Huaneng Renewables (958 HK)

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Hong Kong Utilities 3 April 2018

Target price: HKD3.35 (from HKD2.55) Share price (3 Apr): HKD3.04 | Up/downside: +10.2%

Rerating on improving financials Dennis Ip, CFA (852) 2848 4068  Faster subsidy collection likely from the RPS and recovering RE Fund [email protected]  We expect positive FCF and continued decline in net gearing in 2018 Daniel Yang (852) 2848 4443  Upgrading to Outperform (2) from Hold (3); raising TP to HKD3.35 [email protected]

What's new: We believe that the two recently released supportive policies Forecast revisions (%) should benefit Huaneng Renewables (HNR) with faster subsidy collection Year to 31 Dec 18E 19E 20E and improving financials, which were major market concerns about HNR. Revenue change 5.7 2.3 n.a. Net profit change 10.6 11.8 n.a. What's the impact: The upcoming RPS is asking grids to pay Core EPS (FD) change 14.0 15.2 n.a. renewable energy subsidies in advance. Recently, the Chinese Source: Daiwa forecasts government announced the launch of a Renewable Energy Portfolio (RPS) Share price performance in 2018. Although the main target of this programme is to lower wind/solar curtailment, which should help HNR record higher utilisation, we believe it (HKD) (%) 3.1 105 will also benefit wind IPPs through faster conversion of receivables, as the 2.9 96 renewable energy subsidy will be paid by local grids in advance for those 2.7 88 projects already included in the renewable energy subsidy catalogue. 2.5 79 2.3 70 More inflows likely into the RE Fund as captive power plants required Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 H'neng Ren (LHS) Relative to HSI (RHS) to settle unpaid surcharges. The NDRC published a document last week requiring all captive power plants to settle unpaid government charges, including the renewable energy surcharges. We estimate the Renewable 12-month range 2.33-3.07 Energy (RE) Fund will collect an extra CNY61bn in 2018 and reduce the Market cap (USDbn) 3.97 shortfall by end-2018 to CNY175bn from CNY256bn. Hence, we expect the 3m avg daily turnover (USDm) 10.21 th Shares outstanding (m) 10,252 7 batch of the RE subsidy catalogue to be released soon and the due Major shareholder Huaneng Group (56.9%) subsidy under this catalogue to be settled soon. We note that HNR has around 22% capacity exposure and CNY3bn in subsidies due under the 7th Financial summary (CNY) batch of the catalogue, among the highest of the major wind IPPs (please Year to 31 Dec 18E 19E 20E see China Wind: Faster subsidy collection likely from lower shortfall in Revenue (m) 10,990 11,673 12,227 Renewable Energy Fund dated 3 April 2018). Operating profit (m) 6,256 6,754 7,145 Net profit (m) 3,515 3,936 4,240 Faster subsidy collection and improving financials likely in 2018. Core EPS (fully-diluted) 0.343 0.384 0.414 EPS change (%) 16.7 12.0 7.7 HNR’s receivables by end-2017 surged by 56% YoY to CNY7.2bn, but this Daiwa vs Cons. EPS (%) 0.3 (0.3) (3.6) should be of less concern in 2018, given the likely faster subsidy collection. PER (x) 7.1 6.3 5.9 Thus, together with a moderate capacity expansion (550MW in 2018), HNR Dividend yield (%) 2.3 2.5 2.7 should achieve positive FCF and see its net gearing ratio drop significantly DPS 0.055 0.061 0.066 PBR (x) 0.9 0.8 0.7 from 192% by end-2017 to 162% by end-2018, in our view. EV/EBITDA (x) 7.3 6.6 5.9

ROE (%) 13.5 13.5 13.0 What we recommend: We raise our 2018-19E EPS by 14-15% to mainly Source: FactSet, Daiwa forecasts factor in our higher wind tariff and utilisation assumptions, which will lead to higher operating efficiency and margins. We upgrade our rating from Hold (3) to Outperform (2) and lift our PER-based TP to HKD3.35 (from HKD2.55) on a higher benchmark of 9.0x 2018E PER (from 7.5x), as we believe HNR should see a rerating on improving financials, after being derated in 2017 on concerns over subsidy delays. We see the implementation of the above-mentioned policies to be a positive share- price catalyst. Key risk: unsatisfactory execution of government policies.

