given the explosive wind capacity growth at a 120% CAGR in 2006-2009, and the fact that Chinese WTG and component manufacturers only generally started scaling up their production capacity since 2007, there was a severe supply shortage in WTGs and components between 2006 and 2008, although supply and demand finally became more balanced in 2009. Chinese WTG and component manufacturers have thus historically been busy fulfilling domestic orders and consequently lacking resources or reluctant to build distribution channels and business overseas. Short product track record. Most of the leading Chinese WTG manufacturers only started commercial production of their 1MW+ products in 2H07 or 2008. Their short track record has made foreign wind farm operators hesitant to adopt Chinese WTG products. We note that WTG costs account for c.70% of capital costs of a wind farm and depreciation c.70% of wind power generation cost, so defect or malfunction of WTGs would have significantly negative impacts on wind farm operators project returns, particularly when most of the WTG manufacturers only carry a two-to-five year product warranty, much shorter than WTGs designed life of 20-30 years. Export restriction clause in technology licensing agreement. We believe that the majority of Chinese WTG manufacturers have attained design and technology knowhow of their initial products through technology licensing with foreign WTG manufacturers. As there is usually an export restriction clause in such technology licensing agreement, Chinese WTG manufacturers cannot sell their products out of China until they obtain intellectual property rights of the WTG design, or succeed in in-house WTG technology development. Chinese WTG manufacturers and technology source
Company Beizhong Changzhou Dongfang Electric United Power Goldwind Haizhuang Huayi Mingyang Sewind Sinovel Xiangdian ZELRI Source: Suzlon China, CCBIS Technology source DeWind U Erlangen Repower Aerodyn Vensys* Aerodyn Aerodyn Aerodyn Aerodyn, Dewind Fuhrlander Zephyrus Windtec
Compared with Chinese WTG manufacturers, Chinese wind farm operators have less exposure to international markets. We believe that currently none of the leading wind farm operators in China holds any wind projects overseas. In our view, this is a natural result of the capital flow and foreign exchange controls in China and the fact that local regulatory and administrative barriers to enter the industry tend to be high for overseas wind projects.
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US (Illinois)
2H11 or 1H12
We believe Chinese wind farm operators will begin exploring explore overseas opportunities due to higher capacity growth and project returns. We note that subsidies (feed-in tariff) and grid condition might be better in other countries than in China and this will bring them higher project returns. Additionally, we expect both Chinas encouraging overseas investments and ample monetary supply from Chinese banks to contribute to investments by Chinese wind farm operators in overseas projects. Longyuan disclosed in 2H10 that the company is close to completing a deal in South Africa and is currently studying business opportunities (40-50 projects) in other regions and countries, such as North America, Eastern Europe (Hungary), Australia and Kasakstan. Meanwhile, Datang Renewable is also working on wind project development in countries like the US, Canada and Australia and expects one project in Australia to commence operation in 2011.
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We believe it will take time for Chinese manufacturers to penetrate international markets simply based on the cost factor, as overseas wind project investors and foreign banks providing project financing tend to be very selective in WTG brand adoption for a project. Before Chinese WTG manufacturers attain adequate track record and customer confidence, which we believe will take another couple of years, they will secure additional sizable sales orders overseas through leveraging their access to project financing from Chinese banks. In our view, this is particularly important as credit conditions in major wind power markets such as the US and Europe have not recovered much after the global financial crisis in late 2008. For example, according to the WTG export contract signed in December 2010, Goldwind would not only provide WTGs but also provide project financing to a wind farm in Illinois. Meanwhile, we note that the contract announced by A-Power in 2009 regarding WTG exports to a wind project in Texas is also under similar arrangement. We believe that such a trend is likely to continue as Chinese WTG manufacturers are keen on overseas expansion while backed by Chinese government patronage for the purpose of furthering overseas investment.
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We acknowledge that defect or malfunction of WTGs would have significant negative impact on project returns of wind farm operators, as WTG cost accounts for c.70% of capital cost of a wind farm and depreciation c.70% of wind power generation cost. Moreover, most of the WTG manufacturers only give a two-to-five year product warranty, much shorter than WTGs design life of 20-30 years. As for wind project financing, banks tend not to lend money to projects using unreliable WTGs, given the present tight credit environment in Europe and US. Most of the Chinese WTG manufacturers launched their 1.5MW products in late 2007 or 2008, so track record of their products is fairly short. Although Chinese WTGs are 40-50% cheaper than foreign WTGs based on our estimates, several western WTG manufacturers claimed that the efficiency-adjusted price of Chinese WTGs is not as low as it seems to be.
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Foreign governments intervention in international trade Since 2009, there have been incidences of foreign governments or industry unions appealing to restrict Chinese renewable equipment manufacturers, including those from the solar and wind power sectors, from exporting products to their countries. They argue that foreign countries have used significant resources to sustain renewable energy subsidies and boost renewable energy demand for the purpose of creating local employment and tax income as opposed to benefitting unrelated Chinese companies. Furthermore, some believe that the superior cost advantage of Chinese renewable equipment manufacturers is a result of unfair subsidies issued by the Chinese government. Lastly, in the national-level concession project biddings held by the Chinese government over the past two years, none of the foreign equipment manufacturers won any bids, implying that there might be excessive local protectionism in China. Specifically for wind power, in September 2010, United Steelworkers (USW) in the US filed a petition accusing China of five general infractions: (1) restriction of access to critical materials; (2) discrimination against imported goods and foreign companies; (3) technology transfer requirements for foreign investors; (4) subsidies contingent on domestic content; and (5) trade-distorting domestic subsidies. In response to the petition, the Office of the US Trade Representative (USTR) requested a World Trade Organization (WTO) dispute settlement with the Chinese government in December 2010. Some of the issues were addressed during the US-China Joint Commission on Commerce Trade conference in December 2010, while some concerns were dismissed after investigation. For example, the USTR obtained clarification that two Chinese subsidy programs, Export Research and Development Fund and Ride the Wind had already been terminated. China also agreed to change some of its rules to open up the Chinese wind power market. However, we believe that the risk of unfavorable trade policies in Europe and the US remains high for Chinese WTG and component manufacturers. Some Chinese wind power companies, such as Goldwind and CHST, have plans to establish production facilities and possibly supply chains in the US to be eligible for selling in the US market. We expect this to have negative implications for their production costs. In such cases Chinese companies need to carefully balance between volume and profitability.
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Jiangsu Binhai Jiangsu Sheyang Jiangsu Dongtai Jiangsu Dafeng Source: CWEA, CCBIS
3MW from Sinovel 3MW from Sinovel 2.5MW from Goldwind 3.6MW from Shanghai Electric
Construction should be completed by 2014 Construction should be completed by 2014 Construction should be completed by 2014 Construction should be completed by 2014
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In 2010, the central government requested local governments of coastal provinces to complete planning for offshore development up to 2015F and 2020F. According to CWEA, total offshore capacity proposed by five coastal provinces reaches 15GW and 33GW for 2015F and 2020F, respectively, increasing sharply from the 120MW as of end-2010F. Provincial government plans for offshore wind capacity
Region Shanghai Jiangsu Zhejiang Shandong Fujian Others (tentative) Total Source: CWEA, CCBIS 2015F 700 4,600 1,500 3,000 300 5,000 15,100 2020F 1,550 9,450 3,700 7,000 1,100 10,000 32,800
According to Azure International, near-term offshore pipeline of top offshore wind farm developers in China amounts to around 514MW, while cumulative pipeline (including those with long-term potential) could amount to 13.7GW. Top offshore developers pipeline
Developer China National Offshore Oil Corp (CNOOC) Longyuan China Three Gorges Project Corp. Huaneng (China) Group Guangdong Baolihua New Energy Guodian Group Shenhua Group Datang Corporation Changdao Wind Power Development Shangdong Sanrong Group Zhejiang Luneng Source: Azure International, CCBIS Pipeline (MW) 3,102 2,465 2,010 1,302 1,250 800 500 329 300 300 196
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Chinese WTG and component manufacturers lack mature technology for large-scale wind equipment In our opinion, offshore wind projects require at least 2MW WTGs, while WTGs above 3MW would yield better performance. In Europe, some offshore wind farms are currently experimenting with WTGs producing over 4MW. Nonetheless, most Chinese WTG manufacturers only commenced commercial production of 2MW products less than a year ago and schedule to launch their 3MW products in 2011F (with exception to Sinovel which supplied 34 units of 3MW WTG to the Shanghai Donghai Bridge project in 2009/2010). We believe that Chinese WTG and component manufacturers have to speed up related R&D to ensure quality and cost effectiveness of offshore projects in China.
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First 1.5MW offshore wind turbine manufactured in 2007 2.5MW and 3.0MW prototypes produced and under experimental operations are expected to be launched commercially in 2011F 5.0MW product under research and development Dongfang Electric 5.0MW offshore wind turbine under research United Power Company targets to launch 3.0MW in 2011F Mingyang Company targets to launch 3.0MW in 2011F Xemc 5.0MW offshore wind turbine under research (XEMC Darwind) Sewind 3.6MW offshore wind turbine launched in June 2010 Haizhuang 5.0MW offshore wind turbine under research Source: Company data, CCBIS
Goldwind
Absence of mature technology and equipment for installation Installation technology for offshore wind projects has been a challenging issue globally. Moreover, half of the offshore projects currently under construction in China are in the intertidal zone, where it is difficult for ships and cars to operate. According to CWEA, even international markets have limited experience with intertidal installation. Therefore China will need to lead the global market and develop its own technology to overcome this challenge. Due to an absence of mature technology, it is highly costly to produce equipment for offshore project installations in China. We believe the Chinese government is likely to encourage equipment development capability along with the national concession project biddings, in which project developers could cooperate with state-owned heavy machinery manufacturers and leverage their experience for cost savings and knowledge accumulation.
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Huaneng 12%
China Power Investment (CPI) Jingneng 3% 5% China Guangdong Nuclear Power (CGNP) 5% Guohua 6% Huadian 6%
Huaneng 11%
* Guodian: Parent of Longyuan ** Datang: Parent of Datang Renewable Source: CWEA, CCBIS
* Guodian: Parent of Longyuan ** Datang: Parent of Datang Renewable Source: CWEA, CCBIS
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Better position to win wind resources We believe government-owned companies have a closer relationship with the central and provincial governments than private or foreign-funded companies do. This, in our view, strengthens government-owned company position to gain wind resources. In China, to attain wind resources, wind farm operators need to first get provincial government approval to use land for wind farm development. It has become more competitive to gain wind resource presently, as most of the wind-rich areas have already been taken by wind farm operators. We believe that good relationship with provincial governments and the consequent access to good quality wind resources (i.e. sites with high utilization hours, good grid connection and healthy local power demand) will be important for wind farm operators to increase future growth potential. Wind resources reserves of listed wind operators (June 2010)
GW 21 18 15 12 9 6 3 0 Longyuan Datang China WindPower
Note: China WindPower is a non-government owned company Source: Company data, CCBIS
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Easier to get wind farm approvals Based on our channel check with wind farm operators in China, a wind project need to prepare more than 50 types of documents and gain approvals from more than ten government agencies before construction can be commenced. We believe that government-owned companies are in a better position than private companies to attaining government approvals given their better relationship.
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Installed wind capacity (MW) Wind utilization hours Wind power generation (net) (GWh) Average wind power tariff ex VAT (RMB/kWh) Wind power revenue (RMB m) CER/VER income (RMB m) Operating profit (RMB m) EBITDA (RMB m) Net profit (RMB m) Growth (YoY, %) Installed wind capacity Wind power generation (net) Wind power revenue CER/VER income Operating profit EBITDA Net profit Other P&L ratios (%) Wind power revenue as % of total revenue CER/VER income as % of PBT Operating margin Operating margin - non coal power EBITDA margin Net margin Balance sheet ratios (%) Gearing ratio Net gearing ratio ROE Source: Company data, CCBIS estimates
46 66 67 86 43 42 124 43 12 29 66 44 14
31 52 28 71 46 47 35 47 17 36 76 56 16
28 34 32 42 31 28 28 54 18 41 76 62 18
54 68 68 67 75 69 84 100 31 63 63 100 19
27 43 43 35 39 39 30 100 35 63 63 101 22
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2.
3. 4.
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Industry trend II: Vertical integration for cost and quality control
Over the past few years, we have seen a trend of vertical integration among global WTG manufacturers, particularly those in China. During 2006-2008, there was a tight supply of WTGs and components around the globe. Thus, global WTG manufacturers began to vertically integrate to secure supply and mitigate the risk of rising component costs. However, we saw most international WTG manufacturers slow down their integration pace after 2009 on muted demand growth and a difficulty in securing financing for expansion. Nonetheless, the trend of vertical integration continued in China during the same period, unlike the case in the overseas markets as WTG demand growth within China remained strong and Chinese WTG manufacturers combated severe price competition in the China market. A good example of Chinese WTG manufacturer vertical integration is Goldwind. In 2007, Goldwind adopted an asset light model, meaning that the company outsourced all of its component manufacturing to third-party vendors and purely focused on the design and assembly of WTGs. However, Goldwind gradually created in-house capacity for components of its direct-drive WTGs, including generators, control systems and blades. The company also holds minority stakes in several key upstream companies, including those supplying Goldwind with NdFeB magnets (for direct-drive generator) and epoxide-resin glue (for blade production).
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Goldwind Dongfang Electric United Power Mingyang XEMC x Vestas Gamesa GE Wind x Enercon Suzlon Repower Nordex Siemens * Partially supplied by an affiliated company ** Product does not require gearbox *** Pilot production phase Source: CCBIS
x x
x x
** x x x x x x
In our view, vertical integration can enhance cost and quality control and become increasingly important going forward when Chinese WTG manufacturers expand to overseas markets where quality tends to be more important.
Industry trend III: 10-15% decline in ASP YoY starting from 2010
Based on data from CWEA, ASP of WTGs started to increase in 2004, peaked in mid-2008 before declining afterwards. We forecast average WTG ASP in China will fall 10-15% YoY in 2010-2012F. We believe the WTG ASP increase in 2004-2008 was mainly due to tight WTG supply and rising raw material costs. According to CWEA, the average ASP increased from RMB4,800 per kW in April 2004 to RMB6,200 per kW at the beginning of 2008. However, prices began to fall in 2H08 and declined rapidly in 2009. By the end of 2009, the ASP of Chinese WTGs decreased to below RMB5,000 per kW (down over 20%). Chinas ASP trends for WTGs
Source: CWEA
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In our view, the WTG ASP decline in China since 2H08 was driven by a WTG supply surplus, declining raw material (mainly steel) costs, rising localized component supply as well as WTG manufacturers ability to reduce costs owing to economies of scale and vertical integration.
Direct-drive or gearbox?
The global WTG market has so far been dominated by gearbox WTGs. According to BTM Consult, gearbox WTGs accounted for more than 85% of the global market as of 2009, while Enercon and Goldwind were the only two companies among the global top ten WTG manufacturers that had a meaningful share of direct-drive products. Global direct-drive WTG penetration
MW 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2005 2007 Global WTG shipment (LHS) 2009 Direct-drive % (RHS) 2010F 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Over the past year, the presence of direct-drive technology has increased, as demonstrated by Goldwinds rapid market share expansion in China, from 15% in 2009 to 21% in 2010 based on our estimates, on the back of the increasing penetration of its direct-drive WTGs. We believe that Goldwind has also contributed greatly to the rise of direct-drive WTG global market share from the historical average of low teens to slightly above 20% in 2010. Goldwinds WTG shipment volume and market share in China
MW 6,000 5,000 4,000 60% 3,000 40% 2,000 1,000 0 2007 2008 Shipment (LHS) 2009 2010 China market share (RHS) 2011F 20% 100%
80%
0%
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Several global leading WTG manufacturers, including GE Wind, Siemens and Dongfang Electric, which were involved in only gearbox WTG manufacturing historically, started to tap direct-drive WTG R&D and production. According to Goldwind and Mingyang, direct-drive WTGs have several advantages over doubly-fed (gearbox) WTGs, such as higher energy yield, grid friendly, light weight and most importantly savings from repair and maintenance (R&M) costs. (see Appendix 9, page 159-161 for more details). However, we would like to highlight that we have no preference between gearbox and direct-drive WTGs for the following three reasons: 1. No material cost/performance difference for onshore wind applications, which remain over 90% of wind installation in China and globally:
Based on our channel check with wind farm operators, there is no material cost/performance difference between gearbox and direct-drive WTGs for onshore applications, which will remain over 90% of annual installation globally and in China for the next five years in our view. We believe Goldwinds market share expansion is mainly due to its aggressive pricing strategy, supported by its cost reduction efforts on the back of economies of scale and vertical integration instead of end-customer preference of direct-drive technology. 2. Too early to draw conclusions on advantages of direct-drive WTGs for offshore wind applications:
Theoretically, direct-drive WTGs could very well have stronger cost competitiveness over gearbox WTGs for offshore wind farms, especially given their lighter weight and lower R&M expense. However, given the limited operating track record for offshore wind farms globally, it remains too early to draw conclusions. In fact, according to EWEA, among the top global offshore WTG suppliers, only Siemens adopts direct-drive technology. Global leading offshore WTG suppliers
Manufacturer Siemens Vestas Nordex Repower BARD Engineering Multibrid Source: EWEA, CCBIS Type of WTG 3.6MW 3MW 2.5MW 5MW / 6MW 5MW 5MW Technology Direct-drive Gearbox Gearbox Gearbox Gearbox Gearbox
3.
