China Wind Power 4 April 2011

ALTERNATIVE ENERGY | Neutral

Taking the wind out of its sales

We initiate coverage on China’s wind power sector with a Neutral Analysts rating – decelerating growth, grid bottlenecks, carbon income Clarisse Pan (852) 2533 2400 uncertainty, and rising interest rates being major concerns. Yet it’s [email protected]

not all doom and gloom: the development of overseas markets and Alan Lau (852) 2533 2479 offshore wind are potential growth drivers from 2012. As the sector [email protected] has underperformed the Hang Seng China Enterprises Index (HSCEI) by 28% since 3Q10, we believe most market concerns have been priced in and we see long-term investment opportunities for industry leaders with historical trough valuations. We prefer wind equipment producers Xinjiang Goldwind Science & Technology (2208 HK, Outperform) and China High Speed Transmission Equipment (658 HK, Outperform) over wind farm operators China Longyuan Power (916 HK, Neutral) and China Datang Corporation Renewable Power (1798 HK, Underperform).

Please read the analyst certification and other important disclosures on last page China Wind Power 4 April 2011

Table of Contents

Taking the wind out of its sales ...... 3

Executive summary ...... 4

China sees decelerating growth in wind power capacity ...... 9

Grid-related problems remain a serious challenge...... 17

CDM (carbon trading) income uncertainty ...... 22

Overseas expansion a growth driver from 2012...... 27

Offshore wind power – attractive theme by 2012 ...... 34

Competition landscape – wind farm operators in China ...... 40

Competition landscape – WTG manufacturers in China ...... 45

China High Speed Transmission Equipment (658 HK)...... 53

Xinjiang Goldwind Science & Technology (2208 HK) ...... 70

China Ming Yang Wind Power (MY US)...... 89

China Longyuan Power (916 HK) ...... 107

China Datang Corporation Renewable Power (1798 HK) ...... 124

Appendices ...... 138

China Wind Power 4 April 2011

China Wind Power

Sector Rating: Neutral Taking the wind out of its sales (initiation)

We initiate coverage on China’s wind power sector with a Neutral rating. Decelerating growth, grid bottlenecks, carbon income Stock price vs HSCEI uncertainty, and rising interest rates are major concerns for the 130% industry. Yet it’s not all doom and gloom. The development of overseas markets and offshore wind are potential growth drivers 120%

from 2012. As the sector has underperformed the Hang Seng 110% China Enterprises Index (HSCEI) by 28% since 3Q10, we believe 100% most market concerns have been priced in and we see long-term investment opportunities for industry leaders with historical trough 90%

valuations. We prefer wind equipment producers Xinjiang 80% Goldwind Science & Technology (Goldwind, 2208 HK, 70% Outperform) and China High Speed Transmission Equipment (CHST, 658 HK, Outperform) over wind farm operators 60% Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 China Longyuan Power (Longyuan, 916 HK, Neutral) and China CHST Goldwind Mingyang Longyuan Datang HSCEI Datang Renewable Power (Datang, 1798 HK, Underperform). Source: Bloomberg Growth deceleration due to serious grid bottlenecks. Although China is likely to remain the largest wind market Valuations summary globally, we project CAGR of annual wind installation in CHST Goldwind Mingyang Longyuan Datang China at 1% in 2010-2015F, down sharply from 120% in (658 HK) (2208 HK) (MY US) (916 HK) (1798 HK) 2006-2009, due mainly to grid bottlenecks, an issue we Rating* O O N N U expect to persist for another three-to-five years. Share price HK$12.54 HK$14.56 US$10.52 HK$8.47 HK$2.38 Other industry overhangs include carbon income Target price HK$15.60 HK$16.60 US$11.00 HK$9.10 HK$2.00 uncertainty post expiration of the Kyoto Protocol, potential Upside/downside (%) 24 14 5 0 (16) interest hikes in China, overcapacity of wind turbine PER (x) generator (WTG) manufacturing, and pressure on pricing 2011F 10.1 13.2 8.4 19.7 14.2 and margins. 2012F 9.4 12.9 7.1 15.3 10.9 Next wave of growth from overseas expansion and EV/EBITDA(x) offshore wind from 2012F onwards. We estimate 2011F 6.9 15.2 6.6 5.7 3.3 overseas shipments will be c.13% of total shipments of the 2012F 6.3 14.0 5.7 4.5 2.4 leading Chinese wind equipment producers by 2012F. We ROE (%) also expect China’s cumulative offshore wind capacity to 2011F 16.9 17.1 22.6 8.9 8.6 reach 5GW by 2015F, implying a 90% CAGR in 2012F 16.2 15.4 21.0 10.1 10.0 2010-2015F. EPS YoY change (%) Our contrarian stock view: prefer selective wind 2011F (5) 10 48 35 122 equipment producers over wind operators. Some 2012F 7 3 18 28 30 consider Chinese wind operators superior to wind * O = Outperfom; N = Neutral; U = Underperform equipment manufacturers owing to their higher earnings Source: CCBIS estimates CAGR. We disagree believing that wind operators’ current Data as of 1 April 2011 valuations are either fair (Longyuan) or too demanding

(Datang) given low company ROEs (9-10%), stretched

balance sheet positions and high earnings dilution risk from refinancing activities. We like CHST and Goldwind for their Clarisse Pan industry leading positions and believe current valuations, at (852) 2533 2400 [email protected] historical trough levels, provide good entry points for the

long-term. We have a Neutral rating on China Ming Yang Alan Lau Wind Power (Mingyang, MY US) due to the high risk (852) 2533 2479 involved in its new product launch. [email protected]

China Wind Power 4 April 2011

Executive summary

China faces decelerating growth in wind power capacity

In 2010, China overtook the US to become the country with the largest cumulative wind power capacity globally. Wind installation had an impressive 120% CAGR in 2006-2009. But 2010 represented a major stumbling block for wind installation, when annual installation growth slowed significantly to 37% YoY due mainly to a grid connection bottlenecks in the shape of a lack of physical grid connections and power curtailment.

As we do not expect the grid connection problems to be resolved any time soon, we project annual wind installation growth could slow to a paltry 3% YoY for both 2011F and 2012F. Over the five-year period from 2010 to 2015F, we forecast that annual wind installation in China will grow at a CAGR of 1% with cumulative wind installation at a CAGR of 26%.

Although our forecasts have factored in drastic growth deceleration for wind power in China going forward, our estimate for wind power capacity, both onshore and offshore, of 245GW by end-2020F is much higher than the government’s target of 150GW, which we believe to be far too conservative.

In our view, there is a mismatch in China’s targets for renewable energy capacity and renewable energy consumption. To achieve its goal of having 15% energy consumption from renewable energy sources by 2020F, China needs to take a much more aggressive renewable capacity installation target, in our opinion. Moreover, we believe wind power could be the beneficiary if the Chinese government decides to adopt a more cautious stance on nuclear power development post the nuclear crisis in Fukujima, Japan, earlier this year.

Grid-related problems remain a serious challenge

We found two types of grid-related problems within the Chinese wind power industry: (1) installed wind capacity lacking physical grid connections; and (2) wind power curtailment. These problems will reduce the profitability of wind farm operators as they either let wind capacity idle, lower effective capacity utilization hours of wind farms or cap capacity growth potential of wind farm operators.

Based on our estimates, 30% of installed wind capacity will not be connected to the grid by end-2011. Moreover, according to data from China Electricity Council (CEC), approximately 11% of wind power generated in China was not procured by grid operators in 1H10.

While the central government has been grappling with such issues since 2009 and is expected to adopt measures to improve grid connection and wind power generation conditions, we only expect grid-related problems to be resolved gradually over the next three-to-five years.

China Wind Power 4 April 2011

CDM income uncertainty remains an overhang up to 2012F

In addition to wind power tariffs, wind farm operators in China generate income from the sale of carbon credits, most of which are allocated under the UN Clean Development Mechanism (CDM). We estimate that income from carbon trading materially impacts the IRR of a typical wind farm in China by raising project and equity IRR by 230bp and 510bp to 10.7% and 16.8%, respectively. Such income is likely to account for 16-18% of the annual cash flow of Chinese wind farms.

In our view, there are two types of risks associated with the carbon credit income of Chinese wind farm operators. The first is project registration risk with the UN CDM executive board (EB). The second is transaction volume and pricing risk post-2012 when the Kyoto Protocol, the primary regulation governing global emission trading, expires.

With regard to the risks attendant on the expiration of the Kyoto Protocol, we believe that post-2012, the EU Emission Trading System (ETS) will continue to support CDM projects while China has plans to put in place a domestic carbon trading system/market over the next few years. However, uncertainty towards carbon transaction volume and prices remains high.

Overseas expansion a growth driver from 2012

We recognize overseas expansion as the new growth driver for Chinese wind power companies. Overseas markets used to be neglected by Chinese wind companies due mainly to robust wind capacity growth in China historically. Over the past three years, overseas sales contributed on average to less than 1% of Chinese wind companies’ revenue. But that seems to be changing. We expect Chinese wind companies to place greater focus on overseas expansion to sustain growth in the coming few years, given our forecast that China’s wind installation growth will decline, from a 120% CAGR in 2006-2009 to a 1% CAGR in 2010-2015F.

Despite challenges facing Chinese wind companies, including inadequate product track records, concerns on product quality, and the risks inherent in trade policy intervention by foreign governments, Chinese WTG and component manufacturers have undeniable competitive advantages, such as easier access to project financing from Chinese banks and superior cost structures which make their ASPs on average 40-50% cheaper than their foreign counterparts.

We estimate that shipments from overseas markets will represent on average c.13% of leading Chinese WTG and component manufacturers shipments by 2012F, though our forecast implies that the top-five Chinese WTG manufacturers are expanding share in non-China markets rapidly from c.0% in 2010 to c.11% by 2012F and increasing aggregate export shipments from less than 20MW in 2010 to c.2.8GW in 2012F (1,237% CAGR in 2010-2012F).

Offshore wind – attractive theme but little real impact by 2012

The Chinese government encourages the development of offshore wind power projects as offshore wind power could be an effective tool to enhance China’s energy supply (good scalability); moreover, the offshore projects are located much nearer than onshore projects to China’s eastern coastal provinces where power consumption is highly concentrated.

China Wind Power 4 April 2011

At present, local governments of five coastal provinces plan to achieve a total of 15GW and 33GW in offshore wind power capacity by 2015F and 2020F, respectively, while China’s cumulative offshore capacity was merely 120MW by the end of 2010 based on our estimate. Our forecast for China’s offshore wind power capacity in 2015 is more conservative at 5GW, still implying a 90% CAGR in 2010-2015F, significantly higher than the overall wind capacity CAGR of 1% in China over the same period.

Despite rapid growth potential, we highlight that offshore demand will remain less than 3% and 7% of annual wind power capacity in China by 2012F and 2015F, respectively. This is much smaller than the contribution from overseas. According to our estimates overseas demand will be c.13% of leading WTG manufacturer 2012F shipments. Overall, offshore development is an attractive theme though it lacks material business impact, at least for the next few years.

Competition landscape – wind farm operators in China

China’s wind farm operation segment has been dominated by government-owned enterprises. According to China Wind Energy Association (CWEA), all top-ten wind farm operators in China are central or provincial government-owned companies with aggregate market share of 76% in 2009.

Government-owned enterprises are better equipped to maintain a competitive position in the wind farm operation segment than private or foreign-funded companies thanks to their closer relationships with grid operators, Chinese banks and government officials, availing them of good wind sites, grid connections, project financing and project approvals.

Although theoretically we do not expect a material difference in wind farm operating results between government-owned companies given their similar bargaining power, we found Longyuan a better managed wind operator than Datang Renewable given the better operating efficiency of Longyuan’s wind operation and the better quality of its balance sheet.

Competitive landscape – WTG manufacturers in China

China’s WTG market has been dominated by Chinese WTG manufacturers, the majority of which are government-owned enterprises. According to CWEA, Chinese WTG manufacturers have steadily increased their market share in China over the past few years, from 45% in 2006 to 90% in 2010, a trend we expect to continue in the future.

In September 2009, the Chinese central government pointed out that WTG manufacturing was facing over-investment and over-capacity. In light of intense price competition among Chinese WTG manufacturers, we see a trend towards industry consolidation encouraged by the Chinese government and vertical integration within the WTG sector over the next few years.

Among the three listed pure play WTG manufacturers, Goldwind, Mingyang, and Sinovel (601558 CH), we believe Goldwind and Mingyang have better profitability while Sinovel’s production costs are least competitive. Between Goldwind and Mingyang, we expect Mingyang to enjoy better growth thanks to its much smaller base. However, we believe risks with Mingyang are much higher as the company is switching to a new technology platform for its 2.5/3.0MW WTG products.

China Wind Power 4 April 2011

Our stock calls:

We prefer wind equipment producers over wind operators

In general, we prefer wind equipment manufacturers with attractive valuations, including Goldwind and CHST, over wind farm operators, such as Longyuan and Datang Renewable.

Although listed Chinese wind farm operators on average have better earnings CAGR in 2010-2012F than listed Chinese wind equipment manufacturers, we highlight that earnings growth of Chinese wind farm operators derive mainly from continuous investment into projects with unattractive ROE, which we expect to fall in the range of 9-10% at the company level over the next two years. Significant capex requirements together with extremely high net gearing ratios imply not only that refinancing risk is high for listed wind farm operators, but also that their free cash flow will remain negative at least until 2015F, in our view.

On the other hand, we like leading wind equipment manufacturers with attractive valuations. We have Outperform ratings on Goldwind and CHST, both of which have been industry leaders over the past four-to-five years with competitive advantages in cost and product quality. Despite threats from declining wind demand growth in China and margin pressure from intensifying industry competition, we believe major concerns have been priced in. Goldwind and CHST’s current valuations on our conservative estimates are very compelling at 13x and 10x 2011F P/E, respectively, both at discounts to global peer average valuations at 17x and at the low end of their historical valuation range.

China High Speed Transmission Equipment (CHST) (658 HK, Outperform) is the second-largest wind gearbox producer globally. CHST’s shares have underperformed the HSCEI by 33% over the past 12 months amid concerns on muted demand growth, margin pressure, and development of direct-drive WTGs. We believe that CHST’s shares have been oversold and their current valuation of 10x 2011F PER is very attractive. Thus we initiate coverage on CHST with an Outperform rating and target price of HK$15.60.

Goldwind (2208 HK, Outperform) is the second-largest WTG producer in China with a 21% market share in 2010. Despite near-term industry concerns including muted demand growth and margin pressure, which have been priced in, we consider Goldwind one of the major beneficiaries of government-encouraged industry consolidation in the medium term. The company’s current valuation of 13x FY11F PER provides a good entry opportunity. We initiate coverage on the stock with an Outperform rating and target price of HK$16.60.

Mingyang Wind Power (Mingyang, MY US, Neutral) is the fifth-largest WTG producer in China, with 6% market share in 2010. Despite being the only non-government-owned company among the top-five WTG makers in China, Mingyang, nevertheless, remains a beneficiary of industry consolidation. Mingyang is trading at 8x 2011F PER and a 51% discount to the global peer average, a valuation we feel is justifiable owing to high risk from the launch of 2.5/3.0MW super-compact-driven (SCD) WTGs based on disruptively different technology. We initiate coverage on the stock with a Neutral rating and target price of US$11.00.

China Wind Power 4 April 2011

China Longyuan Power Group (Longyuan, 916 HK, Neutral) is the largest wind farm operator in China. By 2010 it owned 15% of domestic installed wind capacity. While we like Longyuan’s leading industry position and earnings CAGR of 31% for 2010-2012F, and we expect the company’s ROE to remain low at 8-10%. Longyuan has underperformed the HSCEI by 13% over the past 12 months and we believe industry concerns are priced in. Nonetheless, we would have to see near-term catalysts before turning positive on the stock. In the meantime, we initiate coverage with a Neutral rating and target price of HK$9.10.

Datang Renewable (Datang, 1798 HK, Underperform) is the second-largest wind farm operator in China. By 2010 it had a 9% share of China’s wind installed capacity. In our view, Datang’s net gearing ratio of 270-290% for 2011F-2012F is a major concern, as it entails high equity refinancing risk. Its ROE range of 9% to 10% in 2011F-2012F also falls short of peers, particularly considering Datang is a pure play wind project operator, with ostensibly higher ROE than coal-fired power operators. We initiate coverage on Datang with an Underperform rating and target price of HK$2.00.

Valuation comparison Market EPS Stock Share price cap PER (x) growth PEG PBV (x) ROE (%) Company code Rating (local currency) (US$m) 2010A 2011F 2012F (%) 2011F 2010A 2011F 2012F 2010A 2011F 2012F Wind turbine component CHST 658 HK O 12.54 2,217 9.6 10.1 9.4 (5) (2.1) 1.8 1.7 1.5 18.7 16.9 16.2 Hansen Transmissions HSN LN NR 49.50 534 N/A N/A N/A N/M N/M 0.6 0.6 0.6 (1.7) (1.5) 0.9 Taewoong 044490 KS NR 52,300 796 42.7 22.3 16.0 79 0.3 2.1 2.0 1.8 2.9 5.5 9.3 Hyunjin Materials 053660 KS NR 17,100 232 N/A 10.9 7.6 N/M N/M 1.3 1.2 1.0 (12.8) (1.0) 10.8 Wind turbine Xinjiang Goldwind – H- share 2208 HK O 14.56 7,858 14.6 13.2 12.9 10 1.3 2.4 2.3 2.0 16.7 17.1 15.4 Xinjiang Goldwind – A-share 002202 CH NR 20.65 7,857 N/A 16.9 13.4 24 0.7 N/A 3.6 2.8 39.1 24.6 21.9 Sinovel 601558 CH NR 74.14 11,381 23.4 20.6 17.0 14 1.5 13.9 4.1 3.3 77.5 19.9 20.5 Mingyang MY US N 10.52 1,315 12.3 8.4 7.1 48 0.2 2.4 1.9 1.5 19.8 22.6 21.0 Vestas VWS DC NR 223.30 8,685 38.9 20.2 15.8 93 0.2 2.2 2.0 1.8 5.9 11.1 12.7 Gamesa GAM SM NR 7.37 2,576 18.6 18.6 18.6 31 0.6 1.1 1.1 1.0 3.1 4.2 5.6 Repower RPW GR NR 145.00 1,900 22.9 25.7 21.5 (11) (2.3) 2.8 2.7 2.5 11.6 10.6 11.5 Nordex NDX1 GR NR 8.26 786 26.6 27.9 21.0 (5) (6.2) 1.5 1.5 1.4 5.9 4.6 6.0 Suzlon SUEL IN NR 44.60 1,778 N/A N/A 24.3 N/M N/M 1.1 1.1 1.1 (12.9) (12.2) 3.8 Dongfang Electric 1072 HK NR 26.70 8,237 17.3 14.0 11.8 24 0.6 2.4 3.0 2.4 33.0 24.5 23.0 Shanghai Electric 2727 HK NR 3.96 13,355 15.2 13.3 12.0 15 0.9 1.6 1.4 1.3 11.3 11.0 11.0 Blade Jiangsu Miracle 002009 CH NR 17.17 580 44.0 27.4 21.7 61 0.5 8.1 N/A N/A 13.8 N/A N/A Sinoma Science & Technology 002080 CH NR 41.85 1,278 35.5 23.5 16.9 51 0.5 3.8 N/A N/A 11.8 N/A N/A Tianjin Xinmao 000836 CH NR 8.58 383 N/A N/A N/A N/M N/M N/A N/A N/A N/A N/A N/A Wind Farm Operator China Longyuan 916 HK N 8.47 8,128 26.5 19.7 15.3 35 0.6 1.9 1.7 1.5 7.3 8.9 10.1 Datang Renewable 1798 HK U 2.38 2,230 31.4 14.2 10.9 122 0.1 1.4 1.2 1.1 4.3 8.6 10.0 China Power New Energy 735 HK NR 0.65 659 17.7 13.3 10.5 33 0.4 0.9 0.8 0.7 5.1 5.9 7.1 China WindPower 182 HK NR 0.84 798 14.4 10.9 8.2 32 0.3 1.6 1.5 1.3 13.4 14.8 16.7 Acciona ANA SM NR 77.21 6,986 28.3 27.3 22.3 4 7.8 0.8 0.8 0.8 2.9 3.3 4.0 Theolia TEO FP NR 1.33 211 N/A N/A 15.6 N/M N/M 0.4 0.3 0.3 (21.2) (3.8) 2.4 Iberdrola Renovables IBR SM NR 3.09 18,553 36.2 30.5 25.7 19 1.7 1.1 1.1 1.1 3.0 3.5 4.0 EDF Energies Nouvelles EEN FP NR 37.18 4,106 27.1 21.9 17.7 24 0.9 2.1 1.9 1.8 7.9 9.2 10.8 EDP Renovaveis EDPR PL NR 5.01 6,222 55.7 41.1 29.1 36 1.2 0.8 0.8 0.8 1.5 1.8 2.6 Infigen Energy IFN AU NR 0.37 293 N/A N/A N/A N/M N/M 0.4 0.4 0.4 (11.1) (6.4) (2.9) Greentech GES DC NR 17.30 175 N/A 9.8 8.5 N/M N/M 0.7 0.5 0.4 (24.9) 4.7 5.2 All prices are as at 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS Source: Bloomberg, CCBIS

China Wind Power 4 April 2011

China sees decelerating growth in wind power capacity

In 2010, China overtook the US to become the country with the largest cumulative wind power capacity globally. Wind installation had an impressive 120% CAGR in 2006-2009. But 2010 saw a major stumbling block for wind installation, when annual installation growth slowed significantly to 37% YoY due mainly to a grid connection bottleneck in the form of a lack of physical grid connections and power curtailment.

As we do not expect the grid connection problems to be resolved any time soon, we project that annual wind installation growth could slow to a paltry 3% YoY for both 2011F and 2012F. Over the five-year period from 2010 to 2015F, we forecast that annual wind installation in China will grow at a CAGR of 1% with cumulative wind installation at a CAGR of 26%.

In our view, there is a mismatch between China’s targets for renewable energy capacity and renewable energy consumption. To achieve its goal of having 15% energy consumption from renewable energy sources by 2020F, China needs to take a much more aggressive renewable capacity installation target, in our opinion. Moreover, we believe wind power could be the beneficiary if the Chinese government decides to adopt a more cautious stance on nuclear power development post the nuclear crisis in Fukujima, Japan, earlier this year.

China is the largest wind power market globally

China has been one of the most important markets for wind power globally since 2006. Despite China’s late start in wind power development compared with other major wind power countries like Germany, Spain and the US, China caught up quickly to become the largest wind power market worldwide in terms of annual capacity installation in 2009. It took over the US as the player with the largest cumulative wind power capacity globally in 2010.

Players in the value chain of the wind power industry in China, including component manufacturers, WTG assemblers and wind farm operators, all enjoyed exponential growth over the past few years as annual wind capacity installation in the country grew at a 120% CAGR in 2006-2009.

We believe China will remain the largest wind market globally over the next five years with more than 34% market share by annual capacity installation; however, in 2010, China’s wind power industry entered a transition period, with annual capacity installation growth slowing significantly to 37% YoY based on statistics from CWEA.

We estimate China’s annual installation growth and cumulative capacity growth will further decline to a CAGR of 1% and 26%, respectively, in 2010-2015F.

China has been the fastest growing wind power market worldwide since 2006. Based on statistics by Global Wind Energy Council (GWEC), China’s annual wind capacity installation grew at a CAGR of 120% in 2006-2009, while global annual wind installation grew at a CAGR of only 36% over the same period. Even in 2009, when the global financial crisis hit the world’s wind power industry hard with the tightened credit market which resulted in difficult access to project financing, China’s annual

China Wind Power 4 April 2011

wind capacity installation still increased by an impressive 124% YoY to 14GW, making China the world’s largest wind power market, 36% bigger than the second-largest player, the US, at 10GW.

China’s annual wind power installation and YoY growth China and global wind power YoY growth comparison

MW 160% 20,000 160% 140%

120% 16,000 130% 100%

12,000 100% 80%

60% 8,000 70% 40%

20% 4,000 40% 0%

0 10% (20)% 2004 2005 2006 2007 2008 2009 2010 2004 2005 2006 2007 2008 2009 2010 China annual wind capacity (LHS) China YoY growth (RHS) China YoY growth Global YoY growth

Source: China Wind Energy Association (CWEA), CCBIS estimates Source: CWEA, GWEC, CCBIS estimates

In 2010, China’s annual wind power installation continued to surpass that of other countries, according to CWEA. Moreover, China’s cumulative wind power capacity overtook that of the US for the first time in 2010. Based on data from CWEA and GWEC, China’s annual and cumulative wind power capacity installation reached 19GW and 45GW, respectively, in 2010, against 5GW and 40GW for the US, the second largest wind power player worldwide.

2010 top-ten wind power countries by annual installation 2010 top-ten wind power countries by cumulative capacity

Turkey Denmark

Canada Canada

Italy UK

UK France

France Italy

India India

Spain Spain

Germany Germany

USA USA

China China

0 3,300 6,600 9,900 13,200 16,500 19,800 0 7,000 14,000 21,000 28,000 35,000 42,000 MW MW

Source: GWEC, CWEA, CCBIS estimates Source: GWEC, CWEA, CCBIS estimates

We believe that the robust growth within China’s wind power industry so far is due mainly to the Chinese government’s commitment in developing renewable energy and the fact that wind power, among various types of renewable energy, is the most effective tool for China to achieve its renewable energy targets, given wind power’s lower generation cost and better scalability.

China Wind Power 4 April 2011

China’s clean energy-related government targets

Category Target Note Energy consumption Renewable energy to account for 10% of energy consumption by CCBIS estimates that China fell short of the target and achieved end-2010 8-9% Renewable energy to account for 15% of energy consumption by CCBIS expects the Chinese government to set a new target at end-2020 11% for 2015 Power supply structure Power producers need to have 5% of total capacity from renewable CCBIS believes that 5% of capacity was sourced from non-hydro energy sources (3% from non-hydro renewable) by end-2010 renewables by end-2010, exceeding the target Power producers need to have 10% of total capacity from renewable CCBIS expects China to continue to hit this target by end-2020 energy sources (8% from non-hydro renewable) by end-2020 Energy conservation Energy consumption per GDP to decline by 20% from 2005 level by CCBIS estimates that energy consumption per GDP declined by end-2010 19-20% at the end of the 11th Five-Year Plan period (2010) CCBIS expects energy consumption per GDP reduction target for the 12th Five-Year period to be set at 15-20% Emission reduction Carbon emissions per GDP to decline by 40-45% from 2005 level by CCBIS expects the Chinese government to include medium-term end-2020 emission reduction targets in the 12th Five-Year Plan Source: National Development and Reform Commission (NDRC), CCBIS

Scale characteristic comparison between renewable energy sources

Power generation technology Characteristics Large hydro Plant size: 10-18,000MW Small hydro Plant size: 1-10MW On-shore wind Turbine size: 1.5-3.5MW Blade diameter: 60-100 meters Offshore wind Turbine size: 1.5-5.0MW Blade diameter: 70-125 meters Biomass power Plant size: 1-20MW Geothermal power Plant size: 1-100MW Types: binary, single-and-double-flash, natural steam Rooftop solar PV Peak capacity: 2-5kW Utility-scale solar PV Peak capacity: 200kW-100MW Concentrating solar thermal power (CSP) Plant size: 50-500MW (trough), 10-20MW (tower) Types: trough, tower, dish Sources: REN21 (July 2010), CCBIS

Generation cost comparison between power sources

Nuclear Gas Coal-fired CSP Utility-scale solar PV Rooftop solar PV Geothermal Biomass Offshore wind Onshore wind Small hydro Large hydro 0 5 10 15 20 25 30 35 40 45 50 55 US cents / kwh

Source: REN21 (July 2010), CCBIS estimates

China Wind Power 4 April 2011

China wind power capacity growth to slow to 3% in 2011-12F

Despite rapid growth historically and our view that China will remain the largest wind power market globally over the next few years, we expect China’s wind power industry to experience a slowdown from 2010. According to CWEA, wind capacity installation in China was 19GW in 2010, a much higher figure than the market’s previous expectation of c.15GW, though the 37% YoY growth rate implied for 2010 in China was a significant decline from the 120% CAGR between 2006 and 2009.

For 2011F, we expect China to add 19.5GW of wind power capacity, up 3% YoY, bringing cumulative wind capacity to 64GW, up 44% YoY. For 2012F, we forecast that China’s annual wind capacity installation will be 20.1GW, up 3% YoY. Over the five-year period (2010-2015F), we forecast that annual wind installation in China will grow at a CAGR of 1% and cumulative wind installation at a CAGR of 26%.

China’s wind power capacity installation forecasts

MW MW 160,000 20,200

140,000 20,000 19,800 120,000 19,600 100,000 19,400 80,000 19,200

60,000 19,000 18,800 40,000 18,600 20,000 18,400 0 18,200 2009 2010 2011F 2012F 2013F 2014F 2015F China cumulative wind capacity (LHS) China annual wind installation (RHS)

Source: CCBIS estimates

CCBIS – China wind power installation forecast model

2009 2010 2011F 2012F 2013F 2014F 2015F 2020F Annual new installation (MW) 13,803 18,928 19,496 20,080 20,080 20,080 20,080 20,080 Onshore 13,743 18,868 19,296 19,380 18,880 18,730 18,580 13,100 Offshore 60 60 200 700 1,200 1,350 1,500 6,980 Cumulative installation (MW) 25,823 44,751 64,247 84,326 104,406 124,486 144,566 244,964 Onshore 25,763 44,631 63,927 83,306 102,186 120,916 139,496 214,964 Offshore 60 120 320 1,020 2,220 3,570 5,070 30,000 YoY growth (%) Annual new installation 124 37 3 3 0 0 0 N/A Onshore 123 37 2 0 (3) (1) (1) N/A Offshore N/A 0 233 250 71 13 11 N/A Cumulative installation 115 73 44 31 24 19 16 N/A Onshore 114 73 43 30 23 18 15 N/A Offshore N/A 100 167 219 118 61 42 N/A Source: CCBIS estimates

China Wind Power 4 April 2011

Overall, we expect China’s cumulative wind power capacity, both onshore and offshore, to reach 145GW and 245GW by the end of 2015F and 2020F, respectively. Our 2020F wind power capacity estimate is much higher than the government’s unofficial target of 150GW, which we believe is far too conservative. In our view, there is a mismatch between China’s renewable energy capacity target and renewable energy consumption. To achieve the government’s goal of 15% energy consumption from renewable energy sources by 2020F, China needs to take a much more aggressive renewable capacity installation target, in our opinion.

Wind power stands to benefit greatly should the Chinese government decide to adopt a more cautious stance on nuclear power development. Post nuclear crisis in Fukujima, Japan, the Chinese State Council announced that the nation will temporarily suspend approvals for new nuclear projects until official guidelines on nuclear security are published in China. The Chinese government will also initiate strict safety examinations of its nuclear projects in operation and under construction.

CCBIS – China power capacity forecast model

2009 2010 2015F 2020F Power capacity (MW) Renewable energy: Small hydro (≤50MW) 55,120 62,000 80,000 100,000 Large hydro (>50MW) 141,670 151,400 204,000 330,000 Wind energy 25,828 44,751 144,566 244,964 Biomass energy 4,500 5,200 10,000 20,000 Solar PV 240 800 9,000 47,000 Total renewable energy 227,358 264,151 447,566 741,964 Nuclear power 9,078 10,820 42,940 90,000 Total alternative energy 236,436 274,971 490,506 831,964 Thermal coal power 651,076 706,630 900,000 1,000,000 Overall power capacity 887,512 981,601 1,390,506 1,831,964

Power capacity (%) Renewable energy: Small hydro (≤50MW) 6.2 6.3 5.8 5.5 Large hydro (>50MW) 16.0 15.4 14.7 18.0 Wind energy 2.9 4.6 10.4 13.4 Biomass energy 0.5 0.5 0.7 1.1 Solar PV 0.0 0.1 0.6 2.6 Total renewable energy 25.6 26.9 32.2 40.5 Nuclear power 1.0 1.1 3.1 4.9 Total alternative energy 26.6 28.0 35.3 45.4 Thermal coal power 73.4 72.0 64.7 54.6 Overall power capacity 100.0 100.0 100.0 100.0 Source: CCBIS estimates

China Wind Power 4 April 2011

CCBIS – China energy consumption forecasts

(%) 2009 2010 2015F 2020F Energy consumption from power Renewable energy: Small hydro (≤50MW) 1.8 1.8 2.0 1.9 Large hydro (>50MW) 4.4 4.6 5.0 6.4 Wind energy 0.3 0.5 1.5 2.8 Biomass energy 0.1 0.1 0.2 0.3 Solar photovoltaic 0.0 0.0 0.1 0.3 Solar water heating 0.8 0.8 1.7 2.0 Landfill gas 0.4 0.5 0.6 0.7 Others 0.4 0.3 0.3 0.2 Energy consumption from renewable energy 8.2 8.7 11.5 14.7 Nuclear power 0.8 0.7 2.4 4.1 Energy consumption from alternative energy 8.9 9.4 13.8 18.7 Thermal coal power: 32.4 32.2 34.8 30.0 Total energy consumption from power 41.4 41.6 48.7 48.7 Source: CCBIS estimates

Factors to slowing growth in China’s wind power sector

We believe that there are three major factors contributing to slow growth within China’s wind power industry in 2010:

Grid connection bottlenecks:

We believe that this is the most important factor; moreover, the grid network will remain a constraining factor on growth within China’s wind power industry over the next three-to-five years. Grid connection bottlenecks have been an issue for China’s wind power market since 2007 and became a constraining factor for industry growth since 2H09. In our view, there are two grid connection bottlenecks: (1) lack of physical grid-line connections and (2) power curtailment (more discussions on grid connection challenges can be found on pages 17-21). In general, we believe that grid bottlenecks will lead to low project returns for wind operators or else their inability to receive project approvals from the government, both of which would slow the pace of capacity expansion of the wind operators.