How we differ: Our 2019-20E EPS estimates are 1-4% below the consensus, likely as we see less upside in HNR’s wind utilisation hour after reaching 2,200 in 2019E.

See important disclosures, including any required research certifications, beginning on page 5

Huaneng Renewables (958 HK): 3 April 2018

HNR: changes to assumptions New Old Chg Average wind tariff (CNY/kWh) 2018 0.544 0.540 1% 2019 0.539 0.529 2% Average wind utilisation hour 2018 2,165 2,146 1% 2019 2,209 2,189 1% New wind capacity addition 2018 450 1,000 -55% 2019 600 1,000 -40%

Source: Daiwa

HNR vs. Longyuan: trade receivables breakdown China wind: exposure to editions of subsidy catalogue HNR Longyuan 8th and CNY bn Portion CNY bn Portion 1-5th 6th 7th subsequent Due from tariff subsidy: China Resources Power 45% 11% 11% 34% -Outstanding for over 2 years 0.3 4% 0.3 5% China Longyuan Power 61% 12% 13% 13% -Outstanding for 1-2 years 1.3 18% 0.4 6% Huaneng Renewables 52% 18% 22% 8% -Outstanding for within 1 year 4.7 64% 3.2 52% Huadian Fuxin 39% 26% 21% 14% Subtotal 6.3 86% 3.9 63% Goldwind 28% 15% 22% 35% Due from tariffs paid by poer grids 1.0 14% 2.3 37% Suntien 40% 10% 12% 37% Total 7.3 100% 6.2 100% Comment on subsidy Some Qualifying for subsidy - including under the 7th batch subsidy catalogue 3.0 41% 3.1 50% payment Timely delay catalogue Not available

Source: Company Source: NEA, Company, Daiwa

HNR: net gearing ratio HNR and Longyuan: net profit (CNYm)

300% 7,000 Longyuan: 18% CAGR 252% 6,000 250% HNR: 12% CAGR 240% 5,000 200% 192% 4,000 162% 3,000 150% 137% 2,000 114% 100% 1,000

50% 0 2017 2018E 2019E 2020E 0% 2015 2016 2017 2018E 2019E 2020E Longyuan HNR

Source: Company, Daiwa Source: Company, Daiwa

HNR: 1-year-forward PER HNR: 1-year-forward PBR PER (x) PBR (x) 28 2.0 1.8 23 21.7x Avg+2SD 1.6 1.6x Avg+2SD 1.4 18 1.3x Avg+1SD 16.5x Avg+1SD 1.2 13 1.1x Avg 11.4x Avg 1.0 0.8 0.8x Avg-1SD 8 6.3x Avg-1SD 0.6 0.6x Avg-2SD 3 0.4 1.1x Avg-2SD 0.2 (2) 0.0 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Source: Bloomberg Source: Bloomberg

Huaneng Renewables (958 HK): 3 April 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Consolidated capacity - Total (MW) 6,551 8,011 10,345 11,087 11,569 12,116 12,816 13,416 Consolidated capacity - wind (MW) 6,221 7,526 9,720 10,252 10,689 11,136 11,736 12,236 Wind power utilization hours (hours) 2,029 1,875 1,882 1,966 2,082 2,165 2,209 2,209 Solar power utilization hours (hours) n.a. 1,420 1,591 1,373 1,449 1,464 1,478 1,493 Consolidated wind power output (Million 10,837 11,170 13,232 17,684 20,344 21,674 23,226 24,535 Kwh) Average on-grid wind farm tariff 0.594 0.598 0.598 0.562 0.553 0.544 0.539 0.533 (CNY/kWh) Average on-grid solar farm tariff n.a. 0.99 0.89 0.89 0.86 0.82 0.79 0.76 (CNY/kWh)