Less reputational risk for global leading WTG makers to explore direct-drive technology for offshore product development:
Historically, global leading WTG manufacturers have been hesitant to switch technology platforms due to the high risk of ruining their track record and brand reputation. However, as all WTG manufacturers have minimal experience with offshore wind power so far, we believe that leading WTG manufacturers face less risk exploring direct-drive technology. Consequently, we see companies like GE Wind and Siemens changing technology platform to direct-drive for their offshore products lately.
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Siemens acquired its direct-drive technology through the acquisition of Bonus Energy in 2004. It installed three 3.6MW direct-drive offshore WTGs in Denmark and is planning to launch full-scale production in 2011. Meanwhile, another global producer GE acquired ScanWind and its direct-drive technology in 2009 and is planning to commercialize its 3.5MW direct-drive WTGs in 2012. Nonetheless, we maintain our view that it remains too early to conclude whether direct-drive is the better technology of choice for offshore wind farms.
In general, we believe that Goldwind and Mingyang have similar profitability performance in terms of margins. Both companies have a better production cost structure than Sinovel. On the other hand, all of the three WTG manufacturers have a very strong balance sheet with net cash position or minimal net debt position through 2012F, based on our estimates. Compared with Goldwind, we expect Mingyang to enjoy higher growth due to its much smaller base. However, we would like to highlight that Mingyangs earnings growth comes with much higher risk as Mingyang is switching its WTG technology platform from doubly-fed (gearbox) WTGs to SCD (super-compact-direct-drive) WTGs for its 2.5/3.0MW products, shipments of which are to be launched after 2H11F. As for 2.5MW WTGs, Goldwind uses direct-drive technology currently used in its 1.5MW WTGs. We forecast 30% of Mingyangs gross profit will come from its 2.5/3.0MW WTG products by 2012F.
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Gearing Net gearing ratio (%) 2010 Net cash Net cash 2011F Net cash Net cash 2012F Net cash Net cash * Mingyangs gross margins are adjusted for warranty provisions (3.3% of revenue) ** Sinovels future forecasts are based on consensus estimates Source: Company data, CCBIS
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(initiation)
Sector Rating:
Neutral
(initiation)
Price: Target:
HK$12.54 HK$15.60
(initiation)
Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) Expected return (%) 1 year Closing price on 1 April 2011 HK$10.52-19.30 HK$17,243/US$2,216 1,375 85 8.3 24
Source: Bloomberg
Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com
Alan Lau
(852) 2533 2479 alanlau@ccbintl.com
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Financial analysis
Revenue mix and growth
CHSTs principle product is wind gearboxes used in wind turbines, which accounted for 74% of its revenue in 2010. We expect wind gearboxes to remain CHSTs largest sales contributor, accounting for c.70% of total revenue in 2011F-2012F. Revenue contribution
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2009
Wind Gear Marine Gear
2010
Rail Gear
2011F
Others
2012F
We forecast that CHSTs overall revenue will grow 25% YoY in 2011F and 7% YoY in 2012F. We believe that growth will be mainly driven by wind gearboxes and marine gearboxes. Our wind gearbox revenue growth estimate of 3% YoY for 2012F is conservative, and assumes no capacity expansion, no introduction of new wind products and no ASP increase from product mix improvement. Our 2012F estimate does, however, include an increase in sales in yaw motors and drive products. On the back of our conservative assumptions for 2012F wind revenue growth, we forecast CHSTs revenue growth will slow from 72% CAGR in 2007-2009, to 16% CAGR in 2010-2012F.
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43 12 154 3 31
25 55 98 20 25
3 18 80 17 7
52 12 0 36
67 4 0 29
74 3 0 23
74 4 1 21
71 4 1 24
10% 5% 0% 2009
Marine Gear
2010
Rail Gear
2011F
Others
2012F
Gross margin
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Operating expenses
The companys operating expenses comprise distribution costs, administrative expenses and R&D cost. Due to stable cost management of CHST, we expect operating expenses over sales to remain stable in 2011F-2012F at 10%, a slight drop from 11% in 2010 due to savings from distribution costs for wind products. Operating expenses
2008 Distribution costs Administrative expenses Research development costs Total YoY (%) Operating expense as % of revenue Distribution costs Administrative expenses Research development costs Overall Source: Company data, CCBIS estimates 107 284 55 447 16 2009 139 318 70 528 18 2010 287 460 50 798 51 2011F 278 570 111 959 20 2012F 274 646 120 1,040 8
3 8 2 13
2 6 1 9
4 6 1 11
3 6 1 10
3 6 1 10
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0.90 0.85 0.80 0.75 0.70 0.65 0.60 2008 2009 2010 2011F 2012F
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Working capital
In general, we expect CHST to continue improving its working capital position in 2011F-2012F and estimate CHSTs cash conversion cycle will shorten from 101 days in 2010 to 55 days and 40 days in 2011F and 2012F, respectively. We saw a surge in accounts receivable days in 2010 due to incidences with customers including GE and Sinovel. However, we believe that the problems have been resolved and we now forecast an improvement in accounts receivable days going forward. Turnover days
(days) Inventory turnover Accounts receivable turnover Accounts payable turnover Cash conversion Source: Company data, CCBIS estimates 2008 148 103 239 11 2009 128 126 174 80 2010 92 159 150 101 2011F 115 125 185 55 2012F 110 120 190 40
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2009
2010
2011F
Cash flow from financing activities
2012F
Net cash flow
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WTG component manufacturers China High Speed Transmission Hansen Transmission Taewoong Hyunjin Materials 658 HK HSN LN 044490 KS 053660 KS O NR NR NR 12.54 49.50 52,300 17,100 2,217 534 796 232 9.6 N/A 42.7 N/A 10.1 N/A 22.3 10.9 9.4 N/A 16.0 7.6 (5) N/M 79 N/M (2.1) N/M 0.3 N/M 1.8 0.6 2.1 1.3 1.7 0.6 2.0 1.2 1.5 0.6 1.8 1.0 18.7 (1.7) 2.9 (12.8) 16.9 (1.5) 5.5 (1.0) 16.2 0.9 9.3 10.8
WTG manufacturers Xinjiang Goldwind - H share 2208 HK O 14.56 7,858 14.6 13.2 12.9 Xinjiang Goldwind - A share 002202 CH NR 20.65 7,857 N/A 16.9 13.4 Sinovel Wind 601558 CH NR 74.14 11,381 23.4 20.6 17.0 China Ming Yang Wind Power MY US N 10.52 1,315 12.3 8.4 7.1 Vestas VWS DC NR 223.30 8,685 38.9 20.2 15.8 Gamesa GAM SM NR 7.37 2,576 18.6 18.6 18.6 Repower RPW GR NR 145.00 1,900 22.9 25.7 21.5 Nordex NDX1 GR NR 8.26 786 26.6 27.9 21.0 Suzlon SUEL IN NR 44.60 1,778 N/A N/A 24.3 Dongfang Electric 1072 HK NR 26.70 8,237 17.3 14.0 11.8 Shanghai Electric 2727 HK NR 3.96 13,355 15.2 13.3 12.0 All prices are as of 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS
1.3 0.7 1.5 0.2 0.2 0.6 (2.3) (6.2) N/M 0.6 0.9
2.4 N/A 13.9 2.4 2.2 1.1 2.8 1.5 1.1 2.4 1.6
2.3 3.6 4.1 1.9 2.0 1.1 2.7 1.5 1.1 3.0 1.4
2.0 2.8 3.3 1.5 1.8 1.0 2.5 1.4 1.1 2.4 1.3
16.7 17.1 39.1 24.6 77.5 19.9 19.8 22.6 5.9 11.1 3.1 4.2 11.6 10.6 5.9 4.6 (12.9) (12.2) 33.0 24.5 11.3 11.0
15.4 21.9 20.5 21.0 12.7 5.6 11.5 6.0 3.8 23.0 11.0
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WACC (%) 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 10.0 10.1 10.2 Source: CCBIS
Sum of PV (RMB m) 9,530 9,490 9,451 9,413 9,374 9,336 9,298 9,260 9,222 9,185 9,148 9,111 9,074 9,038 9,002 8,966 8,931 8,895 8,860 8,825 8,791
PV of TV (RMB m) 13,312 13,034 12,763 12,500 12,244 11,996 11,754 11,519 11,291 11,068 10,852 10,641 10,436 10,236 10,041 9,851 9,666 9,485 9,309 9,138 8,970
EV (RMB m) 22,842 22,524 22,214 21,912 21,618 21,332 21,052 20,779 20,513 20,253 20,000 19,752 19,510 19,274 19,043 18,817 18,596 18,381 18,170 17,963 17,761
Shares (m shares) 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458
WACC calculation Equity Beta Risk-free rate (%) Equity risk premium (%) Country risk premium (%) Cost of equity (%) Cost of debt (%) Debt/capital (%) Tax (%) WACC (%) Terminal growth rate (%) 0.94 3.92 6 1 11 7 30 15 9.1 1
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Risks
Wind policy changes: As an upstream key component supplier to the wind industry, CHST sales orders are highly sensitive to WTG demand, which, in turn, is very dependent on the prevailing Chinese government wind policies. Chinas WTG installation grew at a 120% CAGR in 2006-2009 thanks to Chinas target of generating 15% of total energy from renewable energy by 2020. We believe policy changes could have both positive and negative impacts to the WTG manufacturing industry and our earnings estimates. Development of direct-drive WTG: The direct-drive WTG does not employ a gearbox component and its market share is a sliver next to the market share of the mainstream gearbox-using doubly fed WTGs. Among the top manufacturers in the Chinese WTG market, only Goldwind and Xemc produce direct drive WTGs. In our opinion, CHSTs future wind gearbox sales growth is dependent on technology trend development. However, there is currently no apparent operational benefit for one technology over the other. Overall, technology developments could have both positive and negative implications for our earnings estimates depending on the choices made by wind farm operators over time. Key component shortage: One of the key components of gearboxes is the main bearing. Due to the limited number of suppliers of this part in the Chinese market, CHST relies on global suppliers such as FAG, SKF and Timken for its main bearing supply. Supply of main bearings can be precarious at times. In fact, market supply of main bearings experienced shortages in 2007-2008 due to rapid growth in WTGs. At the moment, no large Chinese main bearing supplier has the technology and capacity to replace overseas suppliers, so we expect CHST to continue to rely on these major global suppliers for its main bearing supply, resulting in a potential slowdown in sales growth in times of rapid WTG growth due to limited component supply. Raw material cost fluctuations: CHSTs raw materials include cast iron, forged steel and other spare parts such as bearings and steel plates. According to management, raw materials accounted for approximately 77% of total cost of sales in 2010. Price fluctuations in forged steel and other major raw materials could lead to both upside and downside surprises in our cost and earnings estimates. Product diversification: Although wind gear sales currently account for approximately 70-75% of CHSTs total revenue, the company is keen on developing new production lines like wind control systems, high speed rail products, numerical control systems and coal and agricultural machinery. New products require investment and time for market acceptance to gain market share. We think the launch of new production lines is positive to CHSTs development because these new lines can reduce the companys dependence on wind gear sales and wind sector growth, though they entail the risk of product failure in the product launching period.
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Company profile
Company history
CHST is one of the leading mechanical transmission equipment producers in China, according to China Gear Industry Yearbook 2010. CHSTs major operational subsidiary, Nanjing High Speed & Accurate Gear (Group) Co., Ltd (NGC), was founded in 1969 with the name Nanjing Machine Tool Repairing Plant. In 1976, the company was transformed into a professional gear manufacturer and renamed Nanjing Gear Box Factory. In 2001, the company evolved once again, this time in to an incorporated (private) company and renamed NGC. The listed holding company CHST was incorporated in 2005 and acquired a stake in NGC in 2006. CHST successfully listed on the Main Board of the Stock Exchange of Hong Kong in July 2007. Major milestones
Date 1969 1976 1997 2001 Development Established in Nanjing through the merger of Second Machinery Maintenance Station of Nanjing and Nanjing Mechanic School; began mechanical transmission equipment production business
Transformed into a professional gear manufacturer and renamed Nanjing Gear Box Factory Obtained ISO9001 certificate for product quality management system Established NGC after restructuring of Nanjing Gear Box Factory, and injected the mechanical transmission equipment production business into NGC 2006 Began marine gear transmission production and mass production of wind gear transmission equipment 2007 Successfully listed on the Main Board of the Stock Exchange of Hong Kong 2009 Began production of transmission equipment for high-speed locomotives, metros and urban light rail systems 2010 Commenced commercial production of 3.0MW wind gearboxes 2011 Received 150 unit order for 3.0MW main wind gearboxes for offshore wind installation in January 2011 Source: Company data, CCBIS
Business description
CHST is principally engaged in the research, design, development, manufacture and distribution of a broad range of mechanical transmission equipment (gearboxes) used in a variety of industrial applications. CHST acquires raw materials, such as forged steel, cast iron, foundry steel bearings, and steel plates, which it subsequently employs in the manufacture of gears, gear drafts and gear housings. It then assembles the components into gearboxes. The production includes nine fundamental procedures described in the chart below.
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Production procedures
Production facilities
CHSTs production facilities are currently all located in Nanjing, including two wind power gearbox production facilities with total capacity of approximately 12,000MW and three production bases for marine gearboxes, rail gearboxes and other traditional gearboxes. Production facilities
Production base Wind gear transmission equipment I Wind gear transmission equipment II Traditional gear transmission equipment Main product Wind power gearbox with production capacity of about 4,000MW Wind power gearbox with production capacity of about 6,000MW Gear transmission equipment for construction; gearbox transmission equipment for bar-rolling, wire-rolling and plate-rolling mills of metallurgy industry; gear transmission equipment for plate-rolling General purpose gearbox; standard gearbox Marine transmission system: pitch propeller, marine gearbox, tunnel thruster, hydraulic coupling, full circle swinging Plant size (sq. m) 172,000 266,000 110,000
Traditional gear transmission equipment Marine gear transmission equipment Source: Company data, CCBIS
69,000 67,000
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Product offerings
CHSTs products are used in various industries, including wind power generation, marine vessels, rail transport, aerospace, metallurgy, petrochemicals, construction and mining. Wind gearboxes have been the companys largest source of revenue over the past few years, with an increasing share of company revenue. Wind gear transmission equipment has contributed approximately 74% of 2010 revenue. Other major product groups include marine gearbox, rail gearbox, and other traditional products, accounting for 3%, 1% and 22% of CHSTs 2010 revenue, respectively. Revenue contribution by product
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 Wind Gear 2008 Marine Gear 2009 Rail Gear 2010 Other Traditional Gear
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The 1.0MW-1.5MW gearbox series is currently the main wind gear transmission equipment produced by the company, accounting for 80% of CHSTs wind product revenue in 2010. Revenue contribution by wind gear transmission equipment
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2MW gearbox 2008 1.0,1.3,1.5MW gearbox 2009 750,850kW gearbox 2010 Yaw motor & drive Pitch
Product development
Historically, CHST concentrated its efforts on building up its product portfolio and enhanced product quality through joint development and cooperation with customers, which are global leaders in their respective fields. CHST jointly developed its 1.5MW wind gearboxes with GE Wind, the largest WTG manufacturer in the US market and one of CHSTs largest customers. CHST is currently developing 2.5MW wind gearboxes for GE in expectation of receiving product certification. CHST also jointly developed 3MW gearboxes for hybrid-direct-drive WTGs with Goldwind in 2009-2010. The company jointly developed 570km/h high-speed train gears with Alstom, a French-based company specializing in manufacturing high speed rail components, such as rolling stock, infrastructure and information systems. CHST has also set up a jointly controlled company with ZF Friedrichshafen AG, a German-based marine gearbox manufacturer, to produce marine gear transmission equipment. CHST launched a new numerical control series product line in 1H10. According to management, CHST is developing other new products, such as wind control systems, transmission equipment for coal-mining and high-end agricultural transmission equipment. Although we do not expect near-term financial contribution from these new product lines, we believe new product development will be positive for the companys long-term growth profile, particularly post 2011.
