Hong Kong Equity Research Utilities

30 November 2016 Asia Pacific/Hong Kong Equity Research Utilities

HK and China Utilities Sector Research Analysts THEME Dave Dai, CFA 852 2101 7358 [email protected] When the clouds clear

Gary Zhou, CFA 852 2101 6648 Figure 1: Macro/policy risk exposure of various sub-sectors [email protected] Low sensitivity to global risks Gloria Yan 852 2101 7369 IPPs Hydro Wind Nuclear [email protected] Solar Gas Shuwei Chen Lower earnings growth 852 2101 7728 [email protected] Higher earnings growth HK Util Thermal High sensitivity to global risks

Source: Credit Suisse estimates ■ Prefer China to HK. After a year of external shocks (Brexit/US Election) and ten major domestic policy surprises, we expect utilities selection in 2017 to be easier for China amid a stabilising economy, clear earnings divergence and appealing valuations: prefer wind/gas/solar to hydro/nuclear/IPPs. HK counterparts could face volatile macro variables and regulatory risks. Top Outperforms: LYP/CRG/XYS/PAH; top Underperforms: HNP/HKCG/HKE/CGN. We adjust TPs for HNR/ HDF/ CRG/ ENN/ CLP/ HKE/CYP, upgrade ENN to OUTPERFORM and downgrade CYP to UNDERPERFORM. ■ Power: More divergent. In China, renewables are best positioned, with further curtailment relief driven by improving power demand and weaker hydro. Better demand-supply should support better market-based prices and reduce market concerns about renewables' expanding market-based sales. Despite better utilisation, IPPs could face a few quarters of losses with higher average coal prices, and the progress of carbon trade and green certificates that could transfer further earnings from IPPs to renewables. Wind (+40%) and solar (+39%) earnings growth in FY17E should clearly outpace other fuels. ■ Gas: Opportunity after bumps. The gas sector saw a bumpy year with policy shocks challenging margin sustainability. Our concerns about dollar margin downside are proven right with the recent local government intervention and winter price hikes. However, we calculate only 5-6% earnings impact despite the recent ~15% stock weakness. At only 9x sector P/E, we see valuations as being attractive with risks priced in and demand recovering next year (~10%), thanks to the various price-cutting efforts and new demand drivers. We like companies that are more likely to outgrow peers on volume growth. ■ Hong Kong: Challenges remain. The 4% average dividend yield is not attractive vs history and global peers. Plus, volatility of the long-term bond yield and USD's strength remain the key challenges. Hong Kong's next return reset could also kickstart in 2017; we stand by our forecast of a return cut from 9.99% to 8.00% (HKE and CLP most negatively exposed). Within the space, PAH is our top pick, given the likely special dividend if no acquisitions.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

30 November 2016

Focus charts

Figure 2: Subsector valuation vs historical average Figure 3: Improving power demand-supply balance (%) 60 Avg + 2SD Total Thermal Hydro 50 Avg + 1SD 40 30 20 Average 10 0 Avg - 1SD (10) (20)

Avg - 2SD (30) Jul-16

Wind Solar Gas Hydro IPPs NuclearHK Utilities Jul-12

Oct-11 Apr-13 Oct-15

Jun-11 Jun-15

Mar-12 Mar-16

Dec-13 Nov-12

Aug-13 Sep-14

May-14 Jan-Feb15 Jan-Feb11 Notes: dots = current valuation relative to history; stars/circles = expected ROE relative to Source: CEIC, Credit Suisse estimates history. Source: Bloomberg, Credit Suisse estimates

Figure 4: Curtailment reduction could re-rate wind Figure 5: Gas demand is the key for city gas sector

(x) Local control PetroChina (x) Gas tariff Gas tariff cut Gas tariff Transmission raised gas 1.9 14% 11% 10-12% 20.0% raised in Aug cut in Nov of gas regulation 17% 8% 15% in Mar 2015 pricing since price in Nov 20.0 2014 2015 since Aug 2016 25.0% 1.8x Avg+2SD 15.0% Apr 2016 2016 1.7 18.7x Avg+2SD 10.0% 18.0 20.0% 1.5x Avg+1SD 1.5 15.9x Avg+1SD 5.0% 16.0 15.0% 1.3 1.3x Avg 14.0 10.0% 0.0% 13.1x Avg 1.1 12.0 5.0% 1.0x Avg-1SD -5.0% 0.9 10.3x Avg-1SD 10.0 0.0% -10.0% 0.8x Avg-2SD 8.0 -5.0% 0.7 -15.0% 7.5x Avg-2SD 6.0 -10.0% 0.5 -20.0% Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Monthly wind speed growth (YoY) LYP P/B Gas consumption volume growth YoY Gas sector P/E Source: NEA, Bloomberg, Credit Suisse estimates Source: NDRC, Bloomberg, Credit Suisse estimates

Figure 6: IPPs will suffer a few quarters of losses Figure 7: HK's regulated return is unsustainable (Rmb mn) (%) 5,000 16 2-3 quarters of 2-3 quarters of 14 4,000 losses during losses likely this 2008-09 time 12 3,000 10 2,000 8 6 1,000 4 0 2

1Q09 4Q11 3Q14 2Q08 3Q08 4Q08 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

-1,000 1Q08

2Q17E 1Q17E 3Q17E 4Q17E 4Q16E -2

-2,000 -4

1964 1988 2012 1970 1973 1976 1979 1982 1985 1991 1994 1997 2000 2003 2006 2009 2015 HNP HDP DTP 1967 SOC return in HK Spread of SoC return over bond yield Historical mean of the spread

Source: Company data, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates

Figure 8: Valuation metrics—our top OUTPERFORM and UNDERPERFORM ideas Name Ticker Rating TP P/E P/B Name Ticker Rating TP P/E P/B 16E 17E 16E 17E 16E 17E 16E 17E LYP 0916.HK O 8.0 11.1 7.8 1.0 1.0 HNP 0902.HK U 3.5 8.4 19.6 0.7 0.7 CRG 1193.HK O 31.0 13.1 11.1 2.6 2.2 HKCG 0003.HK U 11.0 25.4 24.8 3.3 3.2 XYS 0968.HK O 4.0 9.4 6.8 2.7 2.2 HKE 2638.HK U 5.0 18.5 20.1 1.2 1.2 PAH 0006.HK O 81.0 20.8 20.9 1.2 1.2 CGN 1816.HK U 1.8 12.7 11.5 1.5 1.4 Source: Bloomberg, Credit Suisse estimates

HK and China Utilities Sector 2 30 November 2016

When the clouds clear Prefer China to Hong Kong Needless to say, 2016 has not been an easy year to invest in HK/China utilities. Besides Prefer wind/gas/solar over the spillover effects from 2015 including the China GDP slowdown, lower oil prices and hydro/nuclear/IPPs in 2017 Rmb depreciation, low-probability (some call them 'black swan' events) external shocks (Brexit and Trump's victory) and a number of domestic policy surprises have turned a once stable sector into a very volatile one. After a year filled with external shocks and ten major domestic policy surprises, we expect utilities selection in 2017 to be easier for China amid a stabilising economy, clear earnings divergence and appealing valuations: We prefer wind/gas/solar over hydro/nuclear/IPPs. HK counterparts remain unattractive with volatile macro variables and return reset. Top Outperforms are LYP/CRG/XYS/PAH and top Underperforms are HNP/HKCG/HKE/CGN. Also, we upgrade ENN and downgrade CYP. Power: More divergent Following a sequential slowdown since 2013, China's total power output started to gain More balanced power momentum since July 2016. For 2017, we expect: (1) improving power demand and supply and demand may weaker hydro to reduce supply competition and improve renewable curtailment; (2) benefit renewables such as recovering market-based power prices as evidenced by the recent trend in Guangdong wind and solar… and reducing concerns for renewables' participation before reaching grid parity; (3) on a less bright spot, IPPs will face a few quarters of losses with higher average coal prices; and (4) progress of carbon trade and green certificates could transfer further earnings from

IPPs to renewables. Wind (+40%) and solar's (+39%) earnings should clearly outpace …while IPPs could face a other fuels. Nuclear is likely to face pressures in 2017, with its output not fully protected by few quarters of losses with the proposed minimum utilisation scheme and tariff risks ahead (participation in low-tariff higher coal costs direct supply). Our top picks in the power sector are Longyuan Power and Xinyi Solar, and our top sells are Huaneng Power and CGN Power. Gas: Opportunity after bumps The gas sector saw a bumpy year in 2016 with policy shocks challenging margin Our key concerns for gas sustainability. In our recent sector report in September 2016, we highlighted near-term risk have been priced in, and of dollar margin squeeze due to local government intervention and winter price hikes, both current valuation seems of which are proved to be right. However, the downside may have already been priced in, appealing as we calculate only ~5% earnings impact despite the recent ~15% stock weakness. At only 9x sector P/E, we view the valuation as attractive with risks priced in and recovering gas demand. While the 2020 targets are not yet published, we have forecast ~10% demand CAGR for FY16-20E (5.7% only in FY15), supported by lower gas prices and mix changes (commercial and heating to take a leading role while industrials and vehicles move back stage). We like companies that are more likely to outgrow peers on volume growth and our top pick is CR Gas. Hong Kong: Challenges remain The Hong Kong space gained unusual popularity for yield investors in most of 2016. For HK utilities, the crowded However, the crowded yield trade could be challenged by risks of rising long-term interest yield trade could be rates and the strengthening USD (impacting overseas business) which has already challenged by rising long- occurred recently since the US Presidential election. Additionally, negotiation on the next term interest rates and the Hong Kong regulated return could be another long-awaited key event in 2017, for which strengthening US dollar we expect a cut from 9.99% to 8% (HKE and CLP most exposed) for the next regulatory period starting in 2019. The 4% average dividend yield is not attractive relative to history and to global peers. Plus, volatility of the long-term bond yield and strength of USD remain the key challenges. Within the space, PAH is our top pick given a likely special dividend if no acquisitions.

HK and China Utilities Sector 3

Sector Utilities China andHK Figure 9: HK/China valuations summary Name Ticker Rating Price TP Mkt cap P/E (x) P/B (x) Yield (%) ROE (%) % EPS CAGR US$ bn 16E 17E 16E 17E 16E 17E 16E 17E 16-18E China Wind power sector Huaneng Renewables 0958.HK O 2.6 3.6 3.2 8.3 6.7 1.1 1.0 2.4 3.0 14.1 15.5 25.7 Longyuan Power 0916.HK O 6.1 8.0 6.3 11.1 7.8 1.0 1.0 1.8 3.2 9.8 12.8 29.5

China Datang Renewables 1798.HK O 0.7 1.2 0.7 9.2 5.4 0.4 0.4 1.1 1.9 4.7 7.5 43.7 Huadian Fuxin Energy 0816.HK O 1.8 2.8 1.9 5.7 4.4 0.6 0.6 3.1 4.1 11.9 14.1 28.3 China Suntien Green Energy 0956.HK N 1.0 1.2 0.5 7.2 5.4 0.4 0.4 4.6 6.1 6.2 7.9 25.5

Simple average 8.1 5.6 0.7 0.7 2.7 3.9 9.8 12.4 30.4 China Hydro power sector SDIC Power 600886.SS N 7.0 6.8 6.9 8.5 9.1 1.6 1.4 4.1 3.9 19.7 16.4 -10.9 China Yangtze Power Co Ltd 600900.SS N 13.5 14.0 43.0 15.6 16.1 1.8 1.8 4.8 4.8 15.0 11.2 -3.6 Sichuan Chuantou Energy 600674.SS N 9.3 9.0 6.0 9.1 10.2 1.9 1.7 3.4 3.0 22.8 17.7 -13.0 Simple average 10.8 11.5 1.8 1.6 4.1 3.9 19.4 15.3 -10.0 China City Gas sector China Gas Holdings Ltd 0384.HK O 10.7 16.5 6.8 11.3 9.4 2.5 2.1 2.5 3.0 23.8 24.0 17.5 China Resources Gas 1193.HK O 23.3 31.0 6.7 13.1 11.1 2.6 2.2 1.9 2.4 21.0 21.4 18.0 ENN Energy Holdings Ltd 2688.HK O 34.7 42.0 4.8 11.1 9.9 2.1 1.8 2.5 2.7 20.7 19.9 16.1 Beijing Enterprises Holdings 0392.HK O 35.9 62.0 5.8 7.0 6.4 0.7 0.7 3.1 3.4 10.9 10.9 6.1 Hong Kong and China Gas 0003.HK U 14.5 11.0 23.8 25.4 24.8 3.3 3.2 2.4 2.7 13.4 13.1 4.0 Shenzhen Gas Corporation 601139.SS N 9.7 9.0 3.1 22.5 20.1 2.5 2.3 1.5 1.6 11.5 11.9 13.3 Simple average 15.1 13.5 2.3 2.0 2.3 2.7 16.9 17.0 12.5 China IPPs sector Datang International Power 0991.HK U 2.1 1.7 6.9 -8.3 31.0 0.6 0.6 0.0 0.0 -7.1 2.0 n.a. Huadian Power International 1071.HK U 3.3 2.4 6.9 8.7 -75.1 0.6 0.6 4.6 0.0 7.4 -0.8 -34.3 China Resources Power 0836.HK U 12.9 9.8 8.0 8.2 11.2 0.8 0.8 5.3 5.3 10.4 7.2 -16.1 Huaneng Power International 0902.HK U 4.9 3.5 14.7 8.4 19.6 0.7 0.7 6.0 2.6 9.1 3.8 -29.7 Simple average 4.2 -3.3 0.7 0.7 4.0 2.0 5.0 3.0 -26.7 China Solar power sector Xinyi Solar 0968.HK O 2.67 4.00 2.3 9.4 6.8 2.7 2.2 5.1 6.3 30.6 35.5 24.3 Concord New Energy 0182.HK O 0.40 0.56 0.4 5.3 4.4 0.6 0.5 3.7 4.6 11.2 12.4 23.7 GCL New Energy 0451.HK N 0.47 0.50 1.1 18.6 9.6 1.6 1.4 0.0 0.0 11.6 15.7 53.6 Linyang Energy 601222.SS U 8.70 6.80 2.2 26.3 18.8 2.8 2.5 1.5 2.1 11.1 14.2 15.6 Simple average 14.9 9.9 1.9 1.7 2.6 3.3 16.1 19.4 29.3 China Nuclear power sector CGN Power 1816.HK U 2.3 1.8 13.6 12.7 11.5 1.5 1.4 2.0 2.2 12.4 12.5 4.7 Hong Kong Cheung Kong Infrastructure 1038.HK O 65.3 81.0 22.3 15.7 15.9 1.5 1.4 3.4 3.6 9.9 9.3 0.9 Power Assets Holdings 0006.HK O 73.2 81.0 20.1 20.8 20.9 1.2 1.2 3.7 3.8 6.0 5.9 1.3 CLP Holdings Limited 0002.HK U 76.3 67.0 24.8 16.2 16.2 2.0 1.9 3.7 3.7 12.5 11.9 0.5 Hong Kong Electric Investments 2638.HK U 6.8 5.0 7.8 18.5 20.1 1.2 1.2 5.6 5.3 6.7 6.1 -4.9 Simple average 17.8 18.2 1.5 1.4 4.2 4.1 8.8 8.3 -0.6 Note: Based on closing prices as of 29 November 2016. Source: Company data, Credit Suisse estimates

30 November 2016 30 November

30 November 2016

Table of contents

Focus charts 2

When the clouds clear 3 Prefer China to Hong Kong ...... 3 Power: More divergent ...... 3 Gas: Opportunity after bumps ...... 3 Hong Kong: Challenges remain ...... 3 China is more resilient against external shocks ...... 8 Polarised earnings and attractive valuation ...... 9 Remember the so many shocks in 2016? ...... 10 2017 an execution year ...... 13 Key data and share drivers ...... 14

Power: More divergent 17 Demand-supply balance to improve ...... 17 Tariff pressure to be milder ...... 22 Two-to-three quarters of losses for IPPs ...... 24 Carbon trade and green certificate ...... 26

Gas: Opportunity after bumps 29 Assessing margin impact following recent news ...... 29 Demand should pick up further ...... 31 Commercial is the juiciest among new drivers ...... 32 Heating is a huge and expanding market ...... 33 Residential driven by urbanisation ...... 34 First round of LNG imports ...... 37

Hong Kong: Challenges remain 38 Classic inverse correlation with bond yield ...... 39 The greenback risks in 2017 ...... 40 Time for negotiation on the next reset ...... 41 Deal or dividends for PAH ...... 43

Appendix: Sector drivers 45

Longyuan Power 49

Huaneng Renewables Corporation 51

Huadian Fuxin Energy Corporation Limited 53

China Resources Gas 55

HK and China Utilities Sector 5 30 November 2016

ENN Energy Holdings Ltd 57

Xinyi Solar Holdings 59

China Yangtze Power Co Ltd 61

Huaneng Power International Inc 63

CGN Power Co., Ltd. 65

CLP Holdings Limited 67

Hong Kong Electric Investments 69

HK and China Utilities Sector 6 30 November 2016

Prefer China to Hong Kong Needless to say, 2016 has not been an easy year to invest in HK/China utilities (pheww!). Besides the spillover effects from 2015 including China's GDP slowdown, lower oil prices and Rmb depreciation, low-probability (some call them 'black swan' events) external shocks (Brexit and Trump victory) and a number of domestic policy surprises have turned a once stable sector into a very volatile one. After a year filled with external shocks (Brexit and the US Election) and 10 major domestic policy surprises, we expect utilities' selection in 2017 to be easier for China amid a stabilising economy, clear earnings divergence and appealing valuation: We prefer wind/gas/solar over hydro/nuclear/IPPs. The Hong Kong counterparts remain unattractive with volatile macro variables and return reset. Top Outperforms are LYP/CRG/XYS/PAH and top Underperforms are HNP/HKCG/HKE/CGN. LYP and CRG are new additions. Figure 10: Key stock recommendations FY16-18 Sector Stock Key thesis Vs. peers EPS CAGR Top buy Wind Longyuan Power (LYP) Continuing curtailment reduction to boost utilization hours. Replace More leveraged to utilisation recovery and less 30% HNR as top pick. aggressive in direct sales Gas China Resources Gas (CRG) Margin risks largely priced in and volume recovery to drive re- Better positioned in penetrating into commercial 18% rating. Replace CGH as top pick. demand, a key new driver. Solar Xinyi Solar (XYS) Long-term beneficiary of cost declines. More prudent and return-centric as well as lighter 22% balance sheet. HK Power Assets (PAH) Special dividend likely if no major acquisitions. Less exposed to Hong Kong market with regulatory 2% risks. Top sell IPPs Huaneng Power (HNP) A few quarters of losses ahead given sustainably high coal prices. More expensive in valuation and dividend yield -30% could collapse in FY17E. HK HK&China Gas (HKCG) Reversal of the HK yield trade. More expensive than both HK/gas peers. 4% HK HK Electric (HKE) Reversal of the HK yield trade plus HK regulatory risks. Most exposed to SoC cut. -5% Nuclear CGN Power (CGN) Likely risks in utilization and tariffs following years of protection. More expensive than other power sub-sector peers. 5% Source: Credit Suisse estimates

Figure 11: HK-China Utilities—rating and target price changes New Old New TP Old TP Upside/ Current mkt cap EPS change Company Ticker rating rating (HK$) (HK$) downside (US$bn) FY16E FY17E Wind Huaneng Renewables (HNR) 0958.HK O O 3.6 3.8 41% 3.2 1% -4% Longyuan Power (LYP) 0916.HK O O 8.0 8.0 32% 6.3 -3% -4% Huadian Fuxin Energy (HDF) 0816.HK O O 2.8 3.2 58% 1.9 -16% -20% Gas China Resources Gas (CRG) 1193.HK O O 31.0 32.0 33% 6.7 0% -2% ENN Energy Holdings Ltd (ENN) 2688.HK O N 42.0 44.0 21% 4.8 0% -3% HK Utilities Hong Kong Electric Investments (HKE) 2638.HK U U 5.0 5.3 -27% 7.8 0% 0% CLP Holdings Limited 0002.HK U U 67.0 70.0 -12% 24.8 0% 0% Hydro (no rating/TP changes) China Yangtze Power (CYP) 600900.CH N O 14.0 14.6 4% 43.0 -6% -6% IPP/Solar/Nuclear(no rating/TP changes) Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 7 30 November 2016

China is more resilient against external shocks Dramatically, the regulated Hong Kong utilities' business proved to be a safe haven during 1H16 (outperforming the China counterparts) until Brexit hit names with UK business exposure (Cheung Kong Infrastructure [CKI] and Power Assets Holdings [PAH]). While the other two names (CLP and Hong Kong Electric [HKE]) continued to perform well, a reversal took place after the US election and the rapid rise of the ten-year bond yield. Figure 12: Share performance and key events in 2016

Nov 8: US (Rebased to 100) Jun 24: Brexit presidential 115 referendum election 2.4

110 2.2 105 2 100 95 1.8 90 1.6 85 1.4 80 75 1.2 70 1

China Utilities HK Utilities represents key China policy events 10-year US bond yield GBP to USD Source: Company data, Credit Suisse estimates On the China side, utilities were largely immune to the Brexit issue given limited business and currency exposure. While the US election may lead to concerns such as import tariffs and reduced commitment to the climate issues, we believe that China Utilities remains a safe choice during such uncertainties. Reasons are: (1) China's power/gas volumes are generated 100% by domestic demand with limited trades with other countries; (2) some of the power tariffs and gas prices are set with regulated formulas linked to fuel price changes; (3) power capex has been stable or declining with technology innovation and equipment oversupply; and (4) finance costs have declined with domestic monetary policy and most utilities have small or reduced exposure to foreign currency debt. Figure 13: Business model exposure Power-wind Power-solar Power-hydro Power-nuclear Power-coal Gas Volume 100% domestic 100% domestic 100% domestic 95% domestic 100% domestic 100% domestic Tariff Feed-in Feed-in Feed-in/linked to coal Feed-in Linked to coal prices City-gate linked to imported oil Variable cost None None None Uranium (stable) Coal (rising) Gas (declining) Cost to build Stable Declining Stable to rising Stable to rising Stable Stable Domestic equipment Oversupplied Oversupplied Oversupplied Oversupplied Oversupplied Not applicable Finance cost Declining Declining Declining Declining Declining Declining FX debt exposure Low Low Low Low Low Medium Normalized IRR 10-12% 10-12% 10-12% 12-15% 3-5% 10-15% Overall external influence Low Low Low Low Low Medium to low Source: Credit Suisse estimates

HK and China Utilities Sector 8 30 November 2016

Figure 14: Power/gas demand vs Figure 15: On-grid benchmark tariffs China's official PMI and gas prices % % Rmb/KWh Rmb/c.m. 30 52 0.43 2.8 25 52 0.42 2.6 51 20 0.41 2.4 51 2.2 15 0.40 2 50 0.39 10 1.8 50 0.38 5 1.6 49 0.37 1.4 0 49 0.36 1.2

-5 0.35 1

Jul/14 Jul/16

Jul/15 48

Jan/14 Jan/15 Jan/16

Mar/14 Mar/15 Mar/16

Sep/14 Nov/14 Sep/15 Nov/15 Sep/16

May/14 May/15 May/16

-10 48

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Sep-14 Sep-10 Sep-11 Sep-12 Sep-13 Sep-15 Sep-16

May-14 May-11 May-12 May-13 May-15 May-16 Power demand growth YoY Gas demand growth YoY PMI (RHS) May-10 On-grid power tariff City-gate gas price (RHS) Source: CEIC Source: NDRC

Figure 16: Unit construction cost Figure 17: Trend in Rmb/USD and trend by power types benchmark lending rate (Rmb/W) % Rmb/USD 8.0 8.5 20.0 18.0 7.5 8.0 16.0 7.0 14.0 Thermal 6.5 12.0 Solar 7.5 10.0 6.0 8.0 Hydro 5.5 7.0 6.0 Nuclear 4.0 5.0 6.5 2.0 Wind 4.5 0.0

4.0 6.0

2010 2011 2012 2009 2013 2014 2015

2018E 2018E 2016E Interest rate (PBOC) FX (CNY/USD) (RHS) Source: Company data, Credit Suisse estimates Source: CEIC Polarised earnings and attractive valuation In 2017, our top three most favorite sub-sectors are: Wind, gas and solar. We expect these utilities to generate 40%, 15% and 39% aggregate earnings growth in FY17E while conventional counter-parts such as hydro, nuclear and IPPs are expected to be outshined.

Figure 18: Sub-sector earnings growth trend (%) Figure 19: Our forecasts vs consensus (FY17E)

200% (In reporting currency) 150% 10,000 9,000 100% 8,000 7,000 50% 6,000 CS estimate 5,000 0% Consensus 2012 2013 2014 2015 2016 2017 4,000 -50% 3,000 2,000 -100% Wind Gas Solar 1,000 IPP Hydro Nuclear - Wind Gas Solar IPP Hydro Nuclear Source: Company data, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates

Valuation is the second reason we are comfortable with. The below table shows that almost all the subs-sectors are trading below their historical mean. The most notable ones are wind and gas at >30% discount to the historical mean. IPPs look inexpensive trading on 1 standard deviation below mean but this can be justified by the upcoming losses, which we believe should push the sector to test trough valuation next year. Hong Kong utilities now offer ~4% forward dividend yield— lower than the historical mean of 4.4%.

HK and China Utilities Sector 9 30 November 2016

Figure 20: Sub-sector valuation vs historical average Wind Solar Hydro IPPs Nuclear Gas HK utilities P/B (x) P/B (x) P/B (x) P/B (x) P/B (x) P/E (x) yield Current 0.7 1.7 1.6 0.7 1.3 9.1 4.1% Avg.-2SD 0.3 1.3 0.6 0.5 0.8 7.5 3.6% Avg.-1SD 0.7 1.6 1.0 0.7 1.3 10.3 4.0% Average 1.1 1.9 1.4 1.0 1.7 13.1 4.4% Avg.+1SD 1.6 2.1 1.8 1.3 2.1 15.9 4.9% Avg.+2SD 2.0 2.4 2.2 1.6 2.5 18.8 5.3% Source: Bloomberg, Credit Suisse estimates Figure 21: ROE in history Wind Solar Hydro IPPs Nuclear Gas HK Utilities FY17E 12% 19% 15% 3% 12% 18% 8% Historical high 10% 16% 23% 16% 25% 17% 39% Historical low 7% 5% 7% 5% 12% 13% 9% Source: Company data, Credit Suisse estimates

Figure 22: Sub-sector P/B-ROE matrix

ROE 18.0% Solar Hydro 16.0% Wind 14.0% Nuclear 12.0% 10.0% 8.0% 6.0% Coal-fired IPP 4.0% 2.0% 0.0% P/B 0.5 1 1.5 2

Source: CWEA, Company data, Bloomberg, Credit Suisse estimates

Lastly, for our top-pick selection in 2017, we made two major changes to the buy basket. Figure 23: Sub-sector pick changes View New top pick Previous top pick Wind Positive Longyuan Power (LYP) Huaneng Renewables (HNR) Gas Positive China Resources Gas (CRG) China Gas (CGH) Source: Credit Suisse estimates Remember the so many shocks in 2016? Normally within the first year of China's every five-year plan period, we should expect higher intensity of policy announcements. But there is no year like 2016 (13th five-year plan: 2016 to 2020) that is filled with so many policy shocks across the power and gas sectors. Among the ten events we identified, the most notable ones that caused large share-price movements were: the introduction of minimum utilisation hour scheme (MUH) for renewables, local government intervention of gas prices and coal price rebound as a result of supply reform. Overall, we believe there was more good news to the renewable space (wind and solar), evidenced by the relative share strength and consensus earnings changes and more bad news for coal-fired IPPs following an already struggling year in 2015.