China’s installed and grid-connected wind capacity

MW 60,000 36%

50,000 34%

40,000 32%

30,000 30%

20,000 28%

10,000 26%

0 24% 2007 2008 2009 2010 2011F Total installed wind capacity (LHS) Total grid-connected wind capacity (LHS) % not grid-connected* (RHS)

* Assume lead time for capacity ramp up at three months Source: CCBIS estimates

China Wind Power 4 April 2011

Listing of government-owned wind farm operators:

In our view, this is a complementary factor to the “grid connection bottleneck” factor, as state-owned wind operators, which we estimate to aggregately dominate 70-80% of wind installations in China, start monitoring their projects return more closely. Since the listing of China Longyuan Power Group (Longyuan, 916 HK) in December 2009, there has been a trend for major state-owned independent power producers (IPPs) to list their wind farm subsidiaries, including China Datang Corporation Renewable Power (Datang Renewable, 1798 HK) listed in December 2010, Huaneng Renewables (planning to list 2011), and Huadian New Energy (planning to list in 2011).

In the past, lacking grid connection did not seem to be a constraining factor to China’s wind capacity growth. State-owned IPPs have been aggressively increasing their wind capacity as they are required to have 3% and 8% installed capacity slated for non-hydro renewable sources by 2010 and 2020, respectively. Since the regulatory target is set for capacity installation, not power generation, we believe some of the state-owned operators were purely pursuing the scale of their wind assets instead of caring about project returns. As a result, we estimate that 33% of wind capacity installed at the end of 2010 was sitting idle due to a lack of physical grid connection.

Nonetheless, since more and more state-owned wind farm operators have become or would like to become publicly listed companies, we expect wind farm operators in China to start slowing down their capacity growth to meet the expansion pace of grid operators as their shareholders would not tolerate low project ROEs and waste of capital investments.

Large base effect:

After four years of exponential growth, China’s annual wind capacity installation already accounted for 36% and 49% of global market size in 2009 and 2010, respectively, making the country the world’s largest wind market in terms of annual new installations. Another implication was that such a pace of development made it difficult for the nation to continue doubling its installation every year, particularly when we expect global annual wind capacity installations to grow at only a 9% CAGR over the next five years (2010-2015F).

China’s cumulative wind capacity and global share China’s annual wind installation and global share

MW MW 145,000 33% 21,000 50%

30% 18,000 116,000 40% 15,000 27% 87,000 30% 12,000 24% 9,000 58,000 20% 21% 6,000 29,000 10% 18% 3,000

0 15% 0 0% 2009 2010 2011F 2012F 2013F 2014F 2015F 2009 2010 2011F 2012F 2013F 2014F 2015F China cumulative wind installation (LHS) China global share (RHS) China annual wind installation (LHS) China global share (RHS)

Source: CCBIS estimates Source: CCBIS estimates

China Wind Power 4 April 2011

CCBIS – Global wind cumulative capacity forecast model

MW 2009 2010 2011F 2012F 2013F 2014F 2015F 2020F Global cumulative 158,505 196,854 238,602 284,814 335,535 390,330 449,010 770,086 YoY growth (%) 24 21 19 18 16 15

Europe 76,049 86,075 97,352 110,007 125,360 143,518 162,641 287,284 Asia Pacific 41,944 63,591 86,623 110,881 135,221 160,067 186,003 315,737 North America 38,587 44,708 51,492 59,779 69,326 79,777 91,832 148,515 Latin America 1,070 1, 456 1,864 2,563 3,674 4,549 5,577 11,752 Africa 794 958 1,193 1,488 1,840 2,282 2,797 6,475 Others 61 66 79 95 114 136 159 323 Source: GWEC, CWEA, CCBIS estimates

CCBIS – Global wind annual installation forecast model

MW 2009 2010 2011F 2012F 2013F 2014F 2015F Global annual installation 38,209 38,349 41,748 46,212 50,721 54,795 58,680 YoY growth (%) 0 9 11 10 8 7

Europe 10,308 10,026 11,277 12,656 15,353 18,158 19,123 Asia 16,028 21,652 23,032 24,258 24 ,340 24,846 25,936 North America 11,065 6,121 6,784 8,287 9,547 10,452 12,055 Latin America 502 386 408 700 1,111 875 1,028 Africa 246 164 235 295 352 442 515 Others 60 0 13 16 19 22 23 Source: GWEC, CWEA, CCBIS estimates

China Wind Power 4 April 2011

Grid-related problems remain a serious challenge

We found that there are two types of grid-related problems within the Chinese wind power industry: (1) installed wind capacity lacking physical grid connections; and (2) wind power curtailment. These problems will reduce the profitability of wind farm operators as they either let wind capacity idle, lower effective capacity utilization hours of wind farms or cap capacity growth potential of wind farm operators.

Based on our estimates, 30% of installed wind capacity will not be connected to the grid by end-2011. Moreover, according to data from CEC, approximately 11% of wind power generated in China was not procured by grid operators in 1H10.

30% of installed wind capacity not connected to grid in 2011

Based on cumulative wind capacity data from CWEA and CEC, as well as our expectation of a three-month lead time for grid-connected wind capacity to be fully functional, we estimate that the ratio of installed wind capacity not connected to the grid in China will increase from 30% in 2007 to 35% in 2009 but decline YoY to 33% in 2010. We believe that this is due mainly to a much slower YoY growth in new wind capacity installation in 2010 and does not serve as evidence of improving grid connection in China.

Although we expect the gap between installed wind capacity and grid-connected wind capacity to trend slightly downwards YoY again to 30% in 2011F, we believe that grid connection bottlenecks will remain a serious challenge for wind power companies in China over the next few years.

Share of installed wind capacity lacking grid connection in China

MW 60,000 36%

50,000 34%

40,000 32%

30,000 30%

20,000 28%

10,000 26%

0 24% 2007 2008 2009 2010 2011F Total installed wind capacity (LHS) Total grid-connected wind capacity (LHS) % not grid-connected* (RHS)

* Assuming lead time to reach full capacity at three months Source: CCBIS estimates

China Wind Power 4 April 2011

11% of wind power generation was not procured by grid in 1H10

We believe that utilization hours of wind farms in certain regions, including north, northeastern and northwestern China, are substantially lower owing to wind power curtailment problems, i.e. grid operators refusing to procure power generated from wind farms.

According to CEC, north China region generated but not sold to grid 1,588m kWh of wind power in 1H10, accounting for 57.2% of the national amount generated but not sold to grid, while northeastern and northwestern China accounted for 38.33% and 4.47%, respectively.

From a provincial point of view, Inner Mongolia had the highest amount of wind power generated but not procured by grid operators (2,101m kWh) in China for 1H10, accounting for 75.68% of the national unsold wind power. It was followed by Jinlin, which claimed a national share of 9% in 1H10.

China wind power generation by region (1H10) Wind power generated but not sold to grid (1H10)

Central South m kwh 1% 4% 1,600 15% East 9% 1,400 12% 1,200

1,000 9% Northwestern North 12% 42% 800 6% 600 400 3% 200

0 0% North North North East Central South North eastern western eastern Electricity not sold to grid (LHS) 32% As % of total wind electricity generation in the region (RHS)

Source: China Electricity Council, CCBIS Source: China Electricity Council, CCBIS

Causes of grid-related problems and current remedies

In our view, the grid-related problems in China are caused by:

Mismatch between locations of wind resources and power consumption

China’s onshore wind resources are concentrated in the northern, northwestern and northeastern regions, while power consumption is higher in the southeastern coastal areas. According to the CWEA, by end-2009, the five provinces with the highest cumulative wind capacity were Inner Mongolia, Hebei, Liaoning, Jilin and Heilongjiang. These five provinces comprised some 70% of China’s cumulative wind capacity at end-2009. On the other hand, power consumption in Guangdong, Jiangsu, Shandong, Zhejiang and Hebei provinces saw the highest in 2009, according to the CEC. These five provinces accounted for some 40% of China’s overall power consumption in 2009.

China Wind Power 4 April 2011

Distribution of China’s average wind energy density

Source: The Third National Wind Energy Resources Census, CWEA

Regions with richer wind resources tend to have stronger heat demands due to severe weather conditions in winter, while coal-fired power plants also get priority as they generate heat at the same time. Therefore, when power supply exceeds system demand, grid operators in these regions will request wind farms to stop feeding power into the grid.

To resolve this issue, the Chinese government has been exploring the possibility of establishing or relocating high energy consumption industry bases to provinces with rich wind resources. Moreover, the government has plans to construct ultra-high-voltage grid lines to transmit power from northern, northwestern and northeastern China to Beijing, Tianjin, Tanggu and the middle of China.

Electricity delivery from the main wind power bases

Source: CWEA

China Wind Power 4 April 2011

Lack of a centralized plan to match grid networks and wind farm construction

Due to poor economics, grid operators normally have less incentive to construct networks in remote provinces, where wind resources are richer. The difference of construction lead time between grid operators (over two years) and wind farm operators (one year) intensifies a mismatch in the construction of grid networks and wind farms, in our view.

To incentivize grid operators to provide connection to wind farms, NDRC announced Temporary Measures for Renewable Energy Surcharge Distribution, through which grid construction to renewable energy projects, including wind farms, would be refunded. Nonetheless, the measures were not very effective given it took a year for grid operators to receive deserved refund.

Subsidies for wind farm grid construction, sourcing from renewable energy surcharge

RMB m 300 100% 90% 250 80% 70% 200 60% 150 50% 40% 100 30% 20% 50 10% 0 0% 2006 2007 2008 2009 1Q-3Q10 Subsidy for grid construction to wind farms (LHS) As % of total grid construction subsidy (RHS)

Source: NDRC, CCBIS

As grid operators have less incentive to construct networks in remote provinces, wind farm operators started several years ago to finance grid construction to connect their projects to the grid. Based on the statistics from CEC, in 1H10 approximately 43-49% of grid construction in China was funded by grid operators, 50-56% by wind farm operators and 1-2% jointly funded by grid operators and wind farm operators.

China Wind Power 4 April 2011

Grid construction funding breakdown by source

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% North Northeastern Northwestern East Central South China total Grid operator Project operator Both

Source: CEC, CCBIS

At the national level, the Chinese government revised the Renewable Energy Law in 2H09. The law came into effect in April 2010, stating that the nation ought to have centralized planning for grid network and wind farm construction. At the provincial level, each province will have near-term and medium-term planning, while the central government would provide long-term, bigger picture guidance and ensure consistency between the plans of different provinces.

Grid quality and operating technology need upgrade to handle wind power effectively

The intermittence of wind power generation has increased the difficulty for grid operators to manage and utilize wind power effectively. As major grid operators in China lack adequate experience handling wind power and the quality of grid networks in remote areas (with abundant wind resources) is poorer, wind farm operators will be told at times by grid operators to halt feeding power into the grid for the sake of grid network safety.

To resolve this issue, the Chinese government stated in the updated Renewable Energy Law that grid operators are responsible for enhancing grid quality and establishing a smart grid network to better utilize power generated by renewable energy projects.

More importantly, the government specified that relevant government agencies would soon announce minimum requirements on renewable energy purchases (in terms of a percentage of overall power purchases) for grid operators to ensure there is no waste of renewable energy.

China Wind Power 4 April 2011

CDM (carbon trading) income uncertainty

CDM income makes material difference in wind project IRR

Based on our estimates, continuous CDM income stream can enhance project and equity IRR of a typical wind farm in China by 230bp and 510bp, respectively, to 10.7% and 16.8%. In our view, CDM income is significant for wind farm operators in China, as such income accounts for 16-18% of a wind farm’s annual cash inflow at the project level, and accounts for 42-85% of a wind farm’s annual net income, according to our calculation. (Details, including assumptions and analysis, are in Appendix 6 page 150-153).

Project and equity IRRs of a typical wind farm in China CDM income share of wind farm cash flow and earnings

18% 150%

16% 120% 14%

12% 90% 10% 60% 8% 6% 30% 4%

2% 0% Year Year Year Year Year Year Year Year Year Year Year 0% 1 2 3 4 5 6 7 8 9 10 11-20 Project IRR Equity IRR annual With CDM Without CDM CDM as % of project CF CDM as % of equity CF CDM as % of net income

Source: CCBIS estimates Source: CCBIS estimates

Based on our forecasts, 17% and 18% of Longyuan’s profit before tax will derive from carbon credit income in 2011F and 2012F, respectively; while we forecast Datang Renewable share of profit before tax deriving from carbon credit income will be 34% and 35% in 2011F and 2012F, respectively.

China Wind Power 4 April 2011

CDM scheme becomes uncertain after 2012

The Emission Trading Scheme stated in Article 17 of Kyoto Protocol is the primary regulation governing global emission trading markets. CDM, part of the global emission trading market, is designed under Kyoto Protocol to incentivize non-Annex I countries, which do not have emission reduction obligation, to invest in emission reduction projects or technology. According to United Nations Framework Convention on Climate Change (UNFCCC), China is the largest seller of Certified Emission Reduction (CER) under CDM, accounting for 72% of the CDM market in 2009 (Details about global emission markets and CDM are in Appendix 7 page 154-157).

Kyoto Protocol is set to expire end-2012 and an official, international agreement has yet been achieved regarding greenhouse gas (GHG) reduction responsibility and targets after 2012. We believe this will have negative implications for global emission trading markets (including CDM) after 2012, as emission trading markets would not function well without legally binding emission reduction targets. An extreme example is the collapse of CCX (Chicago Climate Exchange), the first emission trading exchange globally, in November 2010. The collapse resulted from an absence of US government legally binding GHG emission targets.

Hopes for CDM post-2012

We maintain our view that there could still be room post-2012 for Chinese wind farm operators to generate income from sales of carbon credits thanks to (1) the EU’s legally binding carbon reduction targets through 2020, which would support current EU ETS markets, and (2) a potential domestic carbon trading market in China.

EU member states have passed the EU Climate and Energy Package, in which member countries commit to reducing GHG emissions to at least 20% below 1990 levels by 2020. The reduction target could be further raised to 30% by 2020 given that other countries are doing their fair share of emission reduction. This is likely to support EU ETS after 2012, in our view. EU ETS is now the largest emission trading system/market globally and recognizes the procurement of CERs from CDM projects as a mean for member countries to fulfill their emission reduction requirement.

Global carbon trading volume breakdown by system

MtCO2e 9,000

7,500

6,000

4,500

3,000

1,500

0 2004 2005 2006 2007 2008 2009 EU ETS New South Wales (NSW) Chicago Climate (CCX) RGGI AAUs Spot and secondary offsets Primary CDM Joint implementation (JI) Voluntary market

Source: World Bank, CCBIS research

China Wind Power 4 April 2011

According to the European Parliament, the use of emission credits from CDM projects would greatly contribute to the emission reduction targets of 2020. They state that CDM and Joint Implementation (JI) together would equal a third of the reduction effort required in 2020 (defining a 10% reduction from 2005 level in 2020 as the reduction effort, where 3% from CDM and JI are roughly a third).

Share of CDM/JI use in non EU ETS sectors

Source: EU Parliament “The EU’s emission reduction target, intended use of CDM and its + 2°C”

We believe China is likely to establish a domestic carbon emission trading system over the next few years, which would enhance carbon credit income of Chinese wind farm operators. According to China Securities Journal and Xinhua News, officials from the National Coordination Committee on Climate Change of the National Development and Reform Commission (NDRC) disclosed that in 2009 the Chinese government started drafting temporary management measures for voluntary GHG emission trading activities in China and the regulation could be announced in 2011.

China’s energy and environmental targets

Field China’s targets Energy conservation Energy consumption per unit of GDP by end- 2010 to decline by 20% from 2005 level Energy consumption per unit of GDP will become one of the ten major new indicators the Chinese government closely monitors in the 12th Five-Year Plan period Emission reduction Carbon emission per unit of GDP by end-2020 to decline by 40-45% from 2005 level Carbon emission per unit of GDP, sulfur dioxide emission, chemical oxygen demand (COD), ammonia nitrogen, and nitrogen oxides will become among the ten major new indicators the Chinese government closely monitors in the 12th Five-Year Plan period Energy structure Renewable energy to account for 10% of total energy consumption by end-2010 Renewable energy to account for 15% of total energy consumption by end-2020 We expect the Chinese government to include a new target in the 12th Five-Year Plan: Renewable energy to account for 11.4% of total energy consumption by end-2015 Source: CCBIS Research

China Wind Power 4 April 2011

Risks post-2012

Although we expect Chinese wind farm operators to maintain a certain level of income from carbon credit sales post-2012 due to existence of EU ETS and a potential domestic carbon market in China, we believe that such income stream remains at risk in terms of volume and price, for the following reasons:

(1) EU has set a legally binding emission reduction target for member states by 2020 regardless of whether other countries are reducing emissions aggressively. We feel this could potentially hinder EU enterprise competitiveness in international markets over the long term. Consequently, it might be risky to assume that EU governments will continue to support EU ETS post-2020, when other countries do not make meaningful efforts and commitment to carbon reduction.

EU emission projections and target by 2020

Source: European Environment Agency (EEA)

(2) We believe it would take several years for the Chinese carbon market to mature and reach meaningful transaction volume. The Chinese government is currently only drafting regulations on voluntary emission reduction trades, which have little trading volume in other countries. Moreover, we expect the Chinese government to implement a real “cap and trade” system only gradually to avoid any pressure to the cost competitiveness of Chinese enterprises with their international peers.

(3) The price of carbon credits could be lower in the Chinese carbon market than in international markets as we expect carbon credit buyers in China (energy suppliers, power utilities or other high emission manufacturers) to have larger bargaining power than sellers in China (clean energy project owners, etc).

China Wind Power 4 April 2011

Chinese wind projects face registration risks with CDM EB

Based on the rules set by the Chinese government and UNFCCC, to qualify for CDM, Chinese wind projects need to first attain approval from the NDRC and then from Clean Development Mechanism Executive Board (CDM EB). According to the World Bank, lead time for the entire CDM registration process expanded from 8-10 months in 2004-2007, to 18-19 months in 2008-2009. The process time of CDM registration with EB increased from three months in 2004-2007 to six months in 2008-2009.

In addition to registration risk of extended approval lead time, wind operators in China also started facing rejection risk as of December 2009. During the CDM EB’s 51st meeting, which ended on 4 December 2009, ten Chinese wind projects were rejected for CDM registration, as CDM EB believed that the Chinese government intentionally kept wind power tariffs too low for Chinese wind projects to qualify for the CDM application. In February 2010, another six projects were rejected although a green light was given to 32 Chinese wind farms at the same time. We believe that Chinese wind farm operators will continue to face challenges registering additional capacity under CDM.

Longyuan’s wind capacity registered under CDM Datang Renewable — CDM income and share of sales

MW MW 4,500 100% 250 15%

4,000 90%

3,500 80% 200 70% 3,000 10% 60% 150 2,500 50% 2,000 40% 100 1,500 5% 30% 1,000 20% 50

500 10% 0 0% 0 0% 1H09 2H09 1H10 2H10 1H11F 2H11F 1H09 2H09 1H10 2H10 1H11F 2H11F Registered capacity (LHS) % of capacity registered (RHS) CDM income (LHS) As % of total revenue (RHS)

Source: CCBIS estimates Source: CCBIS estimates

China Wind Power 4 April 2011

Overseas expansion a growth driver from 2012

We recognize overseas expansion as the new growth driver for Chinese wind power companies. Overseas markets used to be neglected by Chinese wind companies due mainly to robust wind capacity growth in China historically. Over the past three years, overseas sales contributed on average to less than 1% of Chinese wind companies’ revenue. But that seems to be changing. We expect Chinese wind companies to place greater focus on overseas expansion to sustain growth in the coming few years, given our forecast that China’s wind installation growth will decline to a 1% CAGR in 2010-2015F from a 120% CAGR in 2006-2009.

Despite challenges facing Chinese wind companies, including inadequate product track records, concerns on product quality and the risks inherent in trade policy intervention by foreign governments, Chinese WTG and component manufacturers have undeniable competitive advantages, such as easier access to project financing from Chinese banks and superior cost structures which make their ASPs on average 40-50% cheaper than their foreign counterparts.

We believe that currently most Chinese wind power component and equipment manufacturers, with a few exceptions such as China High Speed Transmission (CHST) which had 10-15% wind product sales from overseas for the past three years, on average record less than 1% of revenue from overseas markets. Chinese WTG manufacturers started exploring overseas markets since 2007 but the progress so far has been fairly slow.

According to CWEA, Chinese WTG manufacturers in aggregate had c.42MW of cumulative shipments overseas by the end of 2010, up 62% YoY from c.26MW by the end of 2009, but remained much smaller than their cumulative shipments of 45GW and cumulative wind capacity of 152GW globally excluding China.

China’s historical WTG exports Year Company Export destination Unit Capacity per unit Export volume (MW) 2008 Huide US 10 1MW 10 2008 Huayi Chile 3 780kW 2.34 2008 Goldwind Cuba 6 750kW 4.5 2009 Sinovel India 10 1.5MW 15 2009 Shanghai Electric Thailand 2 1.25MW 2.5 2009 Shanghai Electric UK 3 1.25MW 3.75 2009 Xinyu Thailand 1 1.5MW 1.5 2009 Xinyu US 1 1.5MW 1.5 2009 Goldwind US 3 1.5MW 4.5 2010 Goldwind Cuba 6 750kW 4.5 2010 Mingyang US 1 1.5MW 1.5 2010 Huayi Chile, Russia 3 1.5MW 4.5 2010 Xinyu USA, Thailand 2 1.5MW 3.0 2010 A-Power US 1 2.05MW 2.05 Source: CWEA, CCBIS

China Wind Power 4 April 2011

In our view, the slow progress in wind equipment exports is mainly due to three reasons:

Robust domestic demand growth historically. Given the explosive wind capacity growth at a 120% CAGR in 2006-2009, and the fact that Chinese WTG and component manufacturers only generally started scaling up their production capacity since 2007, there was a severe supply shortage in WTGs and components between 2006 and 2008, although supply and demand finally became more balanced in 2009. Chinese WTG and component manufacturers have thus historically been busy fulfilling domestic orders and consequently lacking resources or reluctant to build distribution channels and business overseas.

Short product track record. Most of the leading Chinese WTG manufacturers only started commercial production of their 1MW+ products in 2H07 or 2008. Their short track record has made foreign wind farm operators hesitant to adopt Chinese WTG products. We note that WTG costs account for c.70% of capital costs of a wind farm and depreciation c.70% of wind power generation cost, so defect or malfunction of WTGs would have significantly negative impacts on wind farm operators’ project returns, particularly when most of the WTG manufacturers only carry a two-to-five year product warranty, much shorter than WTG’s designed life of 20-30 years.

“Export restriction” clause in technology licensing agreement. We believe that the majority of Chinese WTG manufacturers have attained design and technology knowhow of their initial products through technology licensing with foreign WTG manufacturers. As there is usually an export restriction clause in such technology licensing agreement, Chinese WTG manufacturers cannot sell their products out of China until they obtain intellectual property rights of the WTG design, or succeed in in-house WTG technology development.

Chinese WTG manufacturers and technology source

Company Technology source Beizhong DeWind Changzhou U Erlangen Dongfang Electric Repower United Power Aerodyn Goldwind Vensys* Haizhuang Aerodyn Huayi Aerodyn Mingyang Aerodyn Sewind Aerodyn, Dewind Sinovel Fuhrlander Xiangdian Zephyrus ZELRI Windtec Source: Suzlon China, CCBIS

Compared with Chinese WTG manufacturers, Chinese wind farm operators have less exposure to international markets. We believe that currently none of the leading wind farm operators in China holds any wind projects overseas. In our view, this is a natural result of the capital flow and foreign exchange controls in China and the fact that local regulatory and administrative barriers to enter the industry tend to be high for overseas wind projects.

China Wind Power 4 April 2011

More focus on cultivating overseas potential

Wind installation growth in China is expected to lose momentum; hence, there is a pressing need for Chinese wind component and WTG manufacturers to expand into international markets to sustain future volume growth. Moreover, we expect them to realize higher ASP in overseas markets, c.20-30% higher than in the Chinese market which sees fierce competition.

Since 2H09, most of the listed wind power companies in China have put more emphasis on overseas expansion, with several larger-scale WTG export contracts being announced by listed WTG companies including A-Power, Goldwind and Dongfang Electric. In particular, the contract inked by Dongfang Electric and KSK Energy in December 2010 for the supply of 166 units of 1.5MW WTG is viewed as the first "meaningful" export contract by Chinese WTG manufacturers.

Major China WTG export contracts announced

Export Date Company destination Expected delivery Contract details October A-Power US (Texas) Originally March 2010 but delayed 240 units of 2.05MW WTG 2009 Project size 600MW Total investment of US$1.5b; A-Power responsible for wind farm investment December Goldwind US (Illinois) 2H11 or 1H12 Adopting Goldwind’s 1.5MW direct-drive WTG 2010 Construction starts in 2011 and operation 2012 Goldwind responsible for wind farm investment, construction and equipment procurement Project size no more than 120MW December Dongfang Electric India Delivery completed by March 2012 First “meaningful” WTG export contract inked by Chinese WTG producers 2010 Adopting 166 units of Dongfang Electric’s 1.5MW direct-drive WTG Contract value at US$230m, implying WTG ASP at RMB 5,400/kW (c.35% higher than ASP in China) Source: Company data, CCBIS

We believe Chinese wind farm operators will begin exploring explore overseas opportunities due to higher capacity growth and project returns. We note that subsidies (feed-in tariff) and grid condition might be better in other countries than in China and this will bring them higher project returns. Additionally, we expect both China’s encouraging overseas investments and ample monetary supply from Chinese banks to contribute to investments by Chinese wind farm operators in overseas projects.

Longyuan disclosed in 2H10 that the company is close to completing a deal in South Africa and is currently studying business opportunities (40-50 projects) in other regions and countries, such as North America, Eastern Europe (Hungary), Australia and Kasakstan. Meanwhile, Datang Renewable is also working on wind project development in countries like the US, Canada and Australia and expects one project in Australia to commence operation in 2011.

China Wind Power 4 April 2011

Low cost and access to financing are key advantages

In our view, low-cost production and easier access to project financing are competitive advantages of Chinese wind power companies compared with their foreign peers.

Based on the 1H10 results of WTG producers, we estimate that leading foreign WTG manufacturers, particularly those in Europe, generally have production costs that are 30-50% higher than those of Chinese WTG manufacturers. Due to their competitive cost structure, we estimate that Chinese WTG manufacturers could set their ASPs approximately 40-50% lower than those of their foreign peers. We believe cheaper steel cost (steel-related cost is estimated to account for 65-70% of WTG cost) and better production efficiency (including revenue generation per headcount) in China, both quite sustainable as long as manufacturing base remains in China, contribute to the cost competitiveness of Chinese WTG manufacturers.

Global WTG producers - cost comparison (1H10)

RMB/kw 6,000

5,000

4,000

3,000

2,000

1,000

0 Vestas Gamesa Suzlon Dongfang Goldwind Mingyang Sinovel

Source: CCBIS estimates

We believe it will take time for Chinese manufacturers to penetrate international markets simply based on the cost factor, as overseas wind project investors and foreign banks providing project financing tend to be very selective in WTG brand adoption for a project.

Before Chinese WTG manufacturers attain adequate track record and customer confidence, which we believe will take another couple of years, they will secure additional sizable sales orders overseas through leveraging their access to project financing from Chinese banks. In our view, this is particularly important as credit conditions in major wind power markets such as the US and Europe have not recovered much after the global financial crisis in late 2008.

For example, according to the WTG export contract signed in December 2010, Goldwind would not only provide WTGs but also provide project financing to a wind farm in Illinois. Meanwhile, we note that the contract announced by A-Power in 2009 regarding WTG exports to a wind project in Texas is also under similar arrangement. We believe that such a trend is likely to continue as Chinese WTG manufacturers are keen on overseas expansion while backed by Chinese government patronage for the purpose of furthering overseas investment.

China Wind Power 4 April 2011

Quality concerns and foreign government intervention are obstacles

In our opinion, inadequate track record and concerns on product quality, as well as foreign government intervention in international trade are major obstacles to overseas expansion of Chinese WTG manufacturers. However, the export restriction clause in technology licensing agreement, which used to be an important factor limiting export potential in the past, will have less impact going forward as most of the Chinese WTG manufacturers will launch their next generation products using in-house technology.

Inadequate track record and concerns on product quality

The global WTG market has been dominated by a handful of companies due to end-customers’ high requirements on product quality and track record. According to BTM Consult, the same group of global top 10 WTG manufacturers aggregately accounted for 80-90% of the global market between 2005 and 2009.

Global WTG shipment breakdown by manufacturer

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005 2007 2009 Vestas GE Wind Sinovel Enercon Goldwind Gamesa Dongfang Suzlon Siemens RePower Others

Source: CCBIS estimates

We acknowledge that defect or malfunction of WTGs would have significant negative impact on project returns of wind farm operators, as WTG cost accounts for c.70% of capital cost of a wind farm and depreciation c.70% of wind power generation cost. Moreover, most of the WTG manufacturers only give a two-to-five year product warranty, much shorter than WTG’s design life of 20-30 years. As for wind project financing, banks tend not to lend money to projects using unreliable WTGs, given the present tight credit environment in Europe and US.

Most of the Chinese WTG manufacturers launched their 1.5MW products in late 2007 or 2008, so track record of their products is fairly short. Although Chinese WTGs are 40-50% cheaper than foreign WTGs based on our estimates, several western WTG manufacturers claimed that the efficiency-adjusted price of Chinese WTGs is not as low as it seems to be.

China Wind Power 4 April 2011

Foreign governments’ intervention in international trade

Since 2009, there have been incidences of foreign governments or industry unions appealing to restrict Chinese renewable equipment manufacturers, including those from the solar and wind power sectors, from exporting products to their countries. They argue that foreign countries have used significant resources to sustain renewable energy subsidies and boost renewable energy demand for the purpose of creating local employment and tax income as opposed to benefitting unrelated Chinese companies. Furthermore, some believe that the superior cost advantage of Chinese renewable equipment manufacturers is a result of unfair subsidies issued by the Chinese government. Lastly, in the national-level concession project biddings held by the Chinese government over the past two years, none of the foreign equipment manufacturers won any bids, implying that there might be excessive local protectionism in China.

Specifically for wind power, in September 2010, United Steelworkers (USW) in the US filed a petition accusing China of five general infractions: (1) restriction of access to critical materials; (2) discrimination against imported goods and foreign companies; (3) technology transfer requirements for foreign investors; (4) subsidies contingent on domestic content; and (5) trade-distorting domestic subsidies. In response to the petition, the Office of the US Trade Representative (USTR) requested a World Trade Organization (WTO) dispute settlement with the Chinese government in December 2010. Some of the issues were addressed during the US-China Joint Commission on Commerce Trade conference in December 2010, while some concerns were dismissed after investigation. For example, the USTR obtained clarification that two Chinese subsidy programs, “Export Research and Development Fund” and “Ride the Wind” had already been terminated. China also agreed to change some of its rules to open up the Chinese wind power market.

However, we believe that the risk of unfavorable trade policies in Europe and the US remains high for Chinese WTG and component manufacturers. Some Chinese wind power companies, such as Goldwind and CHST, have plans to establish production facilities and possibly supply chains in the US to be eligible for selling in the US market. We expect this to have negative implications for their production costs. In such cases Chinese companies need to carefully balance between volume and profitability.

We expect exports to account for c.13% of shipments by 2012

In our view, overseas demand could pick up from 2012 onward, as quality concerns on Chinese WTGs are gradually dismissed after Chinese companies have their WTGs running for close to five years in China and close to two years in their overseas “demonstrative” projects.

Leading Chinese WTG manufacturers have aggressive targets for overseas expansion. Goldwind and Sinovel target 30% and 1/3 of shipments overseas over the next three-five years, respectively, while Mingyang expects to generate meaningful volume from international markets in 2012. We expect leading Chinese WTG manufacturers on average to generate about 13% of shipment overseas by 2012, implying that top-five Chinese WTG manufacturers would increase their share in non-China markets from c.0% presently to c.11% by 2012.

China Wind Power 4 April 2011

Chinese WTG exports and aggregate share in non-China markets

MW 3,200 15% 2,800 12% 2,400

2,000 9% 1,600 1,200 6% 800 3% 400 0 0% 2011F 2012F Goldwind (LHS) Sinovel (LHS) United Power (LHS) Dongfang (LHS) Mingyang (LHS) Aggregate share in non-China markets (RHS)

Source: CCBIS estimates

China Wind Power 4 April 2011

Offshore wind power – attractive theme by 2012

The Chinese government encourages the development of offshore wind power projects as offshore wind power could be an effective tool to enhance China’s energy supply (good scalability); moreover, offshore projects are much nearer than onshore projects to China’s eastern coastal provinces where power consumption is highly concentrated.

At present, local governments of five coastal provinces plan to achieve a total of 15GW and 33GW in offshore wind power capacity by 2015F and 2020F, respectively, while China’s cumulative offshore capacity was merely 120MW by end-2010 based on our estimate. Our forecast for China’s offshore wind power capacity in 2015 is more conservative at 5GW, still implying a 90% CAGR in 2010-2015F, significantly higher than the overall wind capacity CAGR of 1% in China over the same period.

Despite rapid growth potential, we note that offshore demand will remain less than 3% and 7% of annual wind power capacity in China by 2012F and 2015F, respectively. This is much smaller than the contribution from overseas, demand of which we estimate at c.13% of leading WTG manufacturers’ 2012F shipments. We believe offshore development is more of an attractive theme though it lacks material business impact, at least for the next few years.

China with great potential for offshore wind power development

The Chinese government has had development of offshore wind power technology in its agenda since 2007, shortly after China started to install more completed wind equipment and component supply chain domestically. In 2007, the Shanghai government held bidding for the “Shanghai Donghai Bridge” project, China’s first offshore wind farm, power generation kicked off in June 2010. In May 2010, China held its first national-level bidding for four offshore wind concession projects with aggregate size of 1GW of power capacity.