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Customer profile
CHST sells gearboxes to domestic Chinese customers as well as overseas customers. Since 2004, the company has developed long-term business relationships with leading WTG manufactures in China, including Goldwind, Shanghai Electric, Dongfang Electric, China Guodian United Power, Sinovel and Mingyang. It also sells wind gearboxes to global leading WTG manufacturers, including GE, Vestas, Nordex, REpower and Fuji Heavy. In 2009, the company co-developed high-speed train gears with Alstom and has provided them with rail gearboxes since. Customer profile
Major suppliers
CHSTs raw material is high-end forge steel and main bearings. To better control the cost and quality of its forge steel supply, CHST acquired a 50% stake in Jiangsu Hongsheng in 2008. We estimate that Jiangsu Hongsheng currently accounts for 70% of CHSTs forge steel demand. Moreover, after experiencing prolonged shortages of main bearings in 2006-2008, CHST signed a long-term supply contract with SKF to secure main bearings at predetermined fixed prices in 2009-2011. Besides, CHST also procures main bearings from FAG, SFK and Timken.
Major competitors
CHSTs major competitors include wind gearbox manufacturers, such as Winergy, Hansen Transmission, Sew-Eurodrive, Flender Holding GmbH, Chongqing Gearbox, and Hangzhou Advance Gearbox. Accordingly, CHST is the second-largest wind gearbox manufacturer globally in 2010, while Winergy and Hansen were the largest and third-largest wind gearbox manufacturers globally.
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Shareholding structure
CHSTs largest shareholder is Fortune Apex Limited, owning 15.4% of its total shares as of March 2011. Fortune Apex Limited is mainly owned by company executive directors.
Chen Yongdao
47
Lu Xun
55
Executive Director
56 40
Liao Enrong
49
Executive Director
45 51
Zhu Junsheng
70
Independent Non-executive Director Independent Non-executive Director Chief Financial Officer and Company Secretary
Chen Shimin
51
47
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Financial summary
Income statement forecasts
FYE 31 Dec (RMB m) Revenue Cost of goods sold Gross profit Other income Selling and distribution expenses Administrative expenses R&D expenses Operating profit EBIT Depreciation and amortisation EBITDA Net interest expense Share of results of an associate Extraordinary items Profit before tax Taxation Net profit after tax Minorities Reported net profit after tax Dividends Transfer to reserves Normalized net profit after tax 2009 5,647 (3,786) 1,861 (139) (318) (70) 1,334 1,334 221 1,554 (74) 16 (110) 1,166 (200) 966 (1) 965 (327) 638 965 2010 7,393 (5,094) 2,299 (287) (460) (50) 1,501 1,501 376 1,878 (116) 41 223 1,650 (257) 1,393 10 1,403 (471) 933 1,403 2011F 9,267 (6,646) 2,621 (278) (570) (111) 1,662 1,662 452 2,114 (137) 46 128 1,699 (264) 1,435 0 1,435 (488) 947 1,435 2012F 9,959 (7,116) 2,843 (274) (646) (120) 1,803 1,803 510 2,314 (164) 50 137 1,826 (284) 1,542 0 1,542 (524) 1,017 1,542
Financial ratios
FYE 31 Dec (RMB m) Profitability (%) EBIT margin EBITDA margin Net margin ROE Growth (%) Revenue EBIT EBITDA Net profit growth Valuation and ratio analysis (x) Normalized PER Reported PER Dividend yield Price/cash flow PBV EV/EBIT EV/EBITDA Liquidity and leverage (%) Current ratio Interest cover (x) Gearing ratio Net gearing ratio 2009 23.6 27.5 17.1 21.7 64.2 119.3 144.5 39.4 13.6 13.6 2.5 N/A 3.0 10.9 9.3 1.5 18.1 58 47 2010 20.3 25.4 19.0 18.7 30.9 20.8 12.6 44.3 9.6 9.6 3.5 8.2 1.8 9.7 7.7 1.6 13.0 43 15 2011F 17.9 22.8 15.5 16.9 25.4 12.6 10.7 3.0 10.1 10.1 3.4 26.2 1.7 8.7 6.9 1.7 12.1 55 23 2012F 18.1 23.2 15.5 16.2 7.5 9.4 8.5 7.5 9.4 9.4 3.6 20.2 1.5 8.1 6.3 1.7 11.0 52 17
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4 April 2011
Sector Rating:
Neutral
(initiation)
Price: Target:
HK$14.56 HK$16.60
(initiation)
Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) Expected return (%) 1 year Closing price on 1 April 2011 HK$12.2 21.3 HK$61,118/US$7,855 2,695 92 5.3 14
Source: Bloomberg
Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com
Alan Lau
(852) 2533 2479 alanlau@ccbintl.com
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4 April 2011
Financial analysis
Revenue
We forecast Goldwinds top-line growth to continue in 2011F and 2012F at 23% YoY and 4% YoY, respectively. We believe Goldwinds revenue growth in 2010-2012F will be volume driven and expect its blended ASP of WTGs to decline 14% YoY and 11% YoY in 2011F and 2012F, respectively. Assuming its market share in China will increase and overseas sales will expand, we expect Goldwinds shipment growth to reach 45% YoY in 2011F and 15% YoY in 2012F. Goldwinds principal product, the 1.5MW WTG, contributed 94% of company revenue in 2010. We expect the 1.5MW WTG to continue to be its principal revenue contributor through 2012F. Despite production and shipments of 2.5MW WTG in 2011F and 2012F, we believe the 2.5MW WTG still requires one-to-two more years to gain market acceptance. Besides WTG sales, the company also generates revenue from wind power services and wind farm development. These two business lines aggregately accounted for approximately 3% of total revenue in 2010, and we expect revenue contribution (as share of overall revenue) to remain stable in 2011F and 2012F. Revenue trend
RMB m 25,000 20,000 15,000 10,000 5,000 0 2008 750 kw revenue Others 2009 1.5MW revenue Sales from wind power service 2010 2011F 2.5MW revenue Sales from wind farm development 2012F
1.5MW WTG
1.5MW WTG is currently the dominant product in the Chinese WTG market and Goldwinds core product since 2009. The product accounted for 94% of total revenue in 2010. We estimate this will gradually fall to 75% in 2011F and 63% in 2012F to be replaced by the sale of the new 2.5MW WTG. We expect product shipments to reach 4,525MW in 2011F, representing 18% YoY growth from 3,851MW in 2010, followed by a slight fall to 4,435MW or a 2% YoY decline in 2012F. Due to intensifying competition, we forecast that the ASP of 1.5MW WTG will fall from RMB4,253 per kW in 2010 to RMB3,555 per kW in 2011F and RMB3,164 per kW in 2012F. Based on our assumptions for ASP and shipment volume, we project revenue from 1.5MW WTG to decline by 2% YoY to RMB16.09b in 2011F and by 13% YoY to RMB14.03b in 2012F.
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2.5MW WTG
The company began delivering the 2.5MW WTG in 2H10. We expect the product to earn a pricing premium over the 1.5MW WTG as it is an advanced model. We forecast shipment volume of the 2.5MW WTG to grow significantly, from 2.5MW in 2010 to 1,125MW in 2011F and 2,250MW in 2012F. Despite our assumption for rapid volume growth YoY over the next two years, we believe that 1.5MW WTG will remain Goldwinds dominant product through 2012F as more time is needed for the new 2.5MW WTG product to gain market acceptance. We expect revenue contribution from 2.5MW WTG to grow from 0.07% in 2010 to 21.00% in 2011F and 34.00% in 2012F. We believe an ASP drop for WTGs is inevitable given the market trend, even for advanced 2.5MW WTG models. We forecast product ASP to fall from RMB4,800 per kW in 2010 to RMB3,984 per kW in 2011F and RMB3,370 per kW in 2012F. According to our estimate, due to rapid shipment volume growth in 2011F and 2012F, we forecast revenue contribution from the 2.5MW WTG to ramp up from RMB12m in 2010 to RMB4.48b in 2011F, and grow 69% YoY to RMB7.58b in 2012F.
5,000
4,500
4,000
3,500
750kW WTG
1.5MW WTG
2.5MW WTG
Blended ASP
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4 April 2011
1,138 854 3,868 3,301 31 346 519 5,327 2,765 468 0 0 0 0 N/M 233 1,373 6,299 110 30 88 6,417 113
592 444 3,941 1,750 (47) 1,061 1,592 5,333 8,487 207 0 0 0 0 N/M 110 2,036 10,347 64 215 104 10,667 66
205 154 3,522 542 (69) 2,567 3,851 4,253 16,374 93 1 3 4,800 12 N/M 77 4,007 17,005 64 293 178 17,475 64
200 150 3,274 491 (9) 3,017 4,525 3,555 16,086 (2) 450 1,125 3,984 4,482 37,250 0 5,800 21,059 24 215 215 21,489 23
0 0 3,126 0 (100) 2,956 4,435 3,164 14,030 (13) 900 2,250 3,370 7,584 69 0 6,685 21,614 3 334 334 22,282 4 13
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4 April 2011
Management estimate
Acquired 2 blade factories in 2010, target to produce 800-1,000 blades in 2011, around 10% of supply 100% in 2011F-2012F 60-70% by 2011F Obtained license from Infeneon Technologies (IFFNY US, Not Rated), to produce 100% of insulated-gate bipolar transistor (IGBT) from 2011.
27 26 27
100 50 Nil
Besides acquisitions, the company owns a 35% equity interest in each of its component suppliers, Jianxi Jinli Mag Rare-Earth and Jiangsu Chengfeng New Material Technology, which supply neodymium for its permanent magnet generators and epoxy-glue for its rotor blades, respectively. We expect Goldwind to reduce costs and receive supply priority from these major component suppliers. WTG cost of sales trend
RMB / kW 5,000
4,500 4,000 3,500 3,000 2,500 2,000 2008 2009 750kW WTG 1.5MW WTG 2010 2.5MW WTG 2011F Blended cost of sales 2012F
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4 April 2011
0 2008 750kW WTG 2009 1.5MW WTG 2010 2.5MW WTG 2011F Others WTG 2012F Gross margin
0%
Operating expenses
Operating expenses mainly include product warranty provisions, delivery charges, R&D, depreciation and amortization and labor cost. It accounted for approximately 10% of revenue in 2008-2010. We expect company warranty provision policy and operating expenses to maintain in the near future and assume operating expenses will continue to account for 10% of the revenue in 2011F-2012F.
20% 16%
3,500 3,000 2,500 2,000 1,500 1,000 500 0 2008 2009 2010 Operating profit 2011F Operating margin 2012F 0% 8%
12%
4%
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4 April 2011
Working capital
Goldwind has a relative stable cash conversion cycle at approximately 58 and 57days in 2009 and 2010, respectfully, and we forecast it to maintain at approximately 39 days in 2011F and 2012F each. Turnover days
(days) Inventory turnover Accounts receivable turnover Accounts payable turnover Cash conversion Source: Company data, CCBIS estimates 2008 158 149 190 117 2009 132 100 174 58 2010 119 158 221 57 2011F 110 150 221 39 2012F 110 150 221 39
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WTG component manufacturers China High Speed Transmission Hansen Transmission Taewoong Hyunjin Materials 658 HK HSN LN 044490 KS 053660 KS O NR NR NR 12.54 49.50 52,300 17,100 2,217 534 796 232 9.6 N/A 42.7 N/A 10.1 N/A 22.3 10.9 9.4 N/A 16.0 7.6 (5) N/M 79 N/M (2.1) N/M 0.3 N/M 1.8 0.6 2.1 1.3 1.7 0.6 2.0 1.2 1.5 0.6 1.8 1.0 18.7 (1.7) 2.9 (12.8) 16.9 (1.5) 5.5 (1.0) 16.2 0.9 9.3 10.8
WTG manufacturers Xinjiang Goldwind - H share 2208 HK O 14.56 7,858 14.6 13.2 12.9 Xinjiang Goldwind - A share 002202 CH NR 20.65 7,857 N/A 16.9 13.4 Sinovel Wind 601558 CH NR 74.14 11,381 23.4 20.6 17.0 China Ming Yang Wind Power MY US N 10.52 1,315 12.3 8.4 7.1 Vestas VWS DC NR 223.30 8,685 38.9 20.2 15.8 Gamesa GAM SM NR 7.37 2,576 18.6 18.6 18.6 Repower RPW GR NR 145.00 1,900 22.9 25.7 21.5 Nordex NDX1 GR NR 8.26 786 26.6 27.9 21.0 Suzlon SUEL IN NR 44.60 1,778 N/A N/A 24.3 Dongfang Electric 1072 HK NR 26.70 8,237 17.3 14.0 11.8 Shanghai Electric 2727 HK NR 3.96 13,355 15.2 13.3 12.0 All prices are as of 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS
1.3 0.7 1.5 0.2 0.2 0.6 (2.3) (6.2) N/M 0.6 0.9
2.4 N/A 13.9 2.4 2.2 1.1 2.8 1.5 1.1 2.4 1.6
2.3 3.6 4.1 1.9 2.0 1.1 2.7 1.5 1.1 3.0 1.4
2.0 2.8 3.3 1.5 1.8 1.0 2.5 1.4 1.1 2.4 1.3
16.7 17.1 39.1 24.6 77.5 19.9 19.8 22.6 5.9 11.1 3.1 4.2 11.6 10.6 5.9 4.6 (12.9) (12.2) 33.0 24.5 11.3 11.0
15.4 21.9 20.5 21.0 12.7 5.6 11.5 6.0 3.8 23.0 11.0
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4 April 2011
WACC (%) 5.9 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 Source: CCBIS
Sum of PV (RMB m) 8,381 8,347 8,313 8,279 8,246 8,212 8,179 8,146 8,114 8,082 8,049 8,018 7,986 7,955 7,923 7,892 7,862 7,831 7,801 7,771 7,741
PV of TV (RMB m) 29,732 28,893 28,089 27,319 26,580 25,870 25,188 24,532 23,901 23,294 22,709 22,146 21,602 21,078 20,572 20,084 19,612 19,155 18,714 18,287 17,874
EV (RMB m) 38,113 37,240 36,402 35,598 34,825 34,082 33,367 32,679 32,015 31,376 30,759 30,163 29,588 29,033 28,496 27,976 27,473 26,987 26,515 26,058 25,615
Shares (m shares) 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695
WACC Calculation Equity beta Risk-free rate (%) Equity risk premium (%) Country risk premium (%) Cost of equity (%) Cost of debt (%) Debt/capital (%) Tax (%) WACC (%) Terminal growth rate (%) 0.52 3.92 6 1 7 7 30 15 6.8 1
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4 April 2011
Risks
Launch of new product model: Goldwind has announced plans to develop 3.0MW and larger capacity WTGs using hybrid drive technology. Because hybrid drive WTGs have yet to enter the market, we are unsure of the markets response to the new technology. However, if the market response is better than expected, it may bring potential upside to our earnings estimate. Overseas market expansion: Goldwinds management expressed its plan to deliver WTGs overseas to North America, Europe and Africa. To expand overseas, the company will have to incur significant investment to build its brand, establish delivery and originate after-sales service teams. Operating in foreign countries may incur additional costs entailed by complying with local legal requirements and meeting certain financial requirements for wind project investments. That said, expanding overseas market may also allow the company to diversify its customer portfolio and obtain a higher return. The move could be beneficial to the company in the long run, if successfully implemented. Wind policy changes: Demand for WTG highly susceptible to the Chinese government wind policy. For the past few years, Chinas WTG installation grew at a 120% CAGR in 2006-2009 thanks to Chinas target to generate 15% of total energy from renewable energy by 2020. We think policy changes could have both positive and negative impact to the WTG manufacturing industry and our earnings estimate. Competition in China: Competition in the Chinese WTG market has increased since the listing of top domestic WTG manufacturers, including Sinovel (A-shares), Goldwind (A+H shares) and Mingyang (US listed). By listing, these companies improve corporate governance and provide cash for technology, production and distribution upgrades. In order to gain market share, WTG manufacturers compete by launching new products and lowering ASP, resulting in downward pressure on Goldwind earnings if it is unsuccessfully in implementing cost-cut measures and maintaining gross and operating margins. At the same time, it may become an opportunity for market share expansion in the long term if less-competitive WTG suppliers leave the market.