HK and China Utilities Sector 10 30 November 2016

Figure 24: Sub-sector utilities' performance YTD Figure 25: Sub-sector EPS revisions YTD

(Rebased to 100) (Rebased to 100) 120.00 110.00

110.00 100.00 100.00 90.00 90.00 80.00 80.00 70.00 70.00 60.00 60.00 50.00 50.00

Wind IPP Gas Wind IPP Gas Hydro Solar Nuclear Hydro Solar Nuclear Source: Bloomberg Source: Bloomberg

1. Power reform a reality for IPPs (March 2016): The launch of power industry reform and market-based pricing was a major event in 2015 but the pace has surprised the market in 2016. A key indicator, which is the share of market-based direct sales, has expanded from ~10% of IPPs' coal-fired power output in FY15 (disclosed in March) to around 25-30% of sales in FY16E. This is a risk to the IPPs given the price discounts (~15% in FY16E) with the market-based contracts. Separately, the recent 13th five-year plan (FYP) included a target of cancellation of all planned outputs (except prioritised ones) before the end of 2020, implying direct sales or market-based sales to cover at least 70% of China's total power supply (coal-fired mostly) by the end of the decade.

Figure 26: Structural design of the power industry Figure 27: Three-tiered volume mechanism for IPPs reform

Planned Traded at benchmark dispatch tariffs

Direct supply Tariffs at 10-20% lower (contract market) than benchmark

Thermal power

Tariffs lower than Spot market benchmark

100% 5% 0-5% 90% 25% 80% 30-35% 70% 60% Spot 50% 95% Direct supply 40% 75% 30% 60% Planned dispatch 20% 10% 0% 2015 2016E 2017E Source: NDRC, Credit Suisse estimates Source: Company data, Credit Suisse estimates

2.Long due protection for renewables (May 2016): The large curtailment issues (grid's failure to fully purchase renewable outputs) had dealt severe damage to investor confidence on renewable, especially the wind farms since October 2015, and wind operator stocks found their multi-year lows in February 2016. However, the overly pessimistic expectations did a U-turn when the NDRC announced a new scheme of Minimum Utilization Hours in May, aiming to protect wind and solar with target hours in the affected locations. The new policy was effective 1 July and its execution so far has been on track with signs of utilisation recovery since August.

HK and China Utilities Sector 11 30 November 2016

3. A price war for the solar Top-Runner program (2Q16): One key surprise with the solar PV industry in recent years was the larger-than-expected fall in panel prices. As a result, the NDRC introduced the Top-Runner program, allowing solar companies to bid based on competitive tenders and we expect the program to cover ~30% of the total new ground-mounted solar farms in FY16E. While the program was not a shock, the bidding pattern turned problematic with a few players offering irrational prices to win projects, leading to market concerns on future project returns and probably indirectly to the NDRC's proposal to cut 2017 solar tariffs aggressively. We expect the NDRC to reduce the price weight of tenders in 2017 and tighten technology standards. 4. Further renewables tariff cuts (September 2016): The NDRC launched an unexpected consultation in early September, suggesting to cut 2017 solar tariffs by 23- 31% and 2018 wind tariff by another 5-6%. While long-term tariff trend should understandably trend down, the timing of the consultation was unexpected, causing sharp reaction of renewable stocks. We expect the final decision to improve from the original versions as the suggested tariffs could greatly challenge sustainable profitability of the wind and solar operators. 5. Nuclear utilisation scheme seeking consultation (August 2016): Similar to renewables, the National Energy Administrative (NEA) issued a consultation to introduce a MUH scheme for nuclear power. However, the formula suggests only a partial protection of utilisation hours that are very high. While this is still under development, we expect the final release to push nuclear plants to participate in open direct sales markets which then would translate into pricing pressure. 6. Major come-back of coal prices (3Q16): On the utilities cost side, thermal coal was undoubtedly a major surprise with Qinhuangdao (5,500 kcal grade) price rallying by 99% from bottom to current level. The key driver behind was the government's supply reform which curbed coal production days. This created an inflection with the IPPs reporting YoY increase in fuel costs vs fuel cost drops in 1H16, ending the IPPs' five-year long cost savings. This is especially problematic for a sector with yield appeal and our recent earnings revisions suggest that sector ROE could remain at depressed levels with dividend largely compromised. 7. Shifted focus of the five-year plans (November 2016). In early November, the National Energy Administrative (NEA) announced the final version of the 13th five-year plans (13 FYP) for the power industry. Unlike the usual numerical target focus, power mix changes and emphasis of renewable energy utilisation are the key objectives. Wind and solar were each at >210GW and >110GW but curtailment rates need to decline to <5% over time, which would be positive to lift quality of project earnings. Separately, power reform could reach its climax with all planned outputs cancelled before the end of 2020, suggesting most IPPs' outputs are likely to become market-based pricing. 8. Local government intervention in gas pricing (April and August 2016): For the city- gas sector, the first negative shock took place in early April, when Zhejiang provincial government announced a uni-lateral price cap, resulting in margin squeeze for both provincial transmission and city-gas companies. Despite no other provinces following suit immediately, the NDRC triggered a full review in August suggesting other provinces to review their own local prices. Since then, local end-user prices have been cut in provinces including Fujian, Shaanxi, Hubei and select cities in Guangdong. 9. Beginning of transmission regulation (August 2016): Gas has not been a regulated industry in the past since the privatisation spree started in late 90s. But the mid-stream gas transmission networks will follow 8% ROA regulation effective January 2017. While we do not expect a similar re-regulation for downstream city-gas level in the near term, it is possible that a similar scheme may take place in the medium term.

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10. First seasonal gas price hike (November 2016): When the NDRC cut city-gate gas prices aggressively in November 2015, they allowed gas supplies to charge 20% higher maximum a year from then. Per the public news in October, PetroChina (the largest supplier) indicated to hike gas price by ~10% for the winter and their Northern China subsidiary announced ~15% hike for the winter (November 2016 to March 2017). This also marks the first ever seasonal price. According to our earlier estimates, the impact on national gas companies would be 4-5% in FY17E assuming the price change is seasonal and there is 50% chance of pass-through to end customers. 2017 an execution year Following the release of the 13th FYP, we believe the key policy trends have already been laid out. Therefore, going into 2017, we do not expect major policy surprises for utilities in general and rather, next year should be the first year of executing some of the new policies. Below are the key trends we forecast for China utilities: 1. Better power industry demand-supply (winner: wind): Starting from the macro, CS China economics team expects 2017 economy to stabilise ahead of political succession. This echoes the recent strong rebound of power demand since July 2016 and increases our confidence of a ~5% demand growth next year. Also, the very strong cycle of hydro output (largely associated with the severe El Nino cycle) covering ~20% of the power supply, seemed to have ended two months ago. In such a scenario, all other fuel types faced utilisation pressure, even for renewable energy with lasting curtailment issues. As a result, renewable curtailment should continue to decline and coal-fired power utilisation may only drop slightly. In this trend, renewables especially wind-farm operators (suffering more curtailment than solar farms) are the key beneficiary. Current market expectations: We do not believe that a better demand-supply balance is built in market expectations. The recent share-price performance of the renewables imply lingering investor caution on the curtailment problem. As a result, we expect earnings upside and share-price upside upon better-than-expected execution of renewable curtailment relief. We forecast wind hours to reach 2,100, improving further from 1,900. 2. Reduced pressure on power prices (winner: all fuel types): The above trend also has a direct impact in market prices for electricity. Since the power reform was embarked in 2015, ~25-30% of the coal-fired power sales have transitioned into market-based pricing, followed by increasing participation of other fuel types including hydro, wind, solar and more likely nuclear next year. With better demand-supply balance, we have forecast coal-fired direct sales discount to reduce from 15% in FY16E to 10% in FY17E. If other fuel types expand the direct sales market, we expect pricing pressure to be reduced together with coal-fired competitive landscape. Current market expectations: Renewables participation in the competitive landscape has been a recent concern for investors, especially seeing the irrational biddings at the Top-Runner programs in 2H16. However, better average power prices next year should reduce such risks for renewables, especially for wind power, still suffering large curtailment rate. For the longer term, we do expect renewables to see larger market-based tariffs once costs are towards grid parity, similarly as the Western markets. 3. Coal prices stay >Rmb500/t = IPPs near losses (loser: coal): Our latest coal price forecasts suggest average Rmb510/t (5,500 kcal) for FY17E (Rmb477 in FY16E). While our forecast implies downside of current levels (>Rmb600/t), sustainable level of >Rmb500/t means most of the players in the coal-fired power industry could suffer from losses. We are forecasting 64% aggregate earnings drop for the listed IPPs and expect at least two quarters of losses from 4Q16 to 2Q17. Current market expectations: The coal prices movements have started since 3Q16. While investors have probably prepared for the likely drops of coal prices, this does not appear to us a good time to accumulate the coal-fired IPPs. First, dividend has been a

HK and China Utilities Sector 13 30 November 2016

major appeal for yield investors but with some at losses, sector average yield may be only ~2% in FY17E . P/B valuation is low but still 15-20% higher than trough level. Thus, it is too early to consider buying ahead of even the first quarter of loss. 4. Carbon and green certificate is a plus (winner: wind/solar; loser: coal): As the world's two largest carbon emitters, China and the US officially ratified the Paris climate agreement at the G20 Summit. The pact is aimed at limiting global temperature increases from pre-industrial levels to "well below" 2 degrees Celsius. So far, 113 countries (including the US and China) have ratified it. Another penalty of carbon emissions could be in the form of green certificate. The coal-fired IPPs will need to increase investments in renewable capacity to achieve the target of 15% of thermal output from renewables. Failure to do so could involve purchasing green certificates to fill the gaps. At this point, it is unclear how carbon prices would be set initially and how much free emission rights the IPPs will be granted. Current market expectations: Now whether the US will still honour the pact is unclear, after Trump's victory. However, given China's increasing environmental problem, this is an opportunity for China to play a larger role in global climate issues, in our view. Last December in Paris, China committed to peak its CO2 emissions by 2030 and to make best efforts to peak earlier. It will increase non-fossil energy to 20% of its total energy consumption by 2030, which will require it to install 800 to 1,000 gigawatts in non-fossil capacity, equivalent to the entire current US generating capacity. 5. Gas demand to accelerate in 2017 (winner: gas): We reiterate our thesis from the September sector report that natural gas remains an important growth driver for China's energy rebalancing targets with ~10% demand CAGR for FY16-20E. As FY16E could finish with 7-8% growth, we expect FY17E to accelerate to 10% driven by various price cuts this year, stabilising economy and emerging new drivers. Current market expectations: We believe that investors have reduced investment confidence since China's economic slowdown and lower oil prices since 2015. With gas demand only growing 5% and single-digit again, we do not believe that our forecast of 10% demand growth is in the share price. Also, our new demand analysis (commercial and heating to take place as new drivers) is not widely agreed yet, which could have resulted in larger share performance divergence among peers. 6. Gas margins to be compromised (winner: upstream supplier): The recent price interventions by many local governments are consistent with our expectations and we have already incorporated the margin pressure in our forecasts. However, PetroChina has successfully increased the winter supply price by ~10% per press reports (CNStock). We calculate this to cause ~2-3% earnings impact to the listco earnings assuming a three- month and 50% chance of pass-through. The risk is new but also helps create a buying opportunity as share prices have declined by 10-15% in recent weeks. Current market expectations: We believe that some investors may be overly concerned with PetroChina's price hike. The gas industry remains very oversupplied even with some volume recovery and we continue to see gas demand to grow at cheaper prices over time. Key data and share drivers Wind: a repeat of 2012-13 cycle History suggests a strong correlation between curtailment and share performance. For example, Longyuan, the only company reporting monthly power generation since IPO, was trading below book at the peak of curtailment during 2012 (17% for that year). Meanwhile, 2012 was a less windy year vs a year ago, leading to a double-whammy impact on wind farms' utilisation. Dramatically, both negative shocks turned around in the following year (2013) with curtailment rapidly dropping to 11% and wind resources turning stronger. As a result, the sector had a huge performance year in 2013 and Longyuan traded around 1.8x P/B near the end of 2013. The 2015 problem was almost identical as the one in 2012 and

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based on valuation re-rating so far in 2016, we expect further execution of curtailment relief to support additional re-rating to at least historical mean (1.3x).

Figure 28: Longyuan's monthly wind resources, annual curtailment, and forward P/B valuation (x) 1.9 14% 17% 11% 8% 15% 10-12% 20.0% 1.8x Avg+2SD 1.7 15.0% 10.0% 1.5x Avg+1SD 1.5 5.0% 1.3x Avg 1.3 0.0% 1.1 1.0x Avg-1SD -5.0% 0.9 -10.0% 0.8x Avg-2SD 0.7 -15.0% 0.5 -20.0% Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Monthly wind speed growth (YoY) LYP P/B Source: CWEA, Company data, Bloomberg, Credit Suisse estimates Gas: volume improvement to re-rate in 2017 For city gas, monthly gas demand data and price changes are the two key drivers. In recent years, when monthly gas demand was >15%, sector P/E multiple was >15x even when prices were escalating. However, following the collapse of oil prices and weaker demand, the sector has de-rated close to 10x currently. But it is also observable that the sector recorded meaningful rallies around the two price cuts (March and November 2015). In 2017, we expect further recovery of gas demand following a series of price efforts and long-term gas prices should remain low given the oversupplied status. Following recent weakness associated with margin concerns, we see a good time to accumulate.

Figure 29: Monthly gas demand, gas prices, and gas sector P/E valuation

Local control PetroChina (x) Gas tariff Gas tariff cut Gas tariff Transmission raised gas raised in Aug cut in Nov of gas regulation in Mar 2015 pricing since price in Nov 2014 2015 since Aug 2016 20.0 Apr 2016 2016 25.0% 18.7x Avg+2SD 18.0 20.0% 15.9x Avg+1SD 16.0 15.0% 14.0 10.0% 13.1x Avg 12.0 5.0% 10.3x Avg-1SD 10.0 0.0%

7.5x Avg-2SD 8.0 -5.0% 6.0 -10.0% Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16

Gas consumption volume growth YoY Gas sector P/E Source: NDRC, Bloomberg, Credit Suisse estimates IPPs: valuation to test trough ahead of losses Lastly for IPPs, power demand, coal prices, and tariff changes are the usual three drivers. Lifted by the strong market performance, the sector rerated close to 1.5x P/B during May 2015 but has quickly derated to about 0.8x. Meanwhile, the macro variables all went against the fundamentals: (1) Power demand continued to cool off, (2) coal prices have soared in the past few months after years of corrections, and (3) no tariff hike likely until 2018. Looking forward, our house view suggests continuing GDP slowdown, stable coal prices in the near term, and further tariff pressure mostly from market-based reforms. All these could continue to depress IPPs' valuation.

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Figure 30: Power demand, coal price, tariff changes and IPPs' sector P/B valuation

(x) Coal prices started 1.6 Tariff cut in Sep Tariff cut in Apr Tariff cut in Dec 50% 2014 2015 2015 to rally since 2H16 40% 1.4 1.3x Avg+2SD 30% 1.2 20% 1.1x Avg+1SD 10% 1.0 0% 0.9x Avg -10% 0.8 0.7x Avg-1SD -20% 0.6 -30% 0.6x Avg-2SD -40% 0.4 -50% Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16

Power demand growth YoY Power sector P/B Coal price change since Jan 2014

Source: CEIC, NDRC, Bloomberg, Credit Suisse estimates

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Power: More divergent In China, renewables are best positioned, with improving power demand and weaker hydro to reduce supply competition and improve renewable curtailment. Better demand- supply should support better market-based power prices and reduce market concerns for renewables' participation before reaching grid parity. On the less bright spot, IPPs will face a few quarters of losses with higher average coal prices, and progress of carbon trade and green certificate that could transfer further earnings from IPPs to renewables. Nuclear is also likely to face pressures in 2017, with its output not fully protected by the proposed minimum utilisation scheme and tariff risks ahead (participation in low-tariff direct supply). Demand-supply balance to improve The central thesis of the first trend is improving demand coupled with weaker than expected hydro power. Following a sequential slowdown since 2013, China's total power output started to gain momentum since July 2016. In 1H16, total output increased by only 2% but since July, monthly growth has turned to 8-10% range, which we believe was contributed by both stabilising economic activities and hot temperature. Given 9M16 output of 4% already came ahead of government's (China Electricity Council) earlier forecast of 3%, we expect FY16 to likely reach ~5% YoY. Meanwhile, hydro power, following a very strong cycle since September 2015, has begun to normalise since September 2016.

Figure 31: Power output growth trend (YoY) (%) 60 Total Thermal Hydro 50 40 30 20 10 0 (10) (20)

(30)

Jul-12 Jul-16

Oct-11 Apr-13 Oct-15

Jun-11 Jun-15

Mar-12 Mar-16

Dec-13 Nov-12

Aug-13 Sep-14

May-14 Jan-Feb15 Jan-Feb11 Source: CEIC

This would now leave thermal power demand in the next 12 months to be highly affected by overall demand and changes in hydro. In our base case, we expect a 5% overall output growth in FY17 while hydro power to normalise to historical mean levels. This suggests thermal power demand to expand by 6% next year, accelerating from 5% in FY16. In a more bullish case, assuming overall demand growth of 7% and hydro power to follow the recent weakness (i.e., 15% below the strong cycle that was just completed or 5% below historical mean), thermal power could see 11% YoY expansion in FY17, extra 400 bps ahead of the base case.

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Figure 32: China power demand trend Figure 33: Hydro power monthly utilisation rate (%) (%) 25 Total Thermal 60 20 55 15 50 10 45 5 40 0 35 (5) 30 (10) 25 (15) 20

Jul-12 Jul-16

Oct-11 Apr-13 Oct-15

Jun-11 Jun-15

Mar-12 Mar-16

Nov-12 Aug-13 Dec-13 Sep-14

May-14 Jan-Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-Feb15 Jan-Feb11 2010 2011 2012 2013 2014 2015 2016 Source: CEIC Source: CEIC

Figure 34: Key power demand forecasts (thermal and hydro) Bn KWh FY14 FY15 FY16E FY17E FY18E Total output 5,546 5,618 5,899 6,194 6,442 YoY 4% 1% 5% 5% 4% Thermal output 4,173 4,210 4,373 4,587 4,761 YoY 12% 1% 4% 5% 4% Thermal utilization 4,706 4,329 4,206 4,190 4,258 YoY -6% -8% -3% 0% 2% Hydro output 956 996 1,030 1,029 1,053 YoY -6% 4% 3% 0% 2% Hydro utilization 3,653 3,621 3,650 3,390 3,400 YoY 9% -1% 1% -7% 0% Source: Company data, Credit Suisse estimates FAI growth to maintain momentum Starting from the macro level, our house view suggests Chinese economy in 2017 is relatively easy to forecast. The government will place social and economic stability at the top of its agenda. Therefore, while the government will take a firm approach to prevent further rise in property prices in major cities, it will likely ensure economic growth at or above its stated target of 6.5%. Therefore, despite the huge imbalance of the Chinese economy (with infrastructure investment accounting for almost 45% of the total demand growth in 2016, which is comparable to 2009) and low return of infrastructure projects (all highway companies together made a combined loss of around Rmb350 bn in 2015), we believe the government will continue to keep infrastructure investment growth at a very fast pace to ensure that the growth target is reached. The key forecasts are: (1) overall FAI growth to remain robust (+8% YoY) in FY17E; (2) by segments, corporate capex growth to recover slightly to 6-8% YoY in 2017 given no further downside for current corporate capex growth of 6% YoY; (3) real estate FAI growth will moderate to 2% in 2017 from 5.8% in 9M16; and (4) infrastructure FAI growth may reach >20% YoY. History shows little simultaneous correlation between power demand and FAI growth but given that majority of the power users are energy-intensive industries such as aluminum, steel, chemical and construction materials, any incremental demand on these users could trigger upside surprises on power demand.

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Figure 35: Correlation of power demand, industrial production and FAI (%) 50 Power gen YoY FAI YoY 40 30 20 10 0 (10)

(20)

Jul-07 Jul-11 Jul-15

Oct-06 Apr-08 Oct-10 Apr-12 Oct-14 Apr-16

Jun-06 Jun-10 Jun-14

Mar-07 Mar-11 Mar-15

Nov-07 Dec-08 Nov-11 Dec-12 Nov-15

Aug-08 Sep-09 Aug-12 Sep-13 Aug-16

May-09 May-13

Jan-Feb 06 Jan-Feb Jan-Feb 14 Jan-Feb Jan-Feb 10 Jan-Feb Source: CEIC

Figure 36: Key power-intensive materials demand forecasts Demand FY13 FY14 FY15 FY16E FY17E FY18E Steel (mnt) 768 744 704 703 716 723 YoY 7% -3% -5% 0% 2% 1% Ali (mnt) 27 29 32 32 33 35 YoY 35% 7% 8% 1% 5% 4% Cement (mnt) 2,406 2,466 2,332 2,291 2,190 2,145 YoY 9% 2% -5% -2% -4% -2% Source: CEIC, Mysteel, McColoskey, Credit Suisse estimates Wind: benefiting from further curtailment relief The largest event for wind power was the introduction of the minimum utilisation hour (MUH), which in theory serves as a game-changing event to curb curtailment issues. According to the scheme, all the locations in Zone I-III (covering up to nine provinces) are expected to be protected with 1,800-2,000 hours of annual utilisation. Effective 1 July 2016, different locations have seen varying utilisation improvement. So far, the locations that have seen satisfying execution include Heilongjiang, Liaoning, Inner Mongolia, Hebei, Ningxia and Shanxi while three locations stiff fall behind (Xinjiang, Gansu and Jilin). Figure 37: Impacted provinces and progress on utilisation protection Province Zone Curtailment Utilization hours FY11 FY12 FY13 FY14 FY15 1H16 9M16 Target 9M/FY Jilin I&IV 20% 32% 22% 15% 32% 39% 951 1,800 53% Gansu III 17% 24% 21% 11% 39% 47% 870 1,800 48% Xinjiang I & III 3% 4% 5% 15% 32% 45% 946 1,850 51% Heilongjiang III & IV 14% 17% 15% 12% 21% 23% 1,182 1,875 63% I.M. I & II 20% 30% 16% 9% 18% 30% 1,360 1,950 70% Liaoning IV 10% 13% 5% 6% 10% 19% 1,048 1,850 57% Hebei II & IV 3% 12% 17% 12% 10% 12% 1,418 2,000 71% Ningxia III 1% 1% 1% 0% 13% 22% 1,064 1,850 58% Shanxi IV 0% 1% 0% 0% 8% 12% 1,332 1,900 70% Source: CEIC, NDRC Among feedback from local governments, Gansu has given a discount to the target hours (500 vs 1,800). Yunnan even suggested a tariff discount to wind tariffs benchmarking with hydro while Shanxi suggested a two-tiered pricing (1,500 at regulated tariffs and remaining 400 at a discount). This inconsistent feedback from local governments suggests that the road to achieve full execution of minimum hours is not without challenges. In later July,

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five state-owned companies jointly protested against Yunnan's suggested tariff scheme. Similarly on 19 August and 26 August, the China Wind Power Association announced strong protests against Gansu and Shanxi. One encouraging development is that Gansu government subsequently announced a delay of the execution of the 500-hour proposal. Figure 38: Local government feedback and progress (Gausu has delayed their own proposal) Location Feedback Volume Tariff Progress Capacity Zone I-III LYP HNR HDF DCRP Hebei Released Supportive Supportive N.A. 8% 4% 4% 2% Xinjiang Released Supportive Supportive N.A. 10% 5% 9% 0% Shanxi Released Supportive Two-tier pricing Negotiating 4% 7% 3% 5% Gansu Released 500 instead of 1800 Supportive Delayed the proposal 8% 0% 27% 14% Liaoning No 7% 14% 2% 5% Inner Mongolia No 17% 25% 37% 43% Heilongjiang No 8% 0% 8% 7% Jilin No 3% 4% 3% 10% Ningxia No 5% 0% 0% 8% Zone IV Yunnan Released Supportive Tariff discount Negotiating 4% 11% 4% 3%

Source: NEA, China Wind Association, Local government websites In our view, it may require at least six months for local governments to finalise their respective means to fulfill the target utilisation hours. Meanwhile, investors can keep track of such progress by following the companies' monthly power growth figures. LYP has a complete historical record of the past cycle in 2011-2013 as the first operator listed and the stock was penalised when curtailment rose in 2012. However, following strong pressure from the central government, output growth momentum was regained during later 2012 and throughout 2013. In the current cycle, we believe 4Q15 marked the bottom and output momentum should accelerate with execution of the minimum hours policy. Additionally, the local governments' concerns against the minimum hours scheme were partially due to very strong hydro (18% and 75% of power capacity in Gansu and Yunnan) this year, which should ease in 2017 as the El Ninὁ effect comes to an end.

Figure 39: Capacity breakdown of key locations (2015) 100% 5%1% 8% 90% 13% 80% 26% 70% 27% Others 60% 9% 75% 50% 18% Wind 40% Hydro 30% 57% Thermal 20% 42% 10% 19% 0% Gansu Yunnan Xinjiang

Source: CEIC

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Figure 40: Wind power capacity forecasts FY12 FY13 FY14 FY15 FY16E FY17E FY18E Total connected capacity (GW) 61 76 96 129 154 181 207 Utilization hours 1,929 2,025 1,905 1,728 1,786 1,946 1,988 Curtailment rate 17% 11% 8% 15% 13% 8% 6% Wind resources (YoY) -2% -9% -2% 1% 3% 0% Max hours 2,324 2,275 2,071 2,033 2,053 2,115 2,115 Source: CEIC, Credit Suisse estimates As an example, the following figure shows how Longyuan Power's (LYP) monthly curtailment rates have soared from May 2015 to 1Q16 but have declined to single digit following execution of the MUH scheme. If average curtailment rate is kept at 8% next year, LYP could realise ~20% output growth YoY in FY17E with much higher growth rates in 1H17E due to base differences.