China’s rapid move into offshore development since 2007 could be seen as overly ambitious as offshore wind technology remains an immature and challenging field with high project costs and risks, even for countries with more advanced wind technology. However, China, unlike some European countries which have been developing onshore wind resources for decades, still has abundant unexploited wind resources onshore.

Nonetheless, we believe that China’s long-term goal will not only use offshore wind as a tool to enhance energy supply but also gain leadership in the manufacturing of offshore wind equipment.

China has great potential for offshore wind power development. Based on research conducted by China Meteorological Administration (CMA), China’s technically exploitable offshore wind resource is around 200GW (near-shore area with 5-25m water depth; 50m above sea level), which accounts for 20-30% of China’s onshore wind resources.

More importantly, China’s power consumption is highly concentrated along the eastern coastal line. Thus, transmitting power from offshore wind farms could make economic sense compared with transmitting power long distance from onshore wind farms in the north and west, even after considering the much higher capital investment required for offshore wind projects.

China Wind Power 4 April 2011

China’s offshore wind resources

Source: Azure International

China has huge offshore wind pipeline

We estimate that at the end of 2010, China had cumulative offshore capacity of 120MW. This includes the 102MW Donghai Bridge project already in operation since June 2010, as well as several experimental offshore WTG installations by WTG manufacturers, including 1.5MW by Xinjiang Goldwind, 3MW (1.5MW x2) by China Mingyang Power, 3MW (1.5MW x2) by United Power, 4MW (2MW x2) by Shanghai Electric, 3MW (1.5MW x 2) by Envision Energy and 2MW (2MW x1) by Sany Electric.

Offshore wind project development in China (2010) Project Type of WTG Project size Investor Status Shanghai Donghai Bridge 3MW from Sinovel 102MW China Power New Energy, China Datang, In operation since mid 2010 China Guangdong Nuclear Power, Shanghai Green Energy Jiangsu Binhai 3MW from Sinovel 300MW Datang Renewable Construction should be completed by 2014 Jiangsu Sheyang 3MW from Sinovel 300MW China Power Investment Construction should be completed by 2014 Jiangsu Dongtai 2.5MW from Goldwind 200MW China Longyuan Power Construction should be completed by 2014 Jiangsu Dafeng 3.6MW from Shanghai Electric 200MW Luneng Group Construction should be completed by 2014 Source: CWEA, CCBIS

China Wind Power 4 April 2011

In 2010, the central government requested local governments of coastal provinces to complete planning for offshore development up to 2015F and 2020F. According to CWEA, total offshore capacity proposed by five coastal provinces reaches 15GW and 33GW for 2015F and 2020F, respectively, increasing sharply from the 120MW as of end-2010F.

Provincial government plans for offshore wind capacity

Region 2015F 2020F Shanghai 700 1,550 Jiangsu 4,600 9,450 Zhejiang 1,500 3,700 Shandong 3,000 7,000 Fujian 300 1,100 Others (tentative) 5,000 10,000 Total 15,100 32,800 Source: CWEA, CCBIS

According to Azure International, near-term offshore pipeline of top offshore wind farm developers in China amounts to around 514MW, while cumulative pipeline (including those with long-term potential) could amount to 13.7GW.

Top offshore developers’ pipeline

Developer Pipeline (MW) China National Offshore Oil Corp (CNOOC) 3,102 Longyuan 2,465 China Three Gorges Project Corp. 2,010 Huaneng (China) Group 1,302 Guangdong Baolihua New Energy 1,250 Guodian Group 800 Shenhua Group 500 Datang Corporation 329 Changdao Wind Power Development 300 Shangdong Sanrong Group 300 Zhejiang Luneng 196 Source: Azure International, CCBIS

Offshore wind power to grow 90% CAGR in 2010-2015F…

Despite Chinese local government aggressive plans for offshore wind development up till 2020F, our channel check with CWEA and project developers lead us to conservatively forecast China’s annual offshore capacity installation will rise to 200MW and 700MW, up 233% and 250% in 2011F and 2012F, respectively, from 60MW in 2010.

We estimate cumulative offshore wind capacity in China to reach 5GW by 2015F, implying a CAGR of 90% in annual offshore capacity installation in 2010-2015F, much faster than China’s overall annual wind capacity CAGR of 1% over the same period.

China Wind Power 4 April 2011

China annual offshore installation and growth China cumulative offshore capacity and growth

MW MW 1,600 270% 5,200 240%

1,400 240% 200% 210% 1,200 3,900 180% 160% 1,000 150% 800 2,600 120% 120% 600 90% 80% 400 1,300 60% 40% 200 30%

0 0% 0 0% 2009 2010F 2011F 2012F 2013F 2014F 2015F 2009 2010F 2011F 2012F 2013F 2014F 2015F Offshore – annual (LHS) YoY growth (RHS) Offshore – cumulative (LHS) YoY growth (RHS)

Source: CCBIS estimates Source: CCBIS estimates

… but remain under 7% of China total capacity until 2015F

We expect offshore capacity installation in China to grow rapidly at 233% YoY in 2011F and 250% YoY in 2012F. However, offshore wind demand should remain at a small fraction of China’s wind market over the next five years. Based on our forecasts, offshore installation will account for 3% of annual wind installation by 2012F and less than 7% by 2015F. We believe offshore development is an attractive theme for China’s wind power industry but without material business impact over the next few years.

China’s annual offshore installation share of total China’s cumulative offshore capacity share of total

MW MW 1,600 50% 5,200 50% 45% 45% 1,400 40% 40% 1,200 3,900 35% 35% 1,000 30% 30%

800 25% 2,600 25%

600 20% 20% 15% 15% 400 1,300 10% 10% 200 5% 5% 0 0% 0 0% 2009 2010F 2011F 2012F 2013F 2014F 2015F 2009 2010F 2011F 2012F 2013F 2014F 2015F Offshore – annual (LHS) Offshore as % of total annual (RHS) Offshore – cumulative (LHS) Offshore as % of total cumulative (RHS)

Source: CCBIS estimates Source: CCBIS estimates

China Wind Power 4 April 2011

Challenges in offshore wind development in China

In our view, there are three challenges for offshore wind development in China that public and private segments need to address:

No reasonable and standardized feed-in tariff for offshore projects

Development of offshore wind projects in China are in infant stage. We believe that the Chinese government is highly likely to build a tariff scheme for offshore projects, similar to the wind-tariff scheme created for onshore projects. In our view, the government will host several rounds of national-level concession bidding to discover reasonable wind power tariffs that project developers will accept.

However, experience from onshore wind tariff development in China has been that project developers, most of which are state-owned enterprises, tend to bid too aggressively, thus keeping tariffs at unreasonably low levels.

In China’s latest concession bidding, we observed a similar pattern with four offshore projects held in 2010. According to information from CWEA, we believe that the ROEs of these four offshore projects are very likely to be lower than 8.5%, which is not attractive in our view.

Results from latest national-level concession bidding for offshore projects in China (2010)

Average expected ROE by all Project Tariff granted (RMB/kWh) Investment cost (RMB/kW) Average tariff bidded (RMB/kWh) participating bidders (%) Jiangsu Binhai 0.7370 16,197 0.7675 9.49 Jiangsu Sheyang 0.7047 16,518 0.6818 8.54 Jiangsu Dafeng 0.6396 13,795 0.6846 9.37 Jiangsu Dongtai 0.6235 N/A 0.6846 8.78 Source: CWEA, CCBIS

Chinese WTG and component manufacturers lack mature technology for large-scale wind equipment

In our opinion, offshore wind projects require at least 2MW WTGs, while WTGs above 3MW would yield better performance. In Europe, some offshore wind farms are currently experimenting with WTGs producing over 4MW. Nonetheless, most Chinese WTG manufacturers only commenced commercial production of 2MW products less than a year ago and schedule to launch their 3MW products in 2011F (with exception to Sinovel which supplied 34 units of 3MW WTG to the Shanghai Donghai Bridge project in 2009/2010). We believe that Chinese WTG and component manufacturers have to speed up related R&D to ensure quality and cost effectiveness of offshore projects in China.

China Wind Power 4 April 2011

Wind turbine R&D status of Chinese manufacturers

Company Research, development and trial product Sinovel 3.0MW wind turbines successfully installed and under operations in Shanghai Donghai Bridge project Company predicts 5.0MW turbine to be launched in 2011 Goldwind First 1.5MW offshore wind turbine manufactured in 2007 2.5MW and 3.0MW prototypes produced and under experimental operations are expected to be launched commercially in 2011F 5.0MW product under research and development Dongfang Electric 5.0MW offshore wind turbine under research United Power Company targets to launch 3.0MW in 2011F Mingyang Company targets to launch 3.0MW in 2011F Xemc 5.0MW offshore wind turbine under research (XEMC Darwind) Sewind 3.6MW offshore wind turbine launched in June 2010 Haizhuang 5.0MW offshore wind turbine under research Source: Company data, CCBIS

Absence of mature technology and equipment for installation

Installation technology for offshore wind projects has been a challenging issue globally. Moreover, half of the offshore projects currently under construction in China are in the “intertidal” zone, where it is difficult for ships and cars to operate. According to CWEA, even international markets have limited experience with intertidal installation. Therefore China will need to lead the global market and develop its own technology to overcome this challenge.

Due to an absence of mature technology, it is highly costly to produce equipment for offshore project installations in China. We believe the Chinese government is likely to encourage equipment development capability along with the national concession project biddings, in which project developers could cooperate with state-owned heavy machinery manufacturers and leverage their experience for cost savings and knowledge accumulation.

China Wind Power 4 April 2011

Competition landscape – wind farm operators in China

China’s wind farm operation segment has been dominated by government-owned enterprises. According to CWEA, all top-ten wind farm operators in China are central or provincial government-owned companies with aggregate market share of 76% in 2009.

We believe government-owned enterprises versus private or foreign-funded companies will better maintain a competitive position in the wind farm operation segment thanks to their closer relationships with grid operators, Chinese banks and government officials, allowing access to good wind sites, grid connections, project financing and project approvals.

Wind operation dominated by government-owned enterprises

The wind farm operation segment in China has been dominated by government-owned enterprises. According to CWEA, among the top-20 wind farm operators in China (in terms of new capacity installation in 2009), ten are central government-owned enterprises, six are state-owned provincial energy enterprises, and only four are private or foreign-funded enterprises.

Furthermore, all of the top ten wind farm operators in China are central or provincial government-owned enterprises with aggregate share of 76% in terms of new wind capacity installation in 2009. They also jointly accounted for 71% of China’s cumulative wind capacity by end-2009, based on data from CWEA.

New wind capacity by operator (2009) Cumulative wind capacity by operator (2009) Guodian* Guodian* Others 19% Others 19% 24% 26%

China Resources JOINTO Power 2% 2% China Energy Conservation China Power Datang** Investment Datang** Investment (CPI) 13% (CECIC) 14% 2% 3% China Energy Conservation China Power Investment Investment (CPI) Guohua Huaneng Jingneng (CECIC) 3% 4% 12% 5% Huaneng 3% Jingneng China China 11% Guohua 6% Guangdong Huadian Guangdong Huadian 6% Nuclear Power 9% Nuclear Power 6% (CGNP) (CGNP) 6% 5%

* Guodian: Parent of Longyuan * Guodian: Parent of Longyuan ** Datang: Parent of Datang Renewable ** Datang: Parent of Datang Renewable Source: CWEA, CCBIS Source: CWEA, CCBIS

China Wind Power 4 April 2011

Government-owned enterprises remain leading wind farm operators

We expect large government-owned power supply or energy investment companies to continue their dominance in the China wind farm operation segment due to:

Easier access to bank financing

Compared with private or foreign-funded companies, government-owned enterprises have much better access to bank financing in China as banks in China normally assume fairly low default risk for government-owned enterprises which have better relationships with senior management of banks (who are also government officials).

Better relationship with grid operators

As mentioned in the section “Grid-related problems remain a serious challenge”, we expect it to remain difficult for wind farm operators to attain grid connection in China over the next few years, due mainly to the lack of economic incentive for grid operators to provide connections to wind farms in China as well as the mismatch (in terms of geography and timing) of wind farm and grid operator construction.

Nonetheless, we believe the position of government-owned power supply or energy investment companies is better than that of private or foreign-funded wind farm operators, as they have been dealing with grid operators (also government-owned) within other power/energy sub-segments, like coal-fired power, nuclear power, hydro power, etc, for decades, thus have closer relationships with the grid operators.

Government-owned power companies have compulsory renewable capacity requirements

In our view, one of the major reasons private or foreign-funded companies are not very keen in pursuing opportunities within the wind farm operation industry is the low return on wind projects in China, which is driven by grid-related problems as well as an unattractive wind power tariff scheme.

Government-owned power companies face compulsory renewable capacity targets set by the NDRC, requiring them to source 3% and 8% of total capacity from non-hydro renewable sources by 2010 and 2020F, respectively. Consequently, despite the unattractive economics of wind projects in China, government-owned power companies will have to continue aggressive expansion within the wind farm operation segment.

Based on our estimates, China sourced approximately 3% of its power generating capacity from wind power in 2010, implying that Chinese power companies are currently on track to achieve their renewable capacity targets.

China Wind Power 4 April 2011

China power capacity by source

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2009 2010F 2015F 2020F Wind Energy Biomass Energy Solar PV Small Hydro (≤50MW) Large Hydro (>50MW) Nuclear Power Thermal Coal Power:

Source: CEC, CCBIS

Better position to win wind resources

We believe government-owned companies have a closer relationship with the central and provincial governments than private or foreign-funded companies do. This, in our view, strengthens government-owned company position to gain wind resources. In China, to attain wind resources, wind farm operators need to first get provincial government approval to use land for wind farm development.

It has become more competitive to gain wind resource presently, as most of the wind-rich areas have already been taken by wind farm operators. We believe that good relationship with provincial governments and the consequent access to good quality wind resources (i.e. sites with high utilization hours, good grid connection and healthy local power demand) will be important for wind farm operators to increase future growth potential.

Wind resources reserves of listed wind operators (June 2010)

GW 21

0 Longyuan Datang China WindPower

Note: China WindPower is a non-government owned company Source: Company data, CCBIS

China Wind Power 4 April 2011

Easier to get wind farm approvals

Based on our channel check with wind farm operators in China, a wind project need to prepare more than 50 types of documents and gain approvals from more than ten government agencies before construction can be commenced. We believe that government-owned companies are in a better position than private companies to attaining government approvals given their better relationship.

In theory there is little difference between the government-owned operators

Our view is that state-owned wind operators will maintain leadership in the wind farm development segment in China. In theory there should not be a material difference in quality between the top-five wind farm operators in China due to the following reasons:

Wind tariff scheme in China is designed to allow a certain project ROE range

Based on our calculations, the Chinese government generally allows power generators to have an average project ROE of 8-10%. In our view, this should be applicable to most types of power generation projects, including coal-fired power, nuclear power, hydro power and wind power.

As a result, assuming no grid-related problems such as connection bottlenecks or power curtailments, we would expect wind farm operators to have similar project returns regardless of the quality of wind resources of a wind farm, i.e. the Chinese government has higher wind power tariffs in regions with poorer wind resource and vice versa.

State-owned wind operators have similar bargaining strength with banks, grid operators and government officials

From our observations, state-owned wind operators do not face much difficulty getting project financing from Chinese banks, most of which are also state-owned enterprises. Although we expect central government-owned wind operators to have stronger bargaining power with Chinese banks than provincial government-owned wind operators do, the difference between their competitive positions is not material. A similar rationale can be applied to the relationship with grid operators (to get grid connection) and with local governments (to get wind resources and project approvals).

Wind operators adopt similar brands of WTGs in China

Based on data from CWEA, the top-five wind turbine manufacturers have accounted for over 70% of China market over the past three years, a trend we expect to continue in the future. We thus believe that in general wind farm operators in China are adopting similar brands of WTGs for their projects, which should lead to more consistent project returns and earnings quality.

China Wind Power 4 April 2011

Longyuan is better managed than Datang Renewable

In our view, Longyuan is a better managed wind farm operator than Datang Renewable given Longyuan’s better operating efficiency as reflected in its higher operating margins (excluding coal-related business), lower gearing ratios and similar overall net margins despite Longyuan’s top-line contribution (approximately 50%) from low-margin coal-related business.

Although our estimates show Datang Renewable generally enjoys higher growth rates in parameters like capacity, electricity generation and earnings, we believe this is mostly a result of Datang’s much smaller base while Datang and Longyuan are adding the same amount of wind capacity (c.1.5-2GW) per annum in the next two years.

More importantly, while we expect Longyuan’s overall operating margins to be lower than Datang Renewable’s, this is due mainly to Longyuan’s business contribution from coal related business. If we compare non-coal operating margins of Longyuan to Datang Renewable’s, Longyuan’s margins are 110-130bp better than those of Datang Renewable based on to our forecasts.

Another key difference is Longyuan’s better gearing ratio and lower financing costs. We forecast that Longyuan’s net gearing ratio will be in the range of 121-161% in 2010-2012F, while Datang Renewable’s will be in the range of 195-286%.

Comparison between Longyuan and Datang Renewable

Longyuan Datang Renewable 2010 2011F 2012F 2010 2011F 2012F Installed wind capacity (MW) 6,556 8,600 11,000 4,028 5,600 7,100 Wind utilization hours 2,217 2,242 2,309 2,134 2,240 2,274 Wind power generation (net) (GWh) 9,442 14,371 19,244 4,829 8,437 12,083 Average wind power tariff – ex VAT (RMB/kWh) 0.489 0.499 0.501 0.493 0.500 0.499 Wind power revenue (RMB m) 6,071 7,778 10,235 2,378 4,219 6,034 CER/VER income (RMB m) 392 672 953 229 450 607 Operating profit (RMB m) 4,081 5,950 7,773 1,503 2,740 3,815 EBITDA (RMB m) 6,320 9,301 11,862 2,389 4,412 6,118 Net profit (RMB m) 2,007 2,705 3,468 456 1,011 1,311

Growth (YoY, %) Installed wind capacity 46 31 28 54 39 27 Wind power generation (net) 66 52 34 68 75 43 Wind power revenue 67 28 32 68 75 43 CER/VER income 86 71 42 67 96 35 Operating profit 43 46 31 75 82 39 EBITDA 42 47 28 69 85 39 Net profit 124 35 28 84 122 30

Other P&L ratios (%) Wind power revenue as % of total revenue 43 47 54 100 100 100 CER/VER income as % of PBT 12 17 18 31 34 35 Operating margin 29 36 41 63 65 63 Operating margin - non coal power 66 76 76 63 65 63 EBITDA margin 44 56 62 100 105 101 Net margin 14 16 18 19 24 22

Balance sheet ratios (%) Gearing ratio 136 179 194 243 308 333 Net gearing ratio 121 157 161 195 268 287 ROE 7.3 8.8 9.8 4.3 8.6 10.0 Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Competition landscape – WTG manufacturers in China

Among the three listed pure play WTG manufacturers, Goldwind, Mingyang, and Sinovel, we believe Goldwind and Mingyang have better profitability while Sinovel’s production costs are least competitive. Between Goldwind and Mingyang, we expect Mingyang to enjoy better growth thanks to its much smaller base. However, we believe risks with Mingyang are much higher as the company is switching to a new technology platform for its 2.5/3.0MW WTG products.

China’s WTG market dominated by Chinese manufacturers

According to CWEA, Chinese WTG manufacturers have been steadily increasing their market share in China over the past few years, from 45% in 2006 to 90% in 2010. We believe the Chinese WTG manufacturers will maintain market dominance with China market share of 90% in 2011F.

In our view, dominance of the Chinese WTG producers in the China market is mainly due to:

1. Competitive cost structure - we estimate their cost will be 40-50% cheaper than that of foreign WTG producers.

2. Closer relationship with major wind farm operators, majority of which are government-owned enterprises.

3. Better after-sales services thanks to geographical proximity.

4. China’s localization requirement of 70%. Although it was terminated in December 2009, we believe it greatly helped Chinese WTG manufacturers increase scale, lower costs and build a customer base and track record in China between 2007-2009.

China Wind Power 4 April 2011

China’s WTG market breakdown by manufacturer

MW 95% 18,000 90% 85% 80% 12,000 75% 70% 65% 60% 6,000 55% 50% 45% 0 40% 2006 2007 2008 2009 2010 Domestic (LHS) Foreign (LHS) Domestic % (RHS)

Source: CWEA, CCBIS estimates

Market structure: concentrated yet fragmented

Less than ten producers dominate China’s WTG market. Based on statistics from the CWEA and our estimates, in 2010, the top-three and top-five WTG manufacturers accounted for more than 60% and 75% of the China market, respectively, and the top-ten WTG manufacturers accounted for 92% of the market, up from 87% in 2009. Only two foreign WTG manufacturers made it to the top ten in 2010, down from four in 2009, and their aggregate market share was merely 8%. All of the top-five WTG manufacturers are Chinese companies.

Meanwhile, China’s WTG market supply remains quite fragmented as we estimate that in 2010, there were more than 40 WTG manufacturing companies sharing 8% of the China market, among which more than 20 share 2-3% of the market.

China’s WTG market breakdown by manufacturer (2010)

Others 10% Sinovel Huachuang 23% 3% XEMC Wind Power 3% Gamesa 3% Shanghai Electric 3% Vestas Mingyang 5% 6% Goldwind 21% United Power 9% Dongfang Electric 14%

Source: CWEA, CCBIS estimates

China Wind Power 4 April 2011

Industry trend I: Consolidation – top-five players to benefit

Based on several policy announcements over the past two years, we expect the Chinese government to encourage market consolidation within the WTG industry.

In September 2009, the State Council approved a proposal made by the NDRC to curb capacity expansion and investments within several industries, including steel, cement, polysilicon and wind power equipment.

In December 2009, shortly after the State Council publicly highlighted wind equipment as an over-capacity industry, the China Energy Bureau terminated the 70% localization requirement on wind farm investment in China. Moreover, Ministry of Industry and Information Technology in April 2010 unveiled draft proposal listing requirements for wind equipment manufacturers to be legally qualified to enter into the wind equipment manufacturing industry. The requirements include the capability of producing 2.5MW WTGs, production capacity of over 1GW, and cumulative shipment of over 500MW.

We believe that the top five WTG manufacturers, including Sinovel, Goldwind, Dongfang Electric, United Power and Mingyang, to be the main beneficiaries of industry consolidation in China.

Industry trend II: Vertical integration for cost and quality control

Over the past few years, we have seen a trend of vertical integration among global WTG manufacturers, particularly those in China. During 2006-2008, there was a tight supply of WTGs and components around the globe. Thus, global WTG manufacturers began to vertically integrate to secure supply and mitigate the risk of rising component costs. However, we saw most international WTG manufacturers slow down their integration pace after 2009 on muted demand growth and a difficulty in securing financing for expansion.

Nonetheless, the trend of vertical integration continued in China during the same period, unlike the case in the overseas markets as WTG demand growth within China remained strong and Chinese WTG manufacturers combated severe price competition in the China market.

A good example of Chinese WTG manufacturer vertical integration is Goldwind. In 2007, Goldwind adopted an “asset light” model, meaning that the company outsourced all of its component manufacturing to third-party vendors and purely focused on the design and assembly of WTGs. However, Goldwind gradually created in-house capacity for components of its direct-drive WTGs, including generators, control systems and blades. The company also holds minority stakes in several key upstream companies, including those supplying Goldwind with NdFeB magnets (for direct-drive generator) and epoxide-resin glue (for blade production).

China Wind Power 4 April 2011

Vertical integration by major WTG manufacturers

WTG producer Blade Generator Gearbox Control system Sinovel x x x* x* Goldwind –** Dongfang Electric x United Power x *** x Mingyang x x x XEMC x –** Vestas x Gamesa GE Wind x Enercon –** Suzlon Repower x x x Nordex x x Siemens x * Partially supplied by an affiliated company ** Product does not require gearbox *** Pilot production phase Source: CCBIS

In our view, vertical integration can enhance cost and quality control and become increasingly important going forward when Chinese WTG manufacturers expand to overseas markets where quality tends to be more important.

Industry trend III: 10-15% decline in ASP YoY starting from 2010

Based on data from CWEA, ASP of WTGs started to increase in 2004, peaked in mid-2008 before declining afterwards. We forecast average WTG ASP in China will fall 10-15% YoY in 2010-2012F.

We believe the WTG ASP increase in 2004-2008 was mainly due to tight WTG supply and rising raw material costs. According to CWEA, the average ASP increased from RMB4,800 per kW in April 2004 to RMB6,200 per kW at the beginning of 2008. However, prices began to fall in 2H08 and declined rapidly in 2009. By the end of 2009, the ASP of Chinese WTGs decreased to below RMB5,000 per kW (down over 20%).

China’s ASP trends for WTGs

Source: CWEA

China Wind Power 4 April 2011

In our view, the WTG ASP decline in China since 2H08 was driven by a WTG supply surplus, declining raw material (mainly steel) costs, rising localized component supply as well as WTG manufacturers’ ability to reduce costs owing to economies of scale and vertical integration.

Direct-drive or gearbox?

The global WTG market has so far been dominated by gearbox WTGs. According to BTM Consult, gearbox WTGs accounted for more than 85% of the global market as of 2009, while Enercon and Goldwind were the only two companies among the global top ten WTG manufacturers that had a meaningful share of direct-drive products.

Global direct-drive WTG penetration

MW 45,000 100% 40,000 90% 35,000 80% 70% 30,000 60% 25,000 50% 20,000 40% 15,000 30% 10,000 20% 5,000 10% 0 0% 2005 2007 2009 2010F Global WTG shipment (LHS) Direct-drive % (RHS)

Source: CCBIS estimates

Over the past year, the presence of direct-drive technology has increased, as demonstrated by Goldwind’s rapid market share expansion in China, from 15% in 2009 to 21% in 2010 based on our estimates, on the back of the increasing penetration of its direct-drive WTGs. We believe that Goldwind has also contributed greatly to the rise of direct-drive WTG global market share from the historical average of low teens to slightly above 20% in 2010.

Goldwind’s WTG shipment volume and market share in China

MW 6,000 100%

5,000 80%

4,000 60% 3,000 40% 2,000

20% 1,000

0 0% 2007 2008 2009 2010 2011F Shipment (LHS) China market share (RHS)

Source: CCBIS estimates

China Wind Power 4 April 2011

Several global leading WTG manufacturers, including GE Wind, Siemens and Dongfang Electric, which were involved in only gearbox WTG manufacturing historically, started to tap direct-drive WTG R&D and production.

According to Goldwind and Mingyang, direct-drive WTGs have several advantages over doubly-fed (gearbox) WTGs, such as higher energy yield, grid friendly, light weight and most importantly savings from repair and maintenance (R&M) costs. (see Appendix 9, page 159-161 for more details).

However, we would like to highlight that we have no preference between gearbox and direct-drive WTGs for the following three reasons:

1. No material cost/performance difference for onshore wind applications, which remain over 90% of wind installation in China and globally:

Based on our channel check with wind farm operators, there is no material cost/performance difference between gearbox and direct-drive WTGs for onshore applications, which will remain over 90% of annual installation globally and in China for the next five years in our view. We believe Goldwind’s market share expansion is mainly due to its aggressive pricing strategy, supported by its cost reduction efforts on the back of economies of scale and vertical integration instead of end-customer preference of direct-drive technology.

2. Too early to draw conclusions on advantages of direct-drive WTGs for offshore wind applications:

Theoretically, direct-drive WTGs could very well have stronger cost competitiveness over gearbox WTGs for offshore wind farms, especially given their lighter weight and lower R&M expense. However, given the limited operating track record for offshore wind farms globally, it remains too early to draw conclusions. In fact, according to EWEA, among the top global offshore WTG suppliers, only Siemens adopts direct-drive technology.

Global leading offshore WTG suppliers

Manufacturer Type of WTG Technology Siemens 3.6MW Direct-drive Vestas 3MW Gearbox Nordex 2.5MW Gearbox Repower 5MW / 6MW Gearbox BARD Engineering 5MW Gearbox Multibrid 5MW Gearbox Source: EWEA, CCBIS

3. Less reputational risk for global leading WTG makers to explore direct-drive technology for offshore product development:

Historically, global leading WTG manufacturers have been hesitant to switch technology platforms due to the high risk of ruining their track record and brand reputation. However, as all WTG manufacturers have minimal experience with offshore wind power so far, we believe that leading WTG manufacturers face less risk exploring direct-drive technology. Consequently, we see companies like GE Wind and Siemens changing technology platform to direct-drive for their offshore products lately.

China Wind Power 4 April 2011

Siemens acquired its direct-drive technology through the acquisition of Bonus Energy in 2004. It installed three 3.6MW direct-drive offshore WTGs in Denmark and is planning to launch full-scale production in 2011. Meanwhile, another global producer GE acquired ScanWind and its direct-drive technology in 2009 and is planning to commercialize its 3.5MW direct-drive WTGs in 2012.

Nonetheless, we maintain our view that it remains too early to conclude whether direct-drive is the better technology of choice for offshore wind farms.

Comparison between listed WTG manufacturers

There are three listed pure WTG manufacturing players, namely, Goldwind, Mingyang and Sinovel. Both Goldwind and Sinovel are government-owned enterprises, while Mingyang is the only non-government-owned company among the top five WTG manufacturers in China. In general, we believe that government-owned WTG manufacturers enjoy competitive advantage over non-government-owned ones given the majority of wind farm operators in China are government-owned enterprises and wind power remains a government-subsidized industry in China.

Based on CWEA statistics and our estimates, Goldwind and Sinovel are the two top WTG manufacturers in China in 2010, with 21% and 23% market share, respectively, while Mingyang is the fifth-largest WTG manufacturer. We believe that Goldwind and Sinovel will keep their position as top-two WTG producers in China with very close market share over the next two years. Given Goldwind, Sinovel and Mingyang’s leading positions in China’s WTG market, we expect the three to benefit from the industry consolidation trend going forward.

Snapshot of listed pure China WTG plays

Goldwind Mingyang Sinovel Year for first shipment 2001 2008 2006 Company status Government-owned Private Government-owned Shipment (2010, MW) 4,007 1,220 4,386 Cumulative shipment (2010, MW) 9,358 1,455 10,038 China market share (2010) (%) 21 6 23 Cumulative share in China (2010) (%) 21 3 22 Main products 1.5MW (direct-drive) 1.5MW (gearbox) 1.5MW (gearbox) 2.5MW (direct-drive) 3.0MW (hybrid-direct-drive) 3.0MW (gearbox) Source: Company data, CCBIS

In general, we believe that Goldwind and Mingyang have similar profitability performance in terms of margins. Both companies have a better production cost structure than Sinovel. On the other hand, all of the three WTG manufacturers have a very strong balance sheet with net cash position or minimal net debt position through 2012F, based on our estimates.

Compared with Goldwind, we expect Mingyang to enjoy higher growth due to its much smaller base. However, we would like to highlight that Mingyang’s earnings growth comes with much higher risk as Mingyang is switching its WTG technology platform from doubly-fed (gearbox) WTGs to SCD (super-compact-direct-drive) WTGs for its 2.5/3.0MW products, shipments of which are to be launched after 2H11F. As for 2.5MW WTGs, Goldwind uses direct-drive technology currently used in its 1.5MW WTGs. We forecast 30% of Mingyang’s gross profit will come from its 2.5/3.0MW WTG products by 2012F.

China Wind Power 4 April 2011

Fundamental comparison between listed pure WTG plays

Goldwind Mingyang* Sinovel** Order book Order backlog (GW) (Jan 2011) 7.0 3.2 15.0 Book to bill (2011F) 1.2 1.3 2.8

Shipment and market share Shipment (MW) 2010 4,007 1,203 4,386 2011F 5,800 2,400 5,350 2012F 6,685 3,315 6,238 Shipment CAGR (2010-2012F) (%) 29 66 19 China market share (2011F) (%) 27 12 26

Profitability Gross margin (%) 2010 23.0 23.0* 21.1 2011F 20.7 21.9* 21.1 2012F 21.9 22.0* 21.3 Net margin (%) 2010 13.0 12.6 14.8 2011F 11.4 11.5 15.2 2012F 11.4 11.4 14.8 EPS (RMB/share) 2010 0.98 5.57 2.79 2011F 1.06 8.25 3.60 2012F 1.10 9.73 4.52 EPS CAGR (2010-2012F) (%) 6 32 27 ROE 2010 17 20 19 2011F 17 23 20 2012F 15 21 21

Gearing Net gearing ratio (%) 2010 Net cash Net cash Net cash 2011F Net cash Net cash Net cash 2012F Net cash Net cash Net cash * Mingyang’s gross margins are adjusted for warranty provisions (3.3% of revenue) ** Sinovel’s future forecasts are based on consensus estimates Source: Company data, CCBIS

China Wind Power 4 April 2011

China High Speed Transmission Equipment (658 HK)

Company Rating: Outperform Excessive concern provides buying (initiation) opportunity Sector Rating: Neutral (initiation)

China High Speed Transmission Equipment (CHST) is the second-largest wind gearbox producer globally. CHST’s shares Price: HK$12.54 have underperformed the HSCEI by 33% over the past 12 months amid concerns over muted demand growth, margin Target: HK$15.60 pressure, and the development of direct-drive WTGs. We believe (initiation) that CHST’s shares have been oversold and current valuation of 10x 2011F PE is very attractive. We initiate coverage with an Trading data Outperform rating and target price of HK$15.60. 52-week range HK$10.52-19.30 Solid industry position. CHST’s market share of 43% in Market capitalization (m) HK$17,243/US$2,216 China and 24% worldwide in 2010 are a testament to its Shares outstanding (m) 1,375 solid industry leadership. We believe that the gearbox Free float (%) 85 segment remains the most favorable among the wind 3M average daily T/O (m share) 8.3 equipment value chain given its high barriers to entry. Expected return (%) – 1 year 24 Excessive concern over direct-drive development. We Closing price on 1 April 2011 see no material operational benefit for wind operators to adopt direct-drive over doubly-fed WTGs, particularly for Stock price and HSCEI

onshore applications, which will account for over 90% of HK$ 23.0 15,000 global annual installation by 2015. 22.0 14,500 21.0 14,000 Flattish year-on-year earnings growth in 2011F priced 20.0 13,500 in. Our 2011F estimates assume the lower-end of 19.0 13,000 management guidance in terms of pricing (down 9% YoY) 18.0 12,500 17.0 12,000 and gross margins (28%). Based on our conservative 16.0 11,500 estimates, CHST trades at 10x 2011F PE, and over 15.0 11,000 14.0 10,500 41% discount to the global peer average and at CHST’s 13.0 10,000 historical valuation trough. We believe concerns 12.0 9,500 11.0 9,000 surrounding the stock have been priced in. 10.0 8,500 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Initiate with Outperform; attractive valuation. Our target CHST (LHS) HSCEI (RHS) price of HK$15.60 is based on DCF valuation, implying 13x Source: Bloomberg 2011F PE, in line with the average valuation of Chinese wind equipment manufacturers.