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4 April 2011
Company profile
Company history
Goldwind is Chinas second-largest and the worlds fifth-largest WTG manufacturer in 2010, accounting for 21% of Chinas installed capacity according to CWEA. It is also engaged in the provision of wind power services and the development of wind farms for sale to wind farm operators. Founded in February 1998, Goldwind has one of the richest operating histories among Chinese wind turbine manufacturers. It successfully made its initial public offering on the Shenzhen Stock Exchange in December 2007 and a secondary listing on the Main Board of the Stock Exchange of Hong Kong in October 2010. Goldwind has sales network in four main regions of China, namely (1) Inner Mongolia, (2) northeast China, (3) northern China, and (4) northwest and south China. Further afield, it began distributing wind turbines in the US and Germany and also established branches in Australia. Major milestones
Year 1998 Development Xinjiang New Wind, Goldwinds predecessor company, was established in Urumqi, Xinjiang, by Xinjiang Wind Power; Developed its 600kW wind turbine.
Developed 650kW wind turbines; Obtained the ISO9001 certification. 2001 Changed its name to Xinjiang Goldwind Science & Technology Co., Ltd; Developed 750kW wind turbines. 2002 Established production base in Urumqi, Xinjiang 2003 Obtained the ISO9001:2000 certification 2004 Establishment of the National Wind Power Engineering Technology Research Centre 2005 Developed 1.2 MW wind turbines 2006 Received the "2006 World Wind Energy Award" from the World Wind Energy Association; Ranked 10th-largest wind turbine manufacturer globally. 2007 Listed on the SZSE with stock code 0002202; Established production base in Beijing; Began selling 1.5MW direct-drive permanent magnet wind turbines. 2008 Established production base in Baotou, Inner-Mongolia; Acquired Vensys AG, a research company based in Germany; Launched its 1.5MW wind turbine to the European market. 2009 Developed 2.5MW direct-drive permanent magnet wind turbine; Developed 3.0MW hybrid-drive wind turbine. 2010 Installed three 1.5MW wind turbines on Uilk wind farm in Minnesota, US; Established production base in Neunkirchen, Germany; Launched 2.5MW direct-drive permanent magnet wind turbines; Commenced development of 6.0MW wind turbine; Listed on the Main Board of the Stock Exchange of Hong Kong with stock code 2208 HK; Won bid in Illinois, US under Shady Oaks, a wind farm wholly owned by Goldwind. The plant will install 70 turbines of 1.5MW, all from Goldwind, and is expected to generate electricity in 2012. 2011 Signed a supply contract with HydroChina International for wind farm projects in Adama, Ethiopia, Africa. The contract includes 34 units of its1.5MW direct-drive permanent magnet wind turbine, which will be delivered in three batches between March and June 2011. Source: Company data, CCBIS
2000
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4 April 2011
The companys main product, which can be used both on-shore and off-shore. Launched in the second half of 2010 and currently an advance product to the mainstream 1.5MW WTGs in the China market. The product can be used both on-shore and off-shore. 3.0MW hybrid-drive WTG Adopts the hybrid of direct-drive and conventional gearbox technology. The prototype has been successfully developed but has not yet begun mass production. 6.0MW WTG Currently under development. Source: Company data, CCBIS
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4 April 2011
Impeller 12%
Production facilities
Goldwinds production bases are located in Chinas northern and coastal regions where Chinese wind farms are concentrated. Up to December 2010, the company had total production capacity of 4,300 units of 1.5MW/2.5MW WTG, 2,500 units of turbine rotor and nacelle, 1,000 units of generators and 3,000 units of electric control system.
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4 April 2011
Germang Neunkirchen Base Shaanxi Xian Base Jiangsu Nanjing Base Jiangsu Dafeng Base Total
Other businesses
Other businesses of Goldwind include the provision of wind power services and the development of wind farms for sale to wind farm operators, which together accounted for 3% of total revenue in 2010.
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4 April 2011
Customer profile
Goldwind's major customers are large wind farm operators in China. Its five-largest customers are China Guangdong Nuclear Wind Power, Gansu China Power Jiuquan Fourth Wind Power, Wind Power Guazhou of China Hydropower Consulting Group, Longuuan, and Gansu Jiuquan Huineng. Together, their sales account for over 30% of Goldwinds total sales revenue in 2010. The company is keen to expand its customer base to overseas markets. It began installing WTGs in a wind farm in Minnesota and won a bid to provide wind turbines to a wind farm in Illinois. Currently, Goldwind has representative offices in the US, Germany and Australia.
Shareholder structure
Goldwind has 2,695m shares outstanding as of end-March 2011, of which 81% are A-shares and 19% H-shares. Shareholder structure (March 2011)
Other H share holders, 17.06%
CB Fund, 5.99%
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4 April 2011
Wei Hongliang
38
75 51 47 75 69
35 40 47
36 40 49 44
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4 April 2011
Financial summary
Income statement forecasts
FYE 31 Dec (RMB m) Revenue Cost of goods sold Gross profit Other income Selling and distribution expenses Administrative expenses Research and development expenses Operating profit EBIT Depreciation and amortisation EBITDA Net interest expense Share of results of an associate Extraordinary items Profit before tax Taxation Net profit after tax Minorities Reported net profit after tax Dividends Transfer to reserves Normalized net profit after tax 2009 10,667 (7,909) 2,758 312 (690) (276) (77) 2,026 2,026 (82) 2,108 (39) 4 21 2,011 (200) 1,812 (45) 1,766 (540) 1,226 1,746 2010 17,475 (13,454) 4,021 637 (1,096) (418) (272) 2,872 2,872 (167) 3,039 (88) 16 10 2,810 (416) 2,394 (122) 2,272 (2,540) (268) 2,262 2011F 21,489 (17,047) 4,442 705 (1,289) (494) (301) 3,084 3,084 (301) 3,385 (33) 37 0 3,088 (463) 2,625 (131) 2,494 (857) 1,637 2,494 2012F 22,282 (17,401) 4,882 655 (1,337) (512) (312) 3,375 3,375 (312) 3,687 (33) 37 0 3,379 (676) 2,703 (135) 2,568 (514) 2,054 2,568
Financial ratios
FYE 31 Dec (RMB m) 2009 2010 16.4 17.4 13.0 16.7 63.8 41.8 44.2 28.6 14.6 14.5 7.7 6.6 2.4 17.9 16.9 1.8 32.6 22 Net cash 2011F 14.4 15.8 11.6 17.1 23.0 7.4 11.4 9.8 13.2 13.2 2.6 N/A 2.3 16.7 15.2 1.5 94.8 20 Net cash 2012F 15.1 16.5 11.5 15.4 3.7 9.4 8.9 3.0 12.9 12.9 1.6 N/A 2.0 15.2 14.0 1.5 101.6 17 Net cash Profitability (%) EBIT margin 19.0 EBITDA margin 19.8 Net margin 16.6 ROE 32.0 Growth (%) Revenue 66.2 EBIT 73.3 EBITDA 69.3 Net profit growth 94.3 Valuation and ratio analysis (x) Normalized PER 15.7 Reported PER 15.5 Dividend yield 2.0 Price/cash flow 25.2 PBV 5.0 EV/EBIT 25.4 EV/EBITDA 24.4 Liquidity and leverage (%) Current ratio 1.6 Interest cover (x) 52.1 Gearing ratio 47 Net gearing ratio Net cash Source: Company data, CCBIS estimates
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4 April 2011
(initiation)
Sector Rating:
Neutral
(initiation)
Price: Target:
US$10.52 US$11.00
(initiation)
Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) Expected return (%) 1 year Closing price on 1 April 2011 US$9.19 14.48 US$1,315 125 100 0.3 5
Source: Bloomberg
Reported net profit (RMB m) (494) (221) Normalized EPS (RMB) (4.94) (2.21) Normalized EPS growth (%) N/M N/M PER (x) N/A N/A EV/EBITDA (x) N/A N/A PBV (x) 23.2 12.0 Dividend yield (%) 0.0 0.0 ROE (%) (166.5) (38.4) Net gearing ratio (%) 7.8 Net Cash Source: Company data, CCBIS estimates
Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com
Alan Lau
(852) 2533 2479 alanlau@ccbintl.com
89
4 April 2011
Financial analysis
Revenue
Mingyang commissioned its first WTG in 2008. Until 2010, all of its revenue was generated from Mingyangs 1.5MW WTG. The company launched its SCD 2.5/3.0 WTG in 2010 and successfully delivered two units in the same year. Assuming time is needed for the market to accept the new SCD technology, we estimate that the 1.5MW WTG will continue to be Mingyangs main revenue contributor in 2011F-2012F. We expect Mingyang to have rapid top-line growth of 63% YoY in 2011F and 18% YoY in 2012F on the back of capacity expansion of wind farm operators in China. We forecast total shipment volume to grow from 1,203MW in 2010 to 2,400MW in 2011F and 3,315MW in 2012F, representing year-on-year growth of 99% and 38% in 2011F and 2012F, respectively. Due to the falling WTG ASP industry trend, we forecast blended WTG ASP of the company to decrease in order to maintain competitiveness, from RMB4,587 per kW in 2010 to RMB3,750 per kW in 2011F and RMB3,210 per kW in 2012F. Despite the expected fall in ASP, we expect Mingyangs revenue to ramp up given growth in shipment volume over 2011F-2012F. Revenue trend
RMB m 12,000
10,000 8,000 6,000 4,000 2,000 0 2008 2009 1.5MW WTG 2010 2.5/3.0MW WTG 2011F 6.0MW WTG 2012F
6,000
5,000
4,000
3,000 2008 2009 1.5MW turbines 2010 2011F 2.5/3.0MW turbines 2012F
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4 April 2011
1.5MW WTG
The 1.5MW WTG is Mingyangs main product and accounted for its entire revenue through 2008-2010. We believe the product will continue to be Mingyangs main source of revenue for 2011F-2012F, with an expected shipment volume growth of 75% YoY to 2,100MW in 2011F, from 1,203MW in 2010. We expect ASP for 1.5MW WTGs to face continuous downward pressure, triggered by intense competition among WTG producers in China. We see Mingyang ASP falling 19% YoY in 2011F and 16% in 2012F. Nonetheless, we expect overall product revenue to grow 42% YoY in 2011F due to a rapid increase in its shipment volume.
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Operating expenses
Operating expenses mainly include WTG and component delivery charges, R&D, depreciation and amortization, and labor costs. We expect the company to maintain operating expenses at 6% over revenue in 2011F-2012F, similar to the percentage in 2010.
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decrease from 22x in 2010 to 14x in 2011F and 9x in 2012F, mainly based on our assumption that sales ramp up of SCD WTGs will lag capex growth in the short term. In other words, we believe sales growth of SCD WTG will not be very strong in the early phases of the launching period, so capex growth will exceed sales growth. PPE turnover trend
(x) 25
20
15
10
Working capital
Mingyangs inventory, accounts receivable and accounts payable turnover in 2008 and 2009 was significantly higher than industry peers because the company began to deliver products in 2007 and the commissioning of those products usually takes about a year. Assuming that Mingyang boosts commissioning of wind turbines previously delivered, sales and cost of sales will normalize and stabilize turnover days. Hence, we expect cash conversion days to remain stable at 20 days in 2011F-2012F. Turnover days
(days) Inventory turnover Accounts receivable turnover Accounts payable turnover Cash conversion Source: Company data, CCBIS estimates 2008 1,543 1,156 1,601 1,098 2009 657 506 733 430 2010 156 192 299 48 2011F 140 160 280 20 2012F 140 160 280 20
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WTG component manufacturers China High Speed Transmission Hansen Transmission Taewoong Hyunjin Materials 658HK HSNLN 044490KS 053660KS O NR NR NR 12.54 49.50 52,300 17,100 2,217 534 796 232 9.6 N/A 42.7 N/A 10.1 N/A 22.3 10.9 9.4 N/A 16.0 7.6 (5) N/M 79 N/M (2.1) N/M 0.3 N/M 1.8 0.6 2.1 1.3 1.7 0.6 2.0 1.2 1.5 0.6 1.8 1.0 18.7 (1.7) 2.9 (12.8) 16.9 (1.5) 5.5 (1.0) 16.2 0.9 9.3 10.8
WTG manufacturers Xinjiang Goldwind - H share 2208HK O 14.56 7,858 14.6 13.2 12.9 Xinjiang Goldwind - A share 002202CH NR 20.65 7,857 N/A 16.9 13.4 Sinovel Wind 601558CH NR 74.14 11,381 23.4 20.6 17.0 China Ming Yang Wind Power MYUS N 10.52 1,315 12.3 8.4 7.1 Vestas VWSDC NR 223.30 8,685 38.9 20.2 15.8 Gamesa GAMSM NR 7.37 2,576 18.6 18.6 18.6 Repower RPWGR NR 145.00 1,900 22.9 25.7 21.5 Nordex NDX1GR NR 8.26 786 26.6 27.9 21.0 Suzlon SUELIN NR 44.60 1,778 N/A N/A 24.3 Dongfang Electric 1072HK NR 26.70 8,237 17.3 14.0 11.8 Shanghai Electric 2727HK NR 3.96 13,355 15.2 13.3 12.0 All prices are as of 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS estimates
1.3 0.7 1.5 0.2 0.2 0.6 (2.3) (6.2) N/M 0.6 0.9
2.4 N/A 13.9 2.4 2.2 1.1 2.8 1.5 1.1 2.4 1.6
2.3 3.6 4.1 1.9 2.0 1.1 2.7 1.5 1.1 3.0 1.4
2.0 2.8 3.3 1.5 1.8 1.0 2.5 1.4 1.1 2.4 1.3
16.7 17.1 39.1 24.6 77.5 19.9 19.8 22.6 5.9 11.1 3.1 4.2 11.6 10.6 5.9 4.6 (12.9) (12.2) 33.0 24.5 11.3 11.0
15.4 21.9 20.5 21.0 12.7 5.6 11.5 6.0 3.8 23.0 11.0
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WACC (%) 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 11.0 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 12.0 12.1 Source: CCBIS
Sum of PV (RMB m) 5,911 5,888 5,865 5,843 5,820 5,798 5,776 5,754 5,732 5,710 5,688 5,667 5,645 5,624 5,603 5,581 5,560 5,540 5,519 5,498 5,478
PV of TV (RMB m) 1,508 1,480 1,453 1,427 1,401 1,376 1,352 1,328 1,304 1,281 1,259 1,237 1,216 1,195 1,175 1,155 1,135 1,116 1,097 1,079 1,061
EV (RMB m) 7,419 7,368 7,319 7,270 7,222 7,174 7,127 7,081 7,036 6,991 6,947 6,904 6,861 6,819 6,777 6,736 6,696 6,656 6,616 6,577 6,539
Shares (m shares) 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125
Value per share WACC Calculation (US$) Equity beta 11.5 11.4 11.4 11.3 11.3 11.2 11.1 11.1 11.0 11.0 10.9 10.9 10.8 10.8 10.7 10.7 10.6 10.6 10.5 10.5 10.4 Risk-free rate (%) Equity risk premium (%) Country risk premium (%) Cost of equity (%) Cost of debt (%) Debt/capital (%) Tax (%) WACC (%) Terminal growth rate (%)
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Risks
Launch of a new product model: Mingyang uses doubly-fed induction technology for its 1.5MW WTG model. We believe that execution risks are high for Mingyangs launch of SCD 2.5/3.0MW and 6.0MW WTGs, not only because these are new models and require time for track records to be established, but also because SCD WTGs adopt a disruptively new hybrid-direct-drive and two-blade technology. However, if market response is better-than-expected, it might bring upside surprise to our earnings estimates. Overseas market expansion: Mingyang management has expressed its intention to penetrate overseas markets, including the US. In our view, while overseas markets could provide upside to Mingyangs WTG ASP, the risk inherent in building sales channels in new markets include establishing significantly more expensive after-sale-service workforce overseas and rising exposure to foreign policy changes and foreign currency fluctuations. The impact could be positive or negative depending whether Mingyangs product can meet market expectations, answer foreign customer requirements and adapt to foreign government regulations. Short track record: Mingyang has less than five years of operating history and its WTG has a relatively short track record in comparison with WTGs of other top WTG suppliers, such as Goldwind, Siemens, Vestas and Dongfang Electric. Although Mingyangs WTG has not encountered serious defaults or accidents, its limited track record length may need time to earn larger market acceptance. Vertical integration strategy: Although Mingyang management has experience in the production of WTG components, such as blades and electric control systems, they might encounter problems implementing vertical integration producing other major WTG components such as gearboxes. Depending on the success of Mingyangs component production lines, the vertical integration strategy could bring positive or negative impact to WTG qualities and production costs. Wind policy changes: The demand for WTG can be greatly affected by government wind policy as wind power currently remains dependent on subsidies to be economically viable. For the past few years, Chinas WTG installation has grown at 120% CAGR in 2006-2009 thanks to Chinas target to generate 15% renewable energy of total energy by 2020. We think policy changes could have both positive and negative effects on the WTG manufacturing industry and our earnings estimates. Competition in China: Competition in the Chinese WTG market has been getting more intense due to the listing of top domestic WTG manufacturers, such as Sinovel (A-shares), Goldwind (A+H shares) and Mingyang (US listed). The listing of these companies will improve their corporate governance and provide cash for technology, production and distribution upgrades. In order to gain market share, WTG manufacturers compete by launching new products and lowering ASP. Mingyang will need to successfully implement cost cut measures in order to maintain its gross and operating margins, as earnings will suffer downward pressure if the company fails to do so. However, greater competition may become an opportunity for market share expansion in the long term once less competitive WTG suppliers exit the market.