Figure 41: LYP—potential output growth trend in FY17E

Source: Company data, Credit Suisse estimates

Lastly, improving grid infrastructure is on the way with a number of ultra-high voltage projects (UHV) expected to commence operation in 2017 and one will be operational in 2016. Once completed, transmission and dispatch capacity in Inner Mongolia, Xinjang, Gansu and Ningxia will be significantly improved, and curtailment will be largely alleviated through the strong transmission lines. The broad consensus opinion is that once there is no grid bottleneck, a location should see <5% curtailment rate in a given calendar year. Figure 42: Ultra-high voltage transmission projects (for wind projects) Name From To Status Operation year Comment Technology Voltage 锡盟-山东 Inner Mongolia Shandong Operation 3Q2016 DC 800 宁东-浙江 Ningxia Zhejiang Operation 4Q2016 AC 1000 蒙西-天津南 Inner Mongolia Tianjin Construction Target 1H17 1Q15 start construction AC 1000 锡盟-江苏 Inner Mongolia Jiangsu Construction Target 1H17 2Q15 start construction DC 800 酒泉-湖南 Gansu Hunan Construction Target 1H17 1Q15 start construction DC 800 上海庙-山东 Inner Mongolia Shandong Construction Target 2017 2Q15 start construction DC 800 准东-安徽皖南 Xinjiang Anhui Approved Target 2018 2Q16 start construction DC 800 扎鲁特-山东青州 Inner Mongolia Shandong Approved Target 2018 4Q16 start construction DC 800 蒙西-湖北武汉 Inner Mongolia Hubei Approved Target 2018 DC 1100 准东-四川成都 Xinjiang Sichuan Approved Target 2018 DC 1100 蒙西-长沙 Inner Mongolia Hunan Approved Target 2018 AC 1000 扎鲁特-河南驻马店 Inner Mongolia Henan Plan Target 2018 DC 800 张北-南昌 Hebei Jiangxi Plan Target 2018 AC 1000 Source: State Grid, Credit Suisse estimates

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Tariff pressure to be milder Since the launch of power industry reform in March 2015, market-based power pricing has grown from zero to close to 25-30% in FY16E. As the 13th FYP targets to completely cancel the non-priority outputs before the end of 2020, we expect direct sales or other types of market-based transactions to expand their share. We forecast such contracts to reach ~40% of the IPP's coal-fired power outputs in FY17E, then to 60% in FY18E. However, in the next 12 months, a less depressed demand-supply should lead to better power-pricing environment. This is evidenced by Guangdong's recent monthly bidding with improving price quotations (33% discount in April to only 8% discount in September). Figure 43: Guangdong monthly power bidding data (an example of improving power prices) Bidding result Supply (IPPs) Demand (retailers, big industrial users) Total Average % discount No. of bidders/ No. of bidders/ transacted discount to benchmark Volume successful Volume successful volume (bn kWh) (cent/kWh) tariff bidded bidders bidded bidders Mar-16 1.05 -12.6 -28% 1.30 36/29 1.12 81/80 Apr-16 1.45 -14.8 -33% 1.79 36/33 1.61 81/79 May-16 1.40 -13.3 -30% 1.75 37/32 1.81 91/47 Jun-16 1.87 -9.4 -21% 2.33 37/30 2.30 100/97 Jul-16 2.66 -5.9 -13% 3.29 37/35 3.26 130/112 Aug-16 3.55 -4.3 -10% 4.44 38/37 4.20 145/122 Sep-16 4.00 -3.7 -8% 5.01 38/37 5.60 166/142 Source: Guangdong power trading centre In the recent 2017 Coal and Power outlook report, we adjusted our tariff assumption for the IPPs as: (1) for the direct supply discounts, we expect narrowing discount from 15% in FY16E to 10% in FY17E, driven by higher coal prices and better-than-expected power demand since 3Q16; (2) for on-grid regulated tariffs, given that the IPPs are still largely profitable in 2017 and the average coal price in 2016 only barely meets the requirements to trigger the cost-plus formula, we expect the likely on-grid tariff hike to be delayed till January 2018 after full-year's operation under the new coal price norm. We forecast a Rmb0.02/KWh price hike (~5%) for the regulated on-grid outputs. Figure 44: Key utilisation and tariff assumptions for the listed IPPs FY16E FY17E FY18E Utilisation hours -5% -2% 0% Output from on-grid 75% 60% 40% Output from direct supplies 25% 40% 60% On-grid tariff -9% 0% 5% Direct supply discount -15% -10% -15% Average tariff changes -10% -1% 0% Source: Company data, Credit Suisse estimates Solar price war may be easing in 2017 One key surprise with the solar PV industry in recent years was the larger-than-expected fall in panel prices. As a result, the NDRC introduced the Top-Runner program, allowing solar companies to bid based on competitive tenders and we expect the program to cover ~30% of the total project quota in FY16E. While the program was not a shock, the bidding pattern turned problematic with a few players offering irrational prices to win projects, leading to market concerns on future project returns and probably indirectly to the NDRC's proposal to cut 2017 solar tariffs aggressively. We expect the NDRC to reduce the price weight of tenders in 2017 and tighten technology standards. Tariff currently accounts for 30% weight in the bidding scorecard. We believe other quality factors such as historical project track record (~20%) and technology & system efficiency (~20%) could be assigned with higher weights in 2017, which could

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partly discourage the aggressive low-tariff bidders and help prevent a price war, in our view. At a recent solar industry conference, most companies we met expect the Top Runner program to expand from 5.5GW in 2016 to 8-10GW in 2017 and may represent ~40% project quota in 2017. According to Sinoergy, NEA may also introduce a new scheme called "Super Top Runner" program in 2017 on top of the existing bidding programs, in which tariff bidding will be assigned less weight, with more emphasis on technology upgrade and efficiency enhancement.

Figure 45: Possible solar project quota mix in 2017 100% 22% 22% 80% 24% 44% 60%

40% 54%

20% 34%

0% 2016 2017 Ground-mounted Top Runner Programs Others (poverty alleviation, etc.) Source: NDRC, Company data, Credit Suisse estimates Different paths to grid parity An optimal future for renewable energy lies with grid parity, whereby wind and solar can compete with other fuel types freely in a subsidy-free world. China's policy-makers and industry experts have long argued that by 2020, wind power should be competitive with coal-fired power for on-grid tariffs and solar with retail tariffs (industrials). Tracking the progress, solar PV has outpaced expectations with large tariffs cut coupled with continuing price drops of solar panels. However, wind is behind given stable wind equipment prices and tariff cuts of coal-fired power. Therefore, solar is highly likely to reach grid-parity on the end-user side while wind would still leave ~Rmb0.14/KWh of gap. If solar is ever competitive at the on-grid level, a much larger cost reduction is required (from Rmb6/W currently to Rmb3.5/W) and this is unlikely to be reached before 2020, in our view.

Figure 46: Renewable tariff gaps towards grid parity Rmb/KWh 1.00 0.80 0.60 0.40 0.20 0.00

2020

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16

May-16 May-10 May-11 May-12 May-13 May-14 May-15

Wind (on-grid) Solar (retail) Solar (on-grid) Source: CEIC, Credit Suisse estimates

However, wind has also faced much larger variance on utilisation hours. Over the past decade, wind hours have recorded 1,728 to 2,077 with curtailment changes as a major factor. For example, the hour of 1,728 in 2015 came after a 15% curtailment rate, suggesting maximum hours of 2,032 hours given last year's below-average wind conditions. We calculate that Zone I-III (curtailment-heavy) and Zone IV (curtailment-free) locations require 2,450 and 2,600 hours (~29% higher than our projected levels) to reach

HK and China Utilities Sector 23 30 November 2016

grid parity (tariff cut to coal-fired level while maintaining 10-12% equity IRR). In western countries, this can be achieved through minimisation of curtailment and technology innovation of equipment. Figure 47: Solar farm IRR by 2018 2018 Hours IRR (2018) Solar tariff Benchmark (retail) Zone I 1,500 12% 0.60 0.79 Zone II 1,300 11% 0.70 0.79 Zone III 1,100 10% 0.80 0.79 Source: CEIC, Credit Suisse estimates Figure 48: Wind farm IRR by 2018 2018 Hours IRR (2018) Wind tariff Benchmark (on-grid) Zone I-III 1,900 8.5% 0.43/0.46/0.50 0.38 Zone IV 2,200 19.2% 0.57 0.38 Zone I-III (grid-parity) 2,450 10.0% 0.38 0.38 Zone IV (grid-parity) 2,600 12.0% 0.38 0.38 Source: CEIC, Credit Suisse estimates To gauge what is possible, below chart shows the range of average annual wholesale electricity prices for different power sources going back to 2003 in the United States. The dark diamonds represent the generation-weighted average levelised wind PPA (power purchase agreement) prices in the years in which contracts were executed. Average wind PPA prices compared favourably to yearly wholesale electricity prices from 2003 through 2008. Starting in 2009, the sharp drop in wholesale electricity prices (driven primarily by lower natural gas prices, but also declining electricity demand) squeezed average wind PPA prices out of the wholesale power price range on a nationwide basis. Wind PPA prices have since fallen and in 2013, further PPA price declines, along with a bit of a rebound in wholesale prices, put wind back at the bottom of the range once again. Continuation of these trends in 2014 improved wind’s competitiveness even further. The wind PPAs signed in 2014 fell to around $23.5/MWh nationwide – a new low, but admittedly focused on a sample of projects that largely hail from the lowest-priced interior region of the country. This new low average price level is notable given that installed project costs have not similarly broken through previous lows and that wind projects have, in recent years, been seen at somewhat lower-quality resource areas.

Figure 49: Average levelised long- Figure 50: Levelised long-term wind term wind PPA prices and yearly PPA prices in 2012-2014 and yearly wholesale electricity prices over time wholesale electricity prices by region

Source: Berkeley Lab, FERC, Ventyx, Intercontinental Europe Source: Berkeley Lab, Ventyx, Intercontinental Europe Two-to-three quarters of losses for IPPs Despite better demand and pricing outlook in 2017, the coal-fired IPPs, however, have to face the higher sustainable coal prices and a few quarters of net losses. In our recent 2017 Coal and Power outlook report, we have cut FY16-18E EPS forecasts substantially. Given the lagging impact of coal price realised in the IPPs' P&L (both due to slow mark-to- market of contract coal and inventory pricing), we expect peak average coal prices to

HK and China Utilities Sector 24 30 November 2016

actually be realised in 1Q17 instead of 4Q16. As a result, we forecast a 5% YoY increase in unit fuel cost in FY16E, followed by a 15% YoY increase in FY17E. At Rmb500/t, we expect the industry average to be at a loss-making status. In the following table, we illustrate how net profits, ROE, cash earnings (EBITDA – finance costs – taxes) and EBITDA are impacted by various scenarios of coal prices. At Rmb500/t (5,500kcal), a standard IPP plant (average profitability, lower than the tier-1 listcos we cover) would be marginally loss-making but would still make positive cash earnings till coal prices reach Rmb650/t. Figure 51: Profitability impact of coal prices on a standard IPP plant in 2017 Coal price 350 400 450 500 550 600 650 NP/KWh 0.14 0.07 0.01 -0.06 -0.13 -0.20 -0.27 ROE 9% 5% 0% -4% -8% -12% -17% Cash earning/KWh 0.31 0.26 0.21 0.16 0.10 0.05 0.00 EBITDA/KWh 0.45 0.38 0.31 0.24 0.17 0.10 0.03 ROE 9% 5% 0% -4% -8% -12% -17% Source: Credit Suisse estimates For the listcos, we forecast an aggregate recurring profit to decline by another ~64% YoY in FY17E, followed by ~50% drop in FY16E. We expect Huadian Power (HDP) to record a full-year loss and the other lower-cost players (China Resources Power [CRP], Huaneng Power [HNP] and Datang Power [DTP]) would be profitable on full-year basis but with 1H17 likely a loss. We also expect two of the IPPs to pay no dividend in FY17E - HDP and DTP, while HNP pays 50% of remaining earnings and CRP pays out entire FCF surplus from FY18E so as to keep the stable dividend commitment next three years. One frequently asked question from investors recently is whether the government would tolerate the IPPs to make continuing losses till stable electricity supply is compromised. First, China's power industry has never been so oversupplied. We expect average coal- fired utilisation to go down to ~4,000 hours in FY17E, the lowest level ever. This is despite slightly better power demand forecast (~5% in FY16-17E vs. 3% previously) given the continuing expansion of coal-fired capacity (likely 9% YoY in FY16E) and clean energy units (nuclear, wind and solar). Moreover, this is not the first time the IPPs are facing a loss. During the 2008-09 cycle, the same companies recorded losses for at least two to three quarters (HNP: 2; DTP: 3; HDP: 3). Electricity supply was not an issue in the last cycle partially because most power plants were still positive in cash earnings (excluding depreciation and amortisation). In FY17E, we forecast the tier-1 players will be marginally profitable and 2H17 average profitability to improve vs 1H17. Hence, industry profitability is still better than last time.

Figure 52: Quarterly net profit trend (2008-2017E) (Rmb mn) 5,000 2-3 quarters of 2-3 quarters of 4,000 losses during losses likely this 2008-09 time 3,000

2,000

1,000

1Q09 4Q11 3Q14 2Q08 3Q08 4Q08 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

-1,000 1Q08

2Q17E 4Q16E 1Q17E 3Q17E 4Q17E

-2,000 HNP HDP DTP

Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 25 30 November 2016

Figure 53: Quarterly cash earnings trend (2008-17E) (Rmb mn) 10,000 cash earnings 9,000 cash earnings positive likely 8,000 positive during this time 7,000 2008-09 6,000 5,000 4,000 3,000 2,000 1,000 0

-1,000

4Q09 1Q16 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2Q16 3Q16

4Q16E 1Q17E 2Q17E 3Q17E 4Q17E HNP HDP DTP Source: Company data, Credit Suisse estimates

Lastly, we continue to believe that the IPPs in general should keep some minimal profits to carry out the power pricing reform, which would only be 20% done at the end of 2016. In the 13th five-year plans announced in early November, the National Energy Administrative (NEA) expects most of the planned outputs to be cancelled before end of 2020, meaning likely majority of the coal-fired outputs to be liberalised. Early losses would compromise the IPPs' incentives to explore such reform schedule. Carbon trade and green certificate On 3 September 2016, at the G20 Summit in China, China and the US—the world's two largest carbon emitters—officially ratified the Paris climate agreement. The pact is aimed at limiting global temperature increases from pre-industrial levels to “well below” 2 degrees Celsius. So far, 113 countries (including the US and China) have ratified it.

Figure 54: Global land and ocean temperature anomalies, January-December

Source: NOAA National Centers for Environmental Information

Now whether the US will still honour the pact is unclear, after Trump's victory. However, given China's increasing environmental problems, this is an opportunity for China to play a larger role in global climate issues, in our view. Last December in Paris, China committed to peak its CO2 emissions by 2030 and to make best efforts to peak earlier. It will increase non-fossil energy to 20% of its total energy consumption by 2030, which will require it to install 800 to 1,000 gigawatts in non-fossil capacity, equivalent to the entire current US generating capacity.

HK and China Utilities Sector 26 30 November 2016

Figure 55: Mismatch of air pollution and stock performance

(µg/m³) (rebased to 100) 400.00 140

350.00 120 300.00 100 250.00 80 200.00 60 150.00 40 100.00 50.00 20

0.00 0

Jul-16 Jul-16 Jul-16

Jan-16 Jan-16 Jan-16

Jun-16 Jun-16

Oct-16 Oct-16

Apr-16 Apr-16

Feb-16 Feb-16 Sep-16 Sep-16

Aug-16 Aug-16

Nov-16 Nov-16

Mar-16 Mar-16

May-16 May-16 Beijing average PM2.5 Wind sector stock performance

IPP sector stock performance Gas sector stock performance

Source: WIND, Bloomberg

According to the NDRC's Provisional Guidance on Carbon Emission Rights introduced on 12 December 2014, the carbon trade footprint should follow: (1) 2014-15 as the preparatory period for setting up policies and technical standards, (2) 2016-20 as the operational period for national carbon trading, and (3) carbon trading extended to more corporates and products, and will get linked to the international carbon market after 2020. Power plants are among the participants; the others are steel, petrochem, chemical, non- ferrous metals, construction materials, textile, paper, rubber and fiber-making. According to our discussions with the power groups, most coal-fired IPPs have incurred a small cost purchasing emission rights for the coal-fired power plants located in those test locations, but the costs were partially offset by the gas-fired power plants (given higher quota than the actual emissions) that they own. Some even have wind or solar farms selling quotas to coal-fired power plants. Out of the seven locations designed as pilot programmes, Hubei has become

China's largest market with a cumulative 17,178 kt of CO2 transacted from commencement until date. The average transaction price has been Rmb25/tonne. Figure 56: Transaction statistics for the selected markets during the pilot stage Opening Total Total value Average price Current price Exchange date volume (kt) (Rmb mn) (Rmb/tonne) (Rmb/tonne) Shenzhen 6/18/2013 3,956 197 50 29 Shanghai 11/26/2013 3,112 101 32 12 Beijing 11/28/2013 2,281 120 53 42 Guangdong 12/20/2013 5,782 140 24 17 Tianjin 12/26/2013 1,988 35 17 17 Hubei 4/2/2014 17,178 427 25 23 Chongqing 6/19/2014 268 7 25 15 Source: WIND, Shanghai Environment Energy Exchange At this point, it is unclear how carbon prices would be set initially and how much free emission rights the IPPs will be granted. But if we refer to our calculation on the latest average price of different carbon exchanges, we arrive at a 36% impact (or carbon impact of Rmb18/MWh) on unit profit for coal-fired power. While it is reasonable to expect some free quotas to be given out in the initial years, coal-fired power plants could see increasing carbon costs when standards tighten. Bear in mind that both are scenarios with the maximum impact, and the actual impact will depend on the timing and extent of the standards launched nation-wide. In such a case, almost all the coal-fired power plants will need to participate. Meanwhile, additional quotas have been purchased from renewable energy, and gas-fired power wind operators are allowed to sell carbon when quotas are tight.

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Figure 57: Unit carbon cost/income for coal-fired/wind IPPs (Per kWh) Coal-fired IPPs Wind operators Average carbon price (Rmb/tonne) 25 25 Carbon emission from 1 tonne of raw coal (tonne) 1.8 1.8 Carbon emission cost of burning 1 tonne of raw coal (Rmb) 45 45 Unit coal consumption (g/kWh) 300 -300 Unit carbon cost (Rmb/MWh) 14 -14 Current unit profit (Rmb/MWh) 58 150 Unit profit impact (%) -23% 9% Source: Company data, Credit Suisse estimates If the mechanism applies to individual listcos instead of power groups, we see more cost pressure for listed IPPs with currently lower renewable contribution, such as HNP, HDP and DTP while CRP is better positioned with wind already accounting for 5% of thermal output in 2015. Figure 58: Listed IPPs—worst case earnings impact from green certificate costs (if renewable investments are not made and green certificates apply to individual listcos) FY18 (bn kWh) HNP HDP DTP CRP Total power generation 323 198 162 209 Thermal output 292 173 125 195 Non-hydro renewables output 8.2 11.9 6.1 11.9 Non-hydro renewables as % of thermal 3% 7% 5% 6% Required % 15% 15% 15% 15% Gap % 12% 8% 10% 9% Implied wind capacity shortage at 15% target (GW) 18 7 6 9 Gap (bn kWh) 35.6 14.1 12.6 17.4 Assumed unit price of green certificate (Rmb/kWh) 0.05 0.05 0.05 0.05 Total cost of green certificate (Rmb bn) 1,780 703 630 869 Green certificate cost as % of FY18 net profit 46% 49% 51% 16% Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 28 30 November 2016

Gas: Opportunity after bumps In our recent sector report in September 2016 (click here), we emphasised China's natural gas industry to see the next phase: cheaper prices to drive up demand. While the 2020 targets are not yet published, we have forecast ~10% demand CAGR for FY16-20E (5.7% only in FY15), supported by lower gas prices and mix changes (commercial and heating to take leading role while industrials and vehicles moving back-stage). We also highlighted that in the near term, city-gas distributors are likely to face some challenges to their dollar margins (RMB gross profit per cm) because: (1) local governments have been conducting local price reviews which could trigger end-user price cuts similar as Zhejiang's surprise move in April 2016; (2) PetroChina is allowed to raise city-gate price (cost for the city gas companies) effective 20 November 2016 by no more than 20%. Assessing margin impact following recent news First, since Zhejiang's announcement in April, we have seen more provinces/cities announcing their own gas price decisions in the past several weeks. First, out of all these announcements, the coastal locations cut tariffs more (such as Fujian, Guangdong and Zhejiang) than inland (such as Shaanxi and Hubei). Second, some of the tariff cuts are partially shared by provincial transmission networks such as Shaanxi and Zhejiang coupled with possible cost reductions (such as cheaper LNG supply gaining share) in Fujian and Guangdong. Figure 59: City-gas projects price cut Province City Time Price cut (Rmb/cm) Cut shared by provincial City dollar margin after) Residential C&I CNG networks (Rmb/cm) price cut (Rmb/cm Fujian Xiamen 8/2/2016 0.31 0.31 Residential: 1.04; C&I: 1.24 Hubei Xiantao 8/20/2016 0.19 0.43 C&I: 0.53; CNG station: 1.36 Guangdong Zhanjiang 9/30/2016 0.42 LNG market price Fujian Xiamen 10/1/2016 0.32 0.32 Residential: 0.73; C&I: 0.88 Fujian Ningde 10/1/2016 0.30 0.30 Residential: 0.85; C&I: 1.15 Hubei Jingmen 10/18/2016 0.03 0.03 C&I: 0.80; CNG station: 1.35 Shaanxi Baoji 10/20/2016 0.16 0.14 0.12 C&I: 0.79; CNG station: 1.61 Shaanxi Xianyang 10/20/2016 0.16 0.16 0.12 C&I: 0.79; CNG station: 1.64 Shaanxi Shangluo 10/20/2016 0.16 0.16 0.12 C&I: 0.95; CNG station: 2 Qinghai Golmud 10/21/2016 0.10 Residential: 3.33 Hubei Tianmen 11/1/2016 0.05 C&I: 1.12 Fujian Fuzhou 11/1/2016 0.32 Residential: 0.61 Fujian Zhangzhou 11/1/2016 0.32 Residential: 0.63 Zhejiang Haining 11/1/2016 0.40 0.10 C&I: 1.18 Guangdong Dongguan 11/15/2016 0.10 0.15 Residential: 1.05; C&I: 1.9 Source: Local NDRC websites, Credit Suisse estimates While we expect more provinces to announce their decisions in the following months, our current margin assumptions have already incorporated the possible downside (~Rmb0.7/cm for C&I customers after VAT), in our view. How we arrived at Rmb0.7/cm as a reasonable sustainable level of C&I margin is based on: (1) applying price discounts (15%) to create price advantages to competing fuels like LPG in every location; (2) any likely cuts may be shared between provincial pipelines and city-gas projects (Zhejiang is a good example). As a result, the weighted dollar margin (weighted by location demand) for industrial users (excluding VAT) is around Rmb0.70/m3. This excludes a few high-margin outliers such as Shenzhen.

HK and China Utilities Sector 29 30 November 2016

Figure 60: City-gas dollar margin and provincial Figure 61: Adjusted city-gas dollar margins for charges industrials 2.50 2.50

2.00 City dollar margin 2.00 Weighted Provincial charge 1.50 1.50 dollar margin: 0.70

1.00 1.00

0.50 0.50

0.00 0.00

Jilin

Inner…

Anhui

Hubei Hebei

Tianjin

Henan Hunan

Shanxi

Henan Hunan

Shanxi

Beijing

Hainan

Yunnan

Jiangsu

Shaanxi

Sichuan

Guangxi

Liaoning

Zhejiang Zhejiang

Shanghai

Shenzhen

Shandong Shandong

Chongqing

Guangzhou

Guangzhou Heilongjiang Heilongjiang Source: CEIC Source: CEIC, Credit Suisse estimates

However, on the cost side, PetroChina's Northern company has announced a 15% price hike, covering Beijing, Tianjin, Hebei, Shandong, Liaoning and Inner Mongolia. Based on our industry research, the other provinces in China also received notices for a price hike and we believe the national average to be ~10%. Based on our discussion with the city gas companies, many are confident to pass through to the end-users but require some negotiation time as not all projects come with an automatically pass-through scheme. The city-gate average price currently is about Rmb1.8/cm, meaning a 10% hike to be close to Rmb0.2/cm. Assuming a 10% hike for the winter (covering first three months for 2017) and 50% success rate of full pass-through, the net impact is Rmb0.02/cm or ~2-3% earnings impact to the listcos. In this report, we have cut our city- gas earnings slightly to incorporate these. Figure 62: City-gas C&I dollar margin forecasts Rmb cm (post VAT) CRG CGH ENN FY15 0.72 0.69 0.77 FY17E 0.70 0.66 0.70 FY17E (post PetroChina price hike) 0.68 0.64 0.68 Source: Company data, Credit Suisse estimates As a result, we believe these risks are largely priced in as share prices have declined by ~10-15% since early October. Together with the margin impact (already in our model), total energy impact is 5-6%.

HK and China Utilities Sector 30 30 November 2016

Figure 63: City-gas share performance and key events

130 Zhejiang cut both intra- NDRC launched Mid- province transmission stream de-regulation 120 fee and end-user price policies

110

100

80 Local government PetroChina planned began to review city- 70 to have price hike by gas projects return 10% during winter

60 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16

CGH BJE CRG ENN Source: Company data, Credit Suisse estimates Demand should pick up further Looking beyond the near-term factors, while the 13th five-year plan (2016-20) on the oil and gas industry is yet to be released, industry forecasts point to 10% of China's primary energy supply by 2020 as a consensus target. This implies that demand needs to grow ~10% a year for the next five years.

Figure 64: Primary energy mix (2015) Figure 65: China—natural gas demand growth Bn cm 350 23% 23% 25% 300 22% 20% 20% 250 17% 15% 15% 200 16% 17% 12% 13% 10% 11% 150 9% 10% 10% 10% 100 6% 9% 6% 5% 50

0 0%

2006 2007 2003 2004 2005 2008 2009 2010 2011 2012 2013 2014 2015

2019E 2016E 2017E 2018E 2020E Natural gas consumption YoY

Source: CEIC Source: CEIC, Credit Suisse estimates

30% YoY will support energy demand growth or natural gas demand growth. As we calculated for FY16E, industrials roughly account for 29% of overall demand, which has been driven mostly by construction-related projects. Our macro call that China's economy should stabilise and infrastructure FAI should grow at sectors such as glass, ceramics and other energy-intensive industries.