Forecast and valuation Year to 31 Dec 2008 2009 2010 2011F 2012F Revenue (RMB m) 3,439 5,647 7,393 9,267 9,959 Reported net profit (RMB m) 693 965 1,403 1,435 1,542 Normalized EPS (RMB) 0.56 0.78 1.10 1.04 1.12 Normalized EPS growth (%) 94 39 41 (5) 7

PER (x) 19.0 13.6 9.6 10.1 9.4 Clarisse Pan EV/EBITDA (x) 20.5 9.3 7.7 6.9 6.3 (852) 2533 2400 PBV (x) 3.5 3.0 1.8 1.7 1.5 [email protected] Dividend yield (%) 2.1 2.5 3.5 3.4 3.6 ROE (%) 18.6 21.7 18.7 16.9 16.2 Alan Lau Net gearing ratio (%) 18.2 47.1 15.0 23.1 16.6 (852) 2533 2479 [email protected] Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Financial analysis

Revenue mix and growth

CHST’s principle product is wind gearboxes used in wind turbines, which accounted for 74% of its revenue in 2010. We expect wind gearboxes to remain CHST’s largest sales contributor, accounting for c.70% of total revenue in 2011F-2012F.

Revenue contribution

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2009 2010 2011F 2012F Wind Gear Marine Gear Rail Gear Others

Source: Company data, CCBIS estimates

We forecast that CHST’s overall revenue will grow 25% YoY in 2011F and 7% YoY in 2012F. We believe that growth will be mainly driven by wind gearboxes and marine gearboxes. Our wind gearbox revenue growth estimate of 3% YoY for 2012F is conservative, and assumes no capacity expansion, no introduction of new wind products and no ASP increase from product mix improvement. Our 2012F estimate does, however, include an increase in sales in yaw motors and drive products.

On the back of our conservative assumptions for 2012F wind revenue growth, we forecast CHST’s revenue growth will slow from 72% CAGR in 2007-2009, to 16% CAGR in 2010-2012F.

China Wind Power 4 April 2011

Key operation data

2008 2009 2010 2011F 2012F Revenue (RMB m) Wind 1,801 3,805 5,458 6,840 7,080 Marine 398 210 234 363 428 Rail 0 14 36 72 130 Other traditional 1,241 1,618 1,665 1,992 2,322 Total 3,439 5,647 7,393 9,267 9,959

Revenue growth YoY (%) Wind 151 111 43 25 3 Marine 193 (47) 12 55 18 Rail N/M N/M 154 98 80 Other traditional 18 30 3 20 17 Overall 81 64 31 25 7

Revenue contribution (%) Wind 52 67 74 74 71 Marine 12 4 3 4 4 Rail 0 0 0 1 1 Other traditional 36 29 23 21 24 Source: Company data, CCBIS estimates

Gross profit and margin

While CHST has been able to improve its gross margin regardless of raw material cost trends from 29% in 2007 to 31% in 2010, we believe CHST’s gross margin will face downward pressure in 2011F and 2012F, due mainly to margin pressure from its wind gearbox product line.

We forecast CHST’s overall gross margin will decline from 31% in 2010 to 28% in 2011F, then rebound to 29% in 2012F, mainly due to improvements in the product mix. While we expect gross margin of wind gearboxes to slow from 31% in 2010 to 28% in 2011F-2012F, we expect gross margins of other non-wind products to generally remain stable in 2011F-2012F.

Gross profit trend

RMB m 3,000 35%

2,500 30% 25% 2,000 20% 1,500 15% 1,000 10%

500 5%

0 0% 2008 2009 2010 2011F 2012F Wind Gear Marine Gear Rail Gear Others Gross margin

Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Gross margin by product

(%) 2008 2009 2010 2011F 2012F Wind gears 28 32 31 28 28 Marine gears 23 30 24 24 24 Rail gears N/A 39 29 28 28 Other traditional 32 36 32 30 30 Overall 29 33 31 28 29 Source: Company data, CCBIS estimates

Operating expenses

The company’s operating expenses comprise distribution costs, administrative expenses and R&D cost. Due to stable cost management of CHST, we expect operating expenses over sales to remain stable in 2011F-2012F at 10%, a slight drop from 11% in 2010 due to savings from distribution costs for wind products.

Operating expenses

2008 2009 2010 2011F 2012F Distribution costs 107 139 287 278 274 Administrative expenses 284 318 460 570 646 Research development costs 55 70 50 111 120 Total 447 528 798 959 1,040 YoY (%) 16 18 51 20 8

Operating expense as % of revenue Distribution costs 3 2 4 3 3 Administrative expenses 8 6 6 6 6 Research development costs 2 1 1 1 1 Overall 13 9 11 10 10 Source: Company data, CCBIS estimates

Operating profit and margin

Assuming stable operating expenses of 10% over sales in 2011F-2012F, we expect CHST’s operating margin to fall from 20% in 2010 to 18% in 2011F and remain flat for 2012F.

Operating profit trend

RMB m 2,000 25% 1,800 1,600 20% 1,400 1,200 15% 1,000 800 10% 600 400 5% 200 0 0% 2008 2009 2010 2011F 2012F Operating profit Operating margin

Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Net profit and margin

In 2008-2010, a major component of non-operating expenses was revaluation gains/losses from CHST’s outstanding convertible bonds and equity swap. We do not expect a net gain from revaluation to re-appear in 2011 as the convertible bond and equity swap will be terminated in May 2011. However, due to revenue growth, we expect 2% YoY growth in net profit for 2011F, followed by 7% YoY growth in 2012F. We forecast net margin will fall from 19% in 2010 to 15% in 2011F and remain flat in 2012F, mainly due to the derivative discontinuation in 2011.

Net profit trend

RMB m 1,800 21% 1,600 18% 1,400 15% 1,200 1,000 12%

800 9% 600 6% 400 3% 200 0 0% 2008 2009 2010 2011F 2012F Net profit Net margin

Source: Company data, CCBIS estimates

Capex and PPE turnover

After construction completion of the second wind gearbox production base in 2010, we believe CHST’s annual capex spending will fall from peak expenditure of RMB1.72b in 2010 to RMB1.13b in 2012F. According to management, CHST will add a new product line for coal and agricultural machinery and expand production facilities for other gears. Given continued high capex spending in 2011F and 2012F, we believe PPE turnover (revenue over average PPE) will drop from 0.75x in 2010 to 0.67x in 2011F and 0.64x in 2012F.

PPE turnover trend

(x) 0.90

0.85

0.80

0.75

0.70

0.65

0.60 2008 2009 2010 2011F 2012F

Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Debt and gearing

CHST’s net gearing ratio (net debt over total equity) reached a trough in 2010, following its private equity placement in September 2010. We believe the company will obtain additional loans to finance the expansion of its current production facilities for new product lines such as the coal and agriculture machinery as well as the expansion of in-house production for other gear products. We forecast net gearing ratio to rise from 15% in 2010 to 23% in 2011F, followed by a drop to 17% in 2012F.

Gearing trend

50%

45%

40%

35%

30%

25%

20%

15%

10% 2008 2009 2010 2011F 2012F

Source: Company data, CCBIS estimates

Working capital

In general, we expect CHST to continue improving its working capital position in 2011F-2012F and estimate CHST’s cash conversion cycle will shorten from 101 days in 2010 to 55 days and 40 days in 2011F and 2012F, respectively.

We saw a surge in accounts receivable days in 2010 due to incidences with customers including GE and Sinovel. However, we believe that the problems have been resolved and we now forecast an improvement in accounts receivable days going forward.

Turnover days

(days) 2008 2009 2010 2011F 2012F Inventory turnover 148 128 92 115 110 Accounts receivable turnover 103 126 159 125 120 Accounts payable turnover 239 174 150 185 190 Cash conversion 11 80 101 55 40 Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Cash flow analysis

Overall, we consider the company to have a healthy financial position. CHST does not require large-scale loan refinancing to maintain its position, especially after a new share placement in 2H10.

We believe net cash inflow will be reduced greatly, from RMB1.65b in 2010 to RMB554m in 2011F, associated with the repayment of the equity swap. In 2012F, we expect net cash inflow to rebound to RMB718m after fulfillment of capex requirements and loan repayments.

We believe increasing net profit in 2011F-2012F and prudent working capital management will allow the company to improve its operating cash flow from cash outflow of RMB1.82b in 2010 to cash inflow of RMB2.49b in 2011F.

We estimate the company will have a significant cash outflow from investing activities in 2011F of RMB2.65b, due to an expected increase in capex towards facility upgrades and settlement of the equity swap in May 2011. After the settlement of the equity swap, the company’s cash outflow from investing activities will return to a lower level of RMB1.26b in 2012F.

We expect cash flow from financing activities to fall from RMB894m in 2010 to RMB714m in 2011F as additional funds are received from the issuance of new shares in 2010. Cash flow from financing activities will turn negative in 2012F due to repayment of bank loans.

Cash flow projections

RMB m 3,000

2,000

1,000

(1,000)

(2,000)

(3,000)

(4,000) 2008 2009 2010 2011F 2012F Cash flow from operations Cash flow from investing activities Cash flow from financing activities Net cash flow

Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Valuation and risks

CHST is an upstream market leader with an attractive valuation

CHST is the largest wind gearbox supplier in China, accounting for 43% market share in China in 2010, and the second-largest supplier worldwide, accounting for 24% of the global market share in 2010. We believe that market concerns over the slowdown in growth in the wind market in the near term, margin pressure, and development of direct-drive WTGs, has been for the most part priced in CHST’s current valuation of 10x FY11 PER.

Valuation comparison

Price EPS (local Market cap PER (x) growth PEG (x) PBV (x) ROE (%) Company Stock code Rating currency) (US$m) 2010A 2011F 2012F (%) 2011F 2010A 2011F 2012F 2010A 2011F 2012F WTG component manufacturers China High Speed 658 HK O 12.54 2,217 9.6 10.1 9.4 (5) (2.1) 1.8 1.7 1.5 18.7 16.9 16.2 Transmission Hansen Transmission HSN LN NR 49.50 534 N/A N/A N/A N/M N/M 0.6 0.6 0.6 (1.7) (1.5) 0.9 Taewoong 044490 KS NR 52,300 796 42.7 22.3 16.0 79 0.3 2.1 2.0 1.8 2.9 5.5 9.3 Hyunjin Materials 053660 KS NR 17,100 232 N/A 10.9 7.6 N/M N/M 1.3 1.2 1.0 (12.8) (1.0) 10.8

WTG manufacturers Xinjiang Goldwind - H share 2208 HK O 14.56 7,858 14.6 13.2 12.9 10 1.3 2.4 2.3 2.0 16.7 17.1 15.4 Xinjiang Goldwind - A share 002202 CH NR 20.65 7,857 N/A 16.9 13.4 24 0.7 N/A 3.6 2.8 39.1 24.6 21.9 Sinovel Wind 601558 CH NR 74.14 11,381 23.4 20.6 17.0 14 1.5 13.9 4.1 3.3 77.5 19.9 20.5 China Ming Yang Wind Power MY US N 10.52 1,315 12.3 8.4 7.1 48 0.2 2.4 1.9 1.5 19.8 22.6 21.0 Vestas VWS DC NR 223.30 8,685 38.9 20.2 15.8 93 0.2 2.2 2.0 1.8 5.9 11.1 12.7 Gamesa GAM SM NR 7.37 2,576 18.6 18.6 18.6 31 0.6 1.1 1.1 1.0 3.1 4.2 5.6 Repower RPW GR NR 145.00 1,900 22.9 25.7 21.5 (11) (2.3) 2.8 2.7 2.5 11.6 10.6 11.5 Nordex NDX1 GR NR 8.26 786 26.6 27.9 21.0 (5) (6.2) 1.5 1.5 1.4 5.9 4.6 6.0 Suzlon SUEL IN NR 44.60 1,778 N/A N/A 24.3 N/M N/M 1.1 1.1 1.1 (12.9) (12.2) 3.8 Dongfang Electric 1072 HK NR 26.70 8,237 17.3 14.0 11.8 24 0.6 2.4 3.0 2.4 33.0 24.5 23.0 Shanghai Electric 2727 HK NR 3.96 13,355 15.2 13.3 12.0 15 0.9 1.6 1.4 1.3 11.3 11.0 11.0 All prices are as of 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS

China Wind Power 4 April 2011

Our DCF derived target price of HK$15.60

Our target price of HK$15.60 is derived from a DCF valuation based on a WACC of 9.1% and terminal growth of 1% after FY2020F. At HK$15.60, CHST’s shares will trade at 13x FY11 PER, in line with the average valuation of Chinese wind equipment manufacturers.

CHST DCF valuation model

Free cash flow (RMB m) FY11F FY12F FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F Sales 9,267 9,959 10,691 11,599 12,642 13,811 15,077 16,418 17,818 19,378 EBITDA 2,114 2,314 2,553 2,708 2,932 3,142 3,295 3,395 3,490 3,746 margin (%) 23 23 24 23 23 23 22 21 20 19 Less: tax (264) (284) (325) (347) (381) (413) (438) (465) (482) (526) Working capital 514 142 (177) (192) 18 (225) (228) (230) (240) (85) CAPEX (1,285) (1,131) (1,126) (1,079) (1,064) (1,139) (1,033) (1,024) (1,180) (1,046) FCF 1,079 1,041 925 1,090 1,505 1,365 1,596 1,677 1,587 2,089

Net debt Equity Value per WACC Sum of PV PV of TV EV (FY10) value Shares share WACC calculation (%) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (m shares) (HK$) Equity Beta 0.94 8.2 9,530 13,312 22,842 1,128 21,714 1,458 17.7 Risk-free rate (%) 3.92 8.3 9,490 13,034 22,524 1,128 21,396 1,458 17.4 Equity risk premium (%) 6 8.4 9,451 12,763 22,214 1,128 21,086 1,458 17.2 Country risk premium (%) 1 8.5 9,413 12,500 21,912 1,128 20,785 1,458 16.9 Cost of equity (%) 11 8.6 9,374 12,244 21,618 1,128 20,490 1,458 16.7 Cost of debt (%) 7 8.7 9,336 11,996 21,332 1,128 20,204 1,458 16.5 Debt/capital (%) 30 8.8 9,298 11,754 21,052 1,128 19,924 1,458 16.2 Tax (%) 15 8.9 9,260 11,519 20,779 1,128 19,651 1,458 16.0 WACC (%) 9.1 9.0 9,222 11,291 20,513 1,128 19,385 1,458 15.8 Terminal growth rate (%) 1 9.1 9,185 11,068 20,253 1,128 19,125 1,458 15.6 9.2 9,148 10,852 20,000 1,128 18,872 1,458 15.4 9.3 9,111 10,641 19,752 1,128 18,624 1,458 15.2 9.4 9,074 10,436 19,510 1,128 18,382 1,458 15.0 9.5 9,038 10,236 19,274 1,128 18,146 1,458 14.8 9.6 9,002 10,041 19,043 1,128 17,915 1,458 14.6 9.7 8,966 9,851 18,817 1,128 17,689 1,458 14.4 9.8 8,931 9,666 18,596 1,128 17,469 1,458 14.2 9.9 8,895 9,485 18,381 1,128 17,253 1,458 14.1 10.0 8,860 9,309 18,170 1,128 17,042 1,458 13.9 10.1 8,825 9,138 17,963 1,128 16,835 1,458 13.7 10.2 8,791 8,970 17,761 1,128 16,633 1,458 13.6 Source: CCBIS

China Wind Power 4 April 2011

Risks

Wind policy changes: As an upstream key component supplier to the wind industry, CHST sales orders are highly sensitive to WTG demand, which, in turn, is very dependent on the prevailing Chinese government wind policies. China’s WTG installation grew at a 120% CAGR in 2006-2009 thanks to China’s target of generating 15% of total energy from renewable energy by 2020. We believe policy changes could have both positive and negative impacts to the WTG manufacturing industry and our earnings estimates.

Development of direct-drive WTG: The direct-drive WTG does not employ a gearbox component and its market share is a sliver next to the market share of the mainstream gearbox-using doubly fed WTGs. Among the top manufacturers in the Chinese WTG market, only Goldwind and Xemc produce direct drive WTGs. In our opinion, CHST’s future wind gearbox sales growth is dependent on technology trend development. However, there is currently no apparent operational benefit for one technology over the other. Overall, technology developments could have both positive and negative implications for our earnings estimates depending on the choices made by wind farm operators over time.

Key component shortage: One of the key components of gearboxes is the main bearing. Due to the limited number of suppliers of this part in the Chinese market, CHST relies on global suppliers such as FAG, SKF and Timken for its main bearing supply. Supply of main bearings can be precarious at times. In fact, market supply of main bearings experienced shortages in 2007-2008 due to rapid growth in WTGs. At the moment, no large Chinese main bearing supplier has the technology and capacity to replace overseas suppliers, so we expect CHST to continue to rely on these major global suppliers for its main bearing supply, resulting in a potential slowdown in sales growth in times of rapid WTG growth due to limited component supply.

Raw material cost fluctuations: CHST’s raw materials include cast iron, forged steel and other spare parts such as bearings and steel plates. According to management, raw materials accounted for approximately 77% of total cost of sales in 2010. Price fluctuations in forged steel and other major raw materials could lead to both upside and downside surprises in our cost and earnings estimates.

Product diversification: Although wind gear sales currently account for approximately 70-75% of CHST’s total revenue, the company is keen on developing new production lines like wind control systems, high speed rail products, numerical control systems and coal and agricultural machinery. New products require investment and time for market acceptance to gain market share. We think the launch of new production lines is positive to CHST’s development because these new lines can reduce the company’s dependence on wind gear sales and wind sector growth, though they entail the risk of product failure in the product launching period.

China Wind Power 4 April 2011

Company profile

Company history

CHST is one of the leading mechanical transmission equipment producers in China, according to China Gear Industry Yearbook 2010 .

CHST’s major operational subsidiary, Nanjing High Speed & Accurate Gear (Group) Co., Ltd (NGC), was founded in 1969 with the name Nanjing Machine Tool Repairing Plant. In 1976, the company was transformed into a professional gear manufacturer and renamed Nanjing Gear Box Factory. In 2001, the company evolved once again, this time in to an incorporated (private) company and renamed NGC.

The listed holding company CHST was incorporated in 2005 and acquired a stake in NGC in 2006. CHST successfully listed on the Main Board of the Stock Exchange of Hong Kong in July 2007.

Major milestones

Date Development 1969 Established in Nanjing through the merger of Second Machinery Maintenance Station of Nanjing and Nanjing Mechanic School; began mechanical transmission equipment production business 1976 Transformed into a professional gear manufacturer and renamed Nanjing Gear Box Factory 1997 Obtained ISO9001 certificate for product quality management system 2001 Established NGC after restructuring of Nanjing Gear Box Factory, and injected the mechanical transmission equipment production business into NGC 2006 Began marine gear transmission production and mass production of wind gear transmission equipment 2007 Successfully listed on the Main Board of the Stock Exchange of Hong Kong 2009 Began production of transmission equipment for high-speed locomotives, metros and urban light rail systems 2010 Commenced commercial production of 3.0MW wind gearboxes 2011 Received 150 unit order for 3.0MW main wind gearboxes for offshore wind installation in January 2011 Source: Company data, CCBIS

Business description

CHST is principally engaged in the research, design, development, manufacture and distribution of a broad range of mechanical transmission equipment (gearboxes) used in a variety of industrial applications.

CHST acquires raw materials, such as forged steel, cast iron, foundry steel bearings, and steel plates, which it subsequently employs in the manufacture of gears, gear drafts and gear housings. It then assembles the components into gearboxes. The production includes nine fundamental procedures described in the chart below.

China Wind Power 4 April 2011

Production procedures

Source: Company data, CCBIS

Production facilities

CHST’s production facilities are currently all located in Nanjing, including two wind power gearbox production facilities with total capacity of approximately 12,000MW and three production bases for marine gearboxes, rail gearboxes and other traditional gearboxes.

Production facilities

Production base Main product Plant size (sq. m) Wind gear transmission equipment I Wind power gearbox with production capacity of about 4,000MW 172,000 Wind gear transmission equipment II Wind power gearbox with production capacity of about 6,000MW 266,000 Traditional gear transmission equipment Gear transmission equipment for construction; gearbox transmission equipment for bar-rolling, 110,000 wire-rolling and plate-rolling mills of metallurgy industry; gear transmission equipment for plate-rolling Traditional gear transmission equipment General purpose gearbox; standard gearbox 69,000 Marine gear transmission equipment Marine transmission system: pitch propeller, marine gearbox, tunnel thruster, hydraulic coupling, full 67,000 circle swinging Source: Company data, CCBIS

China Wind Power 4 April 2011

Value chain position

CHST is part of the upstream of the wind power industry. Gearboxes are made from cast iron and other spare parts such as bearing and steel plates. The company acquires these raw materials from suppliers and produces gearboxes, a major component in WTGs. As one of the leading wind gearbox manufacturers, the company supplies gearboxes to WTG manufacturers in China and overseas. CHST also supplies WTGs to wind farm operators for wind power generation.

Value chain of the wind power industry

Source: Company data, CCBIS

Product offerings

CHST’s products are used in various industries, including wind power generation, marine vessels, rail transport, aerospace, metallurgy, petrochemicals, construction and mining.

Wind gearboxes have been the company’s largest source of revenue over the past few years, with an increasing share of company revenue. Wind gear transmission equipment has contributed approximately 74% of 2010 revenue. Other major product groups include marine gearbox, rail gearbox, and other traditional products, accounting for 3%, 1% and 22% of CHST’s 2010 revenue, respectively.

Revenue contribution by product

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 Wind Gear Marine Gear Rail Gear Other Traditional Gear

Source: Company data, CCBIS

China Wind Power 4 April 2011

The 1.0MW-1.5MW gearbox series is currently the main wind gear transmission equipment produced by the company, accounting for 80% of CHST’s wind product revenue in 2010.

Revenue contribution by wind gear transmission equipment

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2MW gearbox 1.0,1.3,1.5MW gearbox 750,850kW gearbox Yaw motor & drive Pitch

Source: Company data, CCBIS

Product development

Historically, CHST concentrated its efforts on building up its product portfolio and enhanced product quality through joint development and cooperation with customers, which are global leaders in their respective fields.

CHST jointly developed its 1.5MW wind gearboxes with GE Wind, the largest WTG manufacturer in the US market and one of CHST’s largest customers. CHST is currently developing 2.5MW wind gearboxes for GE in expectation of receiving product certification. CHST also jointly developed 3MW gearboxes for hybrid-direct-drive WTGs with Goldwind in 2009-2010.

The company jointly developed 570km/h high-speed train gears with Alstom, a French-based company specializing in manufacturing high speed rail components, such as rolling stock, infrastructure and information systems. CHST has also set up a jointly controlled company with ZF Friedrichshafen AG, a German-based marine gearbox manufacturer, to produce marine gear transmission equipment.

CHST launched a new numerical control series product line in 1H10. According to management, CHST is developing other new products, such as wind control systems, transmission equipment for coal-mining and high-end agricultural transmission equipment. Although we do not expect near-term financial contribution from these new product lines, we believe new product development will be positive for the company’s long-term growth profile, particularly post 2011.

China Wind Power 4 April 2011

Customer profile

CHST sells gearboxes to domestic Chinese customers as well as overseas customers. Since 2004, the company has developed long-term business relationships with leading WTG manufactures in China, including Goldwind, Shanghai Electric, Dongfang Electric, China Guodian United Power, Sinovel and Mingyang. It also sells wind gearboxes to global leading WTG manufacturers, including GE, Vestas, Nordex, REpower and Fuji Heavy. In 2009, the company co-developed high-speed train gears with Alstom and has provided them with rail gearboxes since.

Customer profile

Source: Company data, CCBIS

Major suppliers

CHST’s raw material is high-end forge steel and main bearings. To better control the cost and quality of its forge steel supply, CHST acquired a 50% stake in Jiangsu Hongsheng in 2008. We estimate that Jiangsu Hongsheng currently accounts for 70% of CHST’s forge steel demand. Moreover, after experiencing prolonged shortages of main bearings in 2006-2008, CHST signed a long-term supply contract with SKF to secure main bearings at predetermined fixed prices in 2009-2011. Besides, CHST also procures main bearings from FAG, SFK and Timken.

Major competitors

CHST’s major competitors include wind gearbox manufacturers, such as Winergy, Hansen Transmission, Sew-Eurodrive, Flender Holding GmbH, Chongqing Gearbox, and Hangzhou Advance Gearbox. Accordingly, CHST is the second-largest wind gearbox manufacturer globally in 2010, while Winergy and Hansen were the largest and third-largest wind gearbox manufacturers globally.

China Wind Power 4 April 2011

Shareholding structure

CHST’s largest shareholder is Fortune Apex Limited, owning 15.4% of its total shares as of March 2011. Fortune Apex Limited is mainly owned by company executive directors.

Directors and senior management background

Board of directors and senior management

Name Age Position Key experience Hu Yueming 60 Executive Director, Senior engineer; Chairman of the board Appointed Director since March 2007; and CEO Over 30 years of experience managing in machinery and industrial enterprises; Previously served various management positions in state-owned power conglomerates. Chen Yongdao 47 Executive Director and Senior engineer; Vice President Appointed Director since March 2007; Over 20 years of experience in R&D and quality inspection of mechanical transmission equipment production. Lu Xun 55 Executive Director Senior engineer; Appointed Director since March 2007; Over 20 years of experience in marketing management and client resources in mechanical transmission equipment. Li Shengqiang 56 Executive Director Appointed Director since March 2007; Over 25 years of enterprise management experience and mechanical transmission equipment production. Liu Jiangguo 40 Executive Director Senior engineer; Appointed Director since March 2007; Over 10 years experience in R&D of mechanical transmission equipment. Liao Enrong 49 Executive Director Senior engineer; Appointed Director since March 2007; Over 20 years experience in heat treatment of metallic materials and technical and investment management. Zhang Wei 45 Non-executive Director Senior engineer; Appointed Director since July 2006. Jiang Xihe 51 Independent Obtained a doctorate in Accountancy; Non-executive Director Appointed Director since June 2007; Professor and head of Accounting and Financial Development Research Center of Nanjing Normal University. Zhu Junsheng 70 Independent Vice President of Chinese Renewable Energy Society and Director of the Renewable Energy Professional Non-executive Director Committee of China Association of Resource Comprehensive Utilisation; Appointed Director since June 2007. Chen Shimin 51 Independent Obtained a doctorate in Accounting; Non-executive Director Professor in Nanjing University and Shanghai University of Finance and Economics; Appointed Director since June 2007. Lui Wing Hong, 47 Chief Financial Officer Associate member of Australian Society of Certified Public Accountants and a member of Hong Kong Edward and Company Secretary Institute of Certified Public Accountants; Joined group in June 2006. Source: Company data, CCBIS

China Wind Power 4 April 2011

Financial summary Income statement forecasts Balance sheet forecasts

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F FYE 31 Dec (RMB m) 2009 2010 2011F 2012F Revenue 5,647 7,393 9,267 9,959 Fixed assets 4,116 5,269 6,061 6,713 Cost of goods sold (3,786) (5,094) (6,646) (7,116) Other intangible assets 120 214 269 289 Gross profit 1,861 2,299 2,621 2,843 Long-term investments 722 830 922 1,022 Other income Other long-term assets 240 476 582 621 Selling and distribution expenses (139) (287) (278) (274) Total non-current assets 5,198 6,789 7,834 8,644 Administrative expenses (318) (460) (570) (646) Other current assets 640 932 984 1,057 R&D expenses (70) (50) (111) (120) Inventories 1,313 1,258 2,094 2,145 Operating profit 1,334 1,501 1,662 1,803 Marketable securities 0 18 18 18

Accounts receivable 2,613 3,811 3,174 3,274 EBIT 1,334 1,501 1,662 1,803 Cash & equivalents 471 2,124 2,678 3,396 Depreciation and amortisation 221 376 452 510 Total current assets 5,037 8,142 8,948 9,890 EBITDA 1,554 1,878 2,114 2,314 Total assets 10,235 14,932 16,782 18,535 Net interest expense (74) (116) (137) (164) Accounts payable 1,566 2,613 3,369 3,704 Share of results of an associate 16 41 46 50 Short-term debt 1,556 1,209 1,853 1,992 Extraordinary items (110) 223 128 137 Other current liabilities 166 1,405 131 140 Profit before tax 1,166 1,650 1,699 1,826 Total current liabilities 3,288 5,226 5,354 5,837 Taxation (200) (257) (264) (284) Long-term debt 1,012 2,043 2,780 2,988 Net profit after tax 966 1,393 1,435 1,542 Convertible debt 1,369 0 0 0 Minorities (1) 10 0 0 Other long-term liabilities 115 148 170 178 Reported net profit after tax 965 1,403 1,435 1,542 Total non-current liabilities 2,496 2,191 2,950 3,166 Dividends (327) (471) (488) (524) Total liabilities 5,785 7,417 8,304 9,002 Transfer to reserves 638 933 947 1,017 Normalized net profit after tax 965 1,403 1,435 1,542 Total shareholders' equity 4,450 7,514 8,478 9,532 Total equity and liabilities 10,235 14,932 16,782 18,535

Financial ratios Cash flow projections FYE 31 Dec (RMB m) 2009 2010 2011F 2012F FYE 31 Dec (RMB m) 2009 2010 2011F 2012F Profitability (%) EBITDA 1,554 1,878 2,114 2,314 EBIT margin 23.6 20.3 17.9 18.1 Change in working capital (1,784) (121) 514 142 EBITDA margin 27.5 25.4 22.8 23.2 Other operating cash flow (47) 61 (137) (92) Net margin 17.1 19.0 15.5 15.5 Cash flow from operations (277) 1,818 2,491 2,364 ROE 21.7 18.7 16.9 16.2 Capital expenditure (1,602) (1,717) (1,285) (1,131) Growth (%) Addition in investments (2) (81) 0 0 Revenue 64.2 30.9 25.4 7.5 Net acquisitions 1 (41) (46) (50) EBIT 119.3 20.8 12.6 9.4 Reduction/(addition) in other 810 891 (1,268) (72) EBITDA 144.5 12.6 10.7 8.5 long-term assets Net profit growth 39.4 44.3 3.0 7.5 Addition in other long-term liabilities 1 0 0 0 Valuation and ratio analysis (x) Other cash flow from investing 26 (112) (52) (11) Normalized PER 13.6 9.6 10.1 9.4 activities Reported PER 13.6 9.6 10.1 9.4 Cash flow from investing activities (766) (1,059) (2,651) (1,264) Dividend yield 2.5 3.5 3.4 3.6 Cash dividends (274) (327) (471) (488) Price/cash flow N/A 8.2 26.2 20.2 Equity issue 0 2,054 0 0 PBV 3.0 1.8 1.7 1.5 Net debt issue 1,206 683 1,382 346 EV/EBIT 10.9 9.7 8.7 8.1 Net convertible debt repayment 0 (1,369) 0 0 EV/EBITDA 9.3 7.7 6.9 6.3 Other cash flow from financing (99) (147) (197) (240) Liquidity and leverage (%) activities Current ratio 1.5 1.6 1.7 1.7 Cash flow from financial activities 832 894 714 (382) Interest cover (x) 18.1 13.0 12.1 11.0 Net cash flow (210) 1,653 554 718 Gearing ratio 58 43 55 52 Beginning cash 682 471 2,124 2,678 Net gearing ratio 47 15 23 17 Forex 0 0 0 0 Ending cash 471 2,124 2,678 3,396 Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Xinjiang Goldwind Science & Technology (2208 HK)

Company Rating: Outperform (initiation) Industry leader, compelling valuation Sector Rating: Neutral (initiation)

Goldwind is the second-largest WTG producer in China, with 21% market share in 2010. Near-term industry concerns over Price: HK$14.56 muted demand growth and margin pressure, we believe, have been priced in, and we consider Goldwind one of the main Target: HK$16.60 beneficiaries of government-encouraged industry consolidation in (initiation) the medium term. Current valuation of 13x FY11F PER provides a good entry opportunity. We initiate coverage on the stock with an Trading data Outperform rating and target price of HK$16.60. 52-week range HK$12.2 – 21.3 Continuous market share gains in China. We believe Market capitalization (m) HK$61,118/US$7,855 Goldwind will expand its market share in China thanks to its Shares outstanding (m) 2,695 leadership in cost and brand equity. We expect shipment Free float (%) 92 growth of 45% YoY in 2011F, implying a market share gain to 3M average daily T/O (m share) 5.3 30%, from 21% in 2010. Goldwind claimed a 32% share in Expected return (%) – 1 year 14 nationwide WTG public tendering in 2010. Closing price on 1 April 2011

Well-positioned for overseas and offshore. Goldwind was Stock price and HSCEI among the first to produce 2.5/3.0MW WTGs in China. They now represent 25% of the company’s order backlog. HK$ 22.0 14,500

Goldwind is rare insofar as it has a track record in offshore 21.0 14,000

wind in China. We also see it ramping up overseas sales 20.0 13,500 19.0 contribution to 10% in 2011F and c.12% in 2012F. 13,000 18.0 Industry and company negatives priced in. Our 2011F 12,500 17.0 12,000 estimates factor into shipment of 5.8GW (guidance: 16.0 11,500 5.5-6.0GW), ASP decline of 14% YoY and gross margin 15.0 decline of 230bp YoY to 20.7%. Based on our conservative 14.0 11,000 estimates, Goldwind trades at 13x 2011F PE, a 23% 13.0 10,500 discount to the global peer average, a compelling valuation. 12.0 10,000 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Initiate with Outperform. Our target price of HK$16.60 is Goldwind (LHS) HSCEI (RHS) based on DCF valuation, implying 15x 2011F PE, at a 13% Source: Bloomberg discount to the global peer average valuation.