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Company profile
Company history
On 1 October 2010, Mingyang became the first Chinese WTG manufacturer listed on the New York Stock Exchange. According to CWEA, Mingyang is the fifth-largest WTG manufacturer and largest non-state owned manufacturer in China, with market share of 5.5% in 2010. The company was established in Zhongshan, Guangzhou in 2006. In 2007, it acquired the intellectual property (IP) rights to produce 1.5MW WTGs from Mingyang Electric, its former major shareholder. In addition to IP rights, Mingyang obtained substantial WTG manufacturing technology and experience from Mingyang Electric, which has been manufacturing WTG components since 1995. Major milestones
Date 2006 2007 Development Guangdong Mingyang, Mingyangs predecessor company, was established in Zhongshan, Guangdong province.
Received a statement of compliance from Germanischer Lloyd (GL) certification, an international certification body in the wind power sector, for its MY1.5s model; Began selling MY1.5s WTGs. 2008 Constructed production bases in Xian and Tianjin Jilin production base began production and delivery of MY1.5se turbines. Signed a technology licensing contract with Aerodyn Energiesysteme to build the 2.5/3.0MW super compact drive (SCD) WTG 2009 Established a R&D center in Roskilde, Denmark, with Risoe Wind Energy Laboratory; Received product design certificate from China General Certification Center for its MY1.5se model. The certificate is one of the requirements for WTG manufacturers to receive state funding; Received a statement of compliance from GL certification for its MY1.5se model; Signed a technology licensing contract with Aerodyn Energiesysteme to build the 6.0MW SCD WTG 2010 Completed the prototype SCD 2.5/3.0MW WTG and installed it in Rudong, Shanghai; Listed on the NYSE under the stock symbol MY; Won a 200MW bid (about 67 3.0MW SCD WTG) for Xinjiang Hami wind farm project. 2011 Received a total sales order of 1.1GW in January 2011, of which 200MW for SCD 2.5/3.0MW WTGs. 75% of the orders came from the five-largest wind power generators. Source: Company data, CCBIS
Major products
Currently, the 1.5MW WTG is Mingyangs dominant product. The company customized this product into two separate models, a typhoon resistant model and a cold-weather resistant model. Both 1.5MW models are designed to use three rotor blades, doubly-fed induction generators and a three-stage gearbox. In 2H10, Mingyang developed its SCD WTG, which uses a two-rotor blade design and is equipped with a compact integrated two-stage gearbox and a medium slow-running synchronous generator. Management expects the product to be commercialized in 2011.
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Major products
WTG series MY 1.5s (typhoon resistant) MY 1.5se (cold weather resistant) Features Designed to be installed in costal areas, can survive extreme wind speed as high as 70 meters/sec (156.6 miles/hour). It has a rotor diameter of 73m. Equipped with heaters and designed to generate electricity at temperatures as low as -30C (-22F). Installed in the northern parts of China, such as Jilin and Inner Mongolia. Rotor diameter of 82m. SCD 2.5/3.0MW WTG Designed to be installed in coastal and tidal flat areas. Using a compact gearbox and generator, with an emphasis on reduction of size and weight. The design lowers the bearings operational speed and thus reduces wear of components. Typical weight of a 3.0MW WTG is around 120 tonnes. SCD 6.0MW WTG The product is currently under development. Its prototype is expected to be constructed in 1H11. Source: Company data, CCBIS
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Mingyang has also established research centers in Chinas Guangdong province and Denmark.
Production facilities
Mingyangs production facilities are located in Guangdong, Jilin, Tianjin and Jiangsu. By the end of 2010, Mingyang had annual production capacity of 1,598 units of 1.5MW WTG, 500 units of SCD 2.5/3.0MW WTG, and 2,010 sets of rotor blades. Production facilities (December 2010)
Production base Guangdong Zhongshan headquarters Main product 1.5MW WTG SCD 2.5/3.0MW WTG Rotor blades 1.5MW WTG Rotor blades 1.5MW WTG SCD 2.5/3.0MW WTG Rotor blades 1.5MW WTG SCD 2.5/3.0MW WTG Rotor blades 1.5MW WTG SCD 2.5/3.0MW WTG Rotor blades Source: Company data, CCBIS Annual capacity as at Dec 2010 288 units 200 units 288 units 524 units 672 units 524 units 200 units 570 units 262 units 100 units 480 units 1,598 units 500 units 2,010 units
Total
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Mingyangs
SCD
versus
Goldwinds
Both Mingyangs SCD 3.0MW WTG and Goldwinds hybrid-drive 3.0MW WTG employ a hybrid design of a gearbox and gearless direct drive technology. Since both designs have not yet been introduced commercially, they both have limited track records. The main features of the SCD 2.5/3.0MW WTG include a reduction in size and weight and an improvement in operational reliability. This is achieved by using a compact generator and two-rotor blade design. Weight reduction is possible by decreasing the amount of material inside the nacelle and tower as they are the center of weight in a WTG. Weight is also reduced as a result of removing a rotor blade (two instead of three). WTG weight reduction can help save installation costs. A second feature is the lower bearings operational speed of the two-stage gearbox, which reduces the wear of the gearbox component, thereby increasing operational reliability. Weight comparison between Mingyang, Goldwind and Sinovels 3.0MW WTG
tonnes 500
450 400 350 300 250 200 150 100 50 0 Ming Yang SCD 3.0MW Goldwind hybrid-drive 3.0MW Tower Nacelle Hubs Rotor blades Sinovel 3.0MW
The Goldwind hybrid-drive 3.0MW WTG employs a three rotor blade design. The number of blades balances aerodynamic efficiency, costs and system reliability. Traditionally, WTGs require less rotational speed to yield the same energy output as a three rotor blade design. As a result, the two rotor blade design saves cost but is expected to have a lower aerodynamic efficiency. Summary of comparisons
Goldwind hybrid-drive 3.0MW Length of track record Number of blades Gearbox component Low manufacturing cost Reliability Power generation productivity Low-voltage ride through (LVRT) capability Smaller size and weight Low maintenance cost Source: Company data, CCBIS Mingyang SCD 3.0MW
Three blades
Two blades
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Customer profile
Mingyangs customers include the five-largest Chinese national grid companies (i.e. Huadian, Huaneng, Datang, Longyuan [Guodian] and CPIC) and private sector companies, such as Guangdong Yudean, Beijing Jingneng, Guangdong Shuidian Bureau, Fujian Investment and Development Group, and Inner Mongolia Aode Sente New Energy. In 2009, the five-largest Chinese national grid companies contributed 60% to Mingyangs total annual sales and the private sector companies 26%.
Shareholder structure
Shareholder structure (March 2011)
ICBC Int'l Inv Mgt Ltd, 8.79% Pre-IPO investors (note 1), 24.42%
Public, 20.00%
Note 1: Pre-IPO Investors include Merrill Lynch, SCGC Capital, DT Capital, Mitsui & Co., CCBI and other investors Source: Company data, CCBIS
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Xian Wang
39
Song Wang
46
35 46 41
Xianzhong Zhang
48
Jiawan Cheng
47
Yunshan Jin
44
55 41
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Financial summary
Income statement forecasts
FYE 31 Dec (RMB m) Revenue Cost of goods sold Gross profit Other income Selling and distribution expenses Administrative expenses Research and development expenses Operating profit EBIT Depreciation and amortisation EBITDA Net interest expense Share of results of an associate Extraordinary items Profit before tax Taxation Net profit after tax Minorities Reported net profit after tax Dividends Transfer to reserves Normalized net profit after tax 2009 1,173 (1,097) 76 0 (91) (67) (53) (135) (135) (28) (107) (50) (0) 0 (185) (38) (223) 2 (221) 0 (221) (221) 2010 5,518 (4,430) 1,087 18 (149) (151) (43) 763 765 (43) 808 (34) 3 0 731 (21) 711 (13) 698 0 698 698 2011F 8,999 (7,328) 1,671 45 (292) (115) (45) 1,263 1,263 (45) 1,308 (37) 0 0 1,226 (184) 1,042 (11) 1,032 0 1,032 1,032 2012F 10,641 (8,648) 1,993 53 (372) (160) (53) 1,461 1,461 (53) 1,514 (19) 0 0 1,442 (216) 1,226 (9) 1,217 0 1,217 1,217
Financial ratios
FYE 31 Dec (RMB m) Profitability (%) EBIT margin (11.5) EBITDA margin (9.2) Net margin (18.9) ROE (38.4) Growth (%) Revenue 840.6 EBIT N/M EBITDA N/M Net profit growth N/M Valuation and ratio analysis (x) Normalized PER N/A Reported PER N/A Dividend yield 0.0 Price/cash flow 10.1 PBV 12.0 EV/EBIT N/A EV/EBITDA N/A Liquidity and leverage (%) Current ratio 1.1 Interest cover (x) N/A Gearing ratio 0.3 Net gearing ratio Net Cash Source: Company data, CCBIS estimates 13.9 14.6 12.7 19.8 370.5 N/M N/M N/M 12.3 12.3 0.0 4.9 2.4 11.3 10.7 1.6 22.7 0.1 Net Cash 14.0 14.5 11.5 22.6 63.1 65.1 61.9 47.8 8.4 8.4 0.0 N/A 1.9 6.8 6.6 1.5 34.0 0.1 Net Cash 13.7 14.2 11.4 21.0 18.2 15.7 15.7 17.9 7.1 7.1 0.0 14.1 1.5 5.9 5.7 1.5 76.3 0.0 Net Cash 2009 2010 2011F 2012F
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(initiation)
Sector Rating:
Neutral
(initiation)
Price: Target:
HK$8.47 HK$9.10
(initiation)
Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) Expected return (%) 1 year Closing price on 1 April 2011 HK$6.63 9.28 HK$63,223/US$8,126 7,464 72 12.9 7
Source: Bloomberg
Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com
Alan Lau
(852) 2533 2479 alanlau@ccbintl.com
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Financial analysis
Revenue
Longyuan engages mainly in wind power and coal-fired power generation in China. In 2010, wind power and coal-fired power sales accounted for 43% and 54% of the companys total revenue, respectively. The company is also engaged in power generation from other renewable energy sources, which accounted for 3% of total revenue. Overall, we expect Longyuans total revenue to grow 16% YoY in both 2011F and 2012F. We forecast Longyuans revenue growth to mainly come from its wind power business, with CAGR of c.30% for 2010-2012F. In contrast, we expect its coal-related and other businesses to remain largely stable year-on-year for the next two years. As a result of wind power sales growth, we forecast revenue contribution from wind power sales will grow from 43% in 2010 to 47% in 2011F. On the other hand, we expect revenue contribution from coal-related business to fall from 54% in 2010, to 48% in 2011F, and revenue from other business lines to slightly grow, from 3% in 2010 to 5% in 2011F, mainly due to the companys plan to expand solar and geothermal power generation. Revenue trend
RMB m
20,000 50% 45% 15,000 40% 35% 30% 10,000 25% 20% 5,000 15% 10% 5% 0 2008 Wind power 2009 Coal power 2010 Other business 2011F 2012F Total revenue YoY growth 0%
Wind power
We forecast wind power sales to grow 28% YoY in 2011F and 32% YoY in 2012F on the back of capacity expansion of 31% YoY in 2011F and 28% YoY in 2012F respectively (approximately 2GW per annum). Apart from constructing onshore wind farms, we believe Longyuan will achieve its capacity expansion target with the help of a wind project injection from Guodian, its parent company, and through the development of overseas projects in South Africa, North America and Eastern Europe. We regard our assumptions for utilisation hours and wind power tariffs as quite generous. In China, the government has put in place a wind tariff scheme with the aim of keeping wind project returns in the range of 8-10%. Thus wind projects in regions with higher utilization hours will theoretically receive lower wind power tariffs, in our view. However, in our assumptions, we factor in increases in both utilization hours and
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wind power tariffs for Longyuan. We assume Longyuans utilisation hours will gradually increase from 2,217 hours in 2010 to 2,242 hours in 2011F and 2,309 hours in 2012F and for wind power tariffs to reach RMB 0.5 per kWh in both 2011F and 2012F, up from RMB 0.49 per kWh in 2010. Key operation data wind power
2008 Consolidated installed capacity (MW) YoY (%) Average utilization hours YoY (%) Net electricity generation (GWh) YoY (%) Average tariff exclude VAT (RMB/kWh) Wind electricity sales (RMB m) Others (RMB m) Total wind revenue (RMB m) YoY (%) CAGR 2010-2012F (%) Source: Company data, CCBIS estimates 2,503 93 1,923 20 3,407 140 0.48 1,635 3 1,638 125 2009 4,504 80 2,268 18 5,684 67 0.48 2,752 2 2,754 68 2010 6,556 46 2,217 (2) 9,442 66 0.49 4,613 7 4,620 68 2011F 8,600 31 2,242 1 14,371 52 0.50 7,178 0 7,178 55 2012F 11,000 28 2,309 3 19,244 34 0.50 9,635 0 9,635 34 44
Coal-related businesses
According to the companys strategies, Longyuans coal-related businesses will not be a company priority even though the company has no intention of scaling down this business line. We expect revenue from the companys coal-related business to grow 3% YoY in 2011F and remain flat in 2012F. According to management, the company is planning to upgrade its coal power plant capacity by 1GW in 2012F. Coal power capacity expansion is still subject to the approval from relevant government bodies, with the requisite approvals likely to be granted in late 2011F or 2012F. With this in mind, we expect capacity upgrades to be completed by end-2012F and sales increases to come into effect from 2013F. Key operation data coal-related businesses
Consolidated installed capacity (MW) YoY (%) Average utilization hours YoY (%) Net electricity generation (GWh) YoY (%) Average tariff exclude VAT (RMB/kWh) Coal electricity sales (RMB m) Coal steam sales (RMB m) Coal trading sales (RMB m) Others (RMB m) Total coal revenue (RMB m) YoY (%) CAGR 2010-2012F (%) Source: Company data, CCBIS estimates 2008 1,875 (23) 5,893 15 11,863 2 0.34 4,090 121 163 4,373 9 2009 1,875 0 5,819 (1) 10,207 (14) 0.36 3,669 230 1,974 5,873 34 2010 1,875 0 6,055 4 10,670 5 0.36 3,859 311 3,276 267 7,714 31 2011F 1,875 0 6,100 1 10,866 2 0.36 3,942 302 3,371 317 7,933 3 2012F 2,875 53 6,100 0 10,866 0 0.36 3,942 302 3,371 317 7,933 0 1
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Other businesses
Longyuans other businesses include power generation from non-wind renewable energy sources, such as solar power, geothermal power, tidal power and biomass power. We expect revenue from the companys other businesses will grow by 78% YoY in 2011F and 23% YoY in 2012F, assuming capacity expansion of the companys solar and geothermal power generation projects. Key operation data other renewable power
2008 Consolidated installed capacity (MW) YoY (%) Average utilization hours YoY (%) Net electricity generation (GWh) YoY (%) Average tariff exclude VAT (RMB/kWh) Other renewable power sales (RMB m) Others business Total other sales (RMB m) YoY (%) CAGR 2010-2012F (%) Source: Company data, CCBIS estimates 28 615 1,247 (31) 23 234 1.22 28 428 455 93 2009 29 4 2,172 74 54 138 0.84 46 518 563 24 2010 42 45 2,524 16 94 74 0.76 71 624 695 23 2011F 80 90 2,079 (18) 148 57 0.73 108 971 1,079 55 2012F 96 20 2,096 1 179 21 0.73 131 1,175 1,306 21 37
Other income
Other income mainly includes income from sales of CERs and VERs as well as from government grants. We estimate that other income will increase at 24% YoY in 2011F and 33% YoY in 2012F, thanks to rising income from sales of CERs and VERs. In our current forecasts, we assume that the current CDM system and related income will continue after 2012F, which is generous in our view. CER and VER income assumptions
1H10 Capacity registered (MW) 1,902 % of capacity registered (%) 42 CER/VER blended price (/t) 10.3 CERs and VERs income 162 Source: Company data, CCBIS estimates 2H10 2,854 44 9.8 230 1H11F 3,435 48 10.8 305 2H11F 4,128 48 10.8 367 1H12F 4,576 52 11.2 423 2H12F 5,720 52 11.2 529
Operating expenses
Longyuans major operating expenses include coal consumption, coal sales costs and depreciation and amortisation. We forecast the operating expenses of Longyuan will grow 6% YoY in 2011F and 10% in 2012F. The main drivers for the increase are the larger depreciation arising from the increase in plant and equipment, and the increase in the costs for coal trading and power generation. In terms of operating expenses as a percentage of total revenue, we expect the ratio to fall from 78% in 2010 to 71% in 2011F and 68% in 2012F. The conclusion was based on our estimate that the average investment cost for wind farms will decrease accordingly with the decrease in WTG ASP per kW. The fall in average cost per kW capacity will decrease depreciation per sales.