HK and China Utilities Sector 31 30 November 2016

Figure 66: China's industrial production growth Figure 67: Gas demand mix (FY16E) 25% Commercials 10% 20%

15% Transport Industrials 12% 29% 10% Power and heating 5% 16% Chemicals 15% 0% Residential

18%

Feb-15 Feb-16 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14

Aug-15 Aug-16 Aug-11 Aug-12 Aug-13 Aug-14 Aug-10

Source: CEIC Source: CEIC, Credit Suisse estimates Commercial is the juiciest among new drivers Besides industrials cyclically recovering, we expect two other drivers to surprise: commercial and heating. An emerging trend during the recent few quarters of demand slowdown is the acceleration of commercial gas sales (CRG recorded impressive 29% growth in these customers in 1H16). This group normally contains hotels, restaurants, hospitals, schools and other general public services. One clear advantage of serving these customers is strong affordability, as utility cost is normally a small part of their operating costs. We estimate commercial may be 5-10% of overall gas demand in China currently, but in developed areas especially in metropolitan cities, such demand can be more than 20%. This is clearly positive for the listcos with a national footprint. For example, in the top 10 provinces with high hospital density, CRG and CGH have much more geographical exposure than ENN. And for hotels, once again, CRG is best positioned, followed by CGH and ENN. As a result, we would not be surprised if in future years CRG maintains the leading pace in commercial gas demand growth. Figure 68: Hospital exposure of main city-gas distributors Rank Province Hospital no. ENN CGH CRG 1 Sichuan 5,104 √√√ 2 Shanxi 3,726 √ √√ 3 Shandong 3,531 √√√ √√ √√√ 4 Shaanxi 3,482 √√ √ 5 Henan 3,481 √√ √√√ √√ 6 Hebei 3,385 √√√ √√√ √√ 7 Hunan 3,058 √√ √ √√ 8 Heilongjiang 2,570 √√√ √ 9 Jiangsu 2,570 √√ √√√ √√ 10 Anhui 2,507 √√ √√√ √√ Overall exposure score 1.3 1.9 2.1 Note: <5 projects one tick; 5-15 projects two ticks; >15 three ticks. Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 32 30 November 2016

Figure 69: Hotel exposure of main city-gas distributors Rank Province Hotel no. ENN CGH CRG 1 Guangdong 735 √√√ √√ √√√ 2 Zhejiang 688 √√√ √ √√√ 3 Shandong 650 √√√ √√ √√√ 4 Yunnan 614 √ √ √ 5 Jiangsu 608 √√ √√√ √√ 6 Hunan 429 √√ √ √√ 7 Guangxi 400 √ √√√ √ 8 Sichuan 395 √√√ 9 Liaoning 382 √ √√√ √√√ 10 Hebei 377 √√√ √√√ √√ Overall exposure score 2.1 1.9 2.4 Note: <5 projects one tick; 5-15 projects two ticks; >15 three ticks. Source: Company data, Credit Suisse estimates Heating is a huge and expanding market Given China's challenging air problem, especially in the Beijing-Tianjin-Hebei area (BTH) and other northern cities, the government has laid out a strong commitment to curb emissions. As urban centralised heating is a major source of air pollution during the winter heating season, promoting coal-substitution (to convert heating boilers from coal-based to clean energy-based) is a way to significantly reduce emissions during the winter heating season. Following slow implementation, the process is believed to have been hastened by the city gas players in the past winter, following the two price cuts in 2015. Currently, Beijing and a number of smaller cities have achieved the status of "gas-heated", and all remaining areas still rely on coal as the main fuel during the heating season. In 2014, the BTH zone accounted for about 23% of total heating supply in China and the northeast regions accounted for another 34%. Shortage of gas supplies used to be a key bottleneck in the past but is no longer a problem with the status moving into oversupply. To estimate the potential size of China's urban heating market, we use China's total urban heat supply (in units of Joule) in 2014, and convert it into the amount of gas equivalent based on assumptions of gas heating value (8.5kCal/35.6kJ per m3) and the efficiency of gas boilers (80%). This results in a potential urban gas heating market of 116 bcm in 2014 or 122 bcm in 2015E, and the latter is already 61% of the 2015 national gas consumption target. By the 13th five-year plan, the gas heating market will be 156 bcm in 2020 (assuming a 3% CAGR of heat supplied from 2015-20E). One thing to notice here is that the number also includes co-generation. Apparently, the estimate could see upside if heating demand from suburban and rural areas is included.

HK and China Utilities Sector 33 30 November 2016

Figure 70: Provincial heating statistics and the gas equivalent Quantity of heat supplied (10,000GJ, 2014) Gas equivalent (if fully converted) (bcm) By steam By hot water Total % 2014 2015E 2020E Beijing 166 35,300 35,466 11% 12.5 13.1 16.7 Tianjin 1,538 11,254 12,792 4% 4.5 4.7 6.0 Hebei 5,684 19,144 24,828 8% 8.7 9.2 11.7 Shanxi 834 15,067 15,901 5% 5.6 5.9 7.5 Inner Mongolia 182 27,585 27,767 8% 9.8 10.2 13.1 Liaoning 6,521 43,494 50,015 15% 17.6 18.4 23.5 Jilin 457 22,465 22,922 7% 8.1 8.5 10.8 Heilongjiang 2,497 35,482 37,979 11% 13.3 14.0 17.9 Zhejiang 10,857 - 10,857 3% 3.8 4.0 5.1 Anhui 2,870 46 2,916 1% 1.0 1.1 1.4 Shandong 14,020 25,005 39,025 12% 13.7 14.4 18.4 Henan 3,150 5,572 8,722 3% 3.1 3.2 4.1 Hubei 1,279 44 1,323 0% 0.5 0.5 0.6 Shaanxi 2,150 5,872 8,022 2% 2.8 3.0 3.8 Gansu 88 9,175 9,263 3% 3.3 3.4 4.4 Qinghai - 290 290 0% 0.1 0.1 0.1 Ningxia 985 4,109 5,094 2% 1.8 1.9 2.4 Xinjiang 1,221 15,920 17,141 5% 6.0 6.3 8.1 National Total 54,499 275,824 330,323 100% 116.0 121.8 155.5 Note: 1GJ=10^9 J. Source: China Statistics Year Book (2014) Figure 71: Exposure to heating areas Rank Province Heating potential (bcm) ENN CGH CRG 1 Liaoning 18.4 4 18 15 2 Shandong 14.4 15 12 17 3 Heilongjiang 14.0 25 5 4 Beijing 13.1 1 5 Inner Mongolia 10.2 1 13 2 6 Hebei 9.2 19 38 7 7 Jilin 8.5 3 7 8 Xinjiang 6.3 2 9 Shanxi 5.9 2 7 10 Tianjin 4.7 3 1 11 Gansu 3.4 6 12 Shaanxi 3.0 5 1 13 Ningxia 1.9 2 14 Qinghai 0.1 3 Total projects 152 270 207 % 26% 48% 31% Source: Company data, Credit Suisse estimates Residential driven by urbanisation When someone says "a company's household penetration is now 50% and the pace could peak in the next few years", this is likely overstating the pace. In our view, urbanisation is a missing factor in the investment thesis, as it could enlarge the nominator and therefore create more years of connection opportunities. Based on the announced urbanisation plan for 2014-20, total urbanisation of the permanent population could increase from 53% in 2012 to 60% in 2020 and the government said urbanisation could rapidly increase during the range of 30-70%. If we take the population projections from the United Nations, the implied urban population could increase from 726 mn to 860 mn, an 18% increase!

HK and China Utilities Sector 34 30 November 2016

Figure 72: China's rapid urbanisation changes in the past decade

55% 53% 51% 50% 48% 50% 47% 46% 44% 43% 45% 42% 41% 39% 40% 38% 36% 35% 35% 34% 35% 33% 33% 33% 34% 35% 32% 32% 33% 31% 30% 30% 28% 26% 27% 25% 25% 26% 25%

20% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Urbanization rate (by permanent population) Urbanziation rate (by registered households)

Source: CEIC

This matters to city gas distributors as they predominantly sell gas in cities and counties where there is growing presence of urbanisation. If we assume a 3% CAGR in the urban population and assume the annual connection amounts to remain the same, China could have its total penetration rate up to 45% by 2020. Excluding the urbanisation factor, penetration will be much higher at 51%. This means that the household penetration of natural gas is unlikely to peak or slow down on a country-wide basis in this decade. It should retain its structural growth profile.

Figure 73: Natural gas penetration rate in the two scenarios

55% 51% 49% 50% 46% 44% 45% 41% 38% 45% 40% 36% 44% 42% 33% 40% 35% 30% 38% 28% 36% 30% 25% 34% 23% 25% 19% 20% 17% 13% 14% 15% 10% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E2015E2016E2017E2018E2019E2020E

Natural gas penetration rate without urbanization Natural gas penetration rate with urbanization

Source: CEIC, Credit Suisse estimates

This is a crucial factor to the outlook of new household connections as city gas companies' reported pipes (connectable households) may have not reflected these changes. Besides, CS house view of real estate FAI growth of 2% in FY17E suggests connection revenue is unlikely to disappoint next year.

HK and China Utilities Sector 35 30 November 2016

Figure 74: Household penetration (1H16) CGH* CRG ENN BJE SZG Household penetration 48% 45% 55% >80% >50% Volume CAGR past five years 17% 22% 22% 15% 24% * March year-end. Source: Company data, Credit Suisse estimates We prefer stocks with good probability of positive volume surprise. Commercial, heating, residential together are still the solid drivers for at least the next two years. Among national gas companies, CRG is better positioned within these sub-segments, in our view. Figure 75: Demand strength for the new growth drivers CRG CGH ENN Heating √ √√ √ Commercial √√√ √√ √√ Residential √√√ √√ √√ Score 7 6 5 Source: Company data, Credit Suisse estimates Figure 76: CS China bottom-up natural gas demand model bcm 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Total demand (NDRC) 107 131 147 169 179 193 211 233 260 286 312 YoY 19.6% 21.8% 12.6% 15.0% 5.6% 5.7% 9.4% 10.3% 11.4% 9.9% 9.1% Mining 13 14 15 16 17 17 18 19 20 20 21 YoY 5% 6% 9% 5% 7% 4% 4% 4% 4% 4% 4% Manufacturing 37 51 60 72 78 83 88 93 98 103 108 YoY 16% 36% 17% 20% 9% 6% 6% 6% 6% 5% 5% - Petroleum, Coking and Nuclear Fuel 4 7 10 14 14 15 15 16 17 17 18 65% 55% 45% 39% 4% 3% 4% 4% 5% 5% 5% - Chemical Material and Product 19 26 28 31 32 33 34 35 36 37 37 9% 34% 7% 11% 5% 3% 3% 3% 3% 2% 0% - Non Metallic Mineral Product 5 6 7 8 9 10 11 12 13 14 15 2% 40% 8% 17% 16% 10% 8% 8% 8% 8% 8% - Ferrous Metal Smelting and Pressing 2 3 3 4 4 5 5 6 6 7 8 14% 33% 16% 15% 14% 9% 9% 11% 10% 9% 9% - Non Ferrous Metal Smelting and Pressing 1 1 3 3 4 5 6 7 8 9 10 35% 54% 87% 32% 24% 15% 16% 18% 16% 15% 15% - Others 6 8 10 12 14 15 17 18 18 19 20 30% 26% 23% 26% 17% 10% 8% 5% 5% 5% 5% Power and Heating 19 23 23 26 27 29 34 40 49 56 63 YoY 42% 21% 2% 10% 6% 8% 16% 18% 21% 15% 13% Transport, Storage & Telecom Service 11 14 15 18 21 24 27 30 32 34 37 YoY 17% 30% 12% 14% 22% 14% 10% 10% 8% 8% 8% Commercial 5 6 7 7 9 10 12 15 17 21 24 YoY 12% 14% 18% 5% 17% 17% 18% 20% 20% 18% 15% Residential 23 26 29 32 34 37 40 45 52 59 66 YoY 28% 17% 9% 12% 6% 7% 10% 12% 15% 13% 12% Subtotal 108 134 150 170 187 201 220 241 268 294 320 YoY 21% 24% 12% 14% 10% 8% 9% 10% 11% 10% 9% Others (adjustment balance) -1 -3 -3 -1 -8 -8 -8 -8 -8 -8 -8 Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 36 30 November 2016

First round of LNG imports As analysed in the previous sector report, opening of the LNG direct import market is a rising opportunity for city gas companies to lower costs. Before China opens up all the receiving terminals currently monopolised by upstream suppliers, two terminals owned by Shenzhen Gas (SZG) and ENN should commerce operation, respectively, in 2017 and 2018. We can see SZG will be the first among listed companies to import LNG from its own terminal although the upside potential should be limited due to lack of LT take-or-pay contract with those upstream companies. According to our estimates, earnings contribution would be 2% in 2017 and 8% for the years afterwards assuming 50% utilisation rate. With a positive volume surprise due to better industrial output, utilisation rate and earnings could be well above our expectation. Figure 77: Estimated LNG terminals' earnings impact to SZG and ENN SZG ENN 2017E 2018E 2018E Designed capacity (mn t) 0.8 0.8 1.5 Capacity (bcm) 1 1 2.2 Benefits to city: Substituted volume (bcm) 0.016 0.131 0.282 Incremental dollar margin after substitution (Rmb/m3) 0.2 0.2 0.2 Profit contribution (Rmb mn) 2 20 42 Profits from wholesale: Wholesale volume to dealer (bcm) 0.102 0.339 0.588 Dollar margin (Rmb/m3) 0.1 0.1 0.1 Profit contribution (Rmb mn) 8 25 44 Profits from retail: Retail volume to CNG/LNG stations (bcm) 0.008 0.03 0 Dollar margin (Rmb/m3) 0.2 0.2 0 Profit contribution (Rmb mn) 1 5 0 Profits terminal fees (Rmb mn) 8 30 30 Earnings upside: Profit contribution (Rmb mn) 19 80 86 Earnings upside 2% 8% 2% Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 37 30 November 2016

Hong Kong: Challenges remain The Hong Kong space gained unusual popularity for yield investors in most of 2016. However, the crowded yield trade could be challenged with risks of rising long-term interest rates and strengthening USD (impacting overseas business) which has already occurred recently since the US Presidential election. Additionally, negotiation on the next Hong Kong regulated return could be another long-awaited key event in 2017, for which we expect a cut from 9.99% to 8%. Power Assets Holdings (PAH) is our top pick given event-specific potential (special dividend if no acquisitions) and limited exposure to Hong Kong businesses. For the above reasons, CLP Holdings (CLP) and HK Electric Investments (HKE) have substantially outperformed peers and Hang Seng Index in most of 2016 given its regulated business nature and no exposure to GBP. Understandably, recent hikes in long-term bond yield have propelled a reversal trend for CLP, HKE and even Hong Kong & China Gas (HKCG). Lackluster performance of Cheung Kong Infrastructure (CKI) and PAH was mainly impacted by Brexit and British pounds depreciation (~70% earnings exposure to UK).

Figure 78: HK Utilities—share performance in 2016 (Rebased to 100) US election 130 120 110 100 90 Brexit

Jul-16

Jan-16

Jun-16

Oct-16

Apr-16

Feb-16 Sep-16

Aug-16

Nov-16

Mar-16 May-16 CKI PAH CLP HKE HKCG Hang Seng Index Source: Bloomberg

Despite recent weakness, it is very important to note that valuation remains stretched, making the sector a less appealing case for the risk-reward argument. As the following charts show, sector average P/E is trading close to the past-ten-year peak, while sector average yield is close to historical low. Across large-cap global utilities peers, none of the Hong Kong utilities' stocks stand out (even HKE is at around mid-range).

HK and China Utilities Sector 38 30 November 2016

Figure 79: 12-month sector forward P/E history Figure 80: 12-month sector forward dividend yield history (x) (%) 21 20.1x Avg+2SD 5.3 19 5.0% Avg+2SD 4.8 17 17.2x Avg+1SD 4.5% Avg+1SD 15 4.3 14.3x Avg 13 4.0% Avg 3.8 11.5x Avg-1SD 11 3.5% Avg-1SD 3.3 9 8.6x Avg-2SD 3.0% Avg-2SD 7 2.8 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 81: Global large-cap power utilities—FY17E dividend yields (add PAH's special dividend)

Note: Stock selections based on market cap >US$10 bn in developed markets. Source: Company data, Credit Suisse estimates; Classic inverse correlation with bond yield Hong Kong utilities are widely perceived as yield-seeking stocks (due to their relatively stable EPS and DPS track record) and have shown strong negative correlation with US bond yield (see Figure below). In December 2015, the Federal Reserve of US raised interest rates by 25 bp for the first time since 2006, and officially started the rate hike cycle. However, the pace of rate hikes in 2016 was slower than expected, and the US 10- year bond yield has dropped from 2.3% in early 2016 to as low as 1.4% in July 2016, before rising to >2.3% recently. Should bond yields rise continuously in 2017, it is likely that HK utilities may underperform the market.

HK and China Utilities Sector 39 30 November 2016

Figure 82: HK Utilities: share price correlation to US bond yield (Rebased to (%) 300 100) Since early 2014 CKI PAH CLP HKE 4.0 250 Correlation -0.8 -0.8 -0.9 -0.8 3.5 200 3.0 150 2.5 100 2.0 50 1.5 0 1.0 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 CKI PAH CLP HKE US 10-yr bond yield (RHS)

Source: Company data, Credit Suisse estimates

Our US economics team did not expect a large rally of 10-year bond yields but a Fed rate hike in December (25 bp) remains the most likely outcome plus and two more rate hikes (25 bp each) in 2Q17 and 4Q17. While bond yields could remain volatile, so could share price performances going in 2017. The greenback risks in 2017 The US dollar index (against a basket of foreign currencies mainly including EUR, JPY, GBP, CAD, etc.) had a strong rally since the US election. YTD in 2016, the index increased slightly by 2%, milder than the 9% gain in 2015. Among the FX that Hong Kong Utilities have exposure to, Australian dollar, Canadian dollar, and New Zealand dollar registered 2-3% gain against USD in 2016, after major depreciation in 2015 (>10%). However, heavily impacted by Brexit, British pound has dropped another 16% YTD in 2016 against USD. RMB also registered a 6% loss.

Figure 83: US Dollar Index Figure 84: Currency movements vs. USD

102 5% 3% 3% 3% 1% 2% 100 0% 98 GBP CNY INR THB AUD CAD TWD NZD

96 -5% -3% -4% -4% -4% -5% 94 -6% -10% -9% 92 -11% 90 -15% -12% 88 -16% -16%

-20%

Jul-15 Jul-16

Jan-15 Jan-16

Sep-15 Sep-16

Nov-15 Nov-16

Mar-15 Mar-16 May-16 May-15 2015 2016 YTD

Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service

Checking with the latest CS house view, further strengthening of USD is likely over the next 12 months but the impact on GBP and AUD (two currencies that CKI and PAH have large exposure) may be mild at 3%. We estimate CKI has 70% FY17E earnings denominated in GBP and 10% in AUD, and PAH also has 60% exposure to GBP and 10% to AUD. RMB may depreciate another 6% in the next 12 months, based on CS estimates, which is not good news for HKCG and CLP with major RMB exposure (43% and 13%, respectively). HKE, with 100% domestic Hong Kong business, is least affected by forex risks.

HK and China Utilities Sector 40 30 November 2016

Figure 85: Hong Kong utilities–2017E EPS currency exposures (2017E) HKD GBP AUD CNY Others CKI 4% 71% 13% 3% 9% PAH 16% 62% 13% 4% 5% CLP 72% - 9% 13% 6% HKE 100% - - - - HKCG 50% - - 43% 7% Estimated depreciation against 0% -3% -3% -6% n.a. USD in next 12m (CS forecasts) Source: Company data, Credit Suisse estimates

Figure 86: Credit Suisse FX strategy forecasts

Source: Credit Suisse estimates Time for negotiation on the next reset Hong Kong's Scheme of Control (SOC) is usually reset every ten years. The current contract ends by the end of 2018 and given the recent comment by the Secretary for Environment, we expect meaningful negotiation to take place in 2017, which is very crucial to the two HK-heavy names – CLP and HKE. The current regulation allows the two power companies (CLP and HKE) to earn a 9.99% fixed annual return on fixed asset investments approved by the government. Before 2008, the allowed return was 13.5% and the return reduction directly led to a large YoY earnings decline of the two companies' Hong Kong earnings in 2009 (33% for CLP and 28% for PAH).

Figure 87: History of SOC earnings Figure 88: History of overall ROE

(HK$ mn) SOC cut from (%) SOC cut 10,000 13.5% to 30.0 from 9.99% 13.5% to 25.0 9.99% 8,000

20.0 6,000 15.0 4,000 10.0 CLP CLP 2,000 5.0 PAH (before spin-off) PAH (before spin-off) 0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Company data Source: Company data

HK and China Utilities Sector 41 30 November 2016

Given that Hong Kong's currency is pegged to the USD and the cost of borrowing is highly linked to dollar costs, we compare the Scheme of Control (SOC) return over time versus the US ten-year treasury yield. As the following figure illustrates, except for the large bond yield hikes during 1978–86, the spread of SOC over bond yield remained in the positive territory. The current spread is above the historical mean of 6.5%, even after the large SOC rate cut in 2008 (from 13.5% to 9.99%). Given the political pressure over the past few years in Hong Kong, the current scheme is at the risk of further downside.

Figure 89: Historical trend of bond yield and spread over SOC return (%) 16 14 12 10 8 6 4 2 0 -2

-4

1964 1988 2012 1967 1970 1973 1976 1979 1982 1985 1991 1994 1997 2000 2003 2006 2009 2015 SOC return in HK Spread of SoC return over bond yield Historical mean of the spread

Source: Bloomberg, Credit Suisse research

The current 9.99% fixed return on regulated asset base also seems lucrative compared to global peers, especially to the regulated developed countries (mostly at 5-7%). In the consultation paper on the further development of the electricity market issued by the Hong Kong government in March 2015, it is mentioned that the government has commissioned a consultancy study to review the methodology, parameters and assumptions used for setting the permitted SoC rate of return. In view of the downward trend of the risk-free rate and changes in risk appetites in recent years due to the global economic situation, the consultant suggested that the Hong Kong government could consider reducing it to the range of about 6-8%. Figure 90: Regulated utilities' rate of return comparison Nominal post-tax return on Countries/regions Regulated business Regulated Asset Base Period Hong Kong Power generation & distribution 9.99% 2009-2018 UK Power transmission & distribution 5.5-5.8% 2013-2021 Water distribution 5.4-5.5% 2015-2020 Gas distribution 5.4-5.6% 2012-2020 Italy Electricity transmission 4.40% 2016-2013 Gas transmission/distribution/storage 4.4%/4.9%/5.1% 2016-2013 France Gas transmission 4.80% 2016-2020 Gas distribution 6.90% 2013-2017 Germany Gas/electricity distribution 4.90% 2013-17/2014-18 Spain Gas/electricity transmission 6.5% (pre-tax) 2014-2019 Australia Power distribution 6.00% 2016-2020 Gas distribution 6.00% 2016-2021 United States Electricity distribution 5-7% (varies across states) n.a. Malaysia Power generation & distribution 7.50% 2014-2017 Philippines Power distribution/water distribution 14.97%/7.61% 2015-2018 Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 42 30 November 2016

According to local news (Sing Tao Daily), Mr. Wong Kam-sing (Secretary for Environment) mentioned in a Legislative Council meeting in April 2016 that the Hong Kong government would target to complete the SoC negotiation for the next regulatory period (starting in 2019) by mid-2017. Considering possible interruption from political events changes such as Chief Executive election in March 2017, we expect the new regulated rate of return to be announced before the end of 2017. The current SoC agreement had a five-year extension option (2019-23) but it was not activated by the Hong Kong government. As a result, given the government's strong intention, we now expect a SoC regulated return cut in 2019 (earlier than previous assumption of 2023) from 9.99% to 8% (magnitude of cut unchanged vs. our previous assumption). As a result, earnings of CLP and HKE could see a cliff in 2019 by 14% and 32% roughly. In the worst case scenario if power companies and the Hong Kong government fail to reach an agreement before the expiry of current regulatory period (2009-2018), HKE and CLP would only continue to earn the current SoC-regulated rate of return (9.99%) for existing assets during the period from 1 January 2019 to 31 December 2023, while the average net fixed assets taken into account should not include assets acquired or invested after 31 December 2018, unless the purchase of such assets has been approved by the government. Meanwhile, the return on such new assets would also need to be re- negotiated between the government and power companies. Deal or dividends for PAH The year of 2016 has been less fruitful for CKI/PAH; the two companies have gained tremendous growth by expanding to overseas assets in the recent years. YTD in 2016, they have secured one major deal, i.e., the oil pipelines of Husky in April 2016 at CAD1.2 bn equity (65% stake) from Cheung Kong Hutch (parentco of CKI).

Figure 91: CKI and PAH—annual deal flow (measured by EV) (US$bn) 4.5 3.9 3.6 3.5 3.2 2.5 2.0 1.2 1.5 0.90.9 0.8 1.0 0.8 0.30.3 0.3 0.3 0.5 0.10.1 0.0 0.2

-0.5 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD CKI PAH Source: Company data

The slowing acquisitions could further corner PAH to make a decision on its large cash balance. Recall on 12 May, PAH made a public announcement deciding to preserve financial capacity for three major M&A projects: (1) Project 1 (Husky's oil pipeline assets, recently announced, total equity contribution at CAD1.2 bn [PAH 0.9 bn, CKI 0.3 bn]); (2) Project 2 (Ausgrid according to Bloomberg, not successful); (3) Project 3 (very substantial project of a scale comparable to Project 2). According to Financial Times, CKI consortium may be the final bidders for National Grid's regulated UK gas distribution networks. According to our UK utility analyst, Mark Freshney, the total EV of the underlying assets may reach GBP13.3 bn (including GBP7.5 bn equity), implying a RAB premium of 50%, and the deal size could be GBP4.4 bn (equity) assuming c60% sale.