Profit and loss (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales of electricity 5,440 6,114 7,354 9,233 10,548 10,984 11,667 12,221 Service concession construction 355 33 0 0 0 0 0 0 revenue Other Revenue 2 4 3 6 6 6 6 6 Total Revenue 5,798 6,151 7,357 9,239 10,554 10,990 11,673 12,227 Other income 79 168 435 322 469 352 373 390 COGS (446) (120) (109) (189) (191) (220) (236) (249) SG&A (352) (447) (559) (626) (762) (793) (807) (809) Other op.expenses (2,351) (2,406) (3,008) (3,837) (4,419) (4,073) (4,248) (4,414) Operating profit 2,727 3,346 4,116 4,908 5,651 6,256 6,754 7,145 Net-interest inc./(exp.) (1,740) (2,112) (2,073) (1,995) (2,238) (2,233) (2,204) (2,192) Assoc/forex/extraord./others (3) (2) (3) (3) (5) (5) (5) (5) Pre-tax profit 984 1,232 2,041 2,910 3,408 4,018 4,546 4,948 Tax (67) (86) (141) (202) (346) (449) (553) (651) Min. int./pref. div./others (29) (26) (40) (49) (50) (54) (57) (57) Net profit (reported) 888 1,121 1,860 2,659 3,012 3,515 3,936 4,240 Net profit (adjusted) 888 1,121 1,860 2,659 3,012 3,515 3,936 4,240 EPS (reported)(CNY) 0.104 0.124 0.191 0.273 0.294 0.343 0.384 0.414 EPS (adjusted)(CNY) 0.104 0.124 0.191 0.273 0.294 0.343 0.384 0.414 EPS (adjusted fully-diluted)(CNY) 0.104 0.124 0.191 0.273 0.294 0.343 0.384 0.414 DPS (CNY) 0.020 0.020 0.030 0.041 0.043 0.055 0.061 0.066 EBIT 2,727 3,346 4,116 4,908 5,651 6,256 6,754 7,145 EBITDA 4,659 5,616 6,851 8,370 9,449 9,682 10,351 10,913

Cash flow (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 984 1,232 2,041 2,910 3,408 4,018 4,546 4,948 Depreciation and amortisation 1,931 2,270 2,735 3,462 3,798 3,427 3,597 3,768 Tax paid (67) (86) (141) (202) (348) (449) (553) (651) Change in working capital 578 13 347 (3,079) (2,664) 185 528 (31) Other operational CF items 2,492 2,695 2,701 4,248 1,114 2,294 2,322 2,320 Cash flow from operations 5,918 6,125 7,682 7,338 5,308 9,476 10,439 10,353 Capex (7,717) (13,827) (13,549) (6,909) (3,697) (4,087) (5,044) (4,172) Net (acquisitions)/disposals (12) (513) (468) (16) 0 0 0 0 Other investing CF items 1,076 1,379 1,503 (444) 1,076 0 0 0 Cash flow from investing (6,653) (12,961) (12,514) (7,370) (2,621) (4,087) (5,044) (4,172) Change in debt 2,709 10,489 5,246 1,277 7,000 0 (2,000) (2,000) Net share issues/(repurchases) 1,230 1,358 0 0 1,934 0 0 0 Dividends paid (95) (382) (480) (292) (441) (562) (630) (678) Other financing CF items (2,480) (2,577) (2,989) (2,843) (11,248) (2,286) (2,317) (2,315) Cash flow from financing 1,364 8,889 1,778 (1,858) (2,755) (2,848) (4,947) (4,993) Forex effect/others (80) 10 139 85 0 0 0 0 Change in cash 550 2,062 (2,915) (1,804) (67) 2,541 448 1,188 Free cash flow (1,799) (7,702) (5,867) 429 1,611 5,389 5,395 6,181 Source: FactSet, Daiwa forecasts