Forecast and valuation Year to 31 Dec 2008 2009 2010 2011F 2012F Revenue (RMB m) 6,417 10,667 17,475 21,489 22,282 Reported net profit (RMB m) 909 1,766 2,272 2,494 2,568

Normalized EPS (RMB) 0.40 0.78 0.84 0.93 0.95 Normalized EPS growth (%) 45.1 92.6 7.7 10.2 3.0 PER (x) 30.3 15.7 14.6 13.2 12.9 Clarisse Pan EV/EBITDA (x) 41.3 24.4 16.9 15.2 14.0 (852) 2533 2400 PBV (x) 6.6 5.0 2.4 2.3 2.0 [email protected] Dividend yield (%) 2.7 2.0 7.7 2.6 1.6 ROE (%) 22.0 32.0 16.7 17.1 15.4 Alan Lau Net gearing ratio (%) Net Cash Net Cash Net Cash Net Cash Net Cash (852) 2533 2479 [email protected] Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Financial analysis

Revenue

We forecast Goldwind’s top-line growth to continue in 2011F and 2012F at 23% YoY and 4% YoY, respectively. We believe Goldwind’s revenue growth in 2010-2012F will be volume driven and expect its blended ASP of WTGs to decline 14% YoY and 11% YoY in 2011F and 2012F, respectively. Assuming its market share in China will increase and overseas sales will expand, we expect Goldwind’s shipment growth to reach 45% YoY in 2011F and 15% YoY in 2012F.

Goldwind’s principal product, the 1.5MW WTG, contributed 94% of company revenue in 2010. We expect the 1.5MW WTG to continue to be its principal revenue contributor through 2012F. Despite production and shipments of 2.5MW WTG in 2011F and 2012F, we believe the 2.5MW WTG still requires one-to-two more years to gain market acceptance.

Besides WTG sales, the company also generates revenue from wind power services and wind farm development. These two business lines aggregately accounted for approximately 3% of total revenue in 2010, and we expect revenue contribution (as share of overall revenue) to remain stable in 2011F and 2012F.

Revenue trend

RMB m 25,000

20,000

15,000

10,000

5,000

0 2008 2009 2010 2011F 2012F 750 kw revenue 1.5MW revenue 2.5MW revenue Others Sales from wind power service Sales from wind farm development

Source: Company data, CCBIS estimates

1.5MW WTG

1.5MW WTG is currently the dominant product in the Chinese WTG market and Goldwind’s core product since 2009. The product accounted for 94% of total revenue in 2010. We estimate this will gradually fall to 75% in 2011F and 63% in 2012F to be replaced by the sale of the new 2.5MW WTG. We expect product shipments to reach 4,525MW in 2011F, representing 18% YoY growth from 3,851MW in 2010, followed by a slight fall to 4,435MW or a 2% YoY decline in 2012F.

Due to intensifying competition, we forecast that the ASP of 1.5MW WTG will fall from RMB4,253 per kW in 2010 to RMB3,555 per kW in 2011F and RMB3,164 per kW in 2012F. Based on our assumptions for ASP and shipment volume, we project revenue from 1.5MW WTG to decline by 2% YoY to RMB16.09b in 2011F and by 13% YoY to RMB14.03b in 2012F.

China Wind Power 4 April 2011

2.5MW WTG

The company began delivering the 2.5MW WTG in 2H10. We expect the product to earn a pricing premium over the 1.5MW WTG as it is an advanced model.

We forecast shipment volume of the 2.5MW WTG to grow significantly, from 2.5MW in 2010 to 1,125MW in 2011F and 2,250MW in 2012F. Despite our assumption for rapid volume growth YoY over the next two years, we believe that 1.5MW WTG will remain Goldwind’s dominant product through 2012F as more time is needed for the new 2.5MW WTG product to gain market acceptance. We expect revenue contribution from 2.5MW WTG to grow from 0.07% in 2010 to 21.00% in 2011F and 34.00% in 2012F.

We believe an ASP drop for WTGs is inevitable given the market trend, even for advanced 2.5MW WTG models. We forecast product ASP to fall from RMB4,800 per kW in 2010 to RMB3,984 per kW in 2011F and RMB3,370 per kW in 2012F. According to our estimate, due to rapid shipment volume growth in 2011F and 2012F, we forecast revenue contribution from the 2.5MW WTG to ramp up from RMB12m in 2010 to RMB4.48b in 2011F, and grow 69% YoY to RMB7.58b in 2012F.

750kW WTG and other WTG sales

The 750kW WTG and other smaller capacity WTG are less economical to wind farm operators compared with megawatt size WTGs. Shipment of 750kW and below products have been on a declining trend since 2008 and revenue from 750kW and below products only accounted for only 3% of 2010 WTG revenue. We expect the company to entirely phase out this product line in 2012F.

WTG ASP trend

RMB / kW 5,500

5,000

4,500

4,000

3,500

3,000 2008 2009 2010 2011F 2012F

750kW WTG 1.5MW WTG 2.5MW WTG Blended ASP

Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Key operation data

2008 2009 2010 2011F 2012F Sales from wind turbines 750kW turbines Shipments (unit) 1,138 592 205 200 0 Shipments (MW) 854 444 154 150 0 ASP (RMB per kW) - 750MW 3,868 3,941 3,522 3,274 3,126 Revenue from 750kW WTG (RMB m) 3,301 1,750 542 491 0 YoY (%) 31 (47) (69) (9) (100) 1.5MW turbines Shipments (unit) 346 1,061 2,567 3,017 2,956 Shipments (MW) 519 1,592 3,851 4,525 4,435 ASP (RMB per kW) 5,327 5,333 4,253 3,555 3,164 Revenue from 1.5MW WTG (RMB m) 2,765 8,487 16,374 16,086 14,030 YoY (%) 468 207 93 (2) (13) 2.5MW turbines Shipments (unit) 0 0 1 450 900 Shipments (MW) 0 0 3 1,125 2,250 ASP (RMB per kW) 0 0 4,800 3,984 3,370 Revenue from 2.5MW WTG (RMB m) 0 0 12 4,482 7,584 YoY (%) N/M N/M N/M 37,250 69 Other WTG sales (RMB m) 233 110 77 0 0 Total shipment volume (MW) 1,373 2,036 4,007 5,800 6,685 Total WTG sales revenue (RMB m) 6,299 10,347 17,005 21,059 21,614 YoY (%) 110 64 64 24 3 Sales from wind power services (RMB m) 30 215 293 215 334 Sales from wind farm development (RMB m) 88 104 178 215 334 Total revenue (RMB m) 6,417 10,667 17,475 21,489 22,282 YoY (%) 113 66 64 23 4 CAGR 2010-12F (%) 13 Source: Company data, CCBIS estimates

Gross profit and margin

We forecast company gross margin to be 21% and 22% in 2011F and 2012F, respectively. We expect Goldwind’s blended WTG ASP to decline 15% and 10% in 2011F and 2012F, respectively, and believe the company can reduce product costs by similar magnitude through vertical integration, including in-house production of WTG components and investments in major suppliers.

In 2010, Goldwind acquired rotor blade manufacturing companies and it now supplies its own rotor blades needs. Rotor blades account for approximately 20% of its WTG production costs. We forecast company in-house production to increase from 35-40% of total WTG costs in 2010 to over 50% in 2011F.

China Wind Power 4 April 2011

Status of in-house production of components Share of total Produced in-house Component WTG cost (%) as of 2010 (%) Management estimate Blades 20 Nil Acquired 2 blade factories in 2010, target to produce 800-1,000 blades in 2011, around 10% of supply Generators 27 100 100% in 2011F-2012F Electrical control system 26 50 60-70% by 2011F Others 27 Nil Obtained license from Infeneon Technologies (IFFNY US, Not Rated), to produce 100% of insulated-gate bipolar transistor (IGBT) from 2011. Source: Company data, CCBIS estimates

Besides acquisitions, the company owns a 35% equity interest in each of its component suppliers, Jianxi Jinli Mag Rare-Earth and Jiangsu Chengfeng New Material Technology, which supply neodymium for its permanent magnet generators and epoxy-glue for its rotor blades, respectively. We expect Goldwind to reduce costs and receive supply priority from these major component suppliers.

WTG cost of sales trend

RMB / kW 5,000

4,500

4,000

3,500

3,000

2,500

2,000 2008 2009 2010 2011F 2012F 750kW WTG 1.5MW WTG 2.5MW WTG Blended cost of sales

Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Gross profit trend

RMB m 6,000 27% 24% 5,000 21% 4,000 18% 15% 3,000 12% 2,000 9% 6% 1,000 3% 0 0% 2008 2009 2010 2011F 2012F 750kW WTG 1.5MW WTG 2.5MW WTG Others WTG Gross margin

Source: Company data, CCBIS estimates

Operating expenses

Operating expenses mainly include product warranty provisions, delivery charges, R&D, depreciation and amortization and labor cost. It accounted for approximately 10% of revenue in 2008-2010. We expect company warranty provision policy and operating expenses to maintain in the near future and assume operating expenses will continue to account for 10% of the revenue in 2011F-2012F.

Operating profit and margin

Assuming stable gross margin and operating expenses, we expect Goldwind’s operating margin to maintain at 14% and 15% in 2011F and 2012F, respectively. Driven by the ramp up of 2.5MW WTG sales, we forecast 6% and 10% YoY growth in operating profit in 2011F and 2012F, respectively.

Operating profit trend

RMB m 4,000 20%

3,500 16% 3,000

2,500 12% 2,000

1,500 8%

1,000 4% 500

0 0% 2008 2009 2010 2011F 2012F Operating profit Operating margin

Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Net profit and margin

We believe Goldwind will maintain net margin at approximately 12% in 2011F-2012F, year-on-year growth of 9% in 2011F and 4% in 2012F, in line with operating profit growth. Since Goldwind had a net cash position in 2008-2010, management sees no need for large equity and debt placements in the near future, especially after obtaining additional liquidity through its IPO in 2H10. Therefore, we expect the company to incur similar finance cost levels in 2011F-2012F as in 2010.

Net profit trend

RMB m 3,000 18% 16% 2,500 14% 2,000 12% 10% 1,500 8% 1,000 6% 4% 500 2% 0 0% 2008 2009 2010 2011F 2012F Net profit Net margin

Source: Company data, CCBIS estimates

Capex and PPE turnover

Following the IPO in 2H10, we believe Goldwind is keen to expand its production facilities in China and overseas as well as invest in the R&D of WTG and components. In order to expand overseas, Goldwind will also have to establish sales offices and production facilities overseas for sales support. Hence, we expect annual capex to grow, from RMB2.67b in 2010 to RMB2.92b in 2012F, representing a 5% CAGR in 2010-2012F. We forecast PPE turnover (revenue over average PPE) will fall slightly from 6x in 2010 to 4x in 2011F and 3x in 2012F, given expected facility expansion in 2011F-2012F.

PPE turnover trend

(x) 8

2 2008 2009 2010 2011F 2012F

Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Working capital

Goldwind has a relative stable cash conversion cycle at approximately 58 and 57days in 2009 and 2010, respectfully, and we forecast it to maintain at approximately 39 days in 2011F and 2012F each.

Turnover days

(days) 2008 2009 2010 2011F 2012F Inventory turnover 158 132 119 110 110 Accounts receivable turnover 149 100 158 150 150 Accounts payable turnover 190 174 221 221 221 Cash conversion 117 58 57 39 39 Source: Company data, CCBIS estimates

Debt and gearing

Goldwind borrows minimally from banks and other sources and has a relatively healthy liquidity. It has sufficient cash for working capital and business expansions and was in a net cash position in 2008-2010. We believe the company will not need to borrow large sums in the near future, especially after it obtained funds from its IPO in 2H10. We forecast Goldwind to continue its net cash position in 2011F-2012F.

Cash flow analysis

Driven by the company’s stable income growth and better working capital position, we believe its operating cash flow will improve from RMB186m in 2010 to RMB4.62b in 2011F. We also forecast the company to have increasing cash outflow from investing activities over 2011F-2012F due to an increase in capex for facility expansion and R&D spending.

We anticipate the company will have a large cash outflow from financing activities of RMB1.89b in 2011F due to its expected repayment of bank loans. Overall, we expect the net cash inflow from operating activities to be balanced by capex spending and repayment of bank loans in 2011F. Net cash outflow may further increase in 2012F due to the increase in capex according to our estimates.

Cash flow projections

RMB m 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 (1,000) (2,000) (3,000) 2008 2009 2010 2011F 2012F Cash flow from operations Cash flow from investing activities Cash flow from financing activities Net cash flow

Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Valuation and risks

Well-positioned industry leader with attractive valuation

Market concerns over excess wind power capacity in China due to slow grid development and continuously decreasing WTG ASP as a result of fierce competition in the Chinese WTG industry, has pushed down share prices of the whole value chain for wind energy. Share prices have fallen to a trough level in 4Q10 and 1Q11.

As the second-largest WTG producer in China with 21% market share in 2010, Goldwind is expected to be one of the biggest beneficiaries of government-encouraged industry consolidation in the medium term. Currently trading at HK$14.56 or 13x FY11F PER, we believe Goldwind’s solid financial position and continuously expanding market share will bring valuation recovery in the medium-to-long term.

Valuation comparison

China Wind Power 4 April 2011

Our DCF derived target price of HK$16.60

Our target price of HK$16.60 is based on DCF valuation assuming a WACC of 6.8% and terminal growth of 1.0% after FY2020F. At HK$16.60, Goldwind trades at 15x FY11F PER, a 13% discount to its global peer average of 17x.

Goldwind DCF valuation model

Free cash flow (RMB m) FY11F FY12F FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F Sales 21,489 22,282 22,270 20,784 19,762 20,580 22,266 23,691 24,757 25,871 EBITDA 3,385 3,687 3, 563 3,339 3,177 3,102 3,308 3,264 3,391 3,534 margin (%) 16% 17% 16% 16% 16% 15% 15% 14% 14% 14% Less: tax (463) (676) (651) (612) (578) (562) (599) (589) (614) (642) Minority interest 131 135 130 122 116 112 120 118 123 128 Working capital 1,702 (178) 652 (3) 22 1,169 84 199 398 1,197 CAPEX (2,816) (2,924) (2,441) (1,922) (2,547) (2,215) (2,201) (2,278) (2,244) (1,715) FCF 1,939 44 1,252 925 190 1,607 712 714 1,053 2,502

Net debt Equity Value per WACC Sum of PV PV of TV EV (FY10) value Shares share WACC Calculation (%) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (m shares) (HK$) Equity beta 0.52 5.9 8,381 29,732 38,113 (6,357) 44,470 2,695 19.6 Risk-free rate (%) 3.92 6.0 8,347 28,893 37,240 (6,357) 43,597 2,695 19.2 Equity risk premium (%) 6 6.1 8,313 28,089 36,402 (6,357) 42,759 2,695 18.8 Country risk premium (%) 1 6.2 8,279 27,319 35,598 (6,357) 41,955 2,695 18.5 Cost of equity (%) 7 6.3 8,246 26,580 34,825 (6,357) 41,182 2,695 18.2 Cost of debt (%) 7 6.4 8,212 25,870 34,082 (6,357) 40,439 2,695 17.8 Debt/capital (%) 30 6.5 8,179 25,188 33,367 (6,357) 39,724 2,695 17.5 Tax (%) 15 6.6 8,146 24,532 32,679 (6,357) 39,035 2,695 17.2 WACC (%) 6.8 6.7 8,114 23,901 32,015 (6,357) 38,372 2,695 16.9 Terminal growth rate (%) 1 6.8 8,082 23,294 31,376 (6,357) 37,732 2,695 16.6 6.9 8,049 22,709 30,759 (6,357) 37,116 2,695 16.4 7.0 8,018 22,146 30,163 (6,357) 36,520 2,695 16.1 7.1 7,986 21,602 29,588 (6,357) 35,945 2,695 15.8 7.2 7,955 21,078 29,033 (6,357) 35,390 2,695 15.6 7.3 7,923 20,572 28,496 (6,357) 34,852 2,695 15.4 7.4 7,892 20,084 27,976 (6,357) 34,333 2,695 15.1 7.5 7,862 19,612 27,473 (6,357) 33,830 2,695 14.9 7.6 7,831 19,155 26,987 (6,357) 33,343 2,695 14.7 7.7 7,801 18,714 26,515 (6,357) 32,872 2,695 14.5 7.8 7,771 18,287 26,058 (6,357) 32,415 2,695 14.3 7.9 7,741 17,874 25,615 (6,357) 31,972 2,695 14.1 Source: CCBIS

China Wind Power 4 April 2011

Risks

Launch of new product model: Goldwind has announced plans to develop 3.0MW and larger capacity WTGs using hybrid drive technology. Because hybrid drive WTGs have yet to enter the market, we are unsure of the market’s response to the new technology. However, if the market response is better than expected, it may bring potential upside to our earnings estimate.

Overseas market expansion: Goldwind’s management expressed its plan to deliver WTGs overseas to North America, Europe and Africa. To expand overseas, the company will have to incur significant investment to build its brand, establish delivery and originate after-sales service teams. Operating in foreign countries may incur additional costs entailed by complying with local legal requirements and meeting certain financial requirements for wind project investments. That said, expanding overseas market may also allow the company to diversify its customer portfolio and obtain a higher return. The move could be beneficial to the company in the long run, if successfully implemented.

Wind policy changes: Demand for WTG highly susceptible to the Chinese government wind policy. For the past few years, China’s WTG installation grew at a 120% CAGR in 2006-2009 thanks to China’s target to generate 15% of total energy from renewable energy by 2020. We think policy changes could have both positive and negative impact to the WTG manufacturing industry and our earnings estimate.

Competition in China: Competition in the Chinese WTG market has increased since the listing of top domestic WTG manufacturers, including Sinovel (A-shares), Goldwind (A+H shares) and Mingyang (US listed). By listing, these companies improve corporate governance and provide cash for technology, production and distribution upgrades. In order to gain market share, WTG manufacturers compete by launching new products and lowering ASP, resulting in downward pressure on Goldwind earnings if it is unsuccessfully in implementing cost-cut measures and maintaining gross and operating margins. At the same time, it may become an opportunity for market share expansion in the long term if less-competitive WTG suppliers leave the market.

China Wind Power 4 April 2011

Company profile

Company history

Goldwind is China’s second-largest and the world’s fifth-largest WTG manufacturer in 2010, accounting for 21% of China’s installed capacity according to CWEA. It is also engaged in the provision of wind power services and the development of wind farms for sale to wind farm operators.

Founded in February 1998, Goldwind has one of the richest operating histories among Chinese wind turbine manufacturers. It successfully made its initial public offering on the Shenzhen Stock Exchange in December 2007 and a secondary listing on the Main Board of the Stock Exchange of Hong Kong in October 2010.

Goldwind has sales network in four main regions of China, namely (1) Inner Mongolia, (2) northeast China, (3) northern China, and (4) northwest and south China. Further afield, it began distributing wind turbines in the US and Germany and also established branches in Australia.

Major milestones

Year Development 1998 Xinjiang New Wind, Goldwind’s predecessor company, was established in Urumqi, Xinjiang, by Xinjiang Wind Power; Developed its 600kW wind turbine. 2000 Developed 650kW wind turbines; Obtained the ISO9001 certification. 2001 Changed its name to Xinjiang Goldwind Science & Technology Co., Ltd; Developed 750kW wind turbines. 2002 Established production base in Urumqi, Xinjiang 2003 Obtained the ISO9001:2000 certification 2004 Establishment of the National Wind Power Engineering Technology Research Centre 2005 Developed 1.2 MW wind turbines 2006 Received the "2006 World Wind Energy Award" from the World Wind Energy Association; Ranked 10th-largest wind turbine manufacturer globally. 2007 Listed on the SZSE with stock code 0002202; Established production base in Beijing; Began selling 1.5MW direct-drive permanent magnet wind turbines. 2008 Established production base in Baotou, Inner-Mongolia; Acquired Vensys AG, a research company based in Germany; Launched its 1.5MW wind turbine to the European market. 2009 Developed 2.5MW direct-drive permanent magnet wind turbine; Developed 3.0MW hybrid-drive wind turbine. 2010 Installed three 1.5MW wind turbines on Uilk wind farm in Minnesota, US; Established production base in Neunkirchen, Germany; Launched 2.5MW direct-drive permanent magnet wind turbines; Commenced development of 6.0MW wind turbine; Listed on the Main Board of the Stock Exchange of Hong Kong with stock code 2208 HK; Won bid in Illinois, US under Shady Oaks, a wind farm wholly owned by Goldwind. The plant will install 70 turbines of 1.5MW, all from Goldwind, and is expected to generate electricity in 2012. 2011 Signed a supply contract with HydroChina International for wind farm projects in Adama, Ethiopia, Africa. The contract includes 34 units of its1.5MW direct-drive permanent magnet wind turbine, which will be delivered in three batches between March and June 2011. Source: Company data, CCBIS

China Wind Power 4 April 2011

Research and development

Since 2002, the company has co-developed its 1.2MW and 1.5MW wind turbines with Vensys AG, a German-based engineering company acquired by Goldwind in 2008 as its R&D arm. Including R&D bases in Beijing and Urumqi, Xinjiang, Goldwind has three major R&D centers with more than 500 R&D staff globally.

Main business – WTG sales

Goldwind is one of China’s leading WTG manufacturers producing gearless direct-drive permanent magnet (DDPM) full-power rectification WTGs, which generate alternative current through AC-DC-AC conversion. In addition, its permanent magnet technology is able to enhance the productivity of electricity generation. WTG sales accounted for 97% of Goldwind’s revenue for 2010 of which 94% came from 1.5MW WTG sales and 3% from 750kW, with the remaining from other WTG models. At end-2010, Goldwind’s signed orders totaled 2,765MW, comprising 1,811 1.5MW WTG units, 18 2.5MW WTG units and one 3.0MW WTG unit.

WTG product series

Model Features 750kW WTG The product was developed by the company in 2001 and has been for sale since then; however, it is currently no longer one of Goldwind’s main products. 1.5MW DDPM WTG The company’s main product, which can be used both on-shore and off-shore. 2.5MW DDPM WTG Launched in the second half of 2010 and currently an advance product to the mainstream 1.5MW WTGs in the China market. The product can be used both on-shore and off-shore. 3.0MW hybrid-drive WTG Adopts the hybrid of direct-drive and conventional gearbox technology. The prototype has been successfully developed but has not yet begun mass production. 6.0MW WTG Currently under development. Source: Company data, CCBIS

WTG revenue contribution by product (2010)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2009 2010 750 kW WTG 1.5MW WTG Other WTG

Source: Company data, CCBIS

China Wind Power 4 April 2011

Revenue recognition and warranty obligations

Goldwind recognizes sales revenue upon successful delivery of wind turbines (i.e. after the wind turbines are installed and once preliminary inspection is complete). By that time, the company collects up to 90% of the contract price. The remaining amount is collected upon complete fulfillment of the 24-month warranty period.

Component production status of WTGs

The company produces a wide range of major WTG components in-house, including rotor blades, generators, and parts for its electrical control systems. It is a vertically integrated producer as these components cover c.60% of a typical 1.5MW direct-drive WTG production. Before 2010, key components, which accounted for 20% of total production costs, were produced in-house, according to management.

Production cost breakdown of a typical direct-drive 1.5MW WTG

Structural components 16% Generator 27%

Blade 20%

Nacelle 9%

Electric control Impeller 16% 12%

Source: Company data, CCBIS

Component production status

Component Suppliers Blades In-house production recently began after two blade factories were acquired in 2010, target to produce 800-1,000 blades in 2011, around 10% of supply Gearboxes Nanjing High Speed (CHST), Chongqing Gearbox Generators 100% in-house production Electrical control system 50% in-house production Others Jiangxi Jinli Mag Rare-Earth provides neodymium for its permanent magnet generators (Goldwind is a 35% stakeholder) Jiangsu Chenfeng New Material Technology provides epoxy-glue for its blades (Goldwind is a 35% stakeholder) Source: Company data, CCBIS

Production facilities

Goldwind’s production bases are located in China’s northern and coastal regions where Chinese wind farms are concentrated. Up to December 2010, the company had total production capacity of 4,300 units of 1.5MW/2.5MW WTG, 2,500 units of turbine rotor and nacelle, 1,000 units of generators and 3,000 units of electric control system.

China Wind Power 4 April 2011

Production facilities (December 2010)

Production base Main product Annual capacity as at Dec 2010 Xinjiang Urumqi Base Phase I 500 units 1.5MW/2.5MW WTG, 300 units of turbine rotors and turbine rotor and nacelle nacelle Xinjiang Urumqi Base Phase II 1.5MW/2.5MW WTG 600 units Beijing Yizhuang Base 1.5MW/2.5MW WTG 900 units Electric control system 3,000 units Inner Mongolia Baotou Base 1.5MW/2.5MW WTG 900 units Gansu Jiuquan Base Turbine rotors and nacelle 800 units Hebei Chengde Base 500 units 1.5MW/2.5MW WTG, 600 units of turbine rotors and turbine rotors and nacelle nacelle Ningxia Yinchuan Base 500 units 1.5MW/2.5MW WTG, 500 units of turbine rotors and turbine rotors and nacelle nacelle Germang Neunkirchen Base 1.5MW/2.5MW WTG 100 units Shaanxi Xian Base 1.5MW/2.5MW WTG 200 units generator 1,000 units of generators Jiangsu Nanjing Base 1.5MW/2.5MW WTG 100 units Jiangsu Dafeng Base Turbine rotors and nacelle 300 units Total 1.5MW/2.5MW WTG 4,300 units turbine rotors and nacelle, 2,500 units generators, and 1,000 units electric control system 3,000 units Source: Company data, CCBIS

Other businesses

Other businesses of Goldwind include the provision of wind power services and the development of wind farms for sale to wind farm operators, which together accounted for 3% of total revenue in 2010.

Provision of wind services

The company provides a wide range of wind power services, from the development of wind farms and primary investment consultancy, to pre-construction project services such as feasibility studies and wind measurement and WTG maintenance services to wind farm operators.

Wind farm investment, development and sales

Besides selling WTGs, Goldwind invests, develops and sells wind farms to large wind farm operators. As per management of the company, the major investment cost components of a typical wind farm are derived from WTGs (70%), grid connection (15%), construction (12%) and other miscellaneous items (3%). Eighty percent of investment cost is financed by bank borrowings and 20% by equity investments. Goldwind does not intend to hold its wind farms as long-term investments.

China Wind Power 4 April 2011

Breakdown of wind farm investment costs

Others 3% Construction 12%

Grid connection 15%

Wind turbines related costs 70%

Source: Company data, CCBIS

Customer profile

Goldwind's major customers are large wind farm operators in China. Its five-largest customers are China Guangdong Nuclear Wind Power, Gansu China Power Jiuquan Fourth Wind Power, Wind Power Guazhou of China Hydropower Consulting Group, Longuuan, and Gansu Jiuquan Huineng. Together, their sales account for over 30% of Goldwind’s total sales revenue in 2010.

The company is keen to expand its customer base to overseas markets. It began installing WTGs in a wind farm in Minnesota and won a bid to provide wind turbines to a wind farm in Illinois. Currently, Goldwind has representative offices in the US, Germany and Australia.

Shareholder structure

Goldwind has 2,695m shares outstanding as of end-March 2011, of which 81% are A-shares and 19% H-shares.

Shareholder structure (March 2011)

Other H share holders, 17.06% China Three Gorges Group, 26.74% Social Society Fund, 1.50%

CB Fund, 5.99%

Other A share holders, 48.72%

Source: Company data, CCBIS

China Wind Power 4 April 2011

Use of IPO proceeds

Working capital, 10.00%

Bank loans repayment, 11.10% Production base construction, 40.20%

Expansion to int'l market, 24.10%

WTG design development, 14.60%

Source: Company data, CCBIS

China Wind Power 4 April 2011

Board of directors and senior management background

Board of directors and senior management

Name Age Position Key experience Wu Gang 52 Chairman of Board, CEO Senior engineer, with above 20 years of experience in wind power industry; and Executive Director Awarded World Wind Energy Award by World Wind Energy Association in 2006. Guo Jian 47 President and Executive Senior engineer, with above 20 years of experience in wind power industry; Director Received rewards in science and management of business, including the “Xinjiang Elite Ent repreneur in 2009”. Wei Hongliang 38 Vice President and Responsible for capital management and investment; Executive Director General manager of Capital Operation and Equity Management department of China Three Gorges New Energy, a substantial shareholder and a large investment corporation in China. Li Ying 75 Vice Chairman and Senior engineer; non-executive Director Previously served various management positions in state-owned renewable energy enterprises. Gao Zhong 51 Non-executive Director Senior political officer; Previously served various management positions in state-owned enterprises. Lv Houjun 47 Non-executive Director Doctor in economics and a qualified senior economist; Previously served various management positions in large financial institutions. Wang Yousan 75 Independent A qualified senior economist; non-executive Director Previously served various positions in the Xinjiang local government and state-owned enterprises. Shi Pengfei 69 Independent Senior engineer; non-executive Director Memb er of the expert committee of China Hydropower Consulting Group and vice chairman of Chinese Wind Energy Association. Li Man Bun, 35 Independent Deputy chief executive of The Bank of Asia; Brian David non-executive Director Independent non-executive director of Towngas China and an alternate director of AFFIN Bank Berhad. Sun Liang 40 Chief Financial Officer Chartered Financial and Treasury Professional; Previously financial director of Alstom and other subsidiaries of leading global conglomerates. Jürgen Rinck 47 Vice President and Chief Responsible for financial, R&D, sales, and licensing aspects of Vensys AG’s business; Technology Officer Previously general manager of Vensys Energiesysteme GmbH; joined the group since Vensys AG was acquired by Goldwind. Wang Haibo 36 Vice President Previously director of Marketing Center and Investment Development Department of the group; Has substantial experience in the development of operation of wind farm projects. Wang Xiangming 40 Vice President Senior engineer, above 15 years of experience in wind power industry; Considerable experience in product development, client management and technology services Cui Xinwei 49 Chief Engineer Professor grade engineer; above 10 years of experience in R&D of wind power genera tion, advanced technology application, industrialization of products and on-site technological services. Ma Jinru 44 Vice President, Secretary Senior economist; of Board and Company Previously served as a secretary of the board and company secretary for Hong Kong-listed Dalian Port. Secretary Source: Company data, CCBIS

China Wind Power 4 April 2011

Financial summary

Income statement forecasts Balance sheet forecasts

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F FYE 31 Dec (RMB m) 2009 2010 2011F 2012F Revenue 10,667 17,475 21,489 22,282 Fixed assets 2,682 4,131 6,647 9,259 Cost of goods sold (7,909) (13,454) (17,047) (17,401) Goodwill 250 257 257 257 Gross profit 2,758 4,021 4,442 4,882 Other intangible assets 347 353 353 353 Other income 312 637 705 655 Long-term investments 126 323 360 396 Selling and distribution expenses (690) (1,096) (1,289) (1,337) Other long-term assets 192 497 497 497 Administrative expenses (276) (418) (494) (512) Total non-current assets 3,597 5,562 8,113 10,763 Research and development Other current assets 1,134 1,539 2,484 2,563 (77) (272) (301) (312) expenses Inventories 2,854 4,391 5,137 5,24 4 Operating profit 2,026 2,872 3,084 3,375 Accounts receivable 2,920 7,583 8,831 9,157

Cash & equivalents 4,379 9,324 9,299 8,540 EBIT 2,026 2,872 3,084 3,375 Total current assets 11,286 22,836 25,751 25,504 Depreciation and amortisation (82) (167) (301) (312) Total assets 14,883 28,398 33,864 36,266 EBITDA 2,108 3,039 3,385 3,687 Accounts payable 3,760 8,130 10,302 10,515 Net interest expense (39) (88) (33) (33) Short-term debt 602 1,502 1,502 1,502 Share of results of an associate 4 16 37 37 Other current liabilities 2,520 2,824 5,304 5,396 Extraordinary items 21 10 0 0 Total current liabilities 6,882 12,456 17,108 17,413 Profit before tax 2,011 2,810 3,088 3,379 Long-term debt 2,022 1,465 1,365 1,265 Taxation (200) (416) (463) (676) Other long-term liabilities 451 845 836 863 Net profit after tax 1,812 2,394 2,625 2,703 Total non-current liabilities 2,473 2,311 2,201 2,129 Minorities (45) (122) (131) (135) Total liabilities 9,356 14,767 19,309 19,542 Reported net profit after tax 1,766 2,272 2,494 2, 568

Dividends (540) (2,540) (857) (514) Total shareholders' equity 5,527 13,631 14,556 16,724 Transfer to reserves 1,226 (268) 1,637 2,054 Total equity and liabilities 14,883 28,398 33,864 36,266 Normalized net profit after tax 1,746 2,262 2,494 2,568

Financial ratios Cash flow projections FYE 31 Dec (RMB m) 2009 2010 2011F 2012F FYE 31 Dec (RMB m) 2009 2010 2011F 2012F Profitability (%) EBITDA 2,108 3,039 3,363 3,687 EBIT margin 19.0 16.4 14.4 15.1 Change in working capital (313) (2,186) 1,702 (178) EBITDA margin 19.8 17.4 15.8 16.5 Other operating cash flow (493) (667) (463) (676) Net margin 16.6 13.0 11.6 11.5 Cash flow from operations 1,302 186 4,624 2,833 ROE 32.0 16.7 17.1 15.4 Capital expenditure (1,678) (2,667) (2,816) (2,924) Growth (%) Addition in investments (72) (10) 0 0 Revenue 66.2 63.8 23.0 3.7 Net acquisitions 295 276 0 0 EBIT 73.3 41.8 7.4 9.4 Addition in other long-term assets (299) (117) 0 0 EBITDA 69.3 44.2 11.4 8.9 Other cash flow from investing Net profit growth 94.3 28.6 9.8 3.0 activities 137 23 58 55 Valuation and ratio analysis (x) Cash flow from investing activities (1,616) (2,495) (2,758) (2,869)

Normalized PER 15.7 14.6 13.2 12.9 Cash dividends (280) (924) (1,700) (535) Reported PER 15.5 14.5 13.2 12.9 Equity issue 0 6,769 0 0 Dividend yield 2.0 7.7 2.6 1.6 Net debt issue/(repayment) 1,825 1,636 (100) (100) Price/cash flow 25.2 6.6 N/A N/A Other cash flow from financing PBV 5.0 2.4 2.3 2.0 activities (140) (203) (90) (89) EV/EBIT 25.4 17.9 16.7 15.2 Cash flow from financial activities 1,405 7,279 (1,891) (723) EV/EBITDA 24.4 16.9 15.2 14.0 Net cash flow 1,091 4,970 (25) (759) Liquidity and leverage (%) Beginning cash 3,286 4,379 9,324 9,299 Current ratio 1.6 1.8 1.5 1.5 Effect of foreign exchange rate Interest cover (x) 52.1 32.6 94.8 101.6 changes 2 (25) 0 0 Gearing ratio 47 22 20 17 Ending cash 4,379 9,324 9,299 8,540 Net gearing ratio Net cash Net cash Net cash Net cash Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

China Ming Yang Wind Power (MY US)

Company Rating: Neutral (initiation) Cheap but risky Sector Rating: Neutral (initiation)

China Ming Yang Wind (Mingyang) is the fifth-largest WTG producer in China, with 6% market share in 2010. Despite being Price: US$10.52 the only non-government-owned company among the top-five WTG makers in China, Mingyang, nevertheless, remains a Target: US$11.00 beneficiary of industry consolidation. While Mingyang is trading at (initiation) 8x 2011F PER and a 51% discount to the global peer average, we view its valuation justifiable owing to high risk from the launch of Trading data 2.5/3.0MW super-compact-drive technology (SCD) WTGs based on disruptively different technology. We initiate coverage with a 52-week range US$9.19 – 14.48 Neutral rating and target price of US$11.00. Market capitalization (m) US$1,315 Shares outstanding (m) 125 Solid order book. A ccording to Mingyang, its orders on hand Free float (%) 100 are more than 3GW as of December 2010, sufficient to cover 3M average daily T/O (m share) 0.3 100% of its 2011F shipments and c.20% of 2012F shipments, Expected return (%) – 1 year 5 based on our estimates. We expect Mingyang’s book-to-bill ratio Closing price on 1 April 2011 to be 1.3x, similar to Goldwind’s 1.2x. Stock price and S&P 500 Stronger growth allowed by lower base. We estimate Mingyang’s earnings growth at 31% CAGR in 2010-2012F, at US$ the higher end of peers’ 10-30%. We believe earnings growth is 22.0 1,350 driven by Mingyang’s much smaller scale, c.30% of the scale of 20.0 1,300

leading peers like Goldwind and Sinovel. 18.0 1,250

High risk from technology platform switch. We see high risk 16.0 1,200 from the launch of SCD WTG as it is based on a different 14.0 1,150 technology platform (hybrid direct drive) from existing manufactured 1.5MW WTG (doubly-fed). Our forecasts include 12.0 1,100

13% and 19% sales contribution from SCD in 2011F and 2012F, 10.0 1,050 respectively. 8.0 1,000 Initiate with Neutral. Our target price of US$11.00 is based on Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Mingyang (LHS) S&P 500 (RHS) DCF valuation, implying 9x 2011F PE, at a 49% discount to the Source: Bloomberg global peer average, justifiable given the high executi on risk of new SCD product launch.