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0.40
0.35
0.30
Longyuan management commented that the company would mainly utilize debt to finance capex. We expect the companys net gearing ratio (net debt over total equity) to grow from 121% in 2010 to 157% in 2011F and reach 161% in 2012F. Given the stretched balance sheet and further capex needs, going forward, we would not be surprised if the company taps the equity market to satisfy its financial needs. This would likely lower the companys net gearing ratio even further; however, we have not factored this possible outcome in our estimates. Net gearing trend
300%
250%
200%
150%
100%
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916 HK
8.47
8,128
26.5
19.7
15.3
0.6 0.1 0.4 0.3 7.8 N/M 1.7 0.9 1.2 N/M N/M
1.9 1.4 0.9 1.6 0.8 0.4 1.1 2.1 0.8 0.4 0.7
1.7 1.2 0.8 1.5 0.8 0.3 1.1 1.9 0.8 0.4 0.5
1.5 1.1 0.7 1.3 0.8 0.3 1.1 1.8 0.8 0.4 0.4
7.3 4.3
8.9 8.6
10.1 10.0 7.1 16.7 4.0 2.4 4.0 10.8 2.6 (2.9) 5.2
China Datang Corporation 1798 HK U 2.38 2,230 31.4 14.2 10.9 Renewable China Power New Energy 735 HK NR 0.65 659 17.7 13.3 10.5 China Windpower Group 182 HK NR 0.84 798 14.4 10.9 8.2 Acciona ANA SM NR 77.21 6,986 28.3 27.3 22.3 Theolia TEO FP NR 1.33 211 N/A N/A 15.6 Iberdrola Renovables IBR SM NR 3.09 18,553 36.2 30.5 25.7 EDF Energies Nouvelles EEN FP NR 37.18 4,106 27.1 21.9 17.7 EDP Renovaveis EDPR PL NR 5.01 6,222 55.7 41.1 29.1 Infigen Energy IFN AU NR 0.37 293 N/A N/A N/A Greentech GES DC NR 17.30 175 N/A 9.8 8.5 All prices are as at 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS
5.1 5.9 13.4 14.8 2.9 3.3 (21.2) (3.8) 3.0 3.5 7.9 9.2 1.5 1.8 (11.1) (6.4) (24.9) 4.7
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WACC (%) 7.9 8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 Source: CCBIS estimates
PV of TV (RMB m) 113,018 110,594 108,241 105,958 103,741 101,587 99,495 97,461 95,485 93,563 91,693 89,874 88,104 86,381 84,704 83,070 81,479 79,928 78,417 76,944 75,508
EV (RMB m) 110,716 108,171 105,699 103,297 100,963 98,694 96,486 94,339 92,250 90,216 88,236 86,307 84,428 82,598 80,814 79,074 77,378 75,724 74,110 72,535 70,999
Shares (m shares) 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464
WACC Calculation Equity Beta Risk-free rate (%) Equity-risk premium (%) Country-risk premium (%) Cost of equity (%) Cost of debt (%) Debt/capital (%) Tax (%) WACC (%) Terminal growth rate (%)
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Risks
Grid connection bottleneck in China: Grid network construction within Chinas richest wind areas, such as Inner Mongolia, the three northeast provinces, and Xinjiang, is lagging the expansion of wind farms. We believe the issue could be gradually resolved in the coming three-to-five years, from higher spending in ultra high voltage (UHV) transmission lines and the new smart grid system that will be part of the th state grid, all part of the governments 12 Five-Year Plan. If China could enhance its power grid network more rapidly, or alternatively, if the progress on the power grid is slower than we expect, there could be upside or downside surprise, respectively, to our earnings forecasts. Overseas project execution risk: Longyuan management has laid out its plan to develop projects overseas which will entail higher return potential. Targeted regions include South Africa, North America and Eastern Europe. In our view, investment returns from overseas projects could be affected by changes in the policies of the foreign governments in the countries it is dealing with. Obtaining financing for projects can be more difficult from flow of fund restrictions between country borders and the absence of business relationships with overseas banks. Finally, foreign currency fluctuations add additional investment risk to the companys overseas project returns. CER and VER income: CER income has risk inherent in project approval by the CDM EB, the UN body that oversees carbon credit trading. In December 2009, the CDM EB suspended approvals for some Chinese wind farms. Although the CDM EB has since approved some other Chinese wind farms, some uncertainty about the approval process still lingers. Continuation of the Kyoto Protocol and related carbon trading mechanisms also remain uncertain post 2012. Our current forecasts for Longyuan have factored in continuous CER/VER income streams post 2012F. Uncertainties on government subsidies and policies: We note that government subsidy income is a material part to the return from wind farms. Future government policies in China towards feed-in-tariffs, VAT rebates and preferential income tax rates can greatly affect our earnings estimates. Risk of increasing gearing and interest rates: Longyuan relies mainly on bank borrowings, corporate bonds and debentures to finance capex. We expect the companys gearing ratio to grow from 136% in 2010 to 194% in 2012F, which would lead to increasing interest risk exposure in the issuance of new debts and refinancing. In addition, since we foresee potential interest rate hikes by the PBOC to tackle inflation problems in China, we expect Longyuans financing costs would be on a rising trend in the near future. Based on our estimates, for every 1% (100bp) increase in Longyuans effective interest rate, Longyuans net profit would decline by 10%. Equity refinancing risks in 2012F: Longyuans management has publicly announced plans to issue new shares in 2012F. Although the decision is subject to the approval from the board of directors, if the new shares are issued, they may incur additional administrative costs and may also lead to the dilution to earnings per share post issuance.
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Company profile
Longyuan is Chinas largest wind farm operator, accounting for approximately 15% of Chinas cumulative wind capacity by end-2010 based on our estimate. The major shareholder of Longyuan is Guodian, one of the five-largest power generation companies in China.
Company history
Longyuan was established through reorganization of the former China Longyuan Electric Power Group Corporation, founded in January 1993 and one of the pioneers in new energy development in China. The company commenced construction of its first wind farm in 1991 which became operational in the following year with 1.2MW capacity. Longyuan has accumulated nearly 20 years of wind farm operation experience. In 1999, Longyuan was merged with China Fulin, a wind power generation company, and Zhongneng Power-Tech, which is specialized in the development and consultation of electricity technology. In 2002, under the restructuring of Chinas power industry by the State Council, the former State Power Corporation was reorganized and divided into two power grid companies and the five-largest independent power generation companies. It became a wholly owned subsidiary of Guodian, one of the five-largest independent power generation companies after the restructuring. In addition, Longyuan inherited 144MW wind power assets from the former State Power Corporation in 2003 and nine wind farms in 2004 to become Guodians wind power investment arm since then. In 2009, the company was successfully listed on the main board of Hong Kongs stock exchange. Major milestones
1991 1993 1996 1999 2002 Began construction of wind power plants in Xinjiang Established by the former Ministry of Energy Became a wholly owned subsidiary of the former State Power Corporation Merged with China Fulin and Zhongneng Power-Tech Became a wholly owned subsidiary of Guodian as a result of group restructuring of the former State Power Corporation 2003 Inherited 144MW wind power assets from the former State Power Corporation. Total wind installed capacity reached 231MW, accounting for 40% of China's total wind capacity. 2004 Won concession projects for Jiangsu Rudong and Juling Tongyu; began large-scale construction of wind power projects. 2006 Proposed the development plan of six major wind areas 2009 Listed on the main board of Hong Kongs stock exchange 2010 Won bid for Jiangsu Dafeng Intertidal Zone Concession Project for a capacity of 20MW. Gansu Guazhou wind farm with installed capacity of 300MW began operations. Added 35 wind power projects in 2010, installed capacity reached 2,053MW. 2011 56 wind projects and one biomass project were registered with CDM in January 2011, with combined installed capacity of 2,904MW. Source: Company data, CCBIS
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Business description
Longyuan is primarily engaged in the design, development, construction, management and operation of wind farms. In addition to its wind power business, Longyuan also operates other power projects in thermal power, solar power, tidal, biomass and geothermal energy. According to Longyuan, by the end of December 2010, the company had installed capacity of 8,473MW, of which 6,556MW (77.4%) coming from wind power, 1,875MW (22.1%) from coal-fired power and the remaining 42MW (0.5%) from other renewable sources. Revenue by segment (2008-2010)
RMB m 16,000 14,000 12,000 10,000 8,000 4,000 6,000 4,000 2,000 0 2008 Wind power 2009 Coal power 2010 Other revenue 3,000 2,000 1,000 0 2008 Wind power 2009 Coal power 2010 Other renewables
The companys wind projects are located in 13 provinces in China, including Heilongjiang, Jilin, Liaoning, Inner Mongolia, Jiangsu, Zhejiang, Fujian, Hainan, Gansu, Xinjiang, Hebei, Yunnan, and Anhui. Its capacity is concentrated in the northern regions of China, including three northeast provinces, Inner Mongolia and Hebei, which jointly accounted for 62% of Longyuans total capacity in 2010. Installed capacity by region (2008-2010)
MW 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2008 The three northeast provinces The southeast coastal provinces Xinjiang Others 2009 Inner Mongolia Gansu Hebei 2010 4,000 2,000 0 2008 The Three Northeast Provinces The Southeast Coastal Provinces Xinjiang Others 2009 Inner Mongolia Gansu Hebei 2010
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Major customers
Main customers of the company are wholly owned subsidiaries of State Grid Corporation of China, including Fujian Electric Power Company, Heilongjiang Electric Power Company, Northeast China Grid Company Limited and Liaoning Electric Power Company.
Major suppliers
Wind turbine is the primary equipment in the operation of wind farms. Longyuan mainly acquires wind turbines from Gamesa, Vestas, GE, Goldwind and Sinovel. Some major wind turbine manufacturers such as Vestas, Gamesa and Goldwind have established long-term business relationships with the company of up to eight years. As for the companys coal power business, it has entered into long-term coal supply agreements with Shenhua Zhungeer Energy Company and China National Coal Group Corporation to secure coal prices. These contracts have minimum terms of no less than five years.
Shareholder structure
Shareholder structure (March 2011)
Public, 25%
China Life Insurance, 3% Social Society Fund, 3% China Investment Corp, 5% Guodian Group, 64%
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Tian Shicun
58
Wang Liansheng
59
Zhu Yongpeng
59
Wang Baole
54
Non-executive Director
Luan Baoxing
43
Non-executive Director
Li Junfeng
54
Zhang Songyi
55
Meng Yan
55
Chen Bin Yu Yongping Wang Jianting Jia Nansong Huang Yuan Zhang Yuan
51 50 46 48 49 54
Supervisor Supervisor Employee Representative Supervisor Secretary of Board & Joint Company Secretary Vice-President Vice-President
49
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Financial summary
Income statement forecasts
FYE 31 Dec (RMB m) Revenue Other income Operating expenses Operating profit EBIT Depreciation and amortisation EBITDA Net interest expense Share of results of an associate Extraordinary items Profit before tax Income tax Net profit after tax Minorities Reported net profit after tax Dividends Transfer to reserves Normalized net profit after tax 2009 9,744 569 (7,459) 2,854 2,854 (1,590) 4,444 (1,020) 105 4 1,944 (296) 1,647 (753) 894 0 894 890 2010 14,213 989 (11,118) 4,084 4,084 (2,236) 6,320 (1,098) 228 (3) 3,211 (441) 2,770 (763) 2,007 (403) 1,604 2,010 2011F 16,473 1,220 (11,743) 5,950 5,950 (3,351) 9,301 (1,897) (20) 0 4,033 (565) 3,468 (763) 2,705 (541) 2,164 2,705 2012F 19,103 1,617 (12,947) 7,773 7,773 (4,089) 11,862 (2,583) (20) 0 5,170 (724) 4,446 (978) 3,468 (694) 2,774 3,468
Financial ratios
FYE 31 Dec (RMB m) 2009 2010 28.7 44.5 14.1 7.3 45.9 43.1 42.2 124.5 26.5 26.5 0.8 N/A 1.9 13.0 8.4 0.4 3.7 136 121 2011F 36.1 56.5 16.4 8.9 15.9 45.7 47.2 34.8 19.7 19.7 1.0 22.6 1.7 8.9 5.7 0.5 3.1 179 157 2012F 40.7 62.1 18.2 10.1 16.0 30.6 27.5 28.2 15.3 15.3 1.3 11.2 1.5 6.8 4.5 0.7 3.0 194 161 Profitability (%) EBIT margin 29.3 EBITDA margin 45.6 Net margin 9.2 ROE 3.5 Growth (%) Revenue 13.9 EBIT 103.9 EBITDA 79.0 Net profit growth 165.0 Valuation and ratio analysis (x) Normalized PER 48.5 Reported PER 48.2 Dividend yield 0.0 Price/cash flow 2.8 PBV 1.7 EV/EBIT 18.7 EV/EBITDA 12.0 Liquidity and leverage (%) Current ratio 0.9 Interest cover (x) 2.8 Gearing ratio 130 Net gearing ratio 65 Source: Company data, CCBIS estimates
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Sector Rating:
Neutral
(initiation)
Price: Target:
HK$2.38 HK$2.00
(initiation)
Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) Expected return (%) 1 year Closing price on 1 April 2011 HK$1.85 2.43 HK$17,343/US$2,229 7,143 71 8.6 (16)
Source: Bloomberg
Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com
Alan Lau
(852) 2533 2479 alanlau@ccbintl.com
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Financial analysis
Revenue
Datang is the second-largest wind power generation company in China, just behind Longyuan. It is only engaged in the generation of wind power. We anticipate rapid top-line growth for the company from the managements target of adding c.1.5GW capacity in 2011F in order to reach 5.6GW. We forecast capacity to reach 7.1GW by 2012F. Hence, we expect the companys revenue to experience rapid growth at 77% YoY in 2011F and 43% YoY in 2012F. We assume Datangs utilization hours will gradually increase from 2,134 hours in 2010 to 2,240 hours in 2011F and 2,274 hours in 2012F. We further assume its wind power tariffs will rise, from RMB0.49 in 2010 to RMB0.5 per kWh, in 2011F-2012F. In China, the government has put in place a wind tariff scheme with the aim of keeping wind project returns in the range of 8-10%. Thus wind projects in regions with higher utilization hours will theoretically receive lower wind power tariffs, in our view. Therefore, we believe we have given a quite generous assumption to Datangs utilization hours and wind tariffs in 2011F-2012F. Key operation data wind power 2008
Installed capacity (MW) YoY (%) Average utilization hours YoY (%) Net electricity generation (GWh) Average tariff exclude VAT (RMB/kWh) Sale of electricity (RMB m) YoY (%) CAGR 2010-2012F (%) Source: Company data, CCBIS estimates 1,768 92 2,255 5 1,279 0.48 613 114
2009
2,620 48 2,159 (4) 2,880 0.48 1,384 126
2010
4,028 54 2,134 (1) 4,829 0.49 2,378 72
2011F
5,600 39 2,240 5 8,437 0.50 4,219 77
2012F
7,100 27 2,274 1 12,083 0.50 6,034 43 59
Other income
Other income is income generated from the companys registered CDM projects and government grants. We anticipate other income to grow at 104% YoY in 2011F because we believe the number of registered CDM projects in 2011F will double, and the total amount of government grants to increase from robust growth in electricity sales. For 2012, we believe increase in wind capacity and in the number of projects registered under CDM will be similar to 2011F, but due to the increased base numbers, we expect to see growth slow to 29% YoY for 2012F.