HK and China Utilities Sector 43 30 November 2016

Figure 92: PAH&CKI: M&A updates No. Seller Business Stake for sale Attributable deal size EV/RAB Note 1 Husky (Canada) Oil pipelines 65% Equity: CAD1.2bn n.a. Done 2 Ausgrid (Australia) Regulated Power distribution 50% EV: AUD16.2bn 1.4-1.5x Sold to an Australian consortium 3 National Grid (UK) Regulated gas distribution c60% EV: GBP8.0bn 1.5x Under bidding Equity: GBP4.4bn Note: The targets of Project 2&3 are based on news reports (Bloomberg and Financial Times). The deal valuation for National Grid is from CS UK utility research team. Source: Bloomberg, Financial Times, Credit Suisse estimates. In case of lighter-than-expected deals, we expect PAH may pay out special dividends. Its current net cash is around HK$25 per share, based on our estimate, representing >30% of its current share price. Based on our calculation, PAH's ex-cash dividend of 6% is much higher than most peers (3-5%) and considerably high among global large-cap utilities stocks. PAH is our top pick in Hong Kong utilities given event-specific potential. Figure 93: PAH—ex-cash dividend yield calculation PAH (HK$) Current share price 73.2 Net cash per share 25.3 Ex cash share price 47.8 2017E DPS 2.8 D/Y 3.8% Adjusted D/Y 5.8% Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 44 30 November 2016

Appendix: Sector drivers Figure 94: Wind farms—key operational forecasts 2014A 2015A 2016E 2017E 2018E Consolidated wind power capacity (MW) LYP 13,543 15,765 17,565 19,565 21,565 YoY 14% 16% 11% 11% 10% CSG 1,697 2,094 2,594 2,944 3,294 YoY 17% 23% 24% 13% 12% HDF 4,889 6,417 7,517 8,317 9,317 YoY 40% 31% 17% 11% 12% HNR 7,527 9,721 11,021 12,621 14,221 YoY 21% 29% 13% 15% 13% DCRP 5,916 7,029 8,349 9,669 10,789 YoY 3% 19% 19% 16% 12% Wind power utilisation hours LYP 1,980 1,888 1,900 2,050 2,100 YoY -6% -5% 1% 8% 2% CSG 1,996 1,887 2,150 2,150 2,150 YoY -14% -5% 14% 0% 0% HDF 1,888 1,745 1,832 1,961 2,019 YoY -7% -8% 5% 7% 3% HNR 1,875 1,882 1,950 2,050 2,100 YoY -8% 0% 4% 5% 2% DCRP 1,803 1,745 1,808 1,908 1,886 YoY -10% -3% 4% 6% -1% Wind power gross output (GWh) LYP 23,088 25,709 29,739 35,748 41,105 YoY 5% 11% 16% 20% 15% CSG 2,740 3,161 4,330 5,447 6,113 YoY -6% 15% 37% 26% 12% HDF 6,765 9,071 12,060 14,973 17,098 YoY 10% 34% 33% 24% 14% HNR 11,675 13,852 18,198 21,729 26,212 YoY 5% 19% 31% 19% 21% DCRP 10,114 10,551 12,527 15,520 17,578 YoY -6% 4% 19% 24% 13% EBIT margin (%) LYP 36.0 36.3 39.7 43.9 45.7 CSG 20.2 20.1 26.3 29.2 29.5 HDF 35.6 31.0 35.9 39.4 40.7 HNR 54.4 56.0 55.0 57.9 59.3 DCRP 41.0 37.3 39.2 42.2 42.2 Net gearing (%) LYP 165 161 152 141 128 CSG 90 143 169 174 174 HDF 275 277 283 268 244 HNR 234 255 270 281 267 DCRP 286 289 327 343 338 Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 45 30 November 2016

Figure 95: IPPs—key operational forecasts 2014A 2015A 2016E 2017E 2018E Attributable capacity (YoY) CRP 16% 11% 7% 6% 8% HNP 7% 17% 4% 4% 3% DTP 5% 7% 9% 4% 6% HDP 6% 17% 7% 4% 4% CYP 0% 0% 74% 0% 0% Utilisation hours (YoY) CRP -7% -6% -3% -2% 0% HNP -9% -9% -5% -2% 0% DTP -10% -11% -5% -2% 0% HDP -2% -9% -5% -2% 0% CYP 18% -10% 8% -2% 0% Net power output (bn kWh) CRP 5% 8% 4% 3% 4% HNP (China) -7% 9% -2% 2% 2% DTP -2% -10% -7% 0% 3% HDP 3% 6% -1% 0% 6% CYP 18% -10% 93% -3% 0% Coal-fired on-grid tariff (YoY) CRP -1% -3% -9% -2% 0% HNP 0% -3% -9% 0% 2% DTP -1% -1% -4% -2% 0% HDP -3% -5% -11% -1% 2% Unit fuel cost (YoY) CRP -11% -18% 5% 15% 0% HNP -10% -16% 5% 15% 0% DTP -7% -10% 5% 15% 0% HDP -13% -20% 5% 15% 0% EBIT margin (%) CRP 21.5 28.0 23.9 18.5 17.5 HNP 20.2 22.6 16.2 9.5 10.2 DTP 18.6 21.5 11.5 9.2 10.7 HDP 21.7 26.9 17.6 7.3 11.4 CYP 59.1 55.8 57.6 56.6 56.9 SDIC 46.8 47.6 47.1 42.1 38.6 Chuantou 35.1 34.6 31.0 31.8 32.9 Net gearing (%) CRP 107 96 103 100 99 HNP 167 160 157 159 159 DTP 305 293 219 218 216 HDP 253 182 171 180 179 CYP 62 48 105 93 83 SDIC 258 217 219 204 193 Chuantou 31 25 25 24 23 Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 46 30 November 2016

Figure 96: Gas—key operational forecasts 2014A 2015A 2016E 2017E 2018E Total gas sales (mcm) Beijing Enterprises Holdings 9,960 12,850 14,793 15,440 15,500 YoY 14% 29% 15% 4% 0% CR Gas 13,660 14,913 17,156 20,238 23,963 YoY 13% 9% 15% 18% 18% ENN Energy 10,148 11,312 13,212 15,163 16,920 YoY 25% 11% 17% 15% 12% China Gas Holdings 8,975 9,860 11,700 13,817 16,452 YoY 12% 10% 19% 18% 19% Hong Kong and China Gas 15,200 15,455 16,824 18,516 19,859 YoY 13% 2% 9% 10% 7% Shenzhen Gas 1,522 1,502 1,605 1,762 1,863 YoY 10% -1% 7% 10% 6% Connection fee revenue BJE (HK$ mn) - - - - 1 YoY n.a. n.a. n.a. n.a. n.a. CR Gas (HK$ mn) 6,236 6,869 6,578 6,438 5,772 YoY 22% 10% -4% -2% -10% ENN (Rmb mn) 4,403 5,508 5,808 6,280 5,928 YoY 15% 25% 5% 8% -6% China Gas Holdings (HK$ mn) 4,659 4,794 5,155 5,301 5,361 YoY 72% 3% 8% 3% 1% Gross Margin (%) BJE 17.9 15.0 15.7 17.0 17.1 CR Gas 30.3 31.5 36.3 38.6 38.0 ENN 20.9 21.4 24.1 24.0 22.3 China Gas Holdings 20.4 24.1 23.8 23.8 23.9 Hong Kong and China Gas 48.4 52.4 60.0 57.7 57.4 Shenzhen Gas 19.3 23.5 26.7 27.6 28.0 EBIT Margin (%) BJE 6.9 5.4 6.9 7.8 7.9 CR Gas 15.4 15.7 21.2 24.3 24.8 ENN 15.6 12.1 15.7 16.3 16.0 China Gas Holdings 14.3 17.3 18.5 19.3 19.7 Hong Kong and China Gas 23.6 30.4 29.1 29.3 28.7 Shenzhen Gas 10.2 14.5 15.7 17.0 17.9 Net gearing (%) BJE 38.2 30.7 40.1 32.9 26.2 CR Gas 24.8 18.4 18.8 9.1 1.1 ENN 27.5 51.1 40.3 26.6 12.9 China Gas Holdings 80.3 60.4 40.9 21.8 5.7 Hong Kong and China Gas 31.9 36.4 38.4 39.1 40.5 Shenzhen Gas -6.4 -1.0 -1.2 -2.9 -8.4 Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 47 30 November 2016

Figure 97: Foreign debt (USD/HKD) exposure and EPS impact analysis Operating Reported FY17 EPS sensitivity FX loss as % earnings (assuming 10% RMB depreciation) of net profit* Reporting sensitivity (assuming 2) Translation loss due to Ticker Company currency 10% RMB depreciation) 1) FX loss reporting currency difference FY16E FY17E Gas 1193.HK CRG HKD -0.4% 0.0% -10.0% 0% 0% 0384.HK CGH HKD -0.1% -2.3% -10.0% -2% -1% 2688.HK ENN CNY -0.8% -7.3% 0.0% -14% -5% 0392.HK BJE HKD -0.7% 0.0% -10.0% 0% 0% 601139.SS SZG CNY 0.0% -1.1% 0.0% 0% 0% IPPs 0836.HK CRP HKD -0.4% 0.0% -10.0% 0% 0% 0902.HK HNP CNY 0.0% -3.0% 0.0% -2% -1% 1071.HK HDP CNY 0.0% -1.8% 0.0% -1% -1% 0991.HK DTP CNY 0.0% -2.2% 0.0% -1% -1% 600578.SS Jingneng CNY 0.0% 0.0% 0.0% 0% 0% Wind 0916.HK LYP CNY 0.1% -1.0% 0.0% -1% 0% 0816.HK HDF CNY 0.0% 0.0% 0.0% 0% 0% 0958.HK HNR CNY 0.0% -0.1% 0.0% 0% 0% 1798.HK DCRP CNY -0.1% -1.3% 0.0% -2% -1% 0956.HK CSG CNY 0.0% 0.0% 0.0% 0% 0% Hydro 600900.SS CYP CNY 0.0% -0.2% 0.0% 0% 0% 600886.SS SDIC CNY 0.0% 0.0% 0.0% 0% 0% 600674.SS Chuantou CNY 0.0% 0.0% 0.0% 0% 0% Nuclear 1816.HK CGN CNY -0.4% -13.1% 0.0% -11% -6% Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 48 30 November 2016

Asia Pacific/China Electric Utilities

Longyuan Power (0916.HK / 916 HK) Rating OUTPERFORM Price (29 Nov 16, HK$) 6.05 Target price (HK$) 8.00 Upside/downside (%) 32.2

Mkt cap (HK$/US$ mn) 48,620 / 6,269 Key beneficiary of curtailment relief Enterprise value (Rmb mn) 118,194 Number of shares (mn) 8,036 ■ Moving to top pick. For 2017, we expect wind operators to continue to Free float (%) 41.6 benefit from curtailment reduction. Longyuan Power (LYP), as the industry 52-wk price range (HK$) 7.17-3.75 ADTO-6M (US$ mn) 11.7 leader having suffered more, should see larger utilisation increase next year. *Stock ratings are relative to the relevant country benchmark. Also, it remains conservative to enter the competitive tariff market, minimising ¹Target price is for 12 months. volatility of realised tariffs. We move LYP to top pick among wind operators

Research Analysts and have kept our DCF-based target price unchanged at HK$8.00.

Dave Dai, CFA ■ Utilisation to further increase. Assuming no substantial changes in wind 852 2101 7358 [email protected] conditions in the next two months, we expect LYP to reach its utilisation hour target of 1,900 or output growth of 16% YoY. As the minimum utilisation hour

scheme was only effective in 2H16, we expect utilisation to recover further to 2,050 next year. Together with the capacity expansion, we forecast 20% output growth in FY17E. On market-based transactions, LYP's participation is not as aggressive as Huaneng Renewables, minimising tariff risks. ■ Earnings cut on coal. We have cut our FY16-18 EPS forecasts slightly (by 2-4%), mainly due to higher coal price assumptions for LYP's coal-fired power business. This is consistent with our latest assumptions for the coal- fired IPPs. However, given that >90% of LYP's earnings are wind generation, variable changes for the coal business should have limited earnings impact. ■ Valuation. Following the recent weakness, the valuation has become much more appealing at only 1.0x FY17E P/B, much lower than the historical mean of 1.3x. The key downside risks are higher-than-expected curtailment rate and lower-than-expected realised tariffs.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 19,648.6 21,538.0 24,445.8 27,182.0 EBITDA (Rmb mn) 12,679.7 14,465.6 16,965.6 19,247.4 EBIT (Rmb mn) 7,125.4 8,364.8 10,330.8 12,107.5 Net profit (Rmb mn) 2,880.6 3,904.8 5,536.1 6,548.8 EPS (CS adj.) (Rmb) 0.36 0.49 0.69 0.81 Change from previous EPS (%) n.a. (2.8) (4.4) (2.2) Consensus EPS (Rmb) n.a. 0.45 0.55 0.63 EPS growth (%) 12.6 35.6 41.8 18.3 The price relative chart measures performance against the P/E (x) 15.0 11.1 7.8 6.6 MSCI CHINA F IDX which closed at 6,255.21 on 29/11/16. Dividend yield (%) 1.3 1.8 3.2 3.8 On 29/11/16 the spot exchange rate was HK$7.76/US$1 EV/EBITDA (x) 9.1 8.2 7.2 6.5

Performance 1M 3M 12M P/B (x) 1.13 1.05 0.95 0.86 Absolute (%) 1.5 -7.2 -6.2 ROE (%) 8.1 9.8 12.8 13.7 Relative (%) 2.9 -6.3 -7.9 Net debt/equity (%) 161.2 153.0 143.7 130.9

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 49 30 November 2016

Longyuan Power (0916.HK / 916 HK) Price (29 Nov 2016): HK$6.05; Rating: OUTPERFORM; Target Price: HK$8.00; Analyst: Dave Dai Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 19,649 21,538 24,446 27,182 China Longyuan Power Group Corp Ltd is engaged in the design, Cost of goods sold 4,182 4,148 4,350 4,350 development, construction, management and operation of wind EBITDA 12,680 14,466 16,966 19,247 farms in areas with wind resources in the People’s Republic of EBIT 7,125 8,365 10,331 12,107 China. The company is also engaged in the selling of electricity. Net interest expense/(inc.) 3,025 2,608 2,542 2,787 Recurring PBT 4,676 6,209 8,241 9,789 Blue/Grey Sky Scenario Profit after tax 4,076 5,456 7,231 8,576 Reported net profit 2,881 3,905 5,536 6,549 Net profit (Credit Suisse) 2,881 3,905 5,536 6,549 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 2,887 3,269 4,747 5,575 Current receivables 4,238 5,358 6,105 6,807 Inventories 1,081 1,055 1,214 1,214 Other current assets 4,492 4,322 4,322 4,322 Current assets 12,697 14,004 16,388 17,917 Property, plant & equip. 98,609 107,009 116,374 125,234 Investments 4,827 4,827 4,827 4,827 Intangibles 8,699 7,683 7,253 6,824 Other non-current assets 8,641 8,641 8,641 8,641 Total assets 133,473 142,163 153,483 163,443 Current liabilities 55,647 47,135 47,289 47,442 Total liabilities 88,940 92,956 98,428 101,450 Shareholders' equity 38,100 41,224 45,376 50,288 Minority interests 6,433 7,984 9,679 11,705 Total liabilities & equity 133,473 142,163 153,483 163,443 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 7,125 8,365 10,331 12,107 Net interest (3,025) (2,608) (2,542) (2,787) Tax paid (600) (754) (1,011) (1,213) Working capital 3,985 (820) (751) (549) Other cash & non-cash items 4,783 5,725 6,157 6,666 Our Blue Sky Scenario (HK$) 10.00 Operating cash flow 12,269 9,908 12,184 14,224 Sustainable utilization hours of 2,300 Capex (15,344) (14,500) (16,000) (16,000) Free cash flow to the firm (3,075) (4,592) (3,816) (1,776) Our Grey Sky Scenario (HK$) 6.00 Investing cash flow (16,873) (14,500) (16,000) (16,000) Sustainable utilization hours of 2,100 Equity raised 0 0 0 0 Dividends paid (576) (781) (1,384) (1,637) Share price performance Financing cash flow 5,628 4,680 5,629 3,258 Total cash flow 1,024 88 1,813 1,482 Adjustments 0 0 0 0 Net change in cash 1,024 88 1,813 1,482 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 8,036 8,036 8,036 8,036 EPS (Credit Suisse) (Rmb) 0.36 0.49 0.69 0.81 DPS (Rmb) 0.07 0.10 0.17 0.20 Operating CFPS (Rmb) 1.53 1.23 1.52 1.77 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue 7.9 9.6 13.5 11.2 EBIT 8.6 17.4 23.5 17.2 EPS 12.6 35.6 41.8 18.3 Margins (%) The price relative chart measures performance against the MSCI CHINA F IDX EBITDA 64.5 67.2 69.4 70.8 which closed at 6,255.21 on 29-Nov-2016 EBIT 36.3 38.8 42.3 44.5 On 29-Nov-2016 the spot exchange rate was HK$7.76/US$1 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 15.0 11.1 7.8 6.6 P/B 1.13 1.05 0.95 0.86 Dividend yield (%) 1.3 1.8 3.2 3.8 EV/sales 5.9 5.5 5.0 4.6 EV/EBITDA 9.1 8.2 7.2 6.5 EV/EBIT 16.1 14.2 11.8 10.3 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 8.1 9.8 12.8 13.7 ROIC 5.5 6.1 7.0 7.6 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 161.2 153.0 143.7 130.9 Net debt/EBITDA (x) 5.66 5.21 4.66 4.22

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 50 30 November 2016

Asia Pacific/China Electric Utilities

Huaneng Renewables Corporation

(0958.HK / 958 HK) Rating OUTPERFORM [V] Price (29 Nov 16, HK$) 2.55 Target price (HK$) (from 3.80) 3.60 Upside/downside (%) 41.2

Mkt cap (HK$/US$ mn) 24,806 / 3,198 Actively exploring market opportunities Enterprise value (Rmb mn) 77,476 Number of shares (mn) 9,728 ■ Cutting TP. For 2017, we expect wind operators to continue to benefit from Free float (%) 38.7 curtailment reduction. Huaneng Renewables (HNR) has outperformed most 52-wk price range (HK$) 3.10-1.42 ADTO-6M (US$ mn) 10.0 peers in realised utilisation hours, thanks to better location mix and active *Stock ratings are relative to the relevant country benchmark. engagement in the competitive tariff market. However, having outperformed ¹Target price is for 12 months. peers YTD in 2016, we believe that the incremental surprises would be less [V] = Stock Considered Volatile (see Disclosure Appendix)

than peers such as Longyuan Power. We cut our DCF-based target price Research Analysts slightly to HK$3.60 (from HK$3.80) to reflect more market tariffs next.

Dave Dai, CFA 852 2101 7358 ■ Utilisation to further increase. Given the strong YTD performance, we [email protected] expect HNR to beat its own guidance of 1,900 hours in FY16E (we lifted our forecast slightly to 1,950 or 31% output increase). For FY17E, we expect hours to be largely similar as that of Longyuan (we forecast 2,050) or 5% increase. Between the two, Longyuan may enjoy larger utilisation increase in FY17E given the underperformance in FY16E. ■ Some tariff impact. As the power industry reform progresses, we do not rule out HNR engaging more transactions in the market-based schemes such as direct sales. We forecast 5% of total output will be direct sales at 20% discount, which could impact earnings by ~5%. Peers such as Longyuan are more conservative in exploring such transactions given the lower tariffs. ■ Valuation. Following the recent weakness, the valuation has become much more appealing at only 1.0x FY17E P/B. Key downside risks are higher-than- expected curtailment rate and lower-than-expected realised tariffs.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 7,356.9 9,831.5 11,724.8 14,142.2 EBITDA (Rmb mn) 6,851.5 8,770.4 10,494.9 12,674.0 EBIT (Rmb mn) 4,116.2 5,395.1 6,626.7 8,308.3 Net profit (Rmb mn) 1,859.5 2,661.0 3,292.8 4,205.3 EPS (CS adj.) (Rmb) 0.19 0.27 0.34 0.43 Change from previous EPS (%) n.a. 1.2 (4.3) (0.5) Consensus EPS (Rmb) n.a. 0.27 0.32 0.37 EPS growth (%) 54.2 43.1 23.7 27.7 The price relative chart measures performance against the P/E (x) 11.9 8.3 6.7 5.2 MSCI CHINA F IDX which closed at 6,255.21 on 29/11/16. Dividend yield (%) 1.3 2.4 3.0 3.8 On 29/11/16 the spot exchange rate was HK$7.76/US$1 EV/EBITDA (x) 10.1 8.9 8.4 7.5

Performance 1M 3M 12M P/B (x) 1.24 1.11 0.98 0.85 Absolute (%) 0.8 -11.5 9.9 ROE (%) 11.0 14.1 15.5 17.3 Relative (%) 2.2 -10.6 8.2 Net debt/equity (%) 254.6 270.1 281.7 268.2

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 51 30 November 2016

Huaneng Renewables Corporation (0958.HK / 958 HK) Price (29 Nov 2016): HK$2.55; Rating: OUTPERFORM [V]; Target Price: (from HK$3.80) HK$3.60; Analyst: Dave Dai Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 7,357 9,831 11,725 14,142 Huaneng Renewables Corp Ltd. Is an alternative energy company. Cost of goods sold 0 0 0 0 The company acquires and develops wind and solar power projects EBITDA 6,851 8,770 10,495 12,674 in China. EBIT 4,116 5,395 6,627 8,308 Net interest expense/(inc.) 2,073 2,405 2,697 3,262 Blue/Grey Sky Scenario Recurring PBT 2,041 2,987 3,927 5,044 Profit after tax 1,899 2,713 3,370 4,320 Reported net profit 1,860 2,661 3,293 4,205 Net profit (Credit Suisse) 1,860 2,661 3,293 4,205 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 4,504 7,862 10,911 12,842 Current receivables 2,900 4,916 5,862 7,071 Inventories 43 43 43 43 Other current assets 205 217 231 245 Current assets 7,652 13,037 17,047 20,201 Property, plant & equip. 68,658 78,122 90,444 99,418 Investments 109 109 109 109 Intangibles 682 620 581 541 Other non-current assets 5,452 5,452 5,452 5,452 Total assets 82,553 97,342 113,633 125,721 Current liabilities 28,533 29,123 29,703 30,312 Total liabilities 63,928 76,537 90,116 98,725 Shareholders' equity 17,798 19,927 22,561 25,926 Minority interests 827 878 956 1,070 Total liabilities & equity 82,553 97,342 113,633 125,721 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 4,116 5,395 6,627 8,308 Net interest (2,073) (2,405) (2,697) (3,262) Tax paid (141) (275) (556) (724) Working capital 1,579 (1,438) (380) (614) Our Blue Sky Scenario (HK$) 6.00 Other cash & non-cash items 1,664 3,394 3,866 4,363 Sustainable utilization hours 2250 Operating cash flow 5,144 4,672 6,858 8,071 Capex (13,520) (12,800) (16,150) (13,300) Our Grey Sky Scenario (HK$) 2.50 Free cash flow to the firm (8,375) (8,128) (9,292) (5,229) Sustainable utilization hours 2050 Investing cash flow (13,520) (12,800) (16,150) (13,300) Equity raised 129 0 0 0 Share price performance Dividends paid (292) (532) (659) (841) Financing cash flow 5,093 11,486 12,341 7,159 Total cash flow (3,283) 3,358 3,050 1,930 Adjustments 0 0 0 0 Net change in cash (3,283) 3,358 3,050 1,930 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 9,728 9,728 9,728 9,728 EPS (Credit Suisse) (Rmb) 0.19 0.27 0.34 0.43 DPS (Rmb) 0.03 0.05 0.07 0.09 Operating CFPS (Rmb) 0.53 0.48 0.70 0.83 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue 19.6 33.6 19.3 20.6 EBIT 23.0 31.1 22.8 25.4 EPS 54.2 43.1 23.7 27.7 The price relative chart measures performance against the MSCI CHINA F IDX Margins (%) which closed at 6,255.21 on 29-Nov-2016 EBITDA 93.1 89.2 89.5 89.6 On 29-Nov-2016 the spot exchange rate was HK$7.76/US$1 EBIT 56.0 54.9 56.5 58.7 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 11.9 8.3 6.7 5.2 P/B 1.24 1.11 0.98 0.85 Dividend yield (%) 1.3 2.4 3.0 3.8 EV/sales 9.4 8.0 7.5 6.7 EV/EBITDA 10.1 8.9 8.4 7.5 EV/EBIT 16.9 14.5 13.3 11.4 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 11.0 14.1 15.5 17.3 ROIC 6.3 6.8 6.8 7.5 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 254.6 270.1 281.7 268.2 Net debt/EBITDA (x) 6.92 6.41 6.31 5.71

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 52 30 November 2016

Asia Pacific/China Electric Utilities

Huadian Fuxin Energy Corporation

Limited (0816.HK / 816 HK) Rating OUTPERFORM [V] Price (29 Nov 16, HK$) 1.77 Target price (HK$) (from 3.16) 2.80 Upside/downside (%) 58.2

Mkt cap (HK$/US$ mn) 14,882 / 1,919 Two headwinds next year Enterprise value (Rmb mn) 79,204 Number of shares (mn) 8,408 ■ Two headwinds. We trim our FY16-18 EPS forecasts by 15-20% for Huadian Free float (%) 30.6 Fuxin (HDF) largely to incorporate higher coal prices and ease of hydro 52-wk price range (HK$) 2.32-1.19 ADTO-6M (US$ mn) 4.4 power momentum. We lower our DCF-based target price to HK$2.80 (from *Stock ratings are relative to the relevant country benchmark. HK$3.16) and maintain OUTPERFORM rating on the stock given the ¹Target price is for 12 months. inexpensive valuation. [V] = Stock Considered Volatile (see Disclosure Appendix)

■ Lower earnings from hydro and coal. 2016 has been a very strong year for Research Analysts the hydro power business, thanks to strong water inflows in Fujian. However, Dave Dai, CFA 852 2101 7358 the momentum has eased nation-wide since September and we now forecast [email protected] utilisation hours to normalise from 5,500 in FY16E and to 4,500 in FY17E. Also, we cut the coal-fired power earnings based on assumption changes: Rmb510/t average coal price in FY17E (or 28% higher than previous assumptions). Unit fuel cost may increase +5%/+15% in FY16/17E. ■ Wind and nuclear intact. On the positive side, we expect HDF to record 33% YoY wind output growth in FY16, thanks to strong capacity expansion and curtailment improvement. We expect further utilisation hours improvement in FY17E and FY18E (+7% and +3% YoY) following local government's execution of minimum utilisation policy. On nuclear, with Fuqing 3 commencing operation in end-October and Unit 4 being scheduled to commence operation in 2H17, we expect nuclear to contribute >Rmb400 mn in FY16 and Rmb800-1,000 mn in FY17/18E. ■ Attractive valuation. The stock is trading at an attractive valuation of 0.6x FY17E P/B (the lowest among wind peers) while offering >14% ROE and 4% FY17E dividend yield. The major swing factor is the macro demand, especially Fujian's local demand.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 15,347.0 16,829.3 18,527.6 20,429.3 EBITDA (Rmb mn) 8,001.8 9,766.0 10,454.5 12,076.3 EBIT (Rmb mn) 4,764.7 5,780.6 5,900.0 6,996.4 Net profit (Rmb mn) 1,901.5 2,314.3 3,037.9 3,809.2 EPS (CS adj.) (Rmb) 0.23 0.28 0.36 0.45 Change from previous EPS (%) n.a. (16.4) (20.3) (14.8) Consensus EPS (Rmb) n.a. 0.28 0.30 0.35 EPS growth (%) (3.4) 21.7 31.3 25.4 The price relative chart measures performance against the P/E (x) 7.0 5.7 4.4 3.5 MSCI CHINA F IDX which closed at 6,255.21 on 29/11/16. Dividend yield (%) 2.6 3.1 4.1 5.1 On 29/11/16 the spot exchange rate was HK$7.76/US$1 EV/EBITDA (x) 9.0 8.2 8.0 7.3

Performance 1M 3M 12M P/B (x) 0.72 0.65 0.58 0.51 Absolute (%) -2.2 -11.5 -20.3 ROE (%) 11.4 11.9 14.1 15.6 Relative (%) -0.8 -10.6 -22.0 Net debt/equity (%) 276.6 282.7 265.0 246.3