Forecast and valuation Year to 31 Dec 2008 2009 2010 2011F 2012F Revenue (RMB m) 125 1,173 5,518 8,999 10,641 Reported net profit (RMB m) (494) (221) 698 1,032 1,217 Normalized EPS (RMB) (4.94) (2.21) 5.58 8.25 9.73 Normalized EPS growth (%) N/M N/M N/M 47.8 17.9 PER (x) N/A N/A 12.3 8.4 7.1 Clarisse Pan EV/EBITDA (x) N/A N/A 10.7 6.6 5.7 (852) 2533 2400 PBV (x) 23.2 12.0 2.4 1.9 1.5 [email protected] Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 ROE (%) (166.5) (38.4) 19.8 22.6 21.0 Alan Lau Net gearing ratio (%) 7.8 Net Cash Net Cash Net Cash Net Cash (852) 2533 2479 Source: Company data, CCBIS estimates [email protected]

China Wind Power 4 April 2011

Financial analysis Revenue

Mingyang commissioned its first WTG in 2008. Until 2010, all of its revenue was generated from Mingyang’s 1.5MW WTG. The company launched its SCD 2.5/3.0 WTG in 2010 and successfully delivered two units in the same year. Assuming time is needed for the market to accept the new SCD technology, we estimate that the 1.5MW WTG will continue to be Mingyang’s main revenue contributor in 2011F-2012F.

We expect Mingyang to have rapid top-line growth of 63% YoY in 2011F and 18% YoY in 2012F on the back of capacity expansion of wind farm operators in China. We forecast total shipment volume to grow from 1,203MW in 2010 to 2,400MW in 2011F and 3,315MW in 2012F, representing year-on-year growth of 99% and 38% in 2011F and 2012F, respectively. Due to the falling WTG ASP industry trend, we forecast blended WTG ASP of the company to decrease in order to maintain competitiveness, from RMB4,587 per kW in 2010 to RMB3,750 per kW in 2011F and RMB3,210 per kW in 2012F. Despite the expected fall in ASP, we expect Mingyang’s revenue to ramp up given growth in shipment volume over 2011F-2012F.

Revenue trend

RMB m 12,000

10,000

8,000

6,000

4,000

2,000

0 2008 2009 2010 2011F 2012F 1.5MW WTG 2.5/3.0MW WTG 6.0MW WTG

Source: Company data, CCBIS estimates

WTG ASP trend

RMB / kW 7,000

6,000

5,000

4,000

3,000 2008 2009 2010 2011F 2012F 1.5MW turbines 2.5/3.0MW turbines

Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

1.5MW WTG

The 1.5MW WTG is Mingyang’s main product and accounted for its entire revenue through 2008-2010. We believe the product will continue to be Mingyang’s main source of revenue for 2011F-2012F, with an expected shipment volume growth of 75% YoY to 2,100MW in 2011F, from 1,203MW in 2010.

We expect ASP for 1.5MW WTGs to face continuous downward pressure, triggered by intense competition among WTG producers in China. We see Mingyang ASP falling 19% YoY in 2011F and 16% in 2012F. Nonetheless, we expect overall product revenue to grow 42% YoY in 2011F due to a rapid increase in its shipment volume.

SCD 2.5/3.0MW WTG

The company launched its SCD 2.5/3.0MW WTG in 2H10. We believe “super compact drive technology” is a new technology in the WTG market which needs time to build a good track record and earn broader market acceptance. It is unrealistic to expect the new product to receive a huge market response immediately after launch, so we anticipate product shipment volume to increase gradually in 2011F-2012F.

We believe SCD 2.5/3.0MW WTG will receive an advanced model price premium over the 1.5MW WTG and estimate its ASP to be RMB 3,930 per kW in 2011F and RMB3,388 per kW in 2012F. We forecast the product to contribute c.13% of total revenue in 2011F and 26% of total revenue in 2012F.

SCD 6.0MW WTG

Mingyang has not officially launched the SCD 6.0MW WTG. It announced its plan to build a prototype for future SCD 6.0MW WTG in 2011. We expect the company to launch the product in 2H11 and to commission product sales in 2012F, accounting for 3% of the total revenue that year.

China Wind Power 4 April 2011

Key operation data

2008 2009 2010 2011F 2012F Sales from wind turbines 1.5MW turbines Shipment (unit) 16 152 802 1,400 1,600 Shipment (MW) 24 228 1,203 2,100 2,400 ASP (RMB per kW) - 1.5MW 6,232 5,143 4,587 3,724 3,134 Revenue from 1.5MW WTG (RMB m) 150 1,173 5,518 7,820 7,522 YoY (%) N/M 684 371 42 (4) 2.5/3.0MW turbines Shipment (unit) 0 0 0 100 275 Shipment (MW) 0 0 0 300 825 ASP (RMB per kW) - 2.5/3.0MW 0 0 0 3,930 3,388 Revenue from 2.5/3.0MW WTG (RMB m) 0 0 0 1,179 2,796 YoY (%) N/M N/M N/M N/M 137 6.0MW turbines Shipment (unit) 0 0 0 0 15 Shipment (MW) 0 0 0 0 90 ASP (RMB per kW) - 6.0MW 0 0 0 0 3,589 Revenue from 6.0MW WTG (RMB m) 0 0 0 0 323 YoY (%) N/M N/M N/M N/M N/M Total shipment volume (MW) 24 228 1,203 2,400 3,315 Total revenue (RMB m) 150 1,173 5,518 8,999 10,641 YoY (%) N/A 684% 371% 63% 18% CAGR 2010-2012F (%) 39% Source: Company data, CCBIS estimates

Gross profit and margin

Despite the drop in ASP, we believe Mingyang can maintain its gross profit margin at c.19% in 2011F-2012F based on its measures to cut production costs. We believe Mingyang will be able to lower cost of production by increasing procurement scale of its component parts and begin in-house production of some major components. Overall gross profit is expected to grow 54% YoY in 2011F and 19% YoY in 2012F.

Gross profit contribution of 1.5MW WTGs will fall from 100% in 2010 to 89% in 2011F and reach 67% in 2012F due to the launch of SCD WTGs according to our estimates. In other words, we forecast the combined gross profit contribution from SCD 2.5/3.0MW and 6.0MW WTG to grow to 11% in 2011F and to 33% in 2012F.

China Wind Power 4 April 2011

WTG cost of sales trend

RMB / kW 8,000

7,000

6,000

5,000

4,000

3,000

2,000 2008 2009 2010 2011F 2012F 1.5MW turbines 2.5/3.0MW turbines

Source: Company data, CCBIS estimates

Gross profit trend

RMB m 2,500 30%

2,000 20%

1,500 10%

1,000 0%

500 (10)%

0 (20)% 2008 2009 2010 2011F 2012F (500) (30)% 1.5MW turbines 2.5/3.0MW turbines 6.0MW turbines Gross margin

Source: Company data, CCBIS estimates

Operating expenses

Operating expenses mainly include WTG and component delivery charges, R&D, depreciation and amortization, and labor costs. We expect the company to maintain operating expenses at 6% over revenue in 2011F-2012F, similar to the percentage in 2010.

Operating profit and margin

Operating losses in 2008 and 2009 turned into profit in 2010 due to solid growth in the company’s shipment volume. We expect Mingyang’s operating profit to grow 66% YoY in 2011F and 16% YoY in 2012F due to continuing growth in Mingyang’s shipment volume in 2011F-2012F and good control over its operating costs. Overall, 2011F-2012F operating margin will maintain at 14%, similar to the level in 2010.

China Wind Power 4 April 2011

Operating profit trend

RMB m 2,000 50%

0% 1,500 (50)% 1,000 (100)%

500 (150)%

(200)% 0 (250)% (500) (300)%

(1,000) (350)% 2008 2009 2010 2011F 2012F Operating profit Operating margin

Source: Company data, CCBIS estimates

Net profit and margin

We forecast Mingyang’s net profit to grow along with its operating profits at 47% YoY in 2011F and 18% YoY in 2012F, with the expectation of stable net margins of 12% in 2011F-2012F, a slight decline from 2010’s net margin of 13%.

Net profit trend

RMB m 1,400 50% 1,200 0% 1,000 (50)% 800 (100)% 600 (150)% 400 (200)% 200 (250)% 0 (300)% (200) (350)% (400) (400)% (600) (450)% 2008 2009 2010 2011F 2012F Net profit Net margin

Source: Company data, CCBIS estimates

Capex and PPE turnover

Although Mingyang completed production facility expansion in Tianjin and Zhongshan in 2010, management announced plans for facility expansions including expansion of its Rudong base and construct facilities for future major components production. Management targets to increase its production capacity from 1,598 1.5MW WTG units and 500 SCD 2.5/3.0MW WTG units to 2,100 1.5MW WTG units and 700 SCD 2.5/3.0MW WTG units by the end of 2011.

We forecast company capex to grow from RMB356m in 2010 to RMB651m in 2011F and drop to RMB503m in 2012F, representing 83% YoY growth in 2011F and a 23% year-on-year fall in 2012F. We forecast PPE turnover (revenue over average PPE) to

China Wind Power 4 April 2011

decrease from 22x in 2010 to 14x in 2011F and 9x in 2012F, mainly based on our assumption that sales ramp up of SCD WTGs will lag capex growth in the short term. In other words, we believe sales growth of SCD WTG will not be very strong in the early phases of the launching period, so capex growth will exceed sales growth.

PPE turnover trend

(x) 25

0 2008 2009 2010 2011F 2012F

Source: Company data, CCBIS estimates

Debt and gearing

Mingyang has healthy financial position. We believe the company has little need to raise debt in the near future and we expect net cash in 2011F-2012F.

Working capital

Mingyang’s inventory, accounts receivable and accounts payable turnover in 2008 and 2009 was significantly higher than industry peers because the company began to deliver products in 2007 and the commissioning of those products usually takes about a year. Assuming that Mingyang boosts commissioning of wind turbines previously delivered, sales and cost of sales will normalize and stabilize turnover days. Hence, we expect cash conversion days to remain stable at 20 days in 2011F-2012F.

Turnover days

(days) 2008 2009 2010 2011F 2012F Inventory turnover 1,543 657 156 140 140 Accounts receivable turnover 1,156 506 192 160 160 Accounts payable turnover 1,601 733 299 280 280 Cash conversion 1,098 430 48 20 20 Source: Company data, CCBIS estimates

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Cash flow analysis

We expect Mingyang to experience net cash outflow in 2011F, mainly due to the significant capex spending for facility expansion and the repayment of bank loans. The negative cash flow will turn positive after capex spending falls in 2012F.

Thanks to a net profit increase in 2011F-2012F, we expect cash flow to turn positive in 2011F-2012F, assuming stable working capital management over the period.

We forecast Mingyang’s cash outflow from investing activities will peak at RMB603m in 2011F, from RMB267m in 2010, due to capex peaking in 2011F as a result of management’s production facility expansion targets. The company’s cash outflow from investing activities will drop to RMB464m in 2012F according to our estimate, after Mingyang completed its facility expansions.

Cash flow from financing activities spiked in 2010 thanks to funds received from Mingyang’s IPO in 2H10. We estimate cash outflow of RMB266m and RMB158m in 2011F and 2012F, respectively, related to repayment of bank loans.

Cash flow projections

RMB m 2,500

2,000

1,500

1,000

500

(500)

(1,000) 2008 2009 2010 2011F 2012F Cash flow from operations Cash flow from investing activities Cash flow from financing activities Net cash flow

Source: Company data, CCBIS estimates

China Wind Power 4 April 2011

Valuation and risks

Mingyang’s discounted valuation to peers is justifiable

Mingyang is currently trading at 8x FY11F PER, representing a 51% discount to global peers trading at 17x FY11F PER. In view of Mingyang’s SCD WTG launch and the high risk associated with the platform switch from doubly-fed WTGs, we consider the discount justifiable.

Moreover, although we forecast that the company will achieve 31% CAGR for 2010-2012F, at the high end of its peers at 10-30%, we believe this may be driven by its much smaller size in comparison with leading peers like Goldwind and Sinovel.

Our current estimates reflect the higher-end of management guidance for 2011F-2012F and thus there exists downside risk to our forecasts should Mingyang’s “blue sky scenario” fail to materialize.

Valuation comparison

Price EPS (local Market cap PER (x) growth PEG (x) PBV (x) ROE (%) Company Stock code Rating currency) (US$m) 2010A 2011F 2012F (%) 2011F 2010A 2011F 2012F 2010A 2011F 2012F WTG component manufacturers China High Speed 658HK O 12.54 2,217 9.6 10.1 9.4 (5) (2.1) 1.8 1.7 1.5 18.7 16.9 16.2 Transmission Hansen Transmission HSNLN NR 49.50 534 N/A N/A N/A N/M N/M 0.6 0.6 0.6 (1.7) (1.5) 0.9 Taewoong 044490KS NR 52,300 796 42.7 22.3 16.0 79 0.3 2.1 2.0 1.8 2.9 5.5 9.3 Hyunjin Materials 053660KS NR 17,100 232 N/A 10.9 7.6 N/M N/M 1.3 1.2 1.0 (12.8) (1.0) 10.8

WTG manufacturers Xinjiang Goldwind - H share 2208HK O 14.56 7,858 14.6 13.2 12.9 10 1.3 2.4 2.3 2.0 16.7 17.1 15.4 Xinjiang Goldwind - A share 002202CH NR 20.65 7,857 N/A 16.9 13.4 24 0.7 N/A 3.6 2.8 39.1 24.6 21.9 Sinovel Wind 601558CH NR 74.14 11,381 23.4 20.6 17.0 14 1.5 13.9 4.1 3.3 77.5 19.9 20.5 China Ming Yang Wind Power MYUS N 10.52 1,315 12.3 8.4 7.1 48 0.2 2.4 1.9 1.5 19.8 22.6 21.0 Vestas VWSDC NR 223.30 8,685 38.9 20.2 15.8 93 0.2 2.2 2.0 1.8 5.9 11.1 12.7 Gamesa GAMSM NR 7.37 2,576 18.6 18.6 18.6 31 0.6 1.1 1.1 1.0 3.1 4.2 5.6 Repower RPWGR NR 145.00 1,900 22.9 25.7 21.5 (11) (2.3) 2.8 2.7 2.5 11.6 10.6 11.5 Nordex NDX1GR NR 8.26 786 26.6 27.9 21.0 (5) (6.2) 1.5 1.5 1.4 5.9 4.6 6.0 Suzlon SUELIN NR 44.60 1,778 N/A N/A 24.3 N/A N/M 1.1 1.1 1.1 (12.9) (12.2) 3.8 Dongfang Electric 1072HK NR 26.70 8,237 17.3 14.0 11.8 24 0.6 2.4 3.0 2.4 33.0 24.5 23.0 Shanghai Electric 2727HK NR 3.96 13,355 15.2 13.3 12.0 15 0.9 1.6 1.4 1.3 11.3 11.0 11.0 All prices are as of 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS estimates

China Wind Power 4 April 2011

Our target price at US$11.00 derived from DCF valuation method

We derive our target price of US$11.00 from a DCF valuation based on 11.0% WACC and terminal growth of 1% after FY2020F. At US$11.00, Mingyang’s shares would trade at 9x PE, representing a 49% discount to the average of its global peers. While we believe the company earnings will grow at a 31% CAGR in 2010-2012F, there are several risks to our current earnings estimates, including: (1) launch of a new model (3.0MW hybrid-direct-drive WTG); (2) overseas market expansion; (3) short track record; (4) implementation of vertical integration strategy; (5) wind policy changes; and (6) competition within the China market.

Mingyang DCF valuation model

Free cash flow (RMB m) FY11F FY12F FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F Sales 8,999 10,641 14,166 15,970 16,858 17,794 18,864 20,214 19,604 18,874 EBITDA 1,308 1,514 2,105 2,156 1,964 2,094 2,034 2,193 1,915 1,659 margin (%) 15% 14% 15% 13% 12% 12% 11% 11% 10% 9% less:tax (184) (216) (308) (320) (296) (317) (310) (336) (297) (261) minority interest 11 9 13 13 12 13 13 14 13 11 working capital (623) (65) (185) (85) 389 (464) (76) (165) 236 (313) CAPEX (651) (503) (405) (469) (474) (524) (472) (655) (848) (754) FCF (139) 740 1,220 1,295 1,596 802 1,189 1,051 1,018 342

Net debt Equity Value per WACC Sum of PV PV of TV EV (FY10) value Shares share WACC Calculation (%) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (m shares) (US$) Equity beta 1.2 10.1 5,911 1,508 7,419 (2,006) 9,425 125 11.5 Risk-free rate (%) 3.92 10.2 5,888 1,480 7,368 (2,006) 9,374 125 11.4 Equity risk premium (%) 6 10.3 5,865 1,453 7,319 (2,006) 9,325 125 11.4 Country risk premium (%) 1 10.4 5,843 1,427 7,270 (2,006) 9,276 125 11.3 Cost of equity (%) 13 10.5 5,820 1,401 7,222 (2,006) 9,228 125 11.3 Cost of debt (%) 7 10.6 5,798 1,376 7,174 (2,006) 9,180 125 11.2 Debt/capital (%) 30 10.7 5,776 1,352 7,127 (2,006) 9,133 125 11.1 Tax (%) 15 10.8 5,754 1,328 7,081 (2,006) 9,087 125 11.1 WACC (%) 11.0 10.9 5,732 1,304 7,036 (2,006) 9,042 125 11.0 Terminal growth rate (%) 1 11.0 5,710 1,281 6,991 (2,006) 8,997 125 11.0 11.1 5,688 1,259 6,947 (2,006) 8,953 125 10.9 11.2 5,667 1,237 6,904 (2,006) 8,910 125 10.9 11.3 5,645 1,216 6,861 (2,006) 8,867 125 10.8 11.4 5,624 1,195 6,819 (2,006) 8,825 125 10.8 11.5 5,603 1,175 6,777 (2,006) 8,783 125 10.7 11.6 5,581 1,155 6,736 (2,006) 8,742 125 10.7 11.7 5,560 1,135 6,696 (2,006) 8,702 125 10.6 11.8 5,540 1,116 6,656 (2,006) 8,662 125 10.6 11.9 5,519 1,097 6,616 (2,006) 8,622 125 10.5 12.0 5,498 1,079 6,577 (2,006) 8,583 125 10.5 12.1 5,478 1,061 6,539 (2,006) 8,545 125 10.4 Source: CCBIS

China Wind Power 4 April 2011

Risks

Launch of a new product model: Mingyang uses doubly-fed induction technology for its 1.5MW WTG model. We believe that execution risks are high for Mingyang’s launch of SCD 2.5/3.0MW and 6.0MW WTGs, not only because these are new models and require time for track records to be established, but also because SCD WTGs adopt a disruptively new “hybrid-direct-drive” and “two-blade” technology. However, if market response is better-than-expected, it might bring upside surprise to our earnings estimates.

Overseas market expansion: Mingyang management has expressed its intention to penetrate overseas markets, including the US. In our view, while overseas markets could provide upside to Mingyang’s WTG ASP, the risk inherent in building sales channels in new markets include establishing significantly more expensive after-sale-service workforce overseas and rising exposure to foreign policy changes and foreign currency fluctuations. The impact could be positive or negative depending whether Mingyang’s product can meet market expectations, answer foreign customer requirements and adapt to foreign government regulations.

Short track record: Mingyang has less than five years of operating history and its WTG has a relatively short track record in comparison with WTGs of other top WTG suppliers, such as Goldwind, Siemens, Vestas and Dongfang Electric. Although Mingyang’s WTG has not encountered serious defaults or accidents, its limited track record length may need time to earn larger market acceptance.

Vertical integration strategy: Although Mingyang management has experience in the production of WTG components, such as blades and electric control systems, they might encounter problems implementing vertical integration producing other major WTG components such as gearboxes. Depending on the success of Mingyang’s component production lines, the vertical integration strategy could bring positive or negative impact to WTG qualities and production costs.

Wind policy changes: The demand for WTG can be greatly affected by government wind policy as wind power currently remains dependent on subsidies to be economically viable. For the past few years, China’s WTG installation has grown at 120% CAGR in 2006-2009 thanks to China’s target to generate 15% renewable energy of total energy by 2020. We think policy changes could have both positive and negative effects on the WTG manufacturing industry and our earnings estimates.

Competition in China: Competition in the Chinese WTG market has been getting more intense due to the listing of top domestic WTG manufacturers, such as Sinovel (A-shares), Goldwind (A+H shares) and Mingyang (US listed). The listing of these companies will improve their corporate governance and provide cash for technology, production and distribution upgrades. In order to gain market share, WTG manufacturers compete by launching new products and lowering ASP. Mingyang will need to successfully implement cost cut measures in order to maintain its gross and operating margins, as earnings will suffer downward pressure if the company fails to do so. However, greater competition may become an opportunity for market share expansion in the long term once less competitive WTG suppliers exit the market.

China Wind Power 4 April 2011

Company profile

Company history

On 1 October 2010, Mingyang became the first Chinese WTG manufacturer listed on the New York Stock Exchange. According to CWEA, Mingyang is the fifth-largest WTG manufacturer and largest non-state owned manufacturer in China, with market share of 5.5% in 2010.

The company was established in Zhongshan, Guangzhou in 2006. In 2007, it acquired the intellectual property (IP) rights to produce 1.5MW WTGs from Mingyang Electric, its former major shareholder. In addition to IP rights, Mingyang obtained substantial WTG manufacturing technology and experience from Mingyang Electric, which has been manufacturing WTG components since 1995.

Major milestones

Date Development 2006 Guangdong Mingyang, Mingyang’s predecessor company, was established in Zhongshan, Guangdong province. 2007 Received a statement of compliance from Germanischer Lloyd (GL) certification, an international certification body in the wind power sector, for its MY1.5s model; Began selling MY1.5s WTGs. 2008 Constructed production bases in Xian and Tianjin Jilin production base began production and delivery of MY1.5se turbines. Signed a technology licensing contract with Aerodyn Energiesysteme to build the 2.5/3.0MW super compact drive (SCD) WTG 2009 Established a R&D center in Roskilde, Denmark, with Risoe Wind Energy Laboratory; Received product design certificate from China General Certification Center for its MY1.5se model. The certificate is one of the requirements for WTG manufacturers to receive state funding; Received a statement of compliance from GL certification for its MY1.5se model; Signed a technology licensing contract with Aerodyn Energiesysteme to build the 6.0MW SCD WTG 2010 Completed the prototype SCD 2.5/3.0MW WTG and installed it in Rudong, Shanghai; Listed on the NYSE under the stock symbol MY; Won a 200MW bid (about 67 3.0MW SCD WTG) for Xinjiang Hami wind farm project. 2011 Received a total sales order of 1.1GW in January 2011, of which 200MW for SCD 2.5/3.0MW WTGs. 75% of the orders came from the five-largest wind power generators. Source: Company data, CCBIS

Major products

Currently, the 1.5MW WTG is Mingyang’s dominant product. The company customized this product into two separate models, a typhoon resistant model and a cold-weather resistant model. Both 1.5MW models are designed to use three rotor blades, doubly-fed induction generators and a three-stage gearbox.

In 2H10, Mingyang developed its SCD WTG, which uses a two-rotor blade design and is equipped with a compact integrated two-stage gearbox and a medium slow-running synchronous generator. Management expects the product to be commercialized in 2011.

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Major products WTG series Features MY 1.5s Designed to be installed i n costal areas, can survive extreme wind speed as high as 70 (typhoon resistant) meters/sec (156.6 miles/hour). It has a rotor diameter of 73m. MY 1.5se Equipped with heaters and designed to generate electricity at temperatures as low as (cold weather resistant) -30’C (-22’F). Installed in the northern parts of China, such as Jilin and Inner Mongolia. Rotor diameter of 82m. SCD 2.5/3.0MW WTG Designed to be installed in coastal and tidal flat areas. Using a compact gearbox and generator, with an emphasis on reduction of size and weight. The design lowers the bearings’ operational speed and thus reduces wear of components. Typical weight of a 3.0MW WTG is around 120 tonnes. SCD 6.0MW WTG The product is currently under development. Its prototype is expected to be constructed in 1H11. Source: Company data, CCBIS Revenue recognition and warranty obligations

Mingyang recognizes sales revenue upon successfully delivery of WTGs (i.e. when WTGs are installed and preliminary inspection is complete). By that time, the company would have collected up to 90% of the contract price. The remaining amount is collected upon complete fulfillment of the 24 month warranty period.

During the warranty period, Mingyang guarantees its customer the availability and performance of its wind turbines. It provides technical and maintenance support services and covers parts and labor costs for non-maintenance repairs and replacement. At the point of delivery, the company accrues a provision equivalent to 3.3% on sales price for future warranty obligations, and recognises it as a cost of sales. The accounting treatment is different to other WTG producers in China, who may recognize the provision as a selling expense. Product development and technology licensing

Mingyang’s major technology partner in developing WTG is Aerodyn Energiesysteme. It acquired its 1.5MW WTG production technology through Mingyang Electric, which obtained exclusive product rights from Aerodyn Energiesysteme in 2006. Mingyang obtained exclusive license rights to produce and sell Aerodyn Energiesysteme’s SCD 2.5/3.0MW WTGs and SCD 6.0MW WTGs in 2008 and 2009, respectively. The agreements will expire in 2016 and 2019. Once this occurs, these licenses will become non-exclusive.

Exclusive license terms summary WTG series Expiry date Units limit Geographical market 2010: 30 units SCD 2.5/3.0MW WTG 1 January 2016 China and US distribution only, 2011: 200 units not allowed for other overseas 2012: 500 units SCD 6.0MW WTG 1 January 2019 markets None from 2013 Source: Company data, CCBIS

SCD WTG royalties

Royalties Minimum annual royalty payment First 100 units 2.0% on sales price No less than Euro 16,000 per MW Next 400 units 1.5% on sales price No less than Euro 12,000 per MW Next 500 units 1.0% on sales price No less than Euro 8,000 per MW After 1,000 units 0.5% on sales price No less than Euro 4,000 per MW Source: Company data, CCBIS

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Mingyang has also established research centers in China’s Guangdong province and Denmark.

WTG component production status

Besides self-produced rotor blades, Mingyang acquires most of its critical WTG components from independent suppliers. The company acquires its electric control system, frequency converters and pitch control system from REnergy, an affiliated company controlled by the Chairman of the Board. The remainder of the components are acquired from independent suppliers.

Component production status

Component Suppliers Blades Self-produced. Hubs Ningbo Yongxiang Forging, Jiangsu Jixin Wind Power Technology. Pinghu Zhongzhou Heavy M achinery, Jiangyin Zhenhong Heavy Forging, Zhongshi Main shafts Luoyang Heavy Machinery. Gearboxes Nanjing High Speed (CHST), Winergy Tianjin. Generators Nanjing Turbine & Electric Machinery, Shanghai Nanyang Electrical Machinery. Electrical control system REnergy (an affiliated company controlled by Chairman of the Board). Frequency converters REnergy, IDS, ABB Beijing. Transformers Tianjin Special Variable Electrical Transformer, Zhuhai South Hualitong. Pitch control system REnergy, SSB Wind Energy Technology. Yaw and pitch bearing Xuzhou Rothe Erde Slewing Bearing, Wafangdian Bearing. Source: Company data, CCBIS

Production facilities

Mingyang’s production facilities are located in Guangdong, Jilin, Tianjin and Jiangsu. By the end of 2010, Mingyang had annual production capacity of 1,598 units of 1.5MW WTG, 500 units of SCD 2.5/3.0MW WTG, and 2,010 sets of rotor blades.

Production facilities (December 2010)

Production base Main product Annual capacity as at Dec 2010 Guangdong Zhongshan headquarters 1.5MW WTG 288 units SCD 2.5/3.0MW WTG 200 units Rotor blades 288 units Jilin base 1.5MW WTG 524 units Rotor blades 672 units Tianjin base 1.5MW WTG 524 units SCD 2.5/3.0MW WTG 200 units Rotor blades 570 units Rudong, Jiangsu base 1.5MW WTG 262 units SCD 2.5/3.0MW WTG 100 units Rotor blades 480 units Total 1.5MW WTG 1,598 units SCD 2.5/3.0MW WTG 500 units Rotor blades 2,010 units Source: Company data, CCBIS

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WTG comparison: Mingyang’s SCD versus Goldwind’s hybrid-drive

Both Mingyang’s SCD 3.0MW WTG and Goldwind’s hybrid-drive 3.0MW WTG employ a hybrid design of a gearbox and gearless direct drive technology. Since both designs have not yet been introduced commercially, they both have limited track records.

The main features of the SCD 2.5/3.0MW WTG include a reduction in size and weight and an improvement in operational reliability. This is achieved by using a compact generator and two-rotor blade design. Weight reduction is possible by decreasing the amount of material inside the nacelle and tower as they are the center of weight in a WTG. Weight is also reduced as a result of removing a rotor blade (two instead of three). WTG weight reduction can help save installation costs. A second feature is the lower bearings operational speed of the two-stage gearbox, which reduces the wear of the gearbox component, thereby increasing operational reliability.

Weight comparison between Mingyang, Goldwind and Sinovel’s 3.0MW WTG

tonnes 500 450 400 350 300 250 200 150 100 50 0 Ming Yang SCD 3.0MW Goldwind hybrid-drive 3.0MW Sinovel 3.0MW Tower Nacelle Hubs Rotor blades

Source: Company data, CCBIS

The Goldwind hybrid-drive 3.0MW WTG employs a three rotor blade design. The number of blades balances aerodynamic efficiency, costs and system reliability. Traditionally, WTGs require less rotational speed to yield the same energy output as a three rotor blade design. As a result, the two rotor blade design saves cost but is expected to have a lower aerodynamic efficiency.