Huaneng Renewables (958 HK): 3 April 2018

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 6,436 7,788 4,531 2,605 2,555 5,096 5,544 6,732 Inventory 4 13 43 33 55 42 43 45 Accounts receivable 2,908 3,160 2,900 4,635 7,214 7,147 6,712 6,696 Other current assets 406 180 178 1,423 1,418 1,356 1,301 1,361 Total current assets 9,754 11,141 7,652 8,696 11,242 13,640 13,600 14,835 Fixed assets 45,599 57,873 68,658 72,107 71,406 72,112 73,606 74,055 Goodwill & intangibles 703 696 682 654 621 581 545 508 Other non-current assets 3,742 4,427 5,561 3,989 3,080 3,065 3,051 3,036 Total assets 59,798 74,138 82,553 85,445 86,349 89,399 90,801 92,435 Short-term debt 10,389 17,306 18,727 22,563 20,353 19,855 18,579 17,802 Accounts payable 386 434 496 435 352 395 435 450 Other current liabilities 8,467 8,001 9,311 7,520 6,381 6,381 6,381 6,381 Total current liabilities 19,242 25,741 28,533 30,517 27,086 26,631 25,395 24,633 Long-term debt 22,606 26,842 30,677 28,372 29,451 29,949 29,225 28,002 Other non-current liabilities 3,253 4,670 4,718 5,561 4,369 4,369 4,369 4,369 Total liabilities 45,101 57,253 63,928 64,451 60,907 60,950 58,989 57,004 Share capital 9,029 9,728 9,728 9,728 10,567 10,567 10,567 10,567 Reserves/R.E./others 4,832 6,373 8,070 10,409 14,035 16,988 20,294 23,856 Shareholders' equity 13,861 16,101 17,798 20,137 24,602 27,555 30,861 34,423 Minority interests 836 784 827 857 840 895 951 1,008 Total equity & liabilities 59,798 74,138 82,553 85,445 86,349 89,399 90,801 92,435 EV 52,251 61,970 70,529 74,019 72,774 70,292 67,905 64,779 Net debt/(cash) 26,559 36,360 44,873 48,330 47,249 44,708 42,260 39,072 BVPS (CNY) 1.535 1.783 1.830 2.070 2.400 2.688 3.010 3.358

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 44.0 6.1 19.6 25.6 14.2 4.1 6.2 4.7 EBITDA (YoY) 23.1 20.5 22.0 22.2 12.9 2.5 6.9 5.4 Operating profit (YoY) 25.6 22.7 23.0 19.2 15.1 10.7 8.0 5.8 Net profit (YoY) 59.1 26.3 65.9 43.0 13.3 16.7 12.0 7.7 Core EPS (fully-diluted) (YoY) 57.0 19.6 54.2 43.0 7.5 16.7 12.0 7.7 Gross-profit margin 92.3 98.1 98.5 98.0 98.2 98.0 98.0 98.0 EBITDA margin 80.4 91.3 93.1 90.6 89.5 88.1 88.7 89.3 Operating-profit margin 47.0 54.4 56.0 53.1 53.5 56.9 57.9 58.4 Net profit margin 15.3 18.2 25.3 28.8 28.5 32.0 33.7 34.7 ROAE 6.9 7.5 11.0 14.0 13.5 13.5 13.5 13.0 ROAA 1.6 1.7 2.4 3.2 3.5 4.0 4.4 4.6 ROCE 6.0 6.2 6.4 7.0 7.7 8.2 8.6 8.9 ROIC 6.5 6.6 6.6 6.9 7.1 7.6 8.1 8.4 Net debt to equity 191.6 225.8 252.1 240.0 192.1 162.3 136.9 113.5 Effective tax rate 6.8 6.9 6.9 6.9 10.2 11.2 12.2 13.2 Accounts receivable (days) 195.5 180.0 150.3 148.9 204.9 238.5 216.7 200.1 Current ratio (x) 0.5 0.4 0.3 0.3 0.4 0.5 0.5 0.6 Net interest cover (x) 1.6 1.6 2.0 2.5 2.5 2.8 3.1 3.3 Net dividend payout 19.3 16.1 15.7 15.0 14.6 16.0 16.0 16.0 Free cash flow yield n.a. n.a. n.a. 1.7 6.5 21.6 21.6 24.8 Source: FactSet, Daiwa forecasts

Company profile

Listed in July 2011, Huaneng Renewables is one of the big-5 wind farm operators in China. Its total consolidated capacity of wind farms and solar farms reached 10,689MW and 880MW, respectively, by the end of 2017. The group has developed wind farm and solar farm projects across 21 provinces and autonomous regions in China. Huaneng Group, one of the big-5 independent power producer groups, is the company’s largest shareholder.

Huaneng Renewables (958 HK): 3 April 2018

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Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 68.4% Hold** 21.2% Sell*** 10.4% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2018. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association