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 53 30 November 2016

Huadian Fuxin Energy Corporation Limited (0816.HK / 816 HK) Price (29 Nov 2016): HK$1.77; Rating: OUTPERFORM [V]; Target Price: (from HK$3.16) HK$2.80; Analyst: Dave Dai Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 15,347 16,829 18,528 20,429 Huadian Fuxin Energy Corp. Ltd. is an electric company. The Cost of goods sold 3,994 3,365 4,073 4,073 company is engaged in electricity production and sales power EBITDA 8,002 9,766 10,454 12,076 facilities construction, electricity technnology development and EBIT 4,765 5,781 5,900 6,996 renewable energy generation projects development. Net interest expense/(inc.) 2,569 2,762 2,666 2,699 Recurring PBT 2,623 3,498 4,166 5,295 Blue/Grey Sky Scenario Profit after tax 2,218 2,862 3,500 4,426 Reported net profit 1,902 2,314 3,038 3,809 Net profit (Credit Suisse) 1,902 2,314 3,038 3,809 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 1,996 1,777 1,612 1,848 Current receivables 3,599 5,343 5,790 6,286 Inventories 398 398 398 398 Other current assets 2,196 2,346 2,538 2,750 Current assets 8,189 9,864 10,339 11,282 Property, plant & equip. 75,589 84,068 89,577 96,160 Investments 6,742 7,222 8,153 9,151 Intangibles 1,120 1,056 993 929 Other non-current assets 5,905 5,905 5,905 5,905 Total assets 97,545 108,114 114,966 123,427 Current liabilities 27,122 29,241 31,634 33,347 Total liabilities 76,403 84,521 88,415 93,128 Shareholders' equity 18,470 20,372 22,868 25,999 Minority interests 2,673 3,221 3,683 4,300 Total liabilities & equity 97,545 108,114 114,966 123,427 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 4,765 5,781 5,900 6,996 Net interest (2,569) (2,762) (2,666) (2,699) Tax paid (405) (636) (666) (868) Working capital (88) (1,775) (246) (494) Other cash & non-cash items 3,220 4,465 5,486 6,077 Our Blue Sky Scenario (HK$) 3.84 Operating cash flow 4,922 5,073 7,808 9,012 Sustainable wind utilization hours 2000 Capex (12,900) (12,400) (10,000) (11,600) Free cash flow to the firm (7,978) (7,327) (2,192) (2,588) Our Grey Sky Scenario (HK$) 2.34 Investing cash flow (16,420) (12,879) (10,932) (12,598) Sustainable wind utilization hours 1700 Equity raised 1,894 0 0 0 Dividends paid (339) (412) (541) (679) Share price performance Financing cash flow 10,204 7,588 2,959 3,821 Total cash flow (1,295) (219) (165) 236 Adjustments 0 0 0 0 Net change in cash (1,295) (219) (165) 236 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 8,408 8,408 8,408 8,408 EPS (Credit Suisse) (Rmb) 0.23 0.28 0.36 0.45 DPS (Rmb) 0.04 0.05 0.06 0.08 Operating CFPS (Rmb) 0.59 0.60 0.93 1.07 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue 10.4 9.7 10.1 10.3 EBIT (3.6) 21.3 2.1 18.6 EPS (3.4) 21.7 31.3 25.4 Margins (%) The price relative chart measures performance against the MSCI CHINA F IDX EBITDA 52.1 58.0 56.4 59.1 which closed at 6,255.21 on 29-Nov-2016 EBIT 31.0 34.3 31.8 34.2 On 29-Nov-2016 the spot exchange rate was HK$7.76/US$1 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 7.0 5.7 4.4 3.5 P/B 0.72 0.65 0.58 0.51 Dividend yield (%) 2.6 3.1 4.1 5.1 EV/sales 4.7 4.7 4.5 4.3 EV/EBITDA 9.0 8.2 8.0 7.3 EV/EBIT 15.0 13.8 14.2 12.6 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 11.4 11.9 14.1 15.6 ROIC 5.5 5.6 5.3 5.8 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 276.6 282.7 265.0 246.3 Net debt/EBITDA (x) 7.31 6.83 6.73 6.18

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 54 30 November 2016

Asia Pacific/China Gas Utilities

China Resources Gas (1193.HK / 1193 HK) Rating OUTPERFORM Price (29 Nov 16, HK$) 23.25 Target price (HK$) (from 32.00) 31.00 Upside/downside (%) 33.3

Mkt cap (HK$/US$ mn) 51,708 / 6,667 Quality growth Enterprise value (HK$ mn) 56,343 Number of shares (mn) 2,224 ■ Moving to top pick. We reiterate our positive view on China Resources Gas Free float (%) 36.1 (CRG) and move it to sector top pick after the recent correction. We expect 52-wk price range (HK$) 28.50-18.24 ADTO-6M (US$ mn) 8.7 the company to be best positioned to tap into new growth opportunities while *Stock ratings are relative to the relevant country benchmark. existing dollar margins are not excessive. It currently trades at 11x FY17E, ¹Target price is for 12 months. much lower than the historical mean. We slightly cut our DCF-based target

Research Analysts price to HK$31 (from HK$32) to reflect the recent seasonal cost hike by

Dave Dai, CFA PetroChina. 852 2101 7358 [email protected] ■ Best positioned for new drivers. CRG is best positioned to capture more commercial demand, thanks to its largest exposure to larger cities. For

instance, its project fleet is well exposed to places having high density of hotels and hospitals. Besides, about 31% of its projects are located within the heating zone; so they should also benefit from the heating potential. We forecast an 18% volume CAGR over FY16-18, one of the best in the sector. ■ Gauging the margin concerns. After PetroChina announced its intention to have a city-gate price hike during winter, CRG's share price has declined >15%. We believe the correction is overdone since the earnings impact for FY17 is only ~2%, in our view. For the local government end-user price cuts, we have incorporated the impact in our previous sector report on 16 September. We have forecast C&I dollar margins to normalise to Rmb0.7/cm in FY17E. ■ Attractive valuation. The stock is trading at 11x FY17E P/E, deeply below its past-five-year average of 15x, and in line with peers. The slight cuts in FY17E EPS and TP were mainly due to seasonal cost hike from PetroChina. The key investment risks are lower-than-expected volume growth and weaker oil prices.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (HK$ mn) 31,095.8 28,209.6 28,398.4 31,590.6 EBITDA (HK$ mn) 5,964.4 7,690.5 8,783.4 9,987.1 EBIT (HK$ mn) 4,891.6 6,544.7 7,550.8 8,671.6 Net profit (HK$ mn) 2,837.9 3,855.4 4,555.1 5,364.8 EPS (CS adj.) (HK$) 1.30 1.77 2.09 2.47 Change from previous EPS (%) n.a. (0.0) (2.0) (0.2) Consensus EPS (HK$) n.a. 1.61 1.80 2.02 EPS growth (%) 14.3 35.9 18.1 17.8 The price relative chart measures performance against the P/E (x) 17.8 13.1 11.1 9.4 MSCI CHINA F IDX which closed at 6,255.21 on 29/11/16. Dividend yield (%) 1.3 1.9 2.4 3.1 On 29/11/16 the spot exchange rate was HK$7.76/US$1 EV/EBITDA (x) 9.4 7.3 6.2 5.2

Performance 1M 3M 12M P/B (x) 2.97 2.57 2.20 1.89 Absolute (%) -6.1 -10.6 7.4 ROE (%) 17.2 21.0 21.4 21.6 Relative (%) -4.6 -9.7 5.7 Net debt/equity (%) 18.4 17.7 8.2 0.2

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 55 30 November 2016

China Resources Gas (1193.HK / 1193 HK) Price (29 Nov 2016): HK$23.25; Rating: OUTPERFORM; Target Price: (from HK$32.00) HK$31.00; Analyst: Dave Dai Income Statement (HK$ mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 31,096 28,210 28,398 31,591 China Resources Gas Group Limited (“CR Gas”) is principally Cost of goods sold 21,307 17,313 16,657 18,607 engaged in the city gas distribution business, including piped natural EBITDA 5,964 7,690 8,783 9,987 or petroleum gas distribution and operating CNG (compressed EBIT 4,892 6,545 7,551 8,672 natural gas) filling stations in the PRC. Net interest expense/(inc.) 541 541 564 551 Recurring PBT 5,311 7,269 8,435 9,767 Blue/Grey Sky Scenario Profit after tax 3,803 5,187 6,153 7,277 Reported net profit 2,838 3,855 4,555 5,365 Net profit (Credit Suisse) 2,838 3,855 4,555 5,365 Balance Sheet (HK$ mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 10,751 10,248 12,368 13,851 Current receivables 7,369 7,458 7,391 8,222 Inventories 571 464 446 498 Other current assets 1,660 1,518 1,527 1,685 Current assets 20,351 19,687 21,732 24,256 Property, plant & equip. 22,717 24,600 26,396 28,109 Investments 12,046 13,311 14,759 16,405 Intangibles 1,975 1,082 1,054 1,025 Other non-current assets 2,808 2,808 2,808 2,808 Total assets 59,896 61,488 66,749 72,603 Current liabilities 25,423 22,092 22,429 23,562 Total liabilities 37,409 35,031 35,368 35,501 Shareholders' equity 17,009 19,647 22,973 26,783 Minority interests 5,478 6,810 8,407 10,319 Total liabilities & equity 59,896 61,488 66,749 72,603 Cash Flow (HK$ mn) 12/15A 12/16E 12/17E 12/18E EBIT 4,892 6,545 7,551 8,672 Net interest (541) (541) (564) (551) Tax paid (1,508) (2,081) (2,282) (2,490) Working capital 2,153 (2,247) 412 92 Other cash & non-cash items 1,507 2,000 1,233 1,315 Our Blue Sky Scenario (HK$) 37.00 Operating cash flow 6,503 3,675 6,349 7,038 2016-2020E gas sales volume CAGR 25% Capex (2,249) (3,000) (3,000) (3,000) Free cash flow to the firm 4,253 675 3,349 4,038 Our Grey Sky Scenario (HK$) 23.00 Investing cash flow (3,029) (3,000) (3,000) (3,000) 2016-2020E gas sales volume CAGR 10% Equity raised (1,241) (254) 0 0 Dividends paid (652) (963) (1,229) (1,555) Share price performance Financing cash flow (2,430) (1,178) (1,229) (2,555) Total cash flow 1,043 (503) 2,120 1,483 Adjustments 0 0 0 0 Net change in cash 1,043 (503) 2,120 1,483 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 2,175 2,175 2,175 2,175 EPS (Credit Suisse) (HK$) 1.30 1.77 2.09 2.47 DPS (HK$) 0.30 0.44 0.57 0.71 Operating CFPS (HK$) 2.99 1.69 2.92 3.24 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue 8.3 (9.3) 0.7 11.2 EBIT 10.3 33.8 15.4 14.8 EPS 14.3 35.9 18.1 17.8 Margins (%) The price relative chart measures performance against the MSCI CHINA F IDX EBITDA 19.2 27.3 30.9 31.6 which closed at 6,255.21 on 29-Nov-2016 EBIT 15.7 23.2 26.6 27.4 On 29-Nov-2016 the spot exchange rate was HK$7.76/US$1 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 17.8 13.1 11.1 9.4 P/B 2.97 2.57 2.20 1.89 Dividend yield (%) 1.3 1.9 2.4 3.1 EV/sales 1.8 2.0 1.9 1.6 EV/EBITDA 9.4 7.3 6.2 5.2 EV/EBIT 11.4 8.6 7.2 6.0 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 17.2 21.0 21.4 21.6 ROIC 13.2 16.2 16.9 18.2 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 18.4 17.7 8.2 0.2 Net debt/EBITDA (x) 0.70 0.61 0.29 0.01

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 56 30 November 2016

Asia Pacific/China Gas Utilities

ENN Energy Holdings Ltd (2688.HK / 2688 HK) Rating (from Neutral) OUTPERFORM Price (29 Nov 16, HK$) 34.65 Target price (HK$) (from 44.00) 42.00 Upside/downside (%) 21.2

Mkt cap (HK$/US$ mn) 37,510 / 4,836 Risks largely priced in Enterprise value (Rmb mn) 41,073 Number of shares (mn) 1,083 ■ Upgrade to OUTPERFORM (from Neutral). ENN Energy's (ENN) share price Free float (%) 69.6 has lagged leading peers substantially YTD in 2016 due to margin concerns. 52-wk price range (HK$) 47.15-31.95 ADTO-6M (US$ mn) 12.3 However, we believe that the risks have been largely priced in with recent *Stock ratings are relative to the relevant country benchmark. price-cutting announcements of a few provinces and PetroChina's winter price ¹Target price is for 12 months. hike. Our earnings already reflect lower margins previously while we cut our

Research Analysts FY17E EPS by 3% due to PetroChina's seasonal gas price hike. Our adjusted

Dave Dai, CFA DCF-based target price of HK$42 (from HK$44) offers good upside. 852 2101 7358 [email protected] ■ Gauging the margin concerns. Consistent with what we forecast in a recent report, more local governments decided to cut end-user prices. Our earlier

assumption was a mean-reversion of C&I dollar margin from Rmb0.79/cm to around Rmb0.70/cm given the company's higher volume exposure to coastal provinces with higher-than-average profitability. Following our FY17E EPS cut of 6% on 27 September, the share price fell by 13%. Given ~3% earnings impact on PetroChina's decision, we believe that the share price has fully reflected the risks. In 2017, we expect sector gas volume to further recover, thanks to China's stabilising economy. If industrials sales surprise positively, ENN is the most leveraged on the upside among peers. ■ Import benefits coming in 2018. Another key differentiation is ENN's import benefits starting 2018. The parentco operates the Zhoushan LNG terminal but the listco will enjoy cost savings via access rights to the thermal and direct LNG imports. We have built in Rmb0.2/cm cost saving benefit for the retail portion and Rmb0.1/cm for wholesales or 2% earnings benefit. ■ Valuation. ENN is not our sector top pick as it is not best positioned in new drivers such as commercial and heating (13% FY16-18E gas sales CAGR vs CRG with 18%). However, following our earnings cuts, ENN trades at 10x FY17E, much lower than the historical mean of 14x. The key downside risks are lower-than-expected gas sales and dollar margins. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 32,063.0 31,676.9 34,431.2 37,712.0 EBITDA (Rmb mn) 4,807.0 5,989.3 6,476.9 7,200.2 EBIT (Rmb mn) 3,874.0 4,982.0 5,392.6 6,050.0 Net profit (Rmb mn) 2,036.0 3,016.7 3,358.3 4,067.9 EPS (CS adj.) (Rmb) 1.88 2.79 3.10 3.76 Change from previous EPS (%) n.a. 0.0 (3.1) (0.0) Consensus EPS (Rmb) n.a. 2.76 3.04 3.36 EPS growth (%) (31.4) 48.2 11.3 21.1 The price relative chart measures performance against the P/E (x) 16.4 11.1 9.9 8.2 MSCI CHINA F IDX which closed at 6,255.21 on 29/11/16. Dividend yield (%) 2.1 2.5 2.7 3.1 On 29/11/16 the spot exchange rate was HK$7.76/US$1 EV/EBITDA (x) 8.6 6.8 6.1 5.1

Performance 1M 3M 12M P/B (x) 2.48 2.13 1.84 1.58 Absolute (%) -7.4 -20.3 -11.8 ROE (%) 15.9 20.7 19.9 20.7 Relative (%) -5.9 -19.4 -13.5 Net debt/equity (%) 51.1 40.3 27.0 13.4

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 57 30 November 2016

ENN Energy Holdings Ltd (2688.HK / 2688 HK) Price (29 Nov 2016): HK$34.65; Rating: (from Neutral) OUTPERFORM; Target Price: (from HK$44.00) HK$42.00; Analyst: Dave Dai Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 32,063 31,677 34,431 37,712 ENN Energy Holdings Limited is a clean energy distributor. Its main Cost of goods sold 25,197 24,042 26,412 29,299 business portfolio consists of clean energy distribution including city EBITDA 4,807 5,989 6,477 7,200 pipeline natural gas, LPG & CNG, non-pipeline energy delivery and EBIT 3,874 4,982 5,393 6,050 other value-added services. Net interest expense/(inc.) 542 549 549 518 Recurring PBT 4,027 5,231 5,759 6,696 Blue/Grey Sky Scenario Profit after tax 2,721 3,832 4,243 5,036 Reported net profit 2,036 3,017 3,358 4,068 Net profit (Credit Suisse) 2,036 3,017 3,358 4,068 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 7,454 7,555 7,600 6,417 Current receivables 3,051 3,014 3,276 3,589 Inventories 404 385 423 470 Other current assets 948 946 963 983 Current assets 11,857 11,900 12,262 11,458 Property, plant & equip. 21,121 22,860 24,349 25,672 Investments 9,117 9,600 10,132 10,717 Intangibles 2,206 2,279 2,355 2,435 Other non-current assets 2,718 2,711 2,761 2,821 Total assets 47,019 49,350 51,859 53,103 Current liabilities 19,408 18,131 17,265 15,160 Total liabilities 30,924 30,245 29,415 26,653 Shareholders' equity 13,468 15,663 18,117 21,155 Minority interests 2,627 3,443 4,327 5,295 Total liabilities & equity 47,019 49,350 51,859 53,103 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 3,874 4,982 5,393 6,050 Net interest (542) (549) (549) (518) Tax paid (1,306) (1,399) (1,516) (1,660) Working capital 434 (235) 339 422 Other cash & non-cash items 434 396 528 618 Our Blue Sky Scenario (HK$) 50.00 Operating cash flow 2,894 3,195 4,194 4,913 In the blue sky scenario, if gas volume CAGR is 20% for FY16-18E, Capex (2,664) (2,774) (2,600) (2,500) ENN is worth HK$50.0. Free cash flow to the firm 230 421 1,594 2,413 Investing cash flow (7,268) (3,257) (3,132) (3,085) Our Grey Sky Scenario (HK$) 40.00 Equity raised 27 (0) 0 0 In the grey sky scenario, if gas volume CAGR is 10% for FY16-18E, Dividends paid (693) (822) (904) (1,030) ENN is worth HK$40.0. Financing cash flow 3,369 (1,252) (2,504) (4,730) Total cash flow (1,005) (1,314) (1,441) (2,902) Share price performance Adjustments 0 0 0 0 Net change in cash (1,005) (1,314) (1,441) (2,902) Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 1,083 1,083 1,083 1,083 EPS (Credit Suisse) (Rmb) 1.88 2.79 3.10 3.76 DPS (Rmb) 0.64 0.76 0.83 0.95 Operating CFPS (Rmb) 2.67 2.95 3.87 4.54 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue 10.2 (1.2) 8.7 9.5 EBIT (14.8) 28.6 8.2 12.2 EPS (31.4) 48.2 11.3 21.1 Margins (%) EBITDA 15.0 18.9 18.8 19.1 EBIT 12.1 15.7 15.7 16.0 The price relative chart measures performance against the MSCI CHINA F IDX Valuation (x) 12/15A 12/16E 12/17E 12/18E which closed at 6,255.21 on 29-Nov-2016 P/E 16.4 11.1 9.9 8.2 On 29-Nov-2016 the spot exchange rate was HK$7.76/US$1 P/B 2.48 2.13 1.84 1.58 Dividend yield (%) 2.1 2.5 2.7 3.1 EV/sales 1.3 1.3 1.1 1.0 EV/EBITDA 8.6 6.8 6.1 5.1 EV/EBIT 10.7 8.2 7.3 6.1 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 15.9 20.7 19.9 20.7 ROIC 12.2 14.3 14.4 15.6 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 51.1 40.3 27.0 13.4 Net debt/EBITDA (x) 1.71 1.28 0.93 0.49

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 58 30 November 2016

Asia Pacific/China Electric Utilities

Xinyi Solar Holdings (0968.HK / 968 HK) Rating OUTPERFORM [V] Price (29 Nov 16, HK$) 2.67 Target price (HK$) 4.00 Upside/downside (%) 49.8

Mkt cap (HK$/US$ mn) 18,019 / 2,323 Growth story intact Enterprise value (HK$ mn) 25,113 Number of shares (mn) 6,749 ■ Moving down the value chain. We expect Xinyi Solar (XYS), currently the Free float (%) 37.9 largest global solar-glass maker, to generate the next phase of earnings 52-wk price range (HK$) 3.42-2.18 ADTO-6M (US$ mn) 8.5 growth via investing in solar farms. We forecast a 24% FY16-18 EPS CAGR *Stock ratings are relative to the relevant country benchmark. plus attractive dividend yield of 5-6% during FY16-18. We maintain our ¹Target price is for 12 months. OUTPERFORM rating and SOTP-based target price of HK$4.0 (HK$2.0 for [V] = Stock Considered Volatile (see Disclosure Appendix)

solar glass and HK$2.0 for solar farm and others). Research Analysts ■ Growth with discipline. We forecast XYS to add 0.8-1.0 GW of solar farm Gary Zhou, CFA 852 2101 6648 capacity per year during FY16-18E, supported by its cash-generating glass [email protected] business and lower gearing ratio. More important, XYS has demonstrated Dave Dai, CFA strong price discipline during the recent Top Runner bidding, which is a 852 2101 7358 crucial profitability reference for its future expansions out of the home market [email protected] (Anhui province). We expect solar farm to reach >40% of earnings in FY18E.

■ Glass output likely to pick up in 2017E. Backed by superior product quality, XYS has gained market share in the global solar glass market since 2008. With three new production lines (or 50-60% YoY effective capacity expansion in FY17E), we expect its market share to reach 30% (only 5% in 2010) while peer expansions are less aggressive than the pre-2012 years. Spot solar glass prices have declined ~10% off the peak level in 1H16, and we expect a stabilising trend in 1H17 with increasing rush installation demand. ■ Attractive valuation. Besides the strong earnings growth outlook, XYS also generates attractive dividend yield. The key risk is larger-than-expected solar tariff cut, which dampens future expansion. However, our ex-growth valuation (no new solar farm post-2017 and bear multiple for glass earnings) of HK$2.8 provides strong valuation support. Key risks are lower-than-expected solar glass demand and worse-than-expected regulated solar tariffs cuts.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (HK$ mn) 4,750.4 6,081.3 8,504.0 9,618.1 EBITDA (HK$ mn) 1,569.7 2,788.3 4,052.9 4,761.4 EBIT (HK$ mn) 1,348.9 2,364.9 3,407.4 3,916.5 Net profit (HK$ mn) 1,205.6 1,910.6 2,660.0 2,949.7 EPS (CS adj.) (HK$) 0.19 0.28 0.39 0.44 Change from previous EPS (%) n.a. 0.0 0.0 0.0 Consensus EPS (HK$) n.a. 0.30 0.38 0.43 EPS growth (%) 120.0 52.8 39.2 10.9 The price relative chart measures performance against the P/E (x) 14.4 9.4 6.8 6.1 MSCI CHINA F IDX which closed at 6,255.21 on 29/11/16. Dividend yield (%) 3.3 5.1 6.3 6.5 On 29/11/16 the spot exchange rate was HK$7.76/US$1 EV/EBITDA (x) 11.9 9.2 7.7 7.1

Performance 1M 3M 12M P/B (x) 3.02 2.67 2.18 1.80 Absolute (%) -4.6 -16.3 -15.0 ROE (%) 26.6 30.6 35.5 32.3 Relative (%) -3.2 -15.4 -16.7 Net debt/equity (%) 10.5 95.4 132.5 132.1

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 59 30 November 2016

Xinyi Solar Holdings (0968.HK / 968 HK) Price (29 Nov 2016): HK$2.67; Rating: OUTPERFORM [V]; Target Price: HK$4.00; Analyst: Gary Zhou Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Time-weighted solar glass capacity 1,262 1,508 2,391 2,482 Shares (wtd avg.) (mn) 6,506 6,749 6,749 6,749 (kt/year)Time-weighted solar farm capacity 315.0 1,066 1,897 2,831 EPS (Credit Suisse) 0.19 0.28 0.39 0.44 (MW) - - - - (HK$)DPS (HK$) 0.09 0.14 0.17 0.17 - - - - BVPS (HK$) 0.88 1.00 1.22 1.49 - - - - Operating CFPS (HK$) 0.12 0.17 0.27 0.38 Income Statement (HK$ mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 4,750 6,081 8,504 9,618 P/E 14.4 9.4 6.8 6.1 Cost of goods sold 3,040 3,307 4,572 5,108 P/B 3.02 2.67 2.18 1.80 SG & A 504 578 701 779 Dividend yield (%) 3.3 5.1 6.3 6.5 Other operating exp./(inc.) (363) (591) (822) (1,030) P/CF 22.0 16.0 9.8 7.1 EBITDA 1,570 2,788 4,053 4,761 EV/sales 3.9 4.2 3.7 3.5 Depreciation & amortisation 221 423 645 845 EV/EBITDA 11.9 9.2 7.7 7.1 EBIT 1,349 2,365 3,407 3,917 EV/EBIT 13.9 10.9 9.1 8.7 Net interest expense/(inc.) 16 56 160 243 Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) 62 0 0 0 Growth (%) Associates/JV 0 53 80 80 Sales revenue 97.1 28.0 39.8 13.1 Recurring PBT 1,394 2,362 3,328 3,754 EBIT 128.7 75.3 44.1 14.9 Exceptionals/extraordinaries 0 0 0 0 Net profit 144.6 58.5 39.2 10.9 Taxes 188 258 357 373 EPS 120.0 52.8 39.2 10.9 Profit after tax 1,206 2,103 2,970 3,381 Margins (%) Other after tax income 0 0 0 0 EBITDA 33.0 45.9 47.7 49.5 Minority interests 0 192 310 432 EBIT 28.4 38.9 40.1 40.7 Preferred dividends 0 0 0 0 Pre-tax profit 29.3 38.8 39.1 39.0 Reported net profit 1,206 1,911 2,660 2,950 Net profit 25.4 31.4 31.3 30.7 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 1,206 1,911 2,660 2,950 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 26.6 30.6 35.5 32.3 Balance Sheet (HK$ mn) 12/15A 12/16E 12/17E 12/18E ROIC 20.0 18.0 15.7 13.8 Cash & cash equivalents 2,869 3,086 3,172 3,504 Asset turnover (x) 0.4 0.3 0.3 0.3 Current receivables 1,634 2,468 4,284 5,530 Interest burden (x) 1.0 1.0 1.0 1.0 Inventories 199 205 292 320 Tax burden (x) 0.9 0.9 0.9 0.9 Other current assets 192 192 192 192 Financial leverage (x) 1.8 2.6 3.0 2.9 Current assets 4,893 5,951 7,940 9,546 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 7,104 14,465 20,496 24,570 Investments 175 222 233 245 Net debt/equity (%) 10.5 95.4 132.5 132.1 Intangibles 180 180 180 180 Net debt/EBITDA (x) 0.46 2.76 3.24 3.36 Interest cover (x) 81.79 41.94 21.31 16.13 Other non-current assets 382 488 683 772 Total assets 12,735 21,307 29,531 35,313 Accounts payable 2,156 2,345 3,243 3,623 12MF P/E multiple Short-term debt 474 516 713 797 Current provisions 75 75 75 75 Other current liabilities 4 4 4 4 Current liabilities 2,710 2,940 4,035 4,499 Long-term debt 3,116 10,274 15,577 18,694 Non-current provisions 17 17 17 17 Other non-current liabilities 0 0 0 0 Total liabilities 5,843 13,232 19,630 23,210 Shareholders' equity 5,745 6,736 8,253 10,022 Minority interests 1,146 1,339 1,649 2,081 Total liabilities & equity 12,735 21,307 29,531 35,313 Cash Flow (HK$ mn) 12/15A 12/16E 12/17E 12/18E EBIT 1,349 2,365 3,407 3,917 Net interest (16) (56) (160) (243) Tax paid (188) (258) (357) (373) 12MF P/B multiple Working capital 122 (651) (1,006) (894) Other cash & non-cash items (477) (274) (52) 147 Operating cash flow 790 1,124 1,833 2,554 Capex (3,532) (6,089) (5,132) (3,739) Free cash flow to the firm (2,742) (4,964) (3,299) (1,185) Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 96 0 0 0 Associate investments (150) 0 0 0 Other investment/(outflows) (27) (27) (27) (27) Investing cash flow (3,613) (6,116) (5,159) (3,766) Equity raised 1,674 0 0 0 Dividends paid (434) (580) (919) (1,144) Net borrowings 2,862 7,200 5,500 3,200 Other financing cash flow 1,009 (1,354) (1,009) (269) Financing cash flow 5,110 5,266 3,572 1,787 Source: Credit Suisse, Thomson Reuters Total cash flow 2,287 274 245 575 Adjustments 0 0 0 0 Net change in cash 2,287 274 245 575