Summary of comparisons

Mingyang Goldwind hybrid-drive 3.0MW SCD 3.0MW Length of track record ✘ ✘ Number of blades Three blades Two blades Gearbox component ✓ ✓ Low manufacturing cost ✓✓ ✓✓✓ Reliability ✓✓ ✓✓ Power generation productivity ✓✓ ✓✓ Low-voltage ride through (LVRT) capability ✓✓ ✓✓ Smaller size and weight ✓✓ ✓✓✓ Low maintenance cost ✓✓ ✓✓ Source: Company data, CCBIS

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Other wind services

Mingyang is expanding its wind power services, including wind testing, feasibility studies, wind farm designs, wind farm construction services, and lease financing. In 2010, the company signed an agreement with Huaran for construction services for Mingyang’s WTGs. Mingyang also arranges lease financing provided by one of its major shareholders, Industrial and Commercial Bank of China, for wind farm operators for WTG purchases.

Customer profile

Mingyang’s customers include the five-largest Chinese national grid companies (i.e. Huadian, Huaneng, Datang, Longyuan [Guodian] and CPIC) and private sector companies, such as Guangdong Yudean, Beijing Jingneng, Guangdong Shuidian Bureau, Fujian Investment and Development Group, and Inner Mongolia Aode Sente New Energy. In 2009, the five-largest Chinese national grid companies contributed 60% to Mingyang’s total annual sales and the private sector companies 26%.

Shareholder structure

Shareholder structure (March 2011)

ICBC Int'l Inv Mgt Ltd, China Opportunity S.A. 8.79% SICAR (SOPAF), 10.64% Pre-IPO investors (note 1), 24.42%

Clarity Investors, 13.17%

Chairman Zhang and Public, 20.00% family, 22.98%

Note 1: Pre-IPO Investors include Merrill Lynch, SCGC Capital, DT Capital, Mitsui & Co., CCBI and other investors Source: Company data, CCBIS

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Use of IPO proceeds

Working capital, 15.58%

Production base Construction of research construction, 32.68% centre, 4.08%

WTG design development, 17.70%

Potential acquisition of component suppliers, 29.96% Source: Company data, CCBIS

Board of directors and senior management background

Board of directors and senior management

Name Age Position Key experience Chuanwei Zhang 48 Chairman of Board, CEO Founder of the company; also founder of Mingyang Electric, prior majority shareholder of the company and Executive Director and founder of REnergy, a component supplier; Over 20 years of experience in wind power and renewable energy sector. Xian Wang 39 Senior Vice President and In charge of operations and strategy; Executive Director Previously served as senior executive VP at Guangzhou Huayutai Investment and in charge of the investment department of Guangzhou Sanxin Group; rich in capital management experience. Song Wang 46 Senior Vice President and In charge of technology development, marketing and sales services; Executive Director Previously served as a manager of a subsidiary of Huaneng and a R&D engineer at National Academy of Metallurgical and Automation. Niccolo Magnoni 35 Executive Director Founder and chairman of China Opportunity Fund SA Sicar, a fund that invests in renewabl e energy, insurance and retail industries, and a company investor. Jinfa Wang 46 Senior Vice President In charge of general administration and human resources; Over 20 years of experience in the wind power industry. Renjing Cao 41 Chief Technology Officer Professor of engineering, in charge of research and development; Received several awards for his research including the Beijing, Guangzhou, and Zhongshan City Science and Technology Awards. Xianzhong Zhang 48 Vice President Responsible for quality control; Previously served as a general manager in charge of R&D and product control of Hubei Jiangshan Industry Company. Over 20 years of factory management experience. Jiawan Cheng 47 Vice President Responsible for engineering and services; Previously served as a general manager of Nantong Kailian Wind Power; with over 10 years of experience within the wind power sector Yunshan Jin 44 Vice President In charge of sales and marketing; Previously in charge of marketing at Mingyang Electrical; Over 20 years of sales experience in wind power and renewable energy Manfred Loong 55 Chief Financial Officer Former CFO and COO of UTStarcom China and the Greater China CFO of Lucent China; Over 10 years of senior management experience in multinational conglomerates Yiguo Hao 41 Chief Operating Officer PhD in environmental engineering; Previously serviced various management positions in Dongfeng Motor and Dengfeng Motor Gearboxes; Over 15 years of management experience in Chinese manufacturing companies Source: Company data, CCBIS

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Financial summary

Income statement forecasts Balance sheet forecasts

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F FYE 31 Dec (RMB m) 2009 2010 2011F 2012F Revenue 1,173 5,518 8,999 10,641 Fixed assets 169 418 1,024 1,473 Cost of goods sold (1,097) (4,430) (7,328) (8,648) Other intangible assets 22 86 86 86 Gross profit 76 1,087 1,671 1,993 Long-term investments 29 41 41 41 Other income 0 18 45 53 Other long-term assets 112 325 717 833 Selling and distribution expenses (91) (149) (292) (372) Total non-current assets 331 870 1,869 2,434 Administrative expenses (67) (151) (115) (160) Other current assets 269 345 1,243 1,441 Research and development Inventories 1,973 1,895 2,811 3,317 expenses (53) (43) (45) (53) Marketable securities 42 0 0 0 Operating profit (135) 763 1,263 1,461 Accounts receivable 1,627 2,896 3,945 4,665 Cash & equivalents 722 2,486 2,119 2,731 EBIT (135) 765 1,263 1,461 Total current assets 4,634 7,622 10,117 12,153 Depreciation and amortisation (28) (43) (45) (53) Total assets 4,965 8,492 11,986 14,587 EBITDA (107) 808 1,308 1,514 Accounts payable 2,203 3,633 5,622 6,634 Net interest expense (50) (34) (37) (19) Short-term debt 182 480 300 200 Share of results of an associate (0) 3 0 0 Other current liabilities 1,959 585 1,002 1,274 Extraordinary items 0 0 0 0 Total current liabilities 4,344 4,698 6,923 8,108 Profit before tax (185) 731 1,22 6 1,442 Other long-term liabilities 45 267 493 684 Taxation (38) (21) (184) (216) Total non-current liabilities 45 267 493 684 Net profit after tax (223) 711 1,042 1,226 Total liabilities 4,388 4,965 7,417 8,792 Minorities 2 (13) (11) (9)

Reported net profit after tax (221) 698 1,032 1,217 Total shareholders' equity 577 3,527 4,570 5,795 Dividends 0 0 0 0 Total equity and liabilities 4,965 8,492 11,986 14,587 Transfer to reserves (221) 698 1,032 1,217 Normalized net profit after tax (221) 698 1,032 1,217

Financial ratios Cash flow projections FYE 31 Dec (RMB m) 2009 2010 2011F 2012F FYE 31 Dec (RMB m) 2009 2010 2011F 2012F Profitability (%) EBITDA (107) 808 1,308 1,514 EBIT margin (11.5) 13.9 14.0 13.7 Change in working capital 533 (1,137) (623) (65) EBITDA margin (9.2) 14.6 14.5 14.2 Other operating cash flow 3 (103) (184) (216) Net margin (18.9) 12.7 11.5 11.4 Cash flow from operations 428 (432) 502 1,233 ROE (38.4) 19.8 22.6 21.0 Capital expenditure (73) (356) (651) (503) Growth (%) (Addition)/reduction in investments (71) 32 0 0 Revenue 840.6 370.5 63.1 18.2 Net acquisitions (45) 0 0 0 EBIT N/M N/M 65.1 15.7 Reduction/(addition) in other EBITDA N/M N/M 61.9 15.7 long-term assets (79) 14 0 0 Net profit growth N/M N/M 47.8 17.9 Reduction in other long-term liabilities (44) 0 0 0 Valuation and ratio analysis (x) Other cash flow from investing

Normalized PER N/A 12 .3 8.4 7.1 activities 4 44 49 38 Reported PER N/A 12.3 8.4 7.1 Cash flow from investing activities (309) (267) (603) (464) Dividend yield 0.0 0.0 0.0 0.0 Equity issue 0 2,24 1 0 0 Price/cash flow 10.1 4.9 N/A 14.1 Net debt issue/(repayment) 117 298 (180) (100) PBV 12.0 2.4 1.9 1.5 Other cash flow from financing EV/EBIT N/A 11.3 6.8 5.9 activities 445 (77) (86) (58) EV/EBITDA N/A 10.7 6.6 5.7 Cash flow from financial activities 562 2,462 (266) (158) Liquidity and leverage (%) Net cash flow 681 1,764 (367) 611 Current ratio 1.1 1.6 1.5 1.5 Beginning cash 42 722 2,486 2,1 19 Interest cover (x) N/A 22.7 34.0 76.3 Effect of foreign exchange rate Gearing ratio 0.3 0.1 0.1 0.0 changes (1) 0 0 0 Net gearing ratio Net Cash Net Cash Net Cash Net Cash Ending cash 722 2,486 2,119 2,731 Source: Company data, CCBIS estimates

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China Longyuan Power (916 HK)

Company Rating: Neutral (initiation) Quality company with fair valuation Sector Rating: Neutral (initiation)

Longyuan is the largest wind farm operator in China. By 2010 it owned 15% of domestic installed wind capacity. While we like Price: HK$8.47 Longyuan’s leading industry position and earnings CAGR of 31% for 2010-2012F, we expect the company’s ROE to remain low at Target: HK$9.10 8-10%. Longyuan has underperformed the HSCEI by 13% over (initiation) the past 12 months and we believe the price now reflects industry concerns and has bottomed. Nonetheless, we would have to see Trading data near-term catalysts before turning positive on the stock. We initiate coverage with a Neutral rating on the shares and target 52-week range HK$6.63 – 9.28 price of HK$9.10. Market capitalization (m) HK$63,223/US$8,126 Shares outstanding (m) 7,464 Leader in wind farm operations in China. Longyuan, in Free float (%) 72 our view, outperforms Chinese peers in terms of scale, 3M average daily T/O (m share) 12.9 wind project efficiency and balance sheet management. Expected return (%) – 1 year 7 We expect Longyuan to maintain this leadership and claim Closing price on 1 April 2011 c.15% market share in China in 2010-2012F. Earnings CAGR of 31% for 2010-12F but low ROE. Stock price and HSCEI

Backed by robust capacity expansion, we estimate HK$ Longyuan’s earnings will grow at a 31% CAGR in 12.0 15,000 11.0 2010-2012F. However, we consider ROE of 8-10% in 14,000 2010-2012F quite low and attended by high refinancing 10.0 13,000 risk, particularly in 2012F. 9.0 Limited near-term catalysts. Chinese wind operators face 8.0 12,000 7.0 challenges including grid connection bottlenecks, power 11,000 curtailments, CDM uncertainty and the possibility of 6.0 10,000 interest rate hikes. We believe these concerns are priced 5.0

in, yet we fail to see any near-term positive catalysts for the 4.0 9,000 stock. Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Longyuan (LHS) HSCEI (RHS) Initiate with Neutral. Our target price of HK$9.10 is based Source: Bloomberg on DCF valuation, implying 21x 11F PE, in line with the average for global peers, which we consider fair.

Forecast and valuation Year to 31 Dec 2008 2009 2010 2011F 2012F Revenue (RMB m) 8,555 9,744 14,213 16,473 19,103 Reported net profit (RMB m) 337 894 2,007 2,705 3,468 Normalized EPS (RMB) 0.06 0.15 0.27 0.36 0.46 Normalized EPS growth (%) 165 124 83 35 28 PER (x) 112.8 48.5 26.5 19.7 15.3 Clarisse Pan EV/EBITDA (x) 21.4 12.0 8.4 5.7 4.5 (852) 2533 2400 PBV (x) 5.0 1.7 1.9 1.7 1.5 [email protected] Dividend yield (%) 0.0 0.0 0.8 1.0 1.3 ROE (%) 4.8 3.5 7.3 8.9 10.1 Alan Lau Net gearing ratio (%) 297 65 121 157 161 (852) 2533 2479 Source: Company data, CCBIS estimates [email protected]

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Financial analysis

Revenue

Longyuan engages mainly in wind power and coal-fired power generation in China. In 2010, wind power and coal-fired power sales accounted for 43% and 54% of the company’s total revenue, respectively. The company is also engaged in power generation from other renewable energy sources, which accounted for 3% of total revenue.

Overall, we expect Longyuan’s total revenue to grow 16% YoY in both 2011F and 2012F. We forecast Longyuan’s revenue growth to mainly come from its wind power business, with CAGR of c.30% for 2010-2012F. In contrast, we expect its coal-related and other businesses to remain largely stable year-on-year for the next two years.

As a result of wind power sales growth, we forecast revenue contribution from wind power sales will grow from 43% in 2010 to 47% in 2011F. On the other hand, we expect revenue contribution from coal-related business to fall from 54% in 2010, to 48% in 2011F, and revenue from other business lines to slightly grow, from 3% in 2010 to 5% in 2011F, mainly due to the company’s plan to expand solar and geothermal power generation.

Revenue trend

RMB m 20,000 50% 45% 40% 15,000 35% 30% 10,000 25% 20% 15% 5,000 10% 5% 0 0% 2008 2009 2010 2011F 2012F Wind power Coal power Other business Total revenue YoY growth

Source: Company data, CCBIS estimates

Wind power

We forecast wind power sales to grow 28% YoY in 2011F and 32% YoY in 2012F on the back of capacity expansion of 31% YoY in 2011F and 28% YoY in 2012F respectively (approximately 2GW per annum). Apart from constructing onshore wind farms, we believe Longyuan will achieve its capacity expansion target with the help of a wind project injection from Guodian, its parent company, and through the development of overseas projects in South Africa, North America and Eastern Europe.

We regard our assumptions for utilisation hours and wind power tariffs as quite generous. In China, the government has put in place a wind tariff scheme with the aim of keeping wind project returns in the range of 8-10%. Thus wind projects in regions with higher utilization hours will theoretically receive lower wind power tariffs, in our view. However, in our assumptions, we factor in increases in both utilization hours and

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wind power tariffs for Longyuan. We assume Longyuan’s utilisation hours will gradually increase from 2,217 hours in 2010 to 2,242 hours in 2011F and 2,309 hours in 2012F and for wind power tariffs to reach RMB 0.5 per kWh in both 2011F and 2012F, up from RMB 0.49 per kWh in 2010.

Key operation data – wind power

2008 2009 2010 2011F 2012F Consolidated installed capacity (MW) 2,503 4,504 6,556 8,600 11,000 YoY (%) 93 80 46 31 28 Average utilization hours 1,923 2,268 2,217 2,242 2,309 YoY (%) 20 18 (2) 1 3 Net electricity generation (GWh) 3,407 5,684 9,442 14,371 19,244 YoY (%) 140 67 66 52 34 Average tariff exclude VAT (RMB/kWh) 0.48 0.48 0.49 0.50 0.50 Wind electricity sales (RMB m) 1,635 2,752 4,613 7,178 9,635 Others (RMB m) 3 2 7 0 0 Total wind revenue (RMB m) 1,638 2,754 4,620 7,178 9,635 YoY (%) 125 68 68 55 34 CAGR 2010-2012F (%) 44 Source: Company data, CCBIS estimates

Coal-related businesses

According to the company’s strategies, Longyuan’s coal-related businesses will not be a company priority even though the company has no intention of scaling down this business line. We expect revenue from the company’s coal-related business to grow 3% YoY in 2011F and remain flat in 2012F. According to management, the company is planning to upgrade its coal power plant capacity by 1GW in 2012F. Coal power capacity expansion is still subject to the approval from relevant government bodies, with the requisite approvals likely to be granted in late 2011F or 2012F. With this in mind, we expect capacity upgrades to be completed by end-2012F and sales increases to come into effect from 2013F.

Key operation data – coal-related businesses

2008 2009 2010 2011F 2012F Consolidated installed capacity (MW) 1,875 1,875 1,875 1,875 2,875 YoY (%) (23) 0 0 0 53 Average utilization hours 5,893 5,819 6,055 6,100 6,100 YoY (%) 15 (1) 4 1 0 Net electricity generation (GWh) 11,863 10,207 10,670 10,866 10,866 YoY (%) 2 (14) 5 2 0 Average tariff exclude VAT (RMB/kWh) 0.34 0.36 0.36 0.36 0.36 Coal electricity sales (RMB m) 4,090 3,669 3,859 3,942 3,942 Coal steam sales (RMB m) 121 230 311 302 302 Coal trading sales (RMB m) - - 3,276 3,371 3,371 Others (RMB m) 163 1,974 267 317 317 Total coal revenue (RMB m) 4,373 5,873 7,714 7,933 7,933 YoY (%) 9 34 31 3 0 CAGR 2010-2012F (%) 1 Source: Company data, CCBIS estimates

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Other businesses

Longyuan’s other businesses include power generation from non-wind renewable energy sources, such as solar power, geothermal power, tidal power and biomass power. We expect revenue from the company’s other businesses will grow by 78% YoY in 2011F and 23% YoY in 2012F, assuming capacity expansion of the company’s solar and geothermal power generation projects.

Key operation data – other renewable power

2008 2009 2010 2011F 2012F Consolidated installed capacity (MW) 28 29 42 80 96 YoY (%) 615 4 45 90 20 Average utilization hours 1,247 2,172 2,524 2,079 2,096 YoY (%) (31) 74 16 (18) 1 Net electricity generation (GWh) 23 54 94 148 179 YoY (%) 234 138 74 57 21 Average tariff exclude VAT (RMB/kWh) 1.22 0.84 0.76 0.73 0.73 Other renewable power sales (RMB m) 28 46 71 108 131 Others business 428 518 624 971 1,175 Total other sales (RMB m) 455 563 695 1,079 1,306 YoY (%) 93 24 23 55 21 CAGR 2010-2012F (%) 37 Source: Company data, CCBIS estimates

Other income

Other income mainly includes income from sales of CERs and VERs as well as from government grants. We estimate that other income will increase at 24% YoY in 2011F and 33% YoY in 2012F, thanks to rising income from sales of CERs and VERs. In our current forecasts, we assume that the current CDM system and related income will continue after 2012F, which is generous in our view.

CER and VER income assumptions

1H10 2H10 1H11F 2H11F 1H12F 2H12F Capacity registered (MW) 1,902 2,854 3,435 4,128 4,576 5,720 % of capacity registered (%) 42 44 48 48 52 52 CER/VER blended price (€/t) 10.3 9.8 10.8 10.8 11.2 11.2 CERs and VERs income 162 230 305 367 423 529 Source: Company data, CCBIS estimates

Operating expenses

Longyuan’s major operating expenses include coal consumption, coal sales costs and depreciation and amortisation. We forecast the operating expenses of Longyuan will grow 6% YoY in 2011F and 10% in 2012F. The main drivers for the increase are the larger depreciation arising from the increase in plant and equipment, and the increase in the costs for coal trading and power generation.

In terms of operating expenses as a percentage of total revenue, we expect the ratio to fall from 78% in 2010 to 71% in 2011F and 68% in 2012F. The conclusion was based on our estimate that the average investment cost for wind farms will decrease accordingly with the decrease in WTG ASP per kW. The fall in average cost per kW capacity will decrease depreciation per sales.

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Operating expenses trend

RMB m 14,000 100%

12,000 90%

10,000 80%

8,000 70% 6,000 60%

4,000 50%

2,000 40%

0 30% 2008 2009 2010 2011F 2012F Coal consumption Coal sales costs Depreciation and amortization Personnel costs Other operating expenses SCC costs As a % of sales

Source: Company data, CCBIS estimates

Operating profit and margin

The improvement in revenue mix has provided upward momentum in Longyuan’s operating profit. We believe continuing expansion of the company’s wind power capacity will gradually improve its operating profit and operating margin in 2011F-2012F because wind power consumes no fuel costs and generates higher operating margin over coal power. We forecast operating profit will grow 46% YoY in 2011F and 31% in 2012F, and operating margin will reach 36% in 2011F and 41% in 2012F.

Operating profit trend

RMB m 9,000 45% 8,000 40% 7,000 35% 6,000 30% 5,000 25% 4,000 20% 3,000 15% 2,000 10% 1,000 5% 0 0% 2008 2009 2010 2011F 2012F Operating profit Operating margin

Source: Company data, CCBIS estimates

Net profit and margin

Due to the increase in the base and net finance costs, we believe net profit growth will slow in 2011F and 2012F to 35% YoY and 28% YoY, respectively. These figures are in stark contrast to 124% YoY net profit growth in 2010. In addition, we forecast net profit margin to rise from 14% in 2010 to 16% in 2011F and 18% in 2012F on better business mix.

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Net profit trend

RMB m 4,000 20%

3,500 18% 16% 3,000 14% 2,500 12% 2,000 10%

1,500 8% 6% 1,000 4% 500 2% 0 0% 2008 2009 2010 2011F 2012F Net profit Net margin

Source: Company data, CCBIS estimates

Return on equity (ROE)

While we expect Longyuan’s ROE to rise from 7% in 2010 to 9% in 2011F and 10% in 2012F, we emphasize that this is a result of the company leveraging its balance sheet and increasing contribution from the wind power business, which has relatively higher ROE than the company’s coal-related business. Nevertheless, we believe that Longyuan’s 2012F ROE is in danger of falling further if the company issues new shares in 2012F, as management suggested it might do.

ROE trend

11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2008 2009 2010 2011F 2012F

Source: Company data, CCBIS estimates

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Capex and gearing

We estimate Longyuan’s capex will grow 26% YoY in 2011F followed by a 32% YoY decline in 2012F. The decline in capex for 2012F was mainly related to the decline in the average investment costs from the fall in WTG ASP.

Due to the expected decrease in capex in 2011F-2012F, we estimate the PPE turnover (revenue over average PPE) will fall from 0.32x in 2010 to 0.27x in 2011F and 0.25x in 2012F.

PPE turnover trend

(x) 0.45

0.40

0.35

0.30

0.25 2008 2009 2010 2011F 2012F

Source: Company data, CCBIS estimates

Longyuan management commented that the company would mainly utilize debt to finance capex. We expect the company’s net gearing ratio (net debt over total equity) to grow from 121% in 2010 to 157% in 2011F and reach 161% in 2012F. Given the stretched balance sheet and further capex needs, going forward, we would not be surprised if the company taps the equity market to satisfy its financial needs. This would likely lower the company’s net gearing ratio even further; however, we have not factored this possible outcome in our estimates.

Net gearing trend

300%

250%

200%

150%

100%

50% 2008 2009 2010 2011F 2012F

Source: Company data, CCBIS estimates

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Cash flow analysis

Longyuan had negative free cash flow in 2010 given its heavy capex requirement for wind farm construction. Since we believe Longyuan will continue to expand wind capacity, Longyuan’s free cash flow is likely to remain negative throughout 2012F.

Due to rising earnings and an improving working capital position, we expect Longyuan’s cash flow from operations to grow from RMB4,021m in 2010 to RMB8,744m and RMB9,413m in 2011F and 2012F, respectively.

Longyuan’s cash flow from investing activities primarily derives from capex spending. Given management guidance on capacity expansion of approximately 2GW p.a. in both 2011F and 2012F, and our assumption of declining WTG pricing, we forecast Longyuan’s capex will fall from RMB17,700m in 2010 to RMB13,716m by 2012F.

For cash flow from financing activities, we anticipate the cash outflow to continue to increase from the increased use of debt to build new wind farms in 2011F-2012F.

Cash flow projections

RMB m 30,000

20,000

10,000

(10,000)

(20,000)

(30,000) 2008 2009 2010 2011F 2012F

Cash flow from operations Cash flow from inv esting activ ities Cash flow from financing activ ities Net cash flow

Source: Company data, CCBIS estimates

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Valuation and risks

Longyuan’s current valuation at 20x FY11F PER seems fair

Longyuan’s shares currently trade at 20x FY11F PER, similar to the average for global peers of 21x, which seems fair in our view. However, Longyuan’s shares trade at a 36-39% premium to its direct comparable Datang (1798 HK, Underperform) and to the average for Chinese wind operators, at 14x and 15x respectively, and both justified in our view, based on Longyuan’s industry leadership, better operating efficiency, higher wind project ROEs, and relatively healthier balance sheet and cash flows.

Valuation comparison

Price Market EPS (local cap PER (x) growth PEG PBV (x) ROE (%) Company Stock code Rating currency) (US$m) 2010A 2011F 2012F (%) 2011F 2010A 2011F 2012F 2010A 2011F 2012F China Longyuan Power Group 916 HK N 8.47 8,128 26.5 19.7 15.3 35 0.6 1.9 1.7 1.5 7.3 8.9 10.1 China Datang Corporation 1798 HK U 2.38 2,230 31.4 14.2 10.9 122 0.1 1.4 1.2 1.1 4.3 8.6 10.0 Renewable China Power New Energy 735 HK NR 0.65 659 17.7 13.3 10.5 33 0.4 0.9 0.8 0.7 5.1 5.9 7.1 China Windpower Group 182 HK NR 0.84 798 14.4 10.9 8.2 32 0.3 1.6 1.5 1.3 13.4 14.8 16.7 Acciona ANA SM NR 77.21 6,986 28.3 27.3 22.3 4 7.8 0.8 0.8 0.8 2.9 3.3 4.0 Theolia TEO FP NR 1.33 211 N/A N/A 15.6 N/M N/M 0.4 0.3 0.3 (21.2) (3.8) 2.4 Iberdrola Renovables IBR SM NR 3.09 18,553 36.2 30.5 25.7 19 1.7 1.1 1.1 1.1 3.0 3.5 4.0 EDF Energies Nouvelles EEN FP NR 37.18 4,106 27.1 21.9 17.7 24 0.9 2.1 1.9 1.8 7.9 9.2 10.8 EDP Renovaveis EDPR PL NR 5.01 6,222 55.7 41.1 29.1 36 1.2 0.8 0.8 0.8 1.5 1.8 2.6 Infigen Energy IFN AU NR 0.37 293 N/A N/A N/A N/M N/M 0.4 0.4 0.4 (11.1) (6.4) (2.9) Greentech GES DC NR 17.30 175 N/A 9.8 8.5 N/M N/M 0.7 0.5 0.4 (24.9) 4.7 5.2 All prices are as at 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS

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Our target price at HK$9.10 derived by DCF valuation method

Our target price estimate of HK$9.10 is based on DCF valuation. We assume WACC of 8.8%, and terminal growth of 1% after FY2020F. At our price target, Longyuan’s shares would be trading at 21x FY11F earnings, in line with the average for its global peers of 21x.. Despite a high earnings CAGR of 31% in 2010-2012F, we believe that the company’s ROE remains low at 8-10% level and there are several downside risks to our current earnings estimates, including: (1) grid connection bottlenecks in China; (2) risks attendant on overseas project returns; (3) the risk that CER and VER income could fall short of expectations; (4) uncertainty on government subsidies and policies; and (5) the risk of increasing gearing and interest rates.

Longyuan DCF valuation model

Free cash flow (RMB m) FY11F FY12F FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F Sales 16,473 19,103 21,211 25,657 29,347 33,830 39,595 46,802 54,729 64,400 EBITDA 9,301 11,862 14,828 18,587 22,133 26,487 32,028 38,955 46,575 55,871 ...margin 56% 62% 70% 72% 75% 78% 81% 83% 85% 87% less:tax (565) (724) (987) (1,403) (1,683) (2,721) (3,348) (4,153) (5,046) (6,243) minority interest 763 978 1,231 1,749 2,098 2,394 2,947 3,655 4,440 5,493 working capital 1,155 (181) (1,069) (520) (489) (212) (715) (411) (1,028) (639) CAPEX (22,467) (15,285) (15,701) (23,365) (22,713) (25,372) (30,083) (31,692) (34,835) (37,839) FCF (11,812) (3,350) (1,698) (4,953) (653) 577 828 6,354 10,107 16,643

Sum of Net debt Equity Value per WACC PV PV of TV EV (FY10) Value Shares share WACC Calculation (%) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (m shares) (HK$) Equity Beta 1.07 7.9 (2,303) 113,018 110,716 33,086 77,630 7,464 12.4 Risk-free rate (%) 3.92 8.0 (2,423) 110,594 108,171 33,086 75,085 7,464 12.0 Equity-risk premium (%) 6 8.1 (2,542) 108,241 105,699 33,086 72,613 7,464 11.6 Country-risk premium (%) 1 8.2 (2,660) 105,958 103,297 33,086 70,212 7,464 11.2 Cost of equity (%) 12 8.3 (2,777) 103,741 100,963 33,086 67,878 7,464 10.8 Cost of debt (%) 7 8.4 (2,893) 101,587 98,694 33,086 65,608 7,464 10.4 Debt/capital (%) 50 8.5 (3,008) 99,495 96,486 33,086 63,401 7,464 10.1 Tax (%) 15 8.6 (3,122) 97,461 94,339 33,086 61,254 7,464 9.7 WACC (%) 8.8 8.7 (3,235) 95,485 92,250 33,086 59,164 7,464 9.4 Terminal growth rate (%) 1 8.8 (3,347) 93,563 90,216 33,086 57,130 7,464 9.1 8.9 (3,458) 91,693 88,236 33,086 55,150 7,464 8.8 9.0 (3,567) 89,874 86,307 33,086 53,222 7,464 8.5 9.1 (3,676) 88,104 84,428 33,086 51,343 7,464 8.2 9.2 (3,784) 86,381 82,598 33,086 49,512 7,464 7.9 9.3 (3,890) 84,704 80,814 33,086 47,728 7,464 7.6 9.4 (3,996) 83,070 79,074 33,086 45,989 7,464 7.3 9.5 (4,101) 81,479 77,378 33,086 44,293 7,464 7.0 9.6 (4,204) 79,928 75,724 33,086 42,638 7,464 6.8 9.7 (4,307) 78,417 74,110 33,086 41,025 7,464 6.5 9.8 (4,409) 76,944 72,535 33,086 39,450 7,464 6.3 9.9 (4,510) 75,508 70,999 33,086 37,913 7,464 6.0 Source: CCBIS estimates

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Risks

Grid connection bottleneck in China: Grid network construction within China’s richest wind areas, such as Inner Mongolia, the three northeast provinces, and Xinjiang, is lagging the expansion of wind farms. We believe the issue could be gradually resolved in the coming three-to-five years, from higher spending in ultra high voltage (UHV) transmission lines and the new smart grid system that will be part of the state grid, all part of the government’s 12 th Five-Year Plan. If China could enhance its power grid network more rapidly, or alternatively, if the progress on the power grid is slower than we expect, there could be upside or downside surprise, respectively, to our earnings forecasts.

Overseas project execution risk: Longyuan management has laid out its plan to develop projects overseas which will entail higher return potential. Targeted regions include South Africa, North America and Eastern Europe. In our view, investment returns from overseas projects could be affected by changes in the policies of the foreign governments in the countries it is dealing with. Obtaining financing for projects can be more difficult from flow of fund restrictions between country borders and the absence of business relationships with overseas banks. Finally, foreign currency fluctuations add additional investment risk to the company’s overseas project returns.

CER and VER income: CER income has risk inherent in project approval by the CDM EB, the UN body that oversees carbon credit trading. In December 2009, the CDM EB suspended approvals for some Chinese wind farms. Although the CDM EB has since approved some other Chinese wind farms, some uncertainty about the approval process still lingers. Continuation of the Kyoto Protocol and related carbon trading mechanisms also remain uncertain post 2012. Our current forecasts for Longyuan have factored in continuous CER/VER income streams post 2012F.

Uncertainties on government subsidies and policies: We note that government subsidy income is a material part to the return from wind farms. Future government policies in China towards feed-in-tariffs, VAT rebates and preferential income tax rates can greatly affect our earnings estimates.

Risk of increasing gearing and interest rates: Longyuan relies mainly on bank borrowings, corporate bonds and debentures to finance capex. We expect the company’s gearing ratio to grow from 136% in 2010 to 194% in 2012F, which would lead to increasing interest risk exposure in the issuance of new debts and refinancing. In addition, since we foresee potential interest rate hikes by the PBOC to tackle inflation problems in China, we expect Longyuan’s financing costs would be on a rising trend in the near future. Based on our estimates, for every 1% (100bp) increase in Longyuan’s effective interest rate, Longyuan’s net profit would decline by 10%.

Equity refinancing risks in 2012F: Longyuan’s management has publicly announced plans to issue new shares in 2012F. Although the decision is subject to the approval from the board of directors, if the new shares are issued, they may incur additional administrative costs and may also lead to the dilution to earnings per share post issuance.

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Company profile

Longyuan is China’s largest wind farm operator, accounting for approximately 15% of China’s cumulative wind capacity by end-2010 based on our estimate. The major shareholder of Longyuan is Guodian, one of the five-largest power generation companies in China.

Company history

Longyuan was established through reorganization of the former China Longyuan Electric Power Group Corporation, founded in January 1993 and one of the pioneers in new energy development in China.

The company commenced construction of its first wind farm in 1991 which became operational in the following year with 1.2MW capacity. Longyuan has accumulated nearly 20 years of wind farm operation experience.

In 1999, Longyuan was merged with China Fulin, a wind power generation company, and Zhongneng Power-Tech, which is specialized in the development and consultation of electricity technology.

In 2002, under the restructuring of China’s power industry by the State Council, the former State Power Corporation was reorganized and divided into two power grid companies and the five-largest independent power generation companies. It became a wholly owned subsidiary of Guodian, one of the five-largest independent power generation companies after the restructuring.

In addition, Longyuan inherited 144MW wind power assets from the former State Power Corporation in 2003 and nine wind farms in 2004 to become Guodian’s wind power investment arm since then.

In 2009, the company was successfully listed on the main board of Hong Kong’s stock exchange.

Major milestones

1991 Began construction of wind power plants in Xinjiang 1993 Established by the former Ministry of Energy 1996 Became a wholly owned subsidiary of the former State Power Corporation 1999 Merged with China Fulin and Zhongneng Power-Tech 2002 Became a wholly owned subsidiary of Guodian as a result of group restructuring of the former State Power Corporation 2003 Inherited 144MW wind power assets from the former State Power Corporation. Total wind installed capacity reached 231MW, accounting for 40% of China's total wind capacity. 2004 Won concession projects for Jiangsu Rudong and Juling Tongyu; began large-scale construction of wind power projects. 2006 Proposed the development plan of six major wind areas 2009 Listed on the main board of Hong Kong’s stock exchange 2010 Won bid for Jiangsu Dafeng Intertidal Zone Concession Project for a capacity of 20MW. Gansu Guazhou wind farm with installed capacity of 300MW began operations. Added 35 wind power projects in 2010, installed capacity reached 2,053MW. 2011 56 wind projects and one biomass project were registered with CDM in January 2011, with combined installed capacity of 2,904MW. Source: Company data, CCBIS

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Business description

Longyuan is primarily engaged in the design, development, construction, management and operation of wind farms. In addition to its wind power business, Longyuan also operates other power projects in thermal power, solar power, tidal, biomass and geothermal energy.