Operating expenses
Since the company is only engaged in wind power generation, we noted Datangs main operating expenses are depreciation and amortization, labour, and miscellaneous items such as material costs and repair and maintenance costs. We anticipate operating expenses to grow in 2011F-2012F, driven by the increase in depreciation and repair and maintenance costs from the increased number of WTG installed, but remain stable in terms of per unit of electricity generated and sales. We forecast operating expenses over sales to fall somewhere between 52% and 53% in 2011F-2012F, similar to the level in 2010.
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10%
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250%
200%
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916 HK
8.47
8,128
26.5
19.7
15.3
0.6 0.1 0.4 0.3 7.8 N/M 1.7 0.9 1.2 N/M N/M
1.9 1.4 0.9 1.6 0.8 0.4 1.1 2.1 0.8 0.4 0.7
1.7 1.2 0.8 1.5 0.8 0.3 1.1 1.9 0.8 0.4 0.5
1.5 1.1 0.7 1.3 0.8 0.3 1.1 1.8 0.8 0.4 0.4
7.3 4.3 5.1 13.4 2.9 (21.2) 3.0 7.9 1.5 (11.1) (24.9)
8.9 8.6 5.9 14.8 3.3 (3.8) 3.5 9.2 1.8 (6.4) 4.7
10.1 10.0 7.1 16.7 4.0 2.4 4.0 10.8 2.6 (2.9) 5.2
China Datang Corporation 1798 HK U 2.38 2,230 31.4 14.2 10.9 Renewable China Power New Energy 735 HK NR 0.65 659 17.7 13.3 10.5 China Windpower Group 182 HK NR 0.84 798 14.4 10.9 8.2 Acciona ANA SM NR 77.21 6,986 28.3 27.3 22.3 Theolia TEO FP NR 1.33 211 N/A N/A 15.6 Iberdrola Renovables IBR SM NR 3.09 18,553 36.2 30.5 25.7 EDF Energies Nouvelles EEN FP NR 37.18 4,106 27.1 21.9 17.7 EDP Renovaveis EDPR PL NR 5.01 6,222 55.7 41.1 29.1 Infigen Energy IFN AU NR 0.37 293 N/A N/A N/A Greentech GES DC NR 17.30 175 N/A 9.8 8.5 All prices are as at 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS
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WACC (%) 8.6 8.7 8.8 8.9 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 10.0 10.1 10.2 10.3 10.4 10.5 10.6 Source: CCBIS
Sum of PV (RMB m) (21,190) (21,186) (21,182) (21,177) (21,173) (21,168) (21,163) (21,158) (21,153) (21,147) (21,142) (21,136) (21,130) (21,124) (21,118) (21,112) (21,105) (21,098) (21,091) (21,084) (21,077)
PV of TV (RMB m) 65,238 63,824 62,453 61,123 59,833 58,581 57,364 56,183 55,036 53,920 52,836 51,782 50,756 49,758 48,787 47,842 46,922 46,025 45,152 44,301 43,472
EV (RMB m) 44,049 42,639 41,272 39,946 38,660 37,413 36,201 35,025 33,883 32,773 31,694 30,646 29,626 28,634 27,669 26,731 25,817 24,927 24,061 23,217 22,395
Shares (m shares) 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143
WACC calculation Equity beta Risk-free rate (%) Equity risk premium (%) Country risk premium (%) Cost of equity (%) Cost of debt (%) Debt/capital (%) Tax (%) WACC (%) Terminal growth rate (%) 1.38 3.92 6 1 14 7 50 15 9.5 1
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Risks
Grid connection bottleneck in China: The grid network construction within Chinas richest wind areas, including Inner Mongolia and the three northeast provinces, is lagging behind the expansion of wind farms. We believe the issue could be resolved in the coming 3-5 years, from higher spending in UHV transmission lines and smart grid th systems by the State Grid as part of the 12 five year plan. If China could enhance its power grid network faster or slower than our expectation, there could be upside or downside surprises to our earnings forecasts. Overseas project execution risk: Datang management laid out its plan to develop projects overseas with higher return potential. Targeted regions include North and South America, Australia and Eastern Europe. In our view, investment returns of overseas projects could be affected by changes in foreign government policies. Besides, the means to obtain borrowings to finance projects can be more difficult due to flow of fund restrictions between country borders and the dearth of business relationships with overseas banks. Foreign currency fluctuations raise additional investment risk to the companys overseas project returns. CER and VER income: CER income is dependent on project approvals by the CDM EB, the UN body that oversees carbon credit trading. In December 2009, the CDM EB suspended the approvals for some Chinese wind farms. Although the CDM EB has approved other Chinese wind farms, there is still a degree of uncertainty surrounding the approval process. Moreover, the continuation of the Kyoto Protocol and related carbon trading mechanisms presently remains uncertain post-2012. Our current forecasts for Datang have factored in continuous CER/VER income streams post 2012F. Uncertainty surrounding government subsidies and policies: Government subsidy income is a material component of the return from wind farms. Government subsidies are also subject to annual government approval. Future government policies in China towards feed-in-tariffs, VAT rebates and preferential income tax rates can greatly affect our earnings estimates. Risk of interest rate exposure given high gearing: Datang relies on bank and other borrowings finance its wind farm constructions. We anticipate the companys net gearing ratio will reach c.286% in 2012F, which would lead to increasing interest risk exposure in the issuance of new debt and refinancing. In addition, since we foresee potential interest rate hikes by the PBOC to tackle inflation problems in China, we expect Datangs financing costs to steadily rise in the near future. Based on our estimates, for every 1% (100bp) increase in Datangs effective interest rate, net profit would decline by c.20%
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Company profile
Datang is the second-largest wind farm operator in China according to BTM Consult. As of end-2010, Datang had 4,028MW of cumulative wind capacity, accounting for approximately 9% of Chinas wind capacity based on our estimates. Datangs majority shareholder is Datang Group, one of the five-largest power generation companies in China.
Company history
Datang was established in July 2010, during the reorganization of its predecessor, Datang Chifeng Saihanba Wind Power Generation (Datang Chifeng Saihanba), established in September 2004. Through its predecessor, Datang Chifeng Saihanba, Datang has over six years of experience in wind farm development. The companys first wind power project (installed capacity of 30.6MW) commenced construction in October 2004 and began operations in August 2005. In April 2006, Datang formed its first wind power joint venture with KEPCO Neimenggu International in China, This represented Datangs first step towards leveraging the experience and advanced technology of overseas power companies. In 2009, parent Datang transferred to Datang 12 wind farms with total installed capacity of 549MW, reaffirming Datangs role as Datang Groups flagship company for its wind power business. In 2010, through the reorganization, Datang received all wind power businesses held by Datang Group and also the wind power businesses of Datang Groups subsidiary, Shanxi Renewable Power. Over the past six years, Datang rapidly built up its wind power business. The companys total installed capacity surged from 79.9MW in 2005 to 4,028MW in end-2010. In December 2010, Datang was listed on the Main Board of the Stock Exchange of Hong Kong. Major milestones Datang
Year 2004 Development Predecessor company, Datang Chifeng Saihanba, was established by Datang Group, and began construction of its first wind power project in Inner Mongolia 2005 First wind power farm in Chifeng, Inner Mongolia, began operations, with installed capacity of 30.6MW 2006 First wind power joint venture with KEPCO Neimenggu International in China 2008 Received approval from the NDRC to develop and construct the 102MW Shanghai Donghai Bridge Offshore wind power project Acquired wind power projects in Bayannur and Linxo in Inner Mongolia, expanding total installed capacity to 1,768MW 2009 Datang Chifeng Saihanba was renamed to China Datang Corp. Renewable Power Co., Ltd. Inherited 12 wind farms from Datang Group with installed capacity of 549MW. Total installed capacity reached 2,620MW; ranked second in China, eighth in the world according to BTM 2010 Acquired two wind power projects under construction from Datang Group with installed capacity of 49.5MW each and 2% equity interest in Datang Hailin Wind Power at a consideration of RMB1.7m. Listed on the main board of Hong Kongs stock exchange in December 2010 2011 Won a bid in Chinas first solar thermal power generation project, located in Inner Mongolia, with 50MW capacity Source: Company data, CCBIS
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Major customers
Datangs main customers are local grid companies controlled by the Chinese government. Its top-five customers have historically accounted for over 90% of total revenue in the sale of electricity.
Major suppliers
Datang has established long-term relationships with Vestas, Goldwind and Sinovel, its major wind turbine manufacturers. Other suppliers, for spare parts and consumables, include Eulkind and Nordex. Datangs top-five major suppliers account for approximately 80% of its total purchases.
Shareholder structure
Shareholder structure (March 2011)
Other public investors, 22.46%
China Power Int'l, 0.46% State Grid Int'l Dev, 2.29% High Action Ltd, 0.92% China Longyuan, 1.38% China Yangtze Int'l, 2.29%
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Wu Jing
53
Yin Li
59
Jian Yingjun
47
Non-executive Director
Hu Yongsheng
47
Executive Director and President Executive Director and Vice President Independent non-executive Director Independent non-executive Director Independent non-executive Director Chief Supervisor Supervisor
Zhang Xunkui
42
Wang Guogang
55
Yu Hon To David
62
Liu Chaoan
54
Wang Guoping
53
Zhang Xiaochun
38
Dong Jianhua
50
Employee Representative Vice President, Secretary of Board & Joint Company Secretary Vice-president
Hu Guodong
47
Wang Wenpang
44
Meng Lingbin
48
Vice-president
Zhang Xuefeng
42
Senior engineer; Joined the group in August 2004; Previously served various management positions in state-owned power conglomerates. Engineer; Joined the group in January 2007; Previously served various management positions in state-owned power conglomerates. Senior accountant; Joined the group in February 2005.
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Financial summary
Income statement forecasts
FYE 31 Dec (RMB m) Revenue Other income Operating expenses Operating profit EBIT Depreciation and amortisation EBITDA Net interest expense Share of results of an associate Extraordinary items Profit before tax Income tax Net profit after tax Minorities Reported net profit after tax Dividends Transfer to reserves Normalized net profit after tax 2009 1,428 207 (775) 860 860 (553) 1,413 (475) (1) 0 384 (17) 367 (118) 248 0 248 248 2010 2,380 369 (1,246) 1,503 1,503 (886) 2,389 (766) (2) 0 735 (57) 677 (222) 456 0 456 456 2011F 4,219 754 (2,233) 2,740 2,740 (1,672) 4,412 (1,416) (2) 0 1,322 (132) 1,189 (178) 1,011 (100) 911 1,011 2012F 6,034 971 (3,190) 3,815 3,815 (2,303) 6,118 (2,101) 0 0 1,714 (171) 1,543 (231) 1,311 (152) 1,180 1,311
Financial ratios
FYE 31 Dec (RMB m) 2009 2010 63.1 100.4 19.2 4.3 66.6 74.8 69.1 83.5 31.4 31.4 0.0 3.2 1.4 9.7 6.1 1.1 2.0 243 195 2011F 64.9 104.6 24.0 8.6 77.3 82.4 84.7 121.8 14.2 14.2 0.7 N/A 1.2 5.3 3.3 0.9 1.9 308 268 2012F 63.2 101.4 21.7 10.0 43.0 39.2 38.7 29.7 10.9 10.9 0.9 9.7 1.1 3.8 2.4 1.0 1.8 332 283 Profitability (%) EBIT margin 60.2 EBITDA margin 98.9 Net margin 17.4 ROE 4.4 Growth (%) Revenue 66.0 EBIT 86.2 EBITDA 109.5 Net profit growth 77.6 Valuation and ratio analysis (x) Normalized PER 40.3 Reported PER 40.3 Dividend yield 0.0 Price/cash flow N/A PBV 1.8 EV/EBIT 17.0 EV/EBITDA 10.3 Liquidity and leverage (%) Current ratio 0.6 Interest cover (x) 1.8 Gearing ratio 280 Net gearing ratio 271 Source: Company data, CCBIS estimates
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Oil 5.5%
Source: IEA
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Source: Global Potential for Wind-Generated Electricity by Xi Lu, Harvard University, Michael B. McElroy, Harvard University and Cambridge University, Juha Kiviluoma, VTT Technical Research Centre of Finland, CCBIS
The research also found that wind power would be an effective tool to curb CO2 emission, since there are plenty of wind resources, both onshore and offshore, in the top CO2 emission countries, including China, the US, India, Russia and Japan. Global top-five CO2 emission countries - CO2 emission (2005-2009)
CO2 emission (m tonnes) 8,000
7,000 6,000 5,000 4,000 3,000 2,000 1,000 2005 2006 China 2007 United States India 2008 Russia 2009 Japan
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Global top-five CO2 emission countries annual wind energy potential vs. electricity consumption (2008)
TWh 125,000
100,000
75,000
50,000
25,000
0 China United States India Electricity consumption Potential wind energy onshore Russia Japan Potential wind energy offshore
Source: Global Potential for Wind-Generated Electricity by Xi Lu, Harvard University, Michael B. McElroy, Harvard University and Cambridge University, Juha Kiviluoma, VTT Technical Research Centre of Finland, CCBIS
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15,000 10,000 5,000 0 2001 2002 2003 2004 2005 2006 2007 Newly installed capacity (MW) (LHS) 2008 2009 2010 Growth rate (RHS)
20% 10% 0% (10)% 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Newly installed capacity (MW) (LHS) Growth rate (RHS) 5,000
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14% by 2020
Other developed/OECD/transition countries Albania 18% by 2020 Israel South Korea 2.4 4.3% by 2015, 6.1% by 2020, 11% by 2030 Switzerland 16.0 24% by 2020
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10% by 2012
20% by 2012
China 50%
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GE 12.4% REpower 3.4% Siemens 5.9% Suzlon 6.4% Dongfang 6.5% Enercon 8.5%
Sinovel 9.2%
Gamesa 6.7%
Goldwind 7.2%
Source: BTM
Source: BTM
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2006
Grid-connection Provisions on the Administration of Power Generation from Renewable Energy Interim Measures on Administration of Designated Fund for the Development of Renewable Energy Mandatory Purchase Supervision Measures on Purchase of the Full Amount of Renewable Energy Power by Grid Enterprises Medium and long-term development plan for the development of renewable energy Taxation Catalogue of Public Infrastructure Projects Entitled for Preferential Tax Treatment VAT Circular on VAT Policy Regarding Comprehensive Utilization of Resources and Other Products CO2 emission target in a standing meeting Feed-in-tariff Circular Regarding the Furtherance of On-grid Pricing Policy of Wind Power Taxation Notification on Chinese CDM Fund and CDM Projects subject to Corporate Income Tax VAT Tax refund policy for Purchase of Domestically Manufactured Equipment by Foreign invested Enterprises Mandatory Purchase Renewable Energy Law Sub-clauses 1 and 2 of Rule 14
2007
2008
Peoples Congress Defines the responsibility of each relevant ministry in promoting renewable energy. It also mandates full dispatch, the principle of setting tariffs and a renewable energy fund. NDRC Grid-connection system for power generation from renewable energy shall be constructed and administered by power grid enterprises. MOF MOF will allocate funds from the PRC central financial budget to support the development of renewable energy. SERC Grid enterprises must buy out the grid-connection volume in the area for all power generated by renewable sources. They will be penalized for failure to do so. NDRC Development plan states China's target to reach installed wind power capacity of 5GW by 2010 and 30GW by 2020; further amended to 10GW by 2010 in 2008. MPF Wind farm operators are allowed to receive a three-year income tax exemption and 50% reduction for the following three years, for all wind projects approved after January 2008. MOF Wind power generators receive a 50% tax rebate on VAT on wind power sales. State Council NDRC MPF, SAT MPF, SAT By 2020, CO2 emission per unit of GDP of China is to be reduced to 40-45% under 2005 levels. Onshore feed-in-tariffs are fixed at four ranges according to location; RMB0.51/0.54/0.58/0.61 per kWh (including VAT). 2% of the income from sales of green gas reduction quota can be deducted from tax income. Foreign invested enterprises that purchase domestically manufactured equipment can receive VAT refunds.