Source: Company data, Credit Suisse estimates

HK and China Utilities Sector 60 30 November 2016

Asia Pacific/China Electric Utilities

China Yangtze Power Co Ltd

(600900.SS / 600900 CH) Rating (from Outperform) NEUTRAL Price (29 Nov 16, Rmb) 13.47 Target price (Rmb) (from 14.60) 14.00 Upside/downside (%) 3.9

Mkt cap (Rmb/US$ mn) 296,340 / 42,998 A few uncertainties in 2017 Enterprise value (Rmb mn) 457,948 Number of shares (mn) 22,000 ■ Downgrade to NEUTRAL. Following weaker-than-expected hydro resources Free float (%) 20.7 during peak generation season (3Q16) and likely high-base effects in the 52-wk price range (Rmb) 14.15-11.40 ADTO-6M (US$ mn) 35.2 next few quarters, we cut our full-year utilisation hours assumption by 1-5% *Stock ratings are relative to the relevant country benchmark. for existing plants (Three Gorges and Gezhouba) and the newly injected ¹Target price is for 12 months. ones (Xiluodu and Xiangjiaba), and lower our FY16-17E EPS by 6%

Research Analysts accordingly. Possible participation in low-tariff direct power supply may be a

Dave Dai, CFA concern for China Yangtze Power (CYP) in 2017. We downgrade our rating 852 2101 7358 to NEUTRAL with a slightly lower TP of Rmb14.00 (from Rmb14.60). [email protected] ■ Completing of the strong hydro cycle. Despite exceptionally strong hydro

generation in 1H16 (output from existing plants grew 23% YoY), hydro resources turned much weaker since mid-August and our daily generation monitor suggests 9-10% YoY YTD output growth for Three Gorges from low base in 2015, weaker than our previous expectation of 14% YoY recovery (equaling to 2014 level when hydro resource was strong). ■ Threat from direct power supply may be a concern. Although CYP currently has little participation in direct supply (according to management), its peers like Yalong River already has 4% directly supplied power in 9M16. It is also worth noting that the newly injected power plants of CYP have high on-grid tariffs of Rmb0.30-0.32/kWh. After adding transmission fee, we expect that their destination tariffs may not be competitive compared to local coal-fired tariffs (Rmb0.38-0.42/kWh in coastal provinces), and could be subject to downside if CYP is required to participate in market-based power transactions. CYP's old plants (Three Gorges and Gezhouba) have much lower on-grid tariffs (Rmb0.22-0.26/kWh) and thus are unlikely to be affected. ■ Valuation. We do not expect to see large share price downside partially protected by the strong dividend commitment (guarantee of Rmb0.65 in FY16-20E) or ~5% yield. The key risks are hydro resources volatilities and possible participation in low-tariff direct supply. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 24,239.1 49,947.7 48,029.2 48,606.9 EBITDA (Rmb mn) 19,695.7 39,661.1 37,742.9 38,320.5 EBIT (Rmb mn) 13,533.0 27,651.6 26,133.2 27,093.2 Net profit (Rmb mn) 11,519.9 19,019.8 18,457.3 17,686.2 EPS (CS adj.) (Rmb) 0.70 0.86 0.84 0.80 Change from previous EPS (%) n.a. (5.7) (5.9) (0.5) Consensus EPS (Rmb) n.a. 0.91 0.87 0.87 EPS growth (%) (2.6) 23.8 (3.0) (4.2) The price relative chart measures performance against the P/E (x) 19.3 15.6 16.1 16.8 Shanghai Shenzhen CSI300 index which closed at Dividend yield (%) 3.5 4.8 4.8 4.8 3,535.33 on 29/11/16. On 29/11/16 the spot exchange rate EV/EBITDA (x) 17.3 11.8 12.1 11.6 was Rmb6.89/US$1 P/B (x) 2.43 1.82 1.78 1.74

Performance 1M 3M 12M ROE (%) 13.0 15.0 11.2 10.5 Absolute (%) 1.0 -2.3 0.1 Net debt/equity (%) 47.7 106.4 95.5 86.4

Relative (%) -4.8 -8.6 1.0 Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 61 30 November 2016

China Yangtze Power Co Ltd (600900.SS / 600900 CH) Price (29 Nov 2016): Rmb13.47; Rating: (from OUTPERFORM) NEUTRAL; Target Price: (from Rmb14.60) Rmb14.00; Analyst: Dave Dai Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 24,239 49,948 48,029 48,607 China Yangtze Power Co., Ltd. is principally engaged in electric Cost of goods sold 9,798 19,320 18,920 18,538 power generation and supply. The company operates hydropower EBITDA 19,696 39,661 37,743 38,320 plants. It operates its businesses through electric power generation, EBIT 13,533 27,652 26,133 27,093 operation and investment. Net interest expense/(inc.) 2,850 8,394 7,546 6,963 Recurring PBT 14,927 23,403 22,808 21,870 Blue/Grey Sky Scenario Profit after tax 11,520 19,021 18,458 17,687 Reported net profit 11,520 19,020 18,457 17,686 Net profit (Credit Suisse) 11,520 19,020 18,457 17,686 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 3,856 3,548 2,737 3,003 Current receivables 1,710 3,524 3,388 3,429 Inventories 402 793 776 761 Other current assets 126 126 126 126 Current assets 6,095 7,992 7,029 7,319 Property, plant & equip. 118,852 317,199 306,506 296,195 Investments 11,157 12,257 13,522 14,850 Intangibles 66 66 66 66 Other non-current assets 5,828 5,828 5,828 5,828 Total assets 141,998 343,342 332,951 324,259 Current liabilities 18,648 19,831 19,784 19,707 Total liabilities 50,642 180,826 166,278 154,201 Shareholders' equity 91,323 162,483 166,640 170,026 Minority interests 32 33 32 31 Total liabilities & equity 141,998 343,342 332,951 324,259 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 13,533 27,652 26,133 27,093 Net interest 2,850 8,394 7,546 6,963 Tax paid 0 0 0 0 Working capital (337) (1,021) 104 (102) Other cash & non-cash items 6,500 11,636 11,494 11,043 Our Blue Sky Scenario (Rmb) (from 15.10) 14.50 Operating cash flow 22,546 46,661 45,278 44,997 50 bps decrease in cost of debt Capex (916) (211,216) (2,216) (2,216) Free cash flow to the firm 21,630 (164,556) 43,061 42,781 Our Grey Sky Scenario (Rmb) (from 14.10) 13.50 Investing cash flow 1,353 (211,216) (2,216) (2,216) 50 bps increase in cost of debt Equity raised 733 66,440 0 0 Dividends paid (7,853) (14,300) (14,300) (14,300) Share price performance Financing cash flow (18,329) 181,140 (28,800) (26,300) Total cash flow 5,571 16,584 14,261 16,481 Adjustments 0 0 0 0 Net change in cash 5,572 16,584 14,261 16,481 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 16,500 22,000 22,000 22,000 EPS (Credit Suisse) (Rmb) 0.70 0.86 0.84 0.80 DPS (Rmb) 0.48 0.65 0.65 0.65 Operating CFPS (Rmb) 1.37 2.12 2.06 2.05 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue (9.9) 106.1 (3.8) 1.2 EBIT (14.8) 104.3 (5.5) 3.7 EPS (2.6) 23.8 (3.0) (4.2) Margins (%) The price relative chart measures performance against the Shanghai EBITDA 81.3 79.4 78.6 78.8 Shenzhen CSI300 index which closed at 3,535.33 on 29-Nov-2016 EBIT 55.8 55.4 54.4 55.7 On 29-Nov-2016 the spot exchange rate was Rmb6.89/US$1 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 19.3 15.6 16.1 16.8 P/B 2.43 1.82 1.78 1.74 Dividend yield (%) 3.5 4.8 4.8 4.8 EV/sales 14.0 9.4 9.5 9.1 EV/EBITDA 17.3 11.8 12.1 11.6 EV/EBIT 25.1 17.0 17.4 16.4 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 13.0 15.0 11.2 10.5 ROIC 7.6 9.6 6.4 6.8 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 47.7 106.4 95.5 86.4 Net debt/EBITDA (x) 2.21 4.36 4.22 3.84

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 62 30 November 2016

Asia Pacific/China Electric Utilities

Huaneng Power International Inc

(0902.HK / 902 HK) Rating UNDERPERFORM Price (29 Nov 16, HK$) 4.86 Target price (HK$) 3.50 Upside/downside (%) -28.0

Mkt cap (HK$/US$ mn) 113,712 / 14,661 A challenging year ahead Enterprise value (Rmb mn) 269,152 Number of shares (mn) 15,200 ■ Prolonged earnings pressure. We recently cut our FY16-18 EPS forecasts Free float (%) 47.2 by 27-52% for Huaneng Power (HNP) mainly on 28% higher coal price 52-wk price range (HK$) 7.27-4.46 ADTO-6M (US$ mn) 23.4 forecasts (FY17E: Rmb510/t vs Rmb400/t previously) and expanding low- *Stock ratings are relative to the relevant country benchmark. tariff direct power supply (40%/60% in FY17E/18E). We value HNP with 0.6x ¹Target price is for 12 months. FY17E P/B and ROE likely declining to only 4% in the next two years.

Research Analysts ■ Coal price impact and likely losses in 1H17. During 1H16, HNP continued

Dave Dai, CFA to enjoy coal price benefits with 20% YoY decline in unit fuel costs. However, 852 2101 7358 [email protected] with spot coal prices having rallied by 99% since bottom, we expect much smaller earnings in 2H16E. For FY17E, we expect total net profit to drop by

57% YoY, following 15% unit fuel cost increase. We also expect 1H17 to be a likely loss with delayed recognition of high-price coal inventories. ■ Less top-line pressure. On the brighter side, we expect top-line pressure to be smaller in FY17E compared with past few years: 2% YoY utilisation and average 1% decline in tariffs. The drop in tariff is based on assuming direct supply to increase to 40% of total volume (25% in FY16E) and tariff discounts reducing to 10% from 15% in FY16E, supported by the price recovery in Guangdong's monthly bidding results. ■ Valuation. HNP has kept its dividend policy at >50% payout of reported earnings and the company has not considered switching to an absolute dividend per share payout. Coupled with earning decline, FY17E dividend yield is <3%, much lower than the historical mean. At 0.7x FY17E, we expect further share price downside with ROE outlook likely to be much worse than 2011 level (trough valuation of 0.6x). The key upside risks are better-than- expected demand and lower-than-expected coal prices.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 128,904.9 116,346.9 118,593.3 122,019.8 EBITDA (Rmb mn) 43,554.6 32,951.5 26,231.8 28,243.3 EBIT (Rmb mn) 29,142.9 18,865.3 11,279.8 12,462.5 Net profit (Rmb mn) 13,685.4 7,846.0 3,351.4 3,881.1 EPS (CS adj.) (Rmb) 0.94 0.52 0.22 0.26 Change from previous EPS (%) n.a. 0.0 0.0 0.0 Consensus EPS (Rmb) n.a. 0.64 0.49 0.39 EPS growth (%) 25.0 (45.2) (57.3) 15.8 The price relative chart measures performance against the P/E (x) 4.6 8.4 19.6 16.9 MSCI CHINA F IDX which closed at 6,255.21 on 29/11/16. Dividend yield (%) 10.9 6.0 2.6 3.0 On 29/11/16 the spot exchange rate was HK$7.76/US$1 EV/EBITDA (x) 6.1 8.2 10.5 9.9

Performance 1M 3M 12M P/B (x) 0.75 0.75 0.73 0.72 Absolute (%) 2.3 3.0 -28.1 ROE (%) 17.7 9.1 3.8 4.3 Relative (%) 3.7 3.9 -29.8 Net debt/equity (%) 160.1 156.6 158.8 158.9

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 63 30 November 2016

Huaneng Power International Inc (0902.HK / 902 HK) Price (29 Nov 2016): HK$4.86; Rating: UNDERPERFORM; Target Price: HK$3.50; Analyst: Dave Dai Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 128,905 116,347 118,593 122,020 Huaneng Power Int'l Inc. is principally engaged in the investment, Cost of goods sold 59,242 60,547 69,626 70,739 construction, operation and management of power plants. The EBITDA 43,555 32,952 26,232 28,243 company’s electricity generation business covers Northeast China EBIT 29,143 18,865 11,280 12,462 Grid, North China Grid, Northwest China Grid, East China. Net interest expense/(inc.) 7,809 7,272 7,152 7,377 Recurring PBT 22,975 13,158 5,621 6,509 Blue/Grey Sky Scenario Profit after tax 17,293 9,892 4,225 4,893 Reported net profit 13,685 7,846 3,351 3,881 Net profit (Credit Suisse) 13,685 7,846 3,351 3,881 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 7,538 6,737 6,345 6,527 Current receivables 16,377 14,782 15,067 15,503 Inventories 5,423 5,542 6,373 6,475 Other current assets 4,227 4,227 4,227 4,227 Current assets 33,565 31,288 32,013 32,732 Property, plant & equip. 219,673 229,987 238,335 244,929 Investments 19,745 21,195 22,572 23,880 Intangibles 21,928 21,928 21,928 21,928 Other non-current assets 13,955 13,955 13,955 13,955 Total assets 308,866 318,353 328,803 337,424 Current liabilities 123,837 122,354 124,254 124,924 Total liabilities 207,173 210,690 218,590 224,260 Shareholders' equity 84,142 88,065 89,741 91,681 Minority interests 17,552 19,598 20,472 21,484 Total liabilities & equity 308,866 318,353 328,803 337,424 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 29,143 18,865 11,280 12,462 Net interest (7,946) (7,433) (7,312) (7,538) Tax paid (5,699) (3,266) (1,395) (1,616) Working capital (656) (7) 784 132 Other cash & non-cash items 19,780 18,536 19,329 20,089 Our Blue Sky Scenario (HK$) 3.70 Operating cash flow 34,623 26,696 22,685 23,530 5% coal price increase in 2017 Capex (24,327) (24,400) (23,300) (22,375) Free cash flow to the firm 10,295 2,296 (615) 1,155 Our Grey Sky Scenario (HK$) 3.30 Investing cash flow (33,952) (24,350) (23,177) (22,183) 25% coal price increase in 2017 Equity raised 4,684 0 0 0 Dividends paid (7,144) (3,923) (1,676) (1,941) Share price performance Financing cash flow (5,430) 3,077 6,324 5,059 Total cash flow (4,760) 5,423 5,833 6,406 Adjustments (310) (6,224) (6,224) (6,224) Net change in cash (5,070) (801) (391) 182 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 14,523 15,200 15,200 15,200 EPS (Credit Suisse) (Rmb) 0.94 0.52 0.22 0.26 DPS (Rmb) 0.47 0.26 0.11 0.13 Operating CFPS (Rmb) 2.38 1.76 1.49 1.55 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue 2.8 (9.7) 1.9 2.9 EBIT 15.3 (35.3) (40.2) 10.5 EPS 25.0 (45.2) (57.3) 15.8 Margins (%) The price relative chart measures performance against the MSCI CHINA F IDX EBITDA 33.8 28.3 22.1 23.1 which closed at 6,255.21 on 29-Nov-2016 EBIT 22.6 16.2 9.5 10.2 On 29-Nov-2016 the spot exchange rate was HK$7.76/US$1 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 4.6 8.4 19.6 16.9 P/B 0.75 0.75 0.73 0.72 Dividend yield (%) 10.9 6.0 2.6 3.0 EV/sales 2.0 2.3 2.3 2.3 EV/EBITDA 6.1 8.2 10.5 9.9 EV/EBIT 9.1 14.3 24.5 22.5 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 17.7 9.1 3.8 4.3 ROIC 8.9 5.2 3.0 3.2 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 160.1 156.6 158.8 158.9 Net debt/EBITDA (x) 3.74 5.12 6.67 6.37

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 64 30 November 2016

Asia Pacific/China Electric Utilities

CGN Power Co., Ltd. (1816.HK / 1816 HK) Rating UNDERPERFORM Price (29 Nov 16, HK$) 2.32 Target price (HK$) 1.75 Upside/downside (%) -24.6

Mkt cap (HK$/US$ mn) 105,441 / 13,595 Risks to emerge in 2017 Enterprise value (Rmb mn) 227,966 Number of shares (mn) 45,449 ■ Maintain UNDERPPERFORM. The share price of CGN Power (CGN) has Free float (%) 41.6 been weak over the past 12 months, which we believe was largely driven by 52-wk price range (HK$) 2.99-2.06 ADTO-6M (US$ mn) 11.8 concerns about utilisation pressure but we see additional earnings risks with *Stock ratings are relative to the relevant country benchmark. power tariffs. We believe the proposed nuclear minimum utilisation hours can ¹Target price is for 12 months. only partially protect output, and nuclear power may be forced to participate

Research Analysts in direct power supply with much lower tariffs. Our DCF-based target price is

Dave Dai, CFA HK$1.75 with an UNDERPERFORM rating. 852 2101 7358 [email protected] ■ Continuing utilisation pressure. China's long lasting power oversupply hit CGN's Liaoning utilisation hours in 2015, and then Fujian in 1H16. Our

location-specific forecasts suggest increasing oversupplies across CGN's two other areas: Guangdong and Guangxi. We expect an average of 5% hours pressure CAGR during FY17-18E but the Daya Bay project within Guangdong should be helped by the long-term contract with Hong Kong. ■ Tariff risk is coming in. We expect the release of minimum hours scheme (not fully protecting our projected hours) to force nuclear to join the direct sales market in FY17E. To be competitive, we forecast 10%/15% of volume contribution in FY17/18E with ~15% tariff discount (or ~2% tariff cut each in FY17/18E). We have not assumed any benchmark tariff (Rmb0.43/kWh) cuts but such risk cannot be ruled out given tariff cuts in other fuels. Every 1% of cut gives 3% extra EPS downside. ■ Unattractive valuation. Trading on 1.4x FY17E P/B amid continuing ROE pressure, the stock is expensive versus its power peers at 1.0x on the back of 12% ROE. After its recent asset purchase, we see no near-term injections from the parentco, given a lack of operating units. Key upside risks are better- than-expected utilisation and less sales with competitive tariffs.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 23,262.9 27,935.9 36,987.1 43,230.7 EBITDA (Rmb mn) 13,831.9 16,619.0 21,103.2 24,620.3 EBIT (Rmb mn) 10,843.9 12,952.4 15,622.2 16,181.8 Net profit (Rmb mn) 6,593.6 7,355.6 8,140.9 8,069.6 EPS (CS adj.) (Rmb) 0.15 0.16 0.18 0.18 Change from previous EPS (%) n.a. 0.0 0.0 0.0 Consensus EPS (Rmb) n.a. 0.16 0.18 0.20 EPS growth (%) (15.4) 11.6 10.7 (0.9) The price relative chart measures performance against the P/E (x) 14.2 12.7 11.5 11.6 MSCI CHINA F IDX which closed at 6,255.21 on 29/11/16. Dividend yield (%) 2.0 2.0 2.2 2.2 On 29/11/16 the spot exchange rate was HK$7.76/US$1 EV/EBITDA (x) 15.0 13.8 11.0 9.4

Performance 1M 3M 12M P/B (x) 1.65 1.51 1.37 1.26 Absolute (%) 2.7 3.1 -22.7 ROE (%) 12.3 12.4 12.5 11.3 Relative (%) 4.1 4.0 -24.4 Net debt/equity (%) 145.0 158.0 146.3 132.6

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 65 30 November 2016

CGN Power Co., Ltd. (1816.HK / 1816 HK) Price (29 Nov 2016): HK$2.32; Rating: UNDERPERFORM; Target Price: HK$1.75; Analyst: Dave Dai Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 23,263 27,936 36,987 43,231 CGN Power Co., Ltd. operates and manages nuclear power Cost of goods sold 12,130 14,893 21,076 26,659 generating stations. It is the largest operator of nuclear units in EBITDA 13,832 16,619 21,103 24,620 China. CGN Power has stations in Guangdong, Fujian and Liaoning, EBIT 10,844 12,952 15,622 16,182 and is a subsidiary of China General Nuclear Power Corporation. Net interest expense/(inc.) 2,970 3,428 4,262 4,934 Recurring PBT 9,189 10,621 12,182 11,915 Blue/Grey Sky Scenario Profit after tax 8,073 9,359 10,762 10,680 Reported net profit 6,594 7,356 8,141 8,070 Net profit (Credit Suisse) 6,594 7,356 8,141 8,070 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 7,179 8,172 9,130 9,604 Current receivables 3,539 4,225 5,657 6,621 Inventories 10,790 13,085 17,314 20,244 Other current assets 5,344 5,344 5,344 5,344 Current assets 26,852 30,826 37,446 41,813 Property, plant & equip. 168,647 194,520 204,313 210,015 Investments 13,241 16,159 16,475 16,715 Intangibles 1,254 562 478 394 Other non-current assets 7,807 8,496 8,593 8,692 Total assets 217,801 250,564 267,306 277,629 Current liabilities 25,291 22,848 25,561 29,854 Total liabilities 139,092 164,334 172,349 174,010 Shareholders' equity 56,637 62,154 68,259 74,312 Minority interests 22,073 24,076 26,697 29,308 Total liabilities & equity 217,801 250,564 267,306 277,629 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 10,844 12,952 15,622 16,182 Net interest (2,970) (3,428) (4,262) (4,934) Tax paid (1,116) (1,262) (1,420) (1,235) Working capital (2,636) (837) (1,317) (1,224) Other cash & non-cash items 6,760 7,455 10,154 13,845 Our Blue Sky Scenario (HK$) 2.30 Operating cash flow 10,882 14,880 18,778 22,634 Assume utilization hours to stay flat in FY17E. Capex (17,409) (28,712) (15,580) (14,507) Free cash flow to the firm (6,526) (13,832) 3,198 8,126 Our Grey Sky Scenario (HK$) 1.20 Investing cash flow (27,019) (31,247) (15,180) (14,184) Assume utilization hours to drop 10% YoY in FY17E. Equity raised 0 0 0 0 Dividends paid (1,909) (1,839) (2,035) (2,017) Share price performance Financing cash flow (51,720) 21,426 (2,640) (7,976) Total cash flow (67,856) 5,059 958 474 Adjustments 0 0 0 0 Net change in cash (67,856) 5,059 958 474 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 45,449 45,449 45,449 45,449 EPS (Credit Suisse) (Rmb) 0.15 0.16 0.18 0.18 DPS (Rmb) 0.04 0.04 0.04 0.04 Operating CFPS (Rmb) 0.24 0.33 0.41 0.50 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue 11.9 20.1 32.4 16.9 EBIT 10.4 19.4 20.6 3.6 EPS (15.4) 11.6 10.7 (0.9) Margins (%) The price relative chart measures performance against the MSCI CHINA F IDX EBITDA 59.5 59.5 57.1 57.0 which closed at 6,255.21 on 29-Nov-2016 EBIT 46.6 46.4 42.2 37.4 On 29-Nov-2016 the spot exchange rate was HK$7.76/US$1 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 14.2 12.7 11.5 11.6 P/B 1.65 1.51 1.37 1.26 Dividend yield (%) 2.0 2.0 2.2 2.2 EV/sales 8.9 8.2 6.3 5.3 EV/EBITDA 15.0 13.8 11.0 9.4 EV/EBIT 19.2 17.7 14.9 14.3 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 12.3 12.4 12.5 11.3 ROIC 6.3 5.5 6.0 6.1 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 145.0 158.0 146.3 132.6 Net debt/EBITDA (x) 8.25 8.20 6.58 5.58

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 66 30 November 2016

Asia Pacific/Hong Kong Electric Utilities

CLP Holdings Limited (0002.HK / 2 HK) Rating UNDERPERFORM Price (29 Nov 16, HK$) 76.25 Target price (HK$) (from 70.00) 67.00 Upside/downside (%) -12.1

Mkt cap (HK$/US$ mn) 192,642 / 24,837 Stay cautious Enterprise value (HK$ mn) 246,214 Number of shares (mn) 2,526 ■ Maintain UNDERPERFORM. The crowded yield trade in 2016 is set to Free float (%) 71.5 reverse with risks of rising long-term interest rates. With ~70% earnings 52-wk price range (HK$) 83.90-62.45 ADTO-6M (US$ mn) 32.1 exposure to regulated Hong Kong Power business, we expect Scheme of *Stock ratings are relative to the relevant country benchmark. Control (SoC) negotiation to be a major uncertainty for CLP in 2017. We now ¹Target price is for 12 months. expect SoC rate of return to be cut from 9.99% to 8.00% in 2019 (previously

Research Analysts assumed in 2023), and reduce our TP from HK$70.00 to HK$67.00.