According to Longyuan, by the end of December 2010, the company had installed capacity of 8,473MW, of which 6,556MW (77.4%) coming from wind power, 1,875MW (22.1%) from coal-fired power and the remaining 42MW (0.5%) from other renewable sources.

Revenue by segment (2008-2010) Installed capacity by segment (2008-2010)

RMB m MW 16,000 9,000

14,000 8,000 7,000 12,000 6,000 10,000 5,000 8,000 4,000 6,000 3,000

4,000 2,000

2,000 1,000

0 0 2008 2009 2010 2008 2009 2010 Wind power Coal power Other revenue Wind power Coal power Other renewables

Source: Company data, CCBIS Source: Company data, CCBIS

The company’s wind projects are located in 13 provinces in China, including Heilongjiang, Jilin, Liaoning, Inner Mongolia, Jiangsu, Zhejiang, Fujian, Hainan, Gansu, Xinjiang, Hebei, Yunnan, and Anhui. Its capacity is concentrated in the northern regions of China, including three northeast provinces, Inner Mongolia and Hebei, which jointly accounted for 62% of Longyuan’s total capacity in 2010.

Installed capacity by region (2008-2010) Gross power generation by region (2008-2010)

MW GWh 7,000 12,000

6,000 10,000 5,000 8,000 4,000 6,000 3,000 4,000 2,000 2,000 1,000

0 0 2008 2009 2010 2008 2009 2010 The three northeast provinces Inner Mongolia The Three Northeast Provinces Inner Mongolia The southeast coastal provinces Gansu The Southeast Coastal Provinces Gansu Xinjiang Hebei Xinjiang Hebei Others Others

Source: Company data, CCBIS Source: Company data, CCBIS

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Business overview – wind power

Wind power-related income includes electricity sales (part of company’s overall revenue), VAT rebate income (part of “other income”) and CDM income (part of “other income”). Wind power is generated from wind farms operated by the company before being sold to local grid companies. Electricity is sold at fixed tariffs according to geographical locations based on the fixed price set by NDRC in 2009.

VAT rebate income is received in form of a refund of 50% of the VAT levied on electricity generation on wind power. It is also received on 100% VAT rebate upon procurement (capital expenditure) of domestic wind equipment.

Meanwhile, CDM income is derived from the sale of carbon credits, known as CERs, from wind farms registered with the CDM EB. Longyuan also sells VERs, granted from the electricity output of its CDM projects before those projects are registered as CDM projects. Up to January 2011, the company announced it has 56 registered CDM projects, of which 55 are wind projects and 1 is biomass project, with combined installed capacity of 2,904MW.

Business overview – coal-related business

Coal-related business accounted for 54% of Longyuan’s overall revenue in 2010. Longyuan’s coal-related business mainly comprises of coal-fired power generation and coal trading.

Longyuan sells electricity generated by its coal-fired power plants to Jiangsu Electric Power Company. It operates two coal power plants, which are inherited from the former State Power Corporation with installed capacity of 1,875MW. The company is planning to upgrade its coal-fired power capacity by 1GW by 2012F, subject to government approval. In addition to electricity sales income, the steam generated from coal electricity generation and sold to industrial and commercial users, such as hotels and factories, also contributed to the company’s revenue.

We estimate that Longyuan also generates 17-25% of its revenue before service concession construction (SCC) income from coal trading over 2009-2011F. Based on management’s disclosure, Longyuan’s coal trading business is primarily sourcing coal and selling it to its parent company Guodian. Despite huge top-line contribution, we believe profit impact from this business line is minimal due to its low profit margin at 7-8%.

Business overview – other businesses

Other businesses accounted for merely 3% of Longyuan’s overall revenue in 2010. Longyuan generates income from its pilot projects in other renewable energy sources, including tidal, biomass and geothermal energy. In addition, the company also provides consulting, repairs and maintenance, training and other professional services to wind farms. Management also commented that solar project investment would be a new development area for the company going forward.

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Major customers

Main customers of the company are wholly owned subsidiaries of State Grid Corporation of China, including Fujian Electric Power Company, Heilongjiang Electric Power Company, Northeast China Grid Company Limited and Liaoning Electric Power Company.

Major suppliers

Wind turbine is the primary equipment in the operation of wind farms. Longyuan mainly acquires wind turbines from Gamesa, Vestas, GE, Goldwind and Sinovel. Some major wind turbine manufacturers such as Vestas, Gamesa and Goldwind have established long-term business relationships with the company of up to eight years.

As for the company’s coal power business, it has entered into long-term coal supply agreements with Shenhua Zhunge’er Energy Company and China National Coal Group Corporation to secure coal prices. These contracts have minimum terms of no less than five years.

Shareholder structure

Shareholder structure (March 2011)

Public, 25%

China Life Insurance, 3% Social Society Fund, 3% Guodian Group, 64% China Investment Corp, 5%

Source: Company data, CCBIS

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Board of directors and senior management background

Board of directors and senior management

Name Age Position Key experience Xie Changjun 53 Executive Director and Professor-grade senior engineer; President Joined group in 1993; Previously served various management positions in state-owned power conglomerates. Tian Shicun 58 Executive Director and Professor-grade engineer; Vice-President Joined group in 2006; Previously served various management positions in state-owned power conglomerates. Wang Liansheng 59 Executive Director Senior economist; Joined group in 1997; Previously served various management positions in state-owned power conglomerates. Zhu Yongpeng 59 Non-executive Director and Professor-grade senior engineer; Chairman of Board Joined group in 1993, appointed as Chairman of Board in July 2009; Served as an engineer in several government divisions; General manager of Guodian. Wang Baole 54 Non-executive Director Senior statistician; Appointed as Director in July 2009; Previously served various management positions in state-owned power conglomerates; Head of Plan & Development Department & head of Nuclear Power Office of Guodian. Luan Baoxing 43 Non-executive Director Senior accountant; Appointed as Director in July 2009; Head of Capital Operation and Ownership Management Department of Guodian. Li Junfeng 54 Independent Non-executive Director of academic members, deputy Director general and researcher of the Energy Research Director Institute under the NDRC; Appointed as Director in July 2009. Zhang Songyi 55 Independent Non-executive Received JurisDoctor from Yale University; Director Previous department joint head of Morgan Stanley Asia Limited; Appointed as Director in July 2009. Meng Yan 55 Independent Non-executive PRC CPA, Doctor in Economics (Accounting) Director Dean and professor in School of Accountancy Society of Central University of Finance and Economics; Executive Director of the Accounting Society of China and the Banking Accounting Society of China; Appointed as Director in July 2009. Chen Bin 51 Supervisor Appointed as a supervisor in July 2009; Deputy chief accountant and head of financial management department of Guodian Yu Yongping 50 Supervisor Appointed as a supervisor in July 2009; Head of audit department of Guodian Wang Jianting 46 Employee Representative Appointed as a supervisor in July 2009; Supervisor Chief of disciplinary inspection group and chairman of the trade union of Longyuan. Jia Nansong 48 Secretary of Board & Joint Previously senior engineer in state-owned power conglomerates; Company Secretary Joined group in 1994. Huang Yuan 49 Vice-President Previously senior engineer in state-owned power conglomerates; Joined group in 1993. Zhang Yuan 54 Vice-President Professor-grade senior engineer; Joined group in 2003; Previously served various management positions in state-owned power conglomerates. Ngai Wai Fung 49 Joint Company Secretary Appointed as joint company secretary since 2009; Director and head of listing services of KCS Hong Kong Limited; Vice president of Hong Kong Institute of Chartered Secretaries. Source: Company data, CCBIS

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Financial summary

Income statement forecasts Balance sheet forecasts

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F FYE 31 Dec (RMB m) 2009 2010 2011F 2012F Revenue 9,744 14,213 16,473 19,103 Fixed assets 38,178 51,619 70,735 81,931 Other income 569 989 1,220 1,617 Goodwill 0 12 12 12 Operating expenses (7,459) (11,118) (11,743) (12,947) Other intangible assets 6,086 7,661 7,661 7,661 Operating profit 2,854 4,084 5,950 7,773 Long-term investments 799 1,315 1,315 1,315 Other long-term assets 2,523 3,665 3,665 3,665 EBIT 2,854 4,084 5,950 7,773 Total non-current assets 47,587 64,271 83,387 94,583 Depreciation and amortisation (1,590) (2,236) (3,351) (4,089) Other current assets 1,350 1,985 2,295 2,775 EBITDA 4,444 6,320 9,301 11,862 Inventories 333 632 536 589 Net interest expense (1,020) (1,098) (1,897) (2,583) Marketable securities 0 181 181 181 Share of results of an associate 105 228 (20) (20) Accounts receivable 2,181 3,474 3,159 3,664 Extraordinary items 4 (3) 0 0 Cash & equivalents 16,503 4,089 6,444 11,200 Profit before tax 1,944 3,211 4,033 5,170 Total current assets 20,367 10,362 12,615 18,410 Income tax (296) (441) (565) (724) Total assets 67,954 74,634 96,002 112,993 Net profit after tax 1,647 2,77 0 3,468 4,446 Accounts payable 1,943 1,515 3,215 3,536 Minorities (753) (763) (763) (978) Short-term debt 17,087 17,200 17,600 17,600 Reported net profit after tax 894 2,007 2,705 3,468 Other current liabilities 4,662 6,200 5,553 6,089 Dividends 0 (403) (541) (694) Total current liabilities 23,692 24,915 26,368 27,226 Transfer to reserves 894 1,604 2,164 2,774 Long-term debt 16,219 19,975 36,825 49,053 Normalized net profit after tax 890 2,010 2,705 3,468 Other long-term liabilities 2,363 2,330 2,330 2,330 Total non-current liabilities 18,582 22,304 39,155 51,383 Total liabilities 42,274 47,220 65,523 78,609

Total shareholders' equity 25,680 27,414 30,479 34,384 Total equity and liabilities 67,954 74,634 96,002 112,993

Financial ratios Cash flow projections FYE 31 Dec (RMB m) 2009 2010 2011F 2012F FYE 31 Dec (RMB m) 2009 2010 2011F 2012F Profitability (%) EBITDA 4,444 6,320 9,301 11,862 EBIT margin 29 .3 28.7 36.1 40.7 Change in working capital (83) (1,813) 1,155 (181) EBITDA margin 45.6 44.5 56.5 62.1 Other operating cash flow (276) (486) (1,712) (2,269) Net margin 9.2 14.1 16.4 18.2 Cash flow from operations 4,085 4,021 8,744 9,413 ROE 3.5 7.3 8.9 10.1 Capital expenditure (16,184) (17,845) (22,467) (15,285) Growth (%) Addition in investments (340) (138) (20) (20) Revenue 13.9 45.9 15.9 16.0 Net acquisitions 8 (65) 0 0 EBIT 103.9 43.1 45.7 30.6 Other cash flow from investing 1,360 348 1,174 1,589 EBITDA 79.0 42.2 47.2 27.5 activities Net profit growth 165 .0 124.5 34.8 28.2 Cash flow from investing activities (15,156) (17,700) (21,312) (13,716) Valuation and ratio analysis (x) Cash dividends 0 (632) (403) (541)

Normalized PER 48.5 26.5 19.7 15.3 Equity issue 17,514 126 0 0 Reported PER 48.2 26.5 19.7 15.3 Net debt issue 10,952 3,677 17,250 12,228 Dividend yield 0.0 0.8 1.0 1.3 Other cash flow from financing (1,891) (1,858) (1,924) (2,627) Price/cash flow 2.8 N/A 22.6 11.2 activities PBV 1.7 1.9 1.7 1.5 Cash flow from financial activities 26,575 1,313 14,923 9,060 EV/EBIT 18.7 13. 0 8.9 6.8 Net cash flow 15, 505 (12,365) 2,355 4,756 EV/EBITDA 12.0 8.4 5.7 4.5 Beginning cash 1,002 16,503 4,089 6,444 Liquidity and leverage (%) Forex (3) (48) 0 0 Current ratio 0.9 0.4 0.5 0.7 Ending cash 16,503 4,089 6,444 11,200 Interest cover (x) 2.8 3.7 3.1 3.0 Gearing ratio 130 136 179 194 Net gearing ratio 65 121 157 161 Source: Company data, CCBIS estimates

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China Datang Corporation Renewable Power (1798 HK)

Company Rating: Underperform (initiation) Balance sheet a major concern Sector Rating: Neutral (initiation)

Datang is the second-largest wind farm operator in China. By 2010 it had a 9% share of China’s wind installed capacity. In our view, Price: HK$2.38 Datang’s net gearing ratio of b etween 270% and 290% for 2011F-2012F is a major concern, as it entails high equity refinancing Target: HK$2.00 risk. Its ROE in the range of 9% to 10% in 2011F-2012F also falls (initiation) short of peers, particularly considering Datang is a pure play wind project operator, with ostensibly higher ROE than coal-fired power operators. We initiate coverage with an Underperform rating and Trading data target price of HK$2.00. 52-week range HK$1.85 – 2.43 Market capitalization (m) HK$17,343/US$2,229 Faster earnings growth thanks to scale effect. We expect Shares outstanding (m) 7,143 Datang to enjoy earnings CAGR of 70% in 2010-2012F, better Free float (%) 71 than Longyu an’s 31%, owing to Datang’s smaller scale of 3M average daily T/O (m share) 8.6 c.60% of Longyuan’s in 2010. Expected return (%) – 1 year (16) Closing price on 1 April 2011 Stretched balance sheet: We forecast Datang’s net gearing ratio will surge to 268% and 286% by 2011F and 2012F, respectively. Despite our view that state-owned enterprises in Stock price and HSCEI

China c arry minimal credit risk, Datang’s tight cash position HK$ remains a concern for us. 2.7 14,500 2.6 14,000 ROE at 9-10% in 2011-12F falls short of peers: We estimate 2.5 13,500 Datang’s ROE will be 9-10% in 2011F-2012F. While this is in 2.4 13,000 line with Longyuan’s, we view Datang’s performance as 2.3 12,500

inferior. Unlike Longyuan, which operates a coal-fired 2.2 12,000

business, Datang is a pure wind operator, and should 2.1 11,500

theoretically have higher ROE. 2.0 11,000

1.9 10,500 Initiate with Underperform. Our target price of HK$2.00 is 1.8 10,000 based on DCF valuation, implying 12x 2011F PE, a 43% Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 discoun t to the average of its global peers. We believe Datang (LHS) HSCEI (RHS) Datang’s valuation discount is justifiable given its stretched Source: Bloomberg balance sheet and inferior operating efficiency.

Forecast and valuation Year to 31 Dec 2008 2009 2010 2011F 2012F Revenue (RMB m) 860 1,428 2,380 4,219 6,034 Reported net profit (RMB m) 140 248 456 1,011 1,311 Normalized EPS (RMB) 0.03 0.05 0.06 0.14 0.18 Normalized EPS growth (%) 149.0 77.6 28.5 121.8 29.7 PER (x) 71.7 40.3 31.4 14.2 10.9 Clarisse Pan EV/EBITDA (x) 21.7 10.3 6.1 3.3 2.4 (852) 2533 2400 PBV (x) 2.3 1.8 1.4 1.2 1.1 [email protected] Dividend yield (%) 0.0 0.0 0.0 0.7 0.9 ROE (%) 3.2 4.4 4.3 8.6 10.0 Alan Lau Net gearing ratio (%) 190 271 195 268 286 (852) 2533 2479 Source: Company data, CCBIS estimates [email protected]

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Financial analysis

Revenue

Datang is the second-largest wind power generation company in China, just behind Longyuan. It is only engaged in the generation of wind power. We anticipate rapid top-line growth for the company from the management’s target of adding c.1.5GW capacity in 2011F in order to reach 5.6GW. We forecast capacity to reach 7.1GW by 2012F. Hence, we expect the company’s revenue to experience rapid growth at 77% YoY in 2011F and 43% YoY in 2012F.

We assume Datang’s utilization hours will gradually increase from 2,134 hours in 2010 to 2,240 hours in 2011F and 2,274 hours in 2012F. We further assume its wind power tariffs will rise, from RMB0.49 in 2010 to RMB0.5 per kWh, in 2011F-2012F. In China, the government has put in place a wind tariff scheme with the aim of keeping wind project returns in the range of 8-10%. Thus wind projects in regions with higher utilization hours will theoretically receive lower wind power tariffs, in our view. Therefore, we believe we have given a quite generous assumption to Datang’s utilization hours and wind tariffs in 2011F-2012F.

Key operation data – wind power 2008 2009 2010 2011F 2012F Installed capacity (MW) 1,768 2,620 4,028 5,600 7,100 YoY (%) 92 48 54 39 27 Average utilization hours 2,255 2,159 2,134 2,240 2,274 YoY (%) 5 (4) (1) 5 1 Net electricity generation (GWh) 1,279 2,880 4,829 8,437 12,083 Average tariff exclude VAT (RMB/kWh) 0.48 0.48 0.49 0.50 0.50 Sale of electricity (RMB m) 613 1,384 2,378 4,219 6,034 YoY (%) 114 126 72 77 43 CAGR 2010-2012F (%) 59 Source: Company data, CCBIS estimates

Other income

Other income is income generated from the company’s registered CDM projects and government grants. We anticipate other income to grow at 104% YoY in 2011F because we believe the number of registered CDM projects in 2011F will double, and the total amount of government grants to increase from robust growth in electricity sales. For 2012, we believe increase in wind capacity and in the number of projects registered under CDM will be similar to 2011F, but due to the increased base numbers, we expect to see growth slow to 29% YoY for 2012F.

Operating expenses

Since the company is only engaged in wind power generation, we noted Datang’s main operating expenses are depreciation and amortization, labour, and miscellaneous items such as material costs and repair and maintenance costs. We anticipate operating expenses to grow in 2011F-2012F, driven by the increase in depreciation and repair and maintenance costs from the increased number of WTG installed, but remain stable in terms of per unit of electricity generated and sales. We forecast operating expenses over sales to fall somewhere between 52% and 53% in 2011F-2012F, similar to the level in 2010.

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Operating expenses trend

RMB m 3,500 90% 80% 3,000 70% 2,500 60% 2,000 50% 1,500 40% 30% 1,000 20% 500 10% 0 0% 2008 2009 2010 2011F 2012F Service concession construction costs Depreciation and amortization Labour costs Other operating expenses As a % of sales

Source: Company data, CCBIS estimates

Operating profit and margin

We expect Datang’s operating profit to grow by 82% YoY in 2011F given our estimate for revenue to grow at 77% YoY in 2011F and operating expenses over sales to remain flat YoY in 2011F. We also expect operating margin of the company to fall between 63-65% in 2010-2012F, due to the stable cost control over the period.

Operating profit trend

RMB m 4,000 80%

3,500 70%

3,000 60%

2,500 50%

2,000 40%

1,500 30%

1,000 20%

500 10%

0 0% 2008 2009 2010 2011F 2012F Operating profit Operating margin

Source: Company data, CCBIS estimates

Net profit and margin

Given strong growth in the company’s operating profit in 2011F, we expect net profit in 2011F to experience high growth of 122% YoY. We also forecast net margin will remain stable in 2011F-2012F, between 22-24%. Net interest expense is the main component of Datang’s non-operating expenses. Due to the company’s growing use of debt-to-finance capacity expansion, we expect net interest expenses to rise 85% YoY in 2011F.

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Net profit trend

RMB m 1,400 25%

1,200 20% 1,000 15% 800

600 10%

400 5% 200

0 0% 2008 2009 2010 2011F 2012F Net profit Net margin

Source: Company data, CCBIS estimates

Return on equity (ROE)

We expect Datang to realize significant improvements in ROE in 2011F and 2012F assuming the company expands capacity through the use of debt and a rapid increase in reported net profit of a 70% CAGR in 2010-2012F. Since we expect Datang’s growth in equity will only grow at an 11% CAGR in 2010-2012F, far lag behind growth in reported net profit, we expect ROE will ramp up from 4% in 2010 to 9% in 2011F and reach 10% by 2012F.

ROE trend

11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2008 2009 2010 2011F 2012F

Source: Company data, CCBIS estimates

Capex and PPE turnover

Growth in capex is mainly driven by management’s objective to expand installed capacity. Based on management guidance, Datang’s capex for 2011F will grow 41% YoY to RMB15m from RMB11m in 2010. We expect to see a 27% YoY decline in capex in 2012F, taking into account future declines in WTG ASP according to our estimates. Turning now to PPE turnover (revenue over average PPE), we expect the ratio to rise from 0.09x in 2010 to 0.11x in 2011F and reach 0.12x by 2012F thanks to the expected reduction of the per capacity investment cost in wind turbines.

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PPE turnover trend

(x) 0.13

0.12

0.11

0.10

0.09

0.08

0.07

0.06 2008 2009 2010 2011F 2012F

Source: Company data, CCBIS estimates

Debt and gearing

Datang’s wind farm projects are heavily financed by bank borrowings and loans from related parties. We expect the company's debt to grow from RMB26m in 2010 to RMB36m in 2011F. Assessing its debt composition at June 2010, around 86% of the company loans are repayable after 2 years. We anticipate the company will continue to obtain financial support from Datang Group, its parent company. Hence it will be capable of obtaining new bank loans for future wind farm projects and renewals of its existing loans through guarantees by Datang Group and future electricity tariffs, despite its high net gearing ratio.

The net gearing (net debt over total equity) of Datang has decreased from 271% to 195% in 2010, due to the effect of the IPO in December 2010. Through continuing financing of its projects through bank and other borrowings, we expect the net gearing ratio to rise to 268% in 2011F and reach 286% by 2012F.

Loan composition (June 2010)

Within 1 year After 1 year but 6% within 2 years 8%

After 2 years but within 5 years After 5 years 27% 59%

Source: Company data, CCBIS estimates

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Net gearing trend

300%

250%

200%

150% 2008 2009 2010 2011F 2012F

Source: Company data, CCBIS estimates

Cash flow analysis

The operating cash flow of the company is expected to grow in line with company profit in 2011F-2012F. We noted that Datang’s major cash outflows derive from capex for the construction of new wind farms. Because they are mainly financed by long-term loans, we expect cash outflows from investing activities for constructing new wind farms to be offset by the increase in net cash inflow from financing activities from bank and other loans in 2011F-2012F. We expect the company’s cash flow generation to be weak in 2011F-2012F.

Cash flow projections

RMB m 15,000

10,000

5,000

(5,000)

(10,000)

(15,000) 2008 2009 2010 2011F 2012F Cash flow from operations Cash flow from investing activities Cash flow from financing activities Net cash flow

Source: Company data, CCBIS estimates

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Valuation and risks

Datang’s current valuation discount to peers is justifiable

Datang’s shares currently trade at 14x FY11F PER, a 28% discount over Longyuan (20x), the industry leader in wind power generation in China. From our vantage point, the discount is justified by the better operating efficiency, higher wind project ROE and healthier balance sheet and cash flows for Longyuan over Datang.

Datang’s shares trade at a 32% discount to its global peers’ average of 21x. We believe Datang deserves to be traded at a discount to global peers given its weak balance sheet position. Due to the expected increase of debt to finance for Datang’s capacity expansion, we have concerns over the company’s increasing net gearing ratio, from 195% in 2010 to 286% by 2012F, according to our estimates. As it is a state-owned company and because Datang can avail itself of financial support from Datang Group when necessary, the company can not be considered at great risk of default; nevertheless, its high net gearing ratio exposes it to high interest risk and refinancing risk. Assuming a gearing ratio of 268% for the company in 2011F, then an increment of 1% (100bp) interest rate can lead to a c.20% fall in company net profit. Thus, factoring in the risk of an interest rate hike in the near future could lead to a lower valuation.

Valuation comparison

Price Market EPS (Local cap PER (x) growth PEG PBV (x) ROE (%) Company Stock code Rating currency) (US$m) 2010A 2011F 2012F (%) 2011F 2010A 2011F 2012F 2010A 2011F 2012F China Longyuan Power 916 HK N 8.47 8,128 26.5 19.7 15.3 35 0.6 1.9 1.7 1.5 7.3 8.9 10.1 Group China Datang Corporation 1798 HK U 2.38 2,230 31.4 14.2 10.9 122 0.1 1.4 1.2 1.1 4.3 8.6 10.0 Renewable China Power New Energy 735 HK NR 0.65 659 17.7 13.3 10.5 33 0.4 0.9 0.8 0.7 5.1 5.9 7.1 China Windpower Group 182 HK NR 0.84 798 14.4 10.9 8.2 32 0.3 1.6 1.5 1.3 13.4 14.8 16.7 Acciona ANA SM NR 77.21 6,986 28.3 27.3 22.3 4 7.8 0.8 0.8 0.8 2.9 3.3 4.0 Theolia TEO FP NR 1.33 211 N/A N/A 15.6 N/M N/M 0.4 0.3 0.3 (21.2) (3.8) 2.4 Iberdrola Renovables IBR SM NR 3.09 18,553 36.2 30.5 25.7 19 1.7 1.1 1.1 1.1 3.0 3.5 4.0 EDF Energies Nouvelles EEN FP NR 37.18 4,106 27.1 21.9 17.7 24 0.9 2.1 1.9 1.8 7.9 9.2 10.8 EDP Renovaveis EDPR PL NR 5.01 6,222 55.7 41.1 29.1 36 1.2 0.8 0.8 0.8 1.5 1.8 2.6 Infigen Energy IFN AU NR 0.37 293 N/A N/A N/A N/M N/M 0.4 0.4 0.4 (11.1) (6.4) (2.9) Greentech GES DC NR 17.30 175 N/A 9.8 8.5 N/M N/M 0.7 0.5 0.4 (24.9) 4.7 5.2 All prices are as at 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS

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Our target price of HK$2.00 derived by DCF valuation method Our target price of HK$2.00 was derived from DCF valuation based on a WACC of 9.5%, and terminal growth of 1% after FY2020F. At our target price, Datang’s shares would be trading at 12x, a 40% discount over Longyuan and a 43% discount over global peers. Despite a high earnings CAGR of 70% in 2010-2012F, with an expected net gearing ratio wallowing in the range of 270-290%, high interest rate risk and high refinancing risk could have material impact over company earnings. Besides, we stress that Datang’s ROE is inferior to Longyuan’s, although their overall ROE both remain at 9-10% in 2011F-2012F, because Longyuan also operates coal-fired power, which theoretically has lower return over wind power. We forecast Datang has lower average project ROE compared with Longyuan’s. There are several downside risks to our current earnings estimates, including: (1) Grid connection bottleneck in China; (2) risk attendant on overseas project returns; (3) risk arising from CER and VER income; (4) uncertainties on government subsidies and policies; and (5) risk of increasing gearing and interest rate.

Datang DCF valuation model

Free cash flow (RMB m) FY11F FY12F FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F Sales 4,219 6,034 7,857 9,955 12,707 16,058 20,135 25,169 31,228 38,284 EBITDA 4,412 6,118 7, 765 9,838 12,607 15,932 20,017 25,146 31,199 38,248 ...margin 105% 101% 99% 99% 99% 99% 99% 100% 100% 100% Less:tax (132) (171) (299) (538) (780) (1,091) (1,502) (2,046) (2,706) (3,513) Minority interest 178 231 329 457 884 1,236 1,702 2, 319 3,067 3,982 Working capital 1,235 992 855 1,528 1,358 2,171 2,217 2,738 3,295 5,869 CAPEX (15,011) (10,894) (12,729) (15,569) (19,667) (21,061) (24,403) (28,818) (33,188) (34,173) FCF (9,318) (3,723) (4,080) (4,284) (5,598) (2,813) (1,969) (661) 1,667 10,412

Net debt Equity Value per WACC Sum of PV PV of TV EV (FY10) value Shares share WACC calculation (%) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (m shares) (HK$) Equity beta 1.38 8.6 (21,190) 65,238 44,049 20,545 23,504 7,143 3.9 Risk-free rate (%) 3.92 8.7 (21,186) 63,824 42,639 20,545 22,094 7,143 3.7 Equity risk premium (%) 6 8.8 (21,182) 62,453 41,272 20,545 20,727 7,143 3.4 Country risk premium (%) 1 8.9 (21,177) 61,123 39,946 20,545 19,401 7,143 3.2 Cost of equity (%) 14 9.0 (21,173) 59,833 38,660 20,545 18,115 7,143 3.0 Cost of debt (%) 7 9.1 (21,168) 58,581 37,413 20,545 16,868 7,143 2.8 Debt/capital (%) 50 9.2 (21,163) 57,364 36,201 20,545 15,656 7,143 2.6 Tax (%) 15 9.3 (21,158) 56,183 35,025 20,545 14,480 7,143 2.4 WACC (%) 9.5 9.4 (21,153) 55,036 33,883 20,545 13,338 7,143 2.2 Terminal growth rate (%) 1 9.5 (21,147) 53,920 32,773 20,545 12,228 7,143 2.0 9.6 (21,142) 52,836 31,694 20,545 11,149 7,143 1.9 9.7 (21,136) 51,782 30,646 20,545 10,101 7,143 1.7 9.8 (21,130) 50,756 29,626 20,545 9,081 7,143 1.5 9.9 (21,124) 49,758 28,634 20,545 8,089 7,143 1.3 10.0 (21,118) 48,787 27,669 20,545 7,125 7,143 1.2 10.1 (21,112) 47,842 26,731 20,545 6,186 7,143 1.0 10.2 (21,105) 46,922 25,817 20,545 5,272 7,143 0.9 10.3 (21,098) 46,025 24,927 20,545 4,382 7,143 0.7 10.4 (21,091) 45,152 24,061 20,545 3,516 7,143 0.6 10.5 (21,084) 44,301 23,217 20,545 2,672 7,143 0.4 10.6 (21,077) 43,472 22,395 20,545 1,850 7,143 0.3 Source: CCBIS

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Risks

Grid connection bottleneck in China: The grid network construction within China’s richest wind areas, including Inner Mongolia and the three northeast provinces, is lagging behind the expansion of wind farms. We believe the issue could be resolved in the coming 3-5 years, from higher spending in UHV transmission lines and “smart grid systems” by the State Grid as part of the 12 th five year plan. If China could enhance its power grid network faster or slower than our expectation, there could be upside or downside surprises to our earnings forecasts.

Overseas project execution risk: Datang management laid out its plan to develop projects overseas with higher return potential. Targeted regions include North and South America, Australia and Eastern Europe. In our view, investment returns of overseas projects could be affected by changes in foreign government policies. Besides, the means to obtain borrowings to finance projects can be more difficult due to flow of fund restrictions between country borders and the dearth of business relationships with overseas banks. Foreign currency fluctuations raise additional investment risk to the company’s overseas project returns.

CER and VER income: CER income is dependent on project approvals by the CDM EB, the UN body that oversees carbon credit trading. In December 2009, the CDM EB suspended the approvals for some Chinese wind farms. Although the CDM EB has approved other Chinese wind farms, there is still a degree of uncertainty surrounding the approval process. Moreover, the continuation of the Kyoto Protocol and related carbon trading mechanisms presently remains uncertain post-2012. Our current forecasts for Datang have factored in continuous CER/VER income streams post 2012F.

Uncertainty surrounding government subsidies and policies: Government subsidy income is a material component of the return from wind farms. Government subsidies are also subject to annual government approval. Future government policies in China towards feed-in-tariffs, VAT rebates and preferential income tax rates can greatly affect our earnings estimates.

Risk of interest rate exposure given high gearing: Datang relies on bank and other borrowings finance its wind farm constructions. We anticipate the company’s net gearing ratio will reach c.286% in 2012F, which would lead to increasing interest risk exposure in the issuance of new debt and refinancing. In addition, since we foresee potential interest rate hikes by the PBOC to tackle inflation problems in China, we expect Datang’s financing costs to steadily rise in the near future. Based on our estimates, for every 1% (100bp) increase in Datang’s effective interest rate, net profit would decline by c.20%

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Company profile

Datang is the second-largest wind farm operator in China according to BTM Consult. As of end-2010, Datang had 4,028MW of cumulative wind capacity, accounting for approximately 9% of China’s wind capacity based on our estimates. Datang’s majority shareholder is Datang Group, one of the five-largest power generation companies in China. Company history

Datang was established in July 2010, during the reorganization of its predecessor, Datang Chifeng Saihanba Wind Power Generation (Datang Chifeng Saihanba), established in September 2004.

Through its predecessor, Datang Chifeng Saihanba, Datang has over six years of experience in wind farm development. The company’s first wind power project (installed capacity of 30.6MW) commenced construction in October 2004 and began operations in August 2005.

In April 2006, Datang formed its first wind power joint venture with KEPCO Neimenggu International in China, This represented Datang’s first step towards leveraging the experience and advanced technology of overseas power companies.

In 2009, parent Datang transferred to Datang 12 wind farms with total installed capacity of 549MW, reaffirming Datang’s role as Datang Group’s flagship company for its wind power business. In 2010, through the reorganization, Datang received all wind power businesses held by Datang Group and also the wind power businesses of Datang Group’s subsidiary, Shanxi Renewable Power.

Over the past six years, Datang rapidly built up its wind power business. The company’s total installed capacity surged from 79.9MW in 2005 to 4,028MW in end-2010.

In December 2010, Datang was listed on the Main Board of the Stock Exchange of Hong Kong.

Major milestones – Datang

Year Development 2004 Predecessor company, Datang Chifeng Saihanba, was established by Datang Group, and began construction of its first wind power project in Inner Mongolia 2005 First wind power farm in Chifeng, Inner Mongolia, began operations, with installed capacity of 30.6MW 2006 First wind power joint venture with KEPCO Neimenggu International in China 2008 Received approval from the NDRC to develop and construct the 102MW Shanghai Donghai Bridge Offshore wind power project Acquired