2010
Renewable Energy Law Amendment Offshore wind power Provisional Measures for the Administration of Offshore Wind Power Construction
2010 2010
Peoples Congress China will carry out a renewable energy-related full purchase system. The energy supervisory, electricity regulatory and finance supervisory departments of the State Council will ensure full repurchase of renewable energy to be formulated. Peoples Congress Regulatory framework for the development and use of renewable energy NEA Regulates the administration organization management and technical quality administration for offshore wind power development planning, project granting, project approval, use of sea area, marine environmental protection, construction completion and acceptance, operation information management, etc.
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Wind
Solar PV
Waste (Biomass)
Hydro 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000
According to Renewable Energy Policy Network for the 21st Century (REN21), onshore wind power generation cost is among the lowest compared with other energy sources. However, offshore wind generation cost currently remains high due to the immaturity of offshore wind technology and consequent difficulties in electricity connections as well as higher construction and maintenance costs. Generation cost comparison between power sources
Nuclear Gas Coal-fired CSP Utility-scale solar PV Rooftop solar PV Geothermal Biomass Offshore wind Onshore wind Small hydro Large hydro 0 5 10 15 20 25 30 US cents / kwh 35 40 45 50 55
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Construction 19%
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Analysis of a typical 49.5MW capacity wind farm in China CDM ceases end-2012
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Total capacity (MW) Utilization hours (hours) Gross power generated (MWh) Power loss (%) Electricity sold (MWh) Fixed tariff including VAT (RMB/kWh) Fixed tariff excluding VAT (RMB/kWh) Net electricity tariff (RMB m) Net CDM income (RMB m) VAT refund power generation (RMB m) Total revenue (RMB m) CAPEX (RMB m) Depreciation (RMB m) Maintenance costs (RMB m/kWh) Maintenance fund (RMB m) Total (RMB m) Gross profit (RMB m) Operating expense (RMB m) Operating profit (RMB m) Loan balance at end of year (RMB m) Interest expense (RMB m) Profit before tax (RMB m) Taxation (RMB m) Net profits (RMB m) Capital (RMB m) VAT offset (RMB m) Loan repayment (RMB m) Cash flow equity level (RMB m) Cash flow project level (RMB m) 20-year equity IRR (%) 20-year project IRR (%) ROE (%) Source: CCBIS estimates (427) (d) (21.4) (4.5) (1.5) (27.3) 21.7 (3.4) 18.3 307.5 (17.9) 0.4 0.0 0.4 (21.4) (4.5) (1.5) (27.3) 21.7 (3.4) 18.3 273.3 (16.0) 2.3 0.0 2.3 (21.4) (4.5) (2.4) (28.3) 20.7 (3.4) 17.3 239.2 (14.1) 3.2 0.0 3.2 (21.4) (4.5) (2.4) (28.3) 20.7 (3.4) 17.3 205.0 (12.2) 5.1 (0.6) 4.4 (21.4) (4.5) (2.4) (28.3) 20.7 (3.4) 17.3 170.8 (10.3) 6.9 (0.9) 6.1 (21.4) (4.5) (2.4) (28.3) 20.7 (3.4) 17.3 136.7 (8.5) 8.8 (1.1) 7.7 (21.4) (4.5) (2.4) (28.3) 20.8 (3.4) 17.4 102.5 (6.6) 10.8 (2.7) 8.1 (21.4) (4.5) (2.4) (28.3) 24.9 (3.7) 21.1 68.3 (4.7) 16.4 (4.1) 12.3 (21.4) (4.5) (2.4) (28.3) 24.9 (3.7) 21.1 34.2 (2.8) 18.3 (4.6) 13.7 (21.4) (4.5) (2.4) (28.3) 24.9 (3.7) 21.1 0.0 (0.9) 20.2 (5.1) 15.2 (21.4) (4.5) (2.4) (28.3) 24.9 (3.7) 21.1 0.0 0.0 21.1 (5.3) 15.9 (21.4) (4.5) (2.4) (28.3) 24.9 (3.7) 21.1 0.0 0.0 21.1 (5.3) 15.9 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 9 9 9 9 9 9 9 9 9 9 9 9 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 4.2 4.2 4.2 4.2 4.2 49.0 49.0 49.0 49.0 49.0 49.0 49.1 53.1 53.1 53.1 53.1 53.1
85 (b) (c) (a)+(b)+(c)-(d) (a)+(b)-(d)-(e) 8.3 (34.2) (4.1) 47.9 8.3 (34.2) (2.2) 47.9 8.3 (34.2) (1.3) 47.0 8.3 (34.2) 0.6 47.0 8.3 (34.2) 2.5 47.0 8.3 (34.2) 4.3 47.0 4.1 (34.2) 2.0 42.8 0.0 (34.2) 3.6 42.5 0.0 (34.2) 5.5 42.5 0.0 (34.2) 7.4 42.5 0.0 0.0 42.5 42.5 0.0 0.0 42.5 42.5
0.47
2.67
3.73
5.19
7.11
9.04
9.48
14.44
16.09
17.74
18.57
18.57
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Analysis of a typical 49.5MW capacity wind farm in China CDM continues after 2012
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Total capacity (MW) Utilization hours (hours) Gross power generated (MWh) Power loss (%) Electricity sold (MWh) Fixed tariff including VAT (RMB/kWh) Fixed tariff excluding VAT (RMB/kWh) Net electricity tariff (RMB m) Net CDM income (RMB m) VAT refund power generation (RMB m) Total revenue (RMB m) CAPEX (RMB m) Depreciation (RMB m) Maintenance costs (RMB m/kWh) Maintenance fund (RMB m) Total (RMB m) Gross profit (RMB m) Operating expense (RMB m) Operating profit (RMB m) Loan balance at end of year (RMB m) Interest expense (RMB m) Profit before tax (RMB m) Taxation (RMB m) Net profits (RMB m) Capital (RMB m) VAT offset (RMB m) Loan repayment (RMB m) Cash flow equity level (RMB m) Cash flow project level (RMB m) 20-year equity IRR (%) 20-year project IRR (%) ROE (%) Source: CCBIS estimates (427) (d) (21.4) (4.5) (1.5) (27.3) 21.7 (3.4) 18.3 307.5 (17.9) 0.4 0.0 0.4 (21.4) (4.5) (1.5) (27.3) 31.0 (4.1) 26.9 273.3 (16.0) 10.9 0.0 10.9 (21.4) (4.5) (2.4) (28.3) 30.0 (4.1) 25.9 239.2 (14.1) 11.8 0.0 11.8 (21.4) (4.5) (2.4) (28.3) 30.0 (4.1) 25.9 205.0 (12.2) 13.7 (1.7) 12.0 (21.4) (4.5) (2.4) (28.3) 30.0 (4.1) 25.9 170.8 (10.3) 15.6 (1.9) 13.6 (21.4) (4.5) (2.4) (28.3) 30.0 (4.1) 25.9 136.7 (8.5) 17.5 (2.2) 15.3 (21.4) (4.5) (2.4) (28.3) 30.1 (4.1) 26.0 102.5 (6.6) 19.4 (4.9) 14.6 (21.4) (4.5) (2.4) (28.3) 34.2 (4.4) 29.8 68.3 (4.7) 25.1 (6.3) 18.8 (21.4) (4.5) (2.4) (28.3) 34.2 (4.4) 29.8 34.2 (2.8) 27.0 (6.7) 20.2 (21.4) (4.5) (2.4) (28.3) 34.2 (4.4) 29.8 0.0 (0.9) 28.8 (7.2) 21.6 (21.4) (4.5) (2.4) (28.3) 34.2 (4.4) 29.8 0.0 0.0 29.8 (7.4) 22.3 (21.4) (4.5) (2.4) (28.3) 34.2 (4.4) 29.8 0.0 0.0 29.8 (7.4) 22.3 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 9 9 9 9 9 9 9 9 9 9 9 9 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 0.0 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 0.0 0.0 0.0 0.0 0.0 0.0 0.1 4.2 4.2 4.2 4.2 4.2 49.0 58.2 58.2 58.2 58.2 58.2 58.4 62.4 62.4 62.4 62.4 62.4
85 (b) (c) (a)+(b)+(c)-(d) (a)+(b)-(d)-(e) 8.3 (34.2) (4.1) 47.9 8.3 (34.2) 6.4 56.6 8.3 (34.2) 7.3 55.6 8.3 (34.2) 9.2 55.6 8.3 (34.2) 11.1 55.6 8.3 (34.2) 13.0 55.6 4.1 (34.2) 10.7 51.4 0.0 (34.2) 12.3 51.1 0.0 (34.2) 14.2 51.1 0.0 (34.2) 16.0 51.1 0.0 0.0 51.1 51.1 0.0 0.0 51.1 51.1
0.47
12.78
13.84
14.03
15.96
17.88
17.06
22.03
23.68
25.33
26.15
26.15
153
4 April 2011
Source: CCBIS
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4 April 2011
Source: Bloomberg (ECX European Climate Exchange (ECX) from 22 April 2005 to 1 April 2011)
At present, the major carbon credit trading markets are located in Europe. The eight largest exchanges include the Paris Bluenext Exchange, the Netherlands Climex Exchange, the Austria EXAA Energy Exchange, the European Climate Exchange (ECX), the European Energy Exchange (EEX), the Italian Power Exchange (IPEX), the London Energy Brokers Association (LEBA) and the Nord Pool Exchange. Carbon credit exchanges were also established in Canada, Japan, Russia, the US, and Australia. We expect that developing countries such as China, South Korea and India will establish their own carbon credit exchanges within three-to-five years.
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1st to 2nd months - Plan CDM project activity - Prepare project design document (PDD) - Get approval from each Party involved
7th to 12 months - Monitoring a CDM project activity - Verification & certification - Issuance of CERs - Distribution of CERs
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4 April 2011
Republic of Korea 1.8% Vietnam 1.9% Indonesia 2.1% Malaysia 3.1% Mexico 4.2% China 43.8%
Source: UNFCCC
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4 April 2011
Source: CWEA
According to China Wind Engery Association (CWEA), the top-five WTG manufacturers accounted for above 70% of newly installed wind power capacity in 2010. We estimate that doubly-fed WTG is now main stream, accounting for 76% of total installations in China in 2010. Direct-drive WTGs accounted for the remaining 24%. China WTG market share in newly installed wind power capacity (2010)
Others 10% Huachuang 3% XEMC Wind Power 3% Gamesa 3% Shanghai Electric 3% Vestas 5% Mingyang 6% United Power 9% Dongfang Electric 14% Goldwind 21% Sinovel 23%
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4 April 2011
Main suppliers Length of track record Gearbox component Reliability Low maintenance cost Smaller size and weight Low manufacturing cost Low-voltage ride through (LVRT) capability Power generation productivity Source: Company data, CCBIS estimates 1 1 1 2 2 3
Vestas, Sinovel, Gamesa, Nordex, Repower, GE, Dongfang Electric, United Power, Mingyang Enercon, Mtorres, Lagerwey
Goldwind, Mingyang
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Remarks
1. Gearbox component and reliability
In a conventional WTG, the gearbox component has a relatively higher failure rate. Elimination of the gearbox simplifies the transmission structure and increases operational reliability. Maintenance costs associated with oil replacement are also reduced. 2. Size, weight, and manufacturing cost
Of the three main types of WTGs, doubly-fed, direct-drive, and hybrid WTGs, hybrid WTGs have the smallest size and consume the least materials to construct. As a result, hybrid WTGs have a lower manufacturing cost per kilowatt capacity. Since doubly-fed WTGs employ the gearbox component to enhance turning speed, their sizes are smaller in comparison with a direct-drive WTGs under the same capacity. 3. Low-voltage ride through (LVRT) capability
LVRT capability enables a more stable grid connection and prevents the WTG from going off-line in the event of major grid disturbances. This is why LVRT enabled WTGs are a requirement of the State Grid towards power generators. Studies suggest that direct-drive WTGs have better LVRT capability than doubly-fed WTGs.
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4 April 2011
In order to increase the power generation of wind farms and further exploit wind resources, WTG manufacturers have continued developing larger capacity WTGs. Megawatt-capacity WTGs began commercial used in the 21st century. Currently, the main stream of WTGs used ranges from 1.5MW to 3.0MW. Leading European WTG manufacturers are developing 6.0/7.0MW WTG prototypes, such as Vestas, Siemens and REpower, as well as Chinese WTG manufacturers. A WTGs power generation capabilities are proportional to its rotor blade length. Longer rotor blades allow for larger rotor surface area and the increase in a WTGs tip-speed ratio, which effectively increases the power generation capability of the WTG. Rotor size and maximum power output
Rotor diameter (meters) Power output (kW) 25kW 100 kW 225 kW 300 kW 500 kW 600 kW 750 kW 1.0MW 1.5MW 2.0MW 2.5MW 3.0MW 10 17 27 33 40 44 48 54 64 72 80 88 Source: Danish Wind Industry Association, American Wind Energy Association
Future WTGs are expected to have longer rotor diameters, larger capacity, and will be adaptive to offshore operations, where wind resources are rich but have yet to be harnessed.
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4 April 2011
Netherlands 12%
Denmark 30%
Ranking Countries
Region
1 UK Europe 882.8 287 12 2 Denmark Europe 639.2 305 9 3 Netherlands Europe 246.8 130 4 4 Sweden Europe 163.7 75 5 5 Germany Europe 42.0 9 4 6 China Asian Pacific 46.5 16 0(1) 7 Belgium Europe 30.0 6 1 8 Ireland Europe 25.2 7 1 9 Finland Europe 24.0 8 1 10 Norway Europe 2.3 1 1 11 Japan Asian Pacific 1.0 1 0(1) Total 2,103.4 845 38 (1) China began construction of its first offshore wind farm in April 2009. It has not yet been completed. Japan has its first offshore WTG installed but has not yet constructed any wind farms at end-2009. Source: EWEA, CCBIS estimates
According to the European Wind Energy Association (EWEA), newly installed offshore wind capacity for 2010 is 883MW. Europes cumulative installed offshore wind capacity has reached 2.9GW, representing 3.5% of total installed capacity in wind power. There were 45 offshore wind farms under operations in Europe at end-2010.
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For 2011, EWEA forecasts there will be 1.0GW to 1.5GW new offshore wind capacity on grid in Europe. There are ten wind farms with 3.0GW currently under construction. Offshore cumulative installed capacity will reach 6.2GW when these projects have been completed.
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4 April 2011
Simens 28%
Vestas 56%
Chinese WTG manufacturers, such as Sinovel, Goldwind and Mingyang, are still in their seminal stages within the offshore wind field. Except for the Donghai Bridge offshore wind farm, which deploys WTGs supplied by Sinovel, no other large offshore wind project installation has been completed in China so far. In our view, Chinese WTG manufacturers have a short track record and relative lack of experience in the manufacture and maintenance of offshore WTGs. WTG R&D status of Chinese manufacturers
Company Chinese WTG manufacturers Sinovel Goldwind Dongfang Electric Guodian United Power Mingyang Xemc Sewind Haizhuang International WTG manufacturers Siemens Vestas Nordex REpower BARD Multibrid Source: CWEA, CCBIS Research, development & trial product 3.0MW WTGs successfully installed and operational in Shanghai Donghai Daqiao 108MW project; the company predicts the 5.0MW turbine will be launched in 2011. First 1.5MW offshore WTG manufactured in 2007; 2.5MW, 3.0MW prototypes produced and operational; expected launched date in 2011; 5.0MW designs at research stage. 5.0MW offshore WTG at experimental stage. Company expects 3.0MW to be launched in 2011. Company expects 3.0MW to be launched in 2011. 5.0MW offshore WTG in experimental stage (XEMC Darwind). 3.6MW offshore WTG launched in June 2010. 5.0MW offshore WTG in experimental stage. Long track record in offshore WTG installation beginning in 1991. Launched 3.6MW WTGs and is developing 5.0/6.0 offshore WTGs. Long track record in offshore WTG installation beginning in 1990. 3.0MW WTGs launched; developing 5.0/6.0 offshore WTGs. 2.5MW WTGs launched. Launched 5.0MW and 6.0MW WTGs offshore, with rotor diameter of 126m. Launched 5.0MW WTGs. Launched 5.0MW WTGs.
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Rating definitions
Outperform (O) expected return 10% over the next twelve months Neutral (N) expected return between -10% to 10% over the next twelve months Underperform (U) expected return < -10% over the next twelve months
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