Dave Dai, CFA ■ SoC reset result may be announced in 2017. The current SoC agreement 852 2101 7358 [email protected] will expire by end-2018. There was a five-year extension option (2019-23) but not activated by the Hong Kong government. As a result, we now expect a

SoC cut in 2019 and FY19E earnings are likely to decline by 14% YoY. The Hong Kong government has intended to conclude the SoC negotiation by mid-2017 (according to Mr Wong Kam-sing, Secretary for the Environment) and we expect the result to be announced within 2017. ■ Relatively stable outlook for overseas assets. Australian power generation and retail businesses account for 14% of CLP's FY17E net profit. According to CS Australia utility analyst, Peter Wilson, the oversupply of Australian power generation market has disappeared with plant closure and reduced availability of economic gas supply, and Australian Energy Market Operator now forecasts a reserve shortfall by summer 2018, which may bode well for CLP's Australian power generation business. However, China business (10% net profit contribution) may continue to face both operation (poor results from coal-fired units) challenges. ■ Valuation. Current dividend yield of 3.7% is lower than its historical average (4.1%) and unsustainable given potential SoC return cut. We fine-tune our FY16-18E EPS slightly based on updated FX assumptions (lower RMB exchange rates). Key risks are better-than-expected negotiation results on HK regulated return and less-than-expected interest rate hike.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (HK$ mn) 80,700.0 85,719.0 85,393.7 87,672.3 EBITDA (HK$ mn) 19,885.0 22,292.9 22,918.7 23,219.0 EBIT (HK$ mn) 13,120.0 15,677.8 16,171.7 16,368.8 Net profit (HK$ mn) 15,670.0 11,923.3 11,922.9 12,039.3 EPS (CS adj.) (HK$) 6.20 4.72 4.72 4.77 Change from previous EPS (%) n.a. (0.4) (0.3) (0.1) Consensus EPS (HK$) n.a. 4.78 4.99 5.11 EPS growth (%) 39.6 (23.9) (0.0) 1.0 The price relative chart measures performance against the P/E (x) 12.3 16.2 16.2 16.0 HANG SENG INDEX which closed at 22,737.07 on Dividend yield (%) 3.5 3.7 3.7 3.7 29/11/16. On 29/11/16 the spot exchange rate was EV/EBITDA (x) 12.3 11.1 10.7 10.4 HK$7.76/US$1 P/B (x) 2.07 1.96 1.87 1.79

Performance 1M 3M 12M ROE (%) 17.3 12.5 11.9 11.4 Absolute (%) -2.1 -4.1 17.7 Net debt/equity (%) 51.2 51.3 47.5 43.6

Relative (%) -1.2 -3.1 14.3 Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 67 30 November 2016

CLP Holdings Limited (0002.HK / 2 HK) Price (29 Nov 2016): HK$76.25; Rating: UNDERPERFORM; Target Price: (from HK$70.00) HK$67.00; Analyst: Dave Dai Income Statement (HK$ mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 80,700 85,719 85,394 87,672 CLP is a major Asian utilities company conducting power business Cost of goods sold 31,280 28,554 28,548 28,578 in Hong Kong, China, India, Australia and some Southeast Asian EBITDA 19,885 22,293 22,919 23,219 markets. EBIT 13,120 15,678 16,172 16,369 Net interest expense/(inc.) 3,920 3,209 3,563 3,488 Blue/Grey Sky Scenario Recurring PBT 20,345 14,463 14,462 14,591 Profit after tax 16,763 13,016 13,016 13,132 Reported net profit 15,670 11,923 11,923 12,039 Net profit (Credit Suisse) 15,670 11,923 11,923 12,039 Balance Sheet (HK$ mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 3,799 1,730 2,869 3,482 Current receivables 14,714 15,629 15,570 15,985 Inventories 3,110 3,707 3,546 3,727 Other current assets 652 652 652 652 Current assets 22,275 21,719 22,636 23,846 Property, plant & equip. 127,801 130,441 132,504 133,307 Investments 13,679 13,679 13,679 13,679 Intangibles 28,257 28,032 27,807 27,582 Other non-current assets 11,952 10,944 10,944 10,950 Total assets 203,964 204,815 207,571 209,364 Current liabilities 38,287 36,241 36,238 36,258 Total liabilities 103,032 100,005 99,002 97,022 Shareholders' equity 93,118 98,089 102,941 107,807 Minority interests 7,814 6,721 5,628 4,535 Total liabilities & equity 203,964 204,815 207,571 209,364 Cash Flow (HK$ mn) 12/15A 12/16E 12/17E 12/18E EBIT 13,120 15,678 16,172 16,369 Net interest (3,920) (3,209) (3,563) (3,488) Tax paid (3,582) (1,446) (1,446) (1,459) Working capital (18) (3,559) 218 (576) Our Blue Sky Scenario (HK$) (from 78.00) 79.00 Other cash & non-cash items 17,012 8,635 8,600 8,555 SOC return maintains at 9.99% post 2019 Operating cash flow 22,612 16,099 19,981 19,400 Capex (6,433) (9,030) (8,585) (7,428) Our Grey Sky Scenario (HK$) (from 62.00) 55.00 Free cash flow to the firm 16,179 7,069 11,396 11,972 SOC return is cut to 6% post 2019 Investing cash flow (4,401) (9,030) (8,585) (7,428) Equity raised 0 0 0 0 Share price performance Dividends paid (6,822) (7,035) (7,094) (7,224) Financing cash flow (18,805) (8,045) (9,164) (10,266) Total cash flow (594) (976) 2,232 1,706 Adjustments 0 0 0 0 Net change in cash (594) (976) 2,232 1,706 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 2,526 2,526 2,526 2,526 EPS (Credit Suisse) (HK$) 6.20 4.72 4.72 4.77 DPS (HK$) 2.70 2.78 2.81 2.86 Operating CFPS (HK$) 8.95 6.37 7.91 7.68 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue (12.5) 6.2 (0.4) 2.7 EBIT 1.9 19.5 3.2 1.2 EPS 39.6 (23.9) (0.0) 1.0 The price relative chart measures performance against the HANG SENG Margins (%) INDEX which closed at 22,737.07 on 29-Nov-2016 EBITDA 24.6 26.0 26.8 26.5 On 29-Nov-2016 the spot exchange rate was HK$7.76/US$1 EBIT 16.3 18.3 18.9 18.7 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 12.3 16.2 16.2 16.0 P/B 2.07 1.96 1.87 1.79 Dividend yield (%) 3.5 3.7 3.7 3.7 EV/sales 3.0 2.9 2.9 2.8 EV/EBITDA 12.3 11.1 10.7 10.4 EV/EBIT 18.6 15.7 15.1 14.8 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 17.3 12.5 11.9 11.4 ROIC 6.9 9.1 9.1 9.2 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 51.2 51.3 47.5 43.6 Net debt/EBITDA (x) 2.60 2.41 2.25 2.11

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 68 30 November 2016

Asia Pacific/Hong Kong Electric Utilities

Hong Kong Electric Investments

(2638.HK / 2638 HK) Rating UNDERPERFORM Price (29 Nov 16, HK$) 6.83 Target price (HK$) (from 5.30) 5.00 Upside/downside (%) -26.8

Mkt cap (HK$/US$ mn) 60,351 / 7,781 Double-whammy risks Enterprise value (HK$ mn) 99,798 Number of shares (mn) 8,836 ■ Maintain UNDERPERFORM. We expect further share-price downside of Free float (%) 45.6 Hong Kong Electric (HKE) in 2017, driven by double-whammy risks of rising 52-wk price range (HK$) 8.20-5.83 ADTO-6M (US$ mn) 7.7 US interest rates and potential cut of Hong Kong regulated returns. We now *Stock ratings are relative to the relevant country benchmark. expect Scheme of Control (SoC) rate of return to be cut from 9.99% to 8.00% ¹Target price is for 12 months. in 2019 (previously assumed in 2023), and our TP is cut from HK$5.30 to

Research Analysts HK$5.00 as a result.

Dave Dai, CFA ■ Worst positioned in rate hike cycle. History suggests that HK utilities have 852 2101 7358 [email protected] been traded inversely the ten-year US bond yield, and we believe HKE is one of the most exposed given its pure Hong Kong regulated power business with

little growth. Credit Suisse Economic Team expects three US Fed fund rate hikes (75 bp in total) from now to end-2017. Besides, rate hike could also lead to higher finance cost, and we estimate 25bp interest rate increase could reduce its FY17E EPS by ~3%. ■ SoC reset result may be announced in 2017. The current SoC agreement will expire by end-2018. There was a five-year extension option (2019-23) but it was not activated by the Hong Kong government. As a result, we now expect a SoC regulated return cut in 2019 (earlier than previous assumption of 2023) from 9.99% to 8.00%, indicating FY19E earnings could substantially decline YoY. The Hong Kong government has intended to conclude the SoC negotiation by mid-2017 (according to Mr Wong Kam-sing, Secretary for the Environment) and we expect the result to be announced within 2017. ■ Valuation. The stock is trading at 5% FY17E dividend yield, only at mid- range comparing to global large-cap utilities and also unsustainable given potential SoC return cut in 2019. Our FY16-18E EPS forecasts are largely unchanged while TP is cut from HK$5.30 to HK$5.00 as we now assume a SoC cut starting in 2019 (2023 previously). The key upside risks are better- than-expected SoC negotiation results and milder-than-expected rate hikes. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (HK$ mn) 11,210.0 11,480.6 11,480.6 11,480.6 EBITDA (HK$ mn) 8,081.0 8,211.0 8,057.1 7,882.8 EBIT (HK$ mn) 5,288.0 5,412.1 5,246.6 5,047.0 Net profit (HK$ mn) 3,591.0 3,261.2 3,007.4 2,952.0 EPS (CS adj.) (HK$) 0.41 0.37 0.34 0.33 Change from previous EPS (%) n.a. 0.0 (0.1) (0.1) Consensus EPS (HK$) n.a. 0.38 0.38 0.37 EPS growth (%) 4.8 (9.2) (7.8) (1.8) The price relative chart measures performance against the P/E (x) 16.8 18.5 20.1 20.4 HANG SENG INDEX which closed at 22,737.07 on Dividend yield (%) 5.9 5.6 5.3 5.1 29/11/16. On 29/11/16 the spot exchange rate was EV/EBITDA (x) 12.5 12.1 12.1 12.2 HK$7.76/US$1 P/B (x) 1.23 1.23 1.23 1.23

Performance 1M 3M 12M ROE (%) 7.3 6.7 6.1 6.0 Absolute (%) -10.2 -6.2 10.5 Net debt/equity (%) 83.8 80.2 76.4 73.8

Relative (%) -9.3 -5.1 7.2 Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 69 30 November 2016

Hong Kong Electric Investments (2638.HK / 2638 HK) Price (29 Nov 2016): HK$6.83; Rating: UNDERPERFORM; Target Price: (from HK$5.30) HK$5.00; Analyst: Dave Dai Income Statement (HK$ mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 11,210 11,481 11,481 11,481 HK Electric Investments engages in the generation, transmission, Cost of goods sold 5,189 5,290 5,411 5,563 and distribution of electricity in Hong Kong. EBITDA 8,081 8,211 8,057 7,883 EBIT 5,288 5,412 5,247 5,047 Blue/Grey Sky Scenario Net interest expense/(inc.) 1,025 1,245 1,335 1,395 Recurring PBT 4,263 4,167 3,912 3,652 Profit after tax 3,513 3,434 3,223 3,009 Reported net profit 3,591 3,261 3,007 2,952 Net profit (Credit Suisse) 3,591 3,261 3,007 2,952 Balance Sheet (HK$ mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 6,157 7,102 8,483 9,530 Current receivables 1,160 1,193 1,193 1,193 Inventories 882 817 966 1,039 Other current assets 0 0 0 0 Current assets 8,199 9,112 10,642 11,762 Property, plant & equip. 49,482 49,760 50,369 50,952 Investments 0 0 0 0 Intangibles 33,623 33,623 33,623 33,623 Other non-current assets 22,405 21,859 21,313 20,767 Total assets 113,709 114,354 115,946 117,104 Current liabilities 6,129 7,379 11,412 13,784 Total liabilities 64,703 65,348 66,940 68,098 Shareholders' equity 49,012 49,012 49,012 49,012 Minority interests 0 0 0 0 Total liabilities & equity 113,715 114,360 115,952 117,110 Cash Flow (HK$ mn) 12/15A 12/16E 12/17E 12/18E EBIT 5,288 5,412 5,247 5,047 Net interest (1,025) (1,245) (1,335) (1,395) Tax paid (750) (733) (688) (642) Our Blue Sky Scenario (HK$) (from 6.10) 7.50 Working capital 1,776 1,289 1,664 1,212 SOC permitted return maintains 9.99% post 2019 Other cash & non-cash items 2,956 2,799 2,810 2,836 Operating cash flow 8,245 7,522 7,698 7,057 Our Grey Sky Scenario (HK$) (from 4.50) 2.50 Capex (2,516) (2,516) (2,858) (2,858) SOC permitted return was cut to 6% post 2019 Free cash flow to the firm 5,729 5,006 4,840 4,199 Investing cash flow (2,516) (2,516) (2,858) (2,858) Share price performance Equity raised 0 0 0 0 Dividends paid (3,538) (3,360) (3,216) (3,075) Financing cash flow (4,545) (4,183) (3,691) (3,300) Total cash flow 1,184 823 1,149 899 Adjustments 0 0 0 0 Net change in cash 1,184 823 1,149 899 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 8,836 8,836 8,836 8,836 EPS (Credit Suisse) (HK$) 0.41 0.37 0.34 0.33 DPS (HK$) 0.40 0.38 0.36 0.35 Operating CFPS (HK$) 0.93 0.85 0.87 0.80 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue 6.7 2.4 0.0 0.0 EBIT 5.2 2.3 (3.1) (3.8) The price relative chart measures performance against the HANG SENG EPS 4.8 (9.2) (7.8) (1.8) INDEX which closed at 22,737.07 on 29-Nov-2016 Margins (%) On 29-Nov-2016 the spot exchange rate was HK$7.76/US$1 EBITDA 72.1 71.5 70.2 68.7 EBIT 47.2 47.1 45.7 44.0 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 16.8 18.5 20.1 20.4 P/B 1.23 1.23 1.23 1.23 Dividend yield (%) 5.9 5.6 5.3 5.1 EV/sales 9.0 8.7 8.5 8.4 EV/EBITDA 12.5 12.1 12.1 12.2 EV/EBIT 19.2 18.4 18.6 19.1 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 7.3 6.7 6.1 6.0 ROIC 4.8 5.0 4.9 4.8 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 83.8 80.2 76.4 73.8 Net debt/EBITDA (x) 5.08 4.79 4.65 4.59

Source: Company data, Thomson Reuters, Credit Suisse estimates

HK and China Utilities Sector 70 30 November 2016

Companies Mentioned (Price as of 29-Nov-2016) Beijing Enterprises Holdings (0392.HK, HK$35.9) CGN Power Co., Ltd. (1816.HK, HK$2.32, UNDERPERFORM, TP HK$1.75) CLP Holdings Limited (0002.HK, HK$76.25, UNDERPERFORM, TP HK$67.0) Cheung Kong Infrastructure (1038.HK, HK$65.3) China Datang Renewables Power (1798.HK, HK$0.73) China Gas Holdings Ltd (0384.HK, HK$10.68) China Resources Gas (1193.HK, HK$23.25, OUTPERFORM, TP HK$31.0) China Resources Power Holdings (0836.HK, HK$12.9) China Suntien Green Energy Corporation (0956.HK, HK$1.04) China Yangtze Power Co Ltd (600900.SS, Rmb13.47, NEUTRAL, TP Rmb14.0) Concord New Energy (0182.HK, HK$0.395) Datang International Power Generation (0991.HK, HK$2.12) ENN Energy Holdings Ltd (2688.HK, HK$34.65, OUTPERFORM, TP HK$42.0) GCL New Energy Holdings (0451.HK, HK$0.465) Hong Kong Electric Investments (2638.HK, HK$6.83, UNDERPERFORM, TP HK$5.0) Hong Kong and China Gas (0003.HK, HK$14.5) Huadian Fuxin Energy Corporation Limited (0816.HK, HK$1.77, OUTPERFORM[V], TP HK$2.8) Huadian Power International (1071.HK, HK$3.29) Huaneng Power International Inc (0902.HK, HK$4.86, UNDERPERFORM, TP HK$3.5) Huaneng Renewables Corporation (0958.HK, HK$2.55, OUTPERFORM[V], TP HK$3.6) Jiangsu Linyang Energy (601222.SS, Rmb8.7) Longyuan Power (0916.HK, HK$6.05) Power Assets Holdings Limited (0006.HK, HK$73.15) SDIC Power Holdings (600886.SS, Rmb7.01) Shenzhen Gas Corporation Ltd. (601139.SS, Rmb9.68) Sichuan Chuantou Energy (600674.SS, Rmb9.32) Xinyi Solar Holdings (0968.HK, HK$2.67)

Disclosure Appendix Analyst Certification Dave Dai, CFA, Gary Zhou, CFA, Gloria Yan and Shuwei Chen each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for CGN Power Co., Ltd. (1816.HK)

1816.HK Closing Price Target Price Date (HK$) (HK$) Rating 13-Jan-15 3.31 3.20 N 29-Apr-15 4.45 3.40 U 20-Aug-15 3.16 3.10 21-Oct-15 3.55 R 30-Sep-16 2.29 NR 12-Oct-16 2.30 1.75 U * Asterisk signifies initiation or assumption of coverage.

NEUTRAL UNDERPERFORM REST RICT ED N O T RA T ED

3-Year Price and Rating History for CLP Holdings Limited (0002.HK)

0002.HK Closing Price Target Price Date (HK$) (HK$) Rating 01-May-14 62.00 67.00 N * 14-Aug-14 65.45 68.00 02-Mar-15 68.50 62.00 U 18-Jan-16 62.90 60.00 01-Mar-16 68.65 66.00 N 01-Aug-16 82.00 70.00 U * Asterisk signifies initiation or assumption of coverage.

NEUTRAL UNDERPERFORM

HK and China Utilities Sector 71 30 November 2016

3-Year Price and Rating History for China Resources Gas (1193.HK)

1193.HK Closing Price Target Price Date (HK$) (HK$) Rating 13-Mar-14 25.80 30.50 O 19-May-14 23.80 32.00 25-Aug-14 23.50 27.00 N 24-Nov-14 21.25 27.00 O 18-Jan-16 19.30 26.00 16-Aug-16 23.70 27.30 27-Sep-16 27.80 32.00 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL

3-Year Price and Rating History for China Yangtze Power Co Ltd (600900.SS)

600900.SS Closing Price Target Price Date (Rmb) (Rmb) Rating 21-May-14 5.97 7.60 O 22-May-14 6.04 * 26-Sep-14 7.79 9.50 O 13-Jan-15 10.55 12.20 29-Apr-15 12.90 14.80 13-Nov-15 14.73 13.50 N 09-May-16 12.27 14.60 O * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL

3-Year Price and Rating History for ENN Energy Holdings Ltd (2688.HK)

2688.HK Closing Price Target Price Date (HK$) (HK$) Rating 28-Jan-14 50.15 40.00 U 26-Mar-14 54.00 41.00 19-May-14 55.00 50.00 N 25-Nov-14 47.95 55.00 O 30-Mar-15 46.90 56.00 21-May-15 54.30 53.00 N 06-Oct-15 38.95 54.00 O 18-Jan-16 34.25 52.00 24-Aug-16 42.45 53.00 27-Sep-16 37.60 44.00 N UNDERPERFORM NEUTRAL * Asterisk signifies initiation or assumption of coverage. OUTPERFORM

HK and China Utilities Sector 72 30 November 2016

3-Year Price and Rating History for Hong Kong Electric Investments (2638.HK)

2638.HK Closing Price Target Price Date (HK$) (HK$) Rating 01-May-14 5.33 5.60 N * 02-Mar-15 5.25 5.30 13-Jan-16 6.01 5.30 U * Asterisk signifies initiation or assumption of coverage.

NEUTRAL UNDERPERFORM

3-Year Price and Rating History for Huadian Fuxin Energy Corporation Limited (0816.HK)

0816.HK Closing Price Target Price Date (HK$) (HK$) Rating 03-Mar-14 4.24 5.20 O * 25-Mar-14 3.80 5.30 29-Apr-15 4.28 5.50 25-Aug-15 2.74 5.00 18-Jan-16 1.62 3.10 22-Aug-16 2.13 3.16 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM

3-Year Price and Rating History for Huaneng Power International Inc (0902.HK)

0902.HK Closing Price Target Price Date (HK$) (HK$) Rating 27-Jan-14 7.61 6.40 U 30-Jul-14 8.73 7.40 14-Oct-14 8.90 7.50 * 13-Jan-15 10.84 8.60 11-Mar-15 8.89 7.70 28-Apr-15 11.18 7.30 30-Dec-15 6.68 5.80 24-Mar-16 6.80 5.60 09-May-16 5.47 4.30 12-Jul-16 4.58 4.00 UNDERPERFORM

03-Aug-16 4.72 3.90 08-Aug-16 4.69 3.70 21-Nov-16 4.65 3.50 * Asterisk signifies initiation or assumption of coverage.

HK and China Utilities Sector 73 30 November 2016

3-Year Price and Rating History for Huaneng Renewables Corporation (0958.HK)

0958.HK Closing Price Target Price Date (HK$) (HK$) Rating 03-Mar-14 3.45 4.05 O * 10-Apr-14 2.63 3.65 19-Mar-15 2.79 3.55 10-Apr-15 3.20 3.80 29-Apr-15 3.32 4.00 14-Oct-15 2.91 4.40 18-Jan-16 1.70 3.80 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neu tral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (63% banking clients) Neutral/Hold* 38% (59% banking clients) Underperform/Sell* 15% (55% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with

HK and China Utilities Sector 74 30 November 2016 the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html . Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research:

Target Price and Rating Valuation Methodology and Risks: (12 months) for CGN Power Co., Ltd. (1816.HK) Method: Our target price of HK$1.75 for CGN Power is based on discounted cash flow method with a WACC of 7% (cost of equity of 12% and cost of debt of 4.5%) as well as zero terminal growth. We rate the stock UNDERPERFORM due to likely deteriorating nuclear utilisation and combining tariff pressure with expanding low-tariff direct supply sales. Risk: Key risks to our target price of HK$1.75 for CGN Power include: (1) drop of utilisaiton hours; (2) change of national nuclear policies; (3) nuclear accidents; (4) increase in fuel costs and other costs, as well as (5) delay of the construction schedule of nuclear. Upside risks include higher utilisation hours. Target Price and Rating Valuation Methodology and Risks: (12 months) for CLP Holdings Limited (0002.HK) Method: In arriving at our target price of HK$67.00 for CLP Holdings, we use discounted cash flow method with a weighted average cost of capital of 7% WACC and a 1% terminal growth rate. Maintain Underperform rating due to concerns on regulated return cut for its Hong Kong power business and unappealing valuation. Risk: Risks to our target price of HK$67.00 and Underperform rating for CLP Holdings include: (1) lower-than-expected Hong Kong Scheme of Control regulated return, and (2) currency risks such as Australian dollar. Target Price and Rating Valuation Methodology and Risks: (12 months) for China Resources Gas (1193.HK) Method: Our price target of HK$31.0/share for China Resources Gas (CRG) is based on a discounted cash flow (DCF) methodology. The WACC (weighted average cost of capital) of 8% is based on a 12% cost of equity and 3% cost of debt. We rate the stock OUTPERFORM as we expect the company to generate strong earnings and free cash flow in the coming years and the current share price is undervaluing such growth potential. Risk: Risks that could impede achievement of our HK$31.0/share price target and OUTPERFORM rating for China Resources Gas (CRG) include: (1) lower-than-expected gas sales growth; and (2) few-than-expected new connections. Target Price and Rating Valuation Methodology and Risks: (12 months) for China Yangtze Power Co Ltd (600900.SS) Method: We arrive at our target price of Rmb14.0 for China Yangtze Power by using a discounted cash flow model, as we believe operating cash flow best captures the company's mid- to long-term growth profile. We use WACC of 7% with terminal growth of 0%. We rate the stock NEUTRAL with attractive DPS guarantee but possible participation in low-tariff direct power supply is a concern. Risk: Key risks to our target price of Rmb14.0 and NEUTRAL rating for China Yangtze Power include: volatilities in hydro resources and possible participation in direct supply for its high-tariff new hydro power plants (Xiluodu & Xiangjiaba). Interest rate increases could also be a downside risk. Target Price and Rating Valuation Methodology and Risks: (12 months) for ENN Energy Holdings Ltd (2688.HK) Method: Our target price of HK$42.0 for ENN Energy Holdings Ltd is based on our discounted cash flow (DCF) valuation. Our 9% WACC (weighted average cost of capital) is based on a 12% cost of equity and 4% post-tax cost of debt. The terminal growth rate we use is 2%. We rate the stock OUTPERFORM with attractive valuation and growth potential. Risk: Risks that could cause the share price to diverge from our target price of HK$42.0 and our OUTPERFORM rating for ENN Energy Holdings Ltd include: (1) lower-than-expected growth of gas sales, especially from industrial users; (2) lower-than-expected gas connections; and (3) worse-than-expected profitability of LNG stations. Target Price and Rating Valuation Methodology and Risks: (12 months) for Hong Kong Electric Investments (2638.HK)

HK and China Utilities Sector 75 30 November 2016

Method: Our target price of HK$5.0 for Hong Kong Electric Investments is based on DCF method with a WACC of 5% and 1% terminal growth rate. Our cost of equity is 6% while cost of debt is 3.5%. We rate the stock UNDERPERFORM given demanding valuation and Scheme of Control return cut risks. Risk: Key risks to our target price of HK$5.0 and our Underperform rating for Hong Kong Electric Investments include: (1) Better-than-expect SoC regulated rate of return after current scheme expires; (2) Better-than-expected dividend payout ratio; and (3) lower-than-expected interest rate hike. Target Price and Rating Valuation Methodology and Risks: (12 months) for Huadian Fuxin Energy Corporation Limited (0816.HK) Method: We use a discounted cash flow method to value Huadian Fuxin Energy Corp given the predictable cash flow nature of the wind power industry, and our TP for the company is HK$2.8. Key assumptions are 7.6% WACC and no terminal growth rate. We rate the stock Outperform as we expect the company, as the largest power producer in Fujian province with a strong asset mixture (wind, nuclear, coal and hydro), to generate strong earnings and free cash flow in the coming years and the current share price is undervaluing such growth potential. Risk: Key risks to our target price of HK$2.8 and Outperform rating for Huadian Fuxin Energy Corp. include: (1) lower-than-expected hydro and wind utilisation hours; (2) larger-than-expected rising coal prices; and (3) weaker macro power demand. Target Price and Rating Valuation Methodology and Risks: (12 months) for Huaneng Power International Inc (0902.HK) Method: We use P/B (price-to-book) valuation to derive our target price of HK$3.5 for Huaneng Power International Inc (H). We assume a long- term ROE (return on equity) of 7%, which implies an FY16 P/B of 0.5x. We have an UNDERPERFORM rating on the stock given Huaneng Power's deteriorating risk-reward profile. Risk: Risks to our HK$3.5 target price and UNDERPERFORM rating for Huaneng Power International Inc (H) include: (1) faster-than-expected capacity growth; (2) lower-than-expected coal prices; and (3) better-than-expected utilisation hours. Target Price and Rating Valuation Methodology and Risks: (12 months) for Huaneng Renewables Corporation (0958.HK) Method: We use a discounted cash flow method to value the company given the predictable cash flow nature of the wind power industry, and our TP for the company is HK$3.6. Key assumptions are 8% WACC and 2% terminal growth rate. We rate the company Outperform since as one of the market leaders in the wind power industry, we expect it to generate strong earnings and free cash flow in the coming years and the current share price is undervaluing such growth potential. Risk: Key investment risks to the Outperform rating and the target price of HK$3.6 for Huaneng Renewables include: (1) slower-than-expected capacity growth; (2) volatile wind resources and utilisation hours; and (3) further impairment of assets.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (600900.SS, 0958.HK, 1816.HK, 0902.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (600900.SS, 0958.HK, 1816.HK, 0902.HK) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (0958.HK, 0902.HK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (600900.SS, 0958.HK, 1816.HK, 0902.HK) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (600900.SS, 1193.HK, 0002.HK, 0958.HK, 1816.HK, 2688.HK, 0816.HK, 0902.HK) within the next 3 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (0902.HK). For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=273016&v=7adsfhmnwd6iyn1x4jft2zz6g . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.

HK and China Utilities Sector 76 30 November 2016

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (0958.HK, 1816.HK, 0902.HK) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse (Hong Kong) Limited ...... Dave Dai, CFA ; Gary Zhou, CFA ; Gloria Yan ; Shuwei Chen To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited ...... Dave Dai, CFA ; Gary Zhou, CFA ; Gloria Yan ; Shuwei Chen For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.

HK and China Utilities Sector 77 30 November 2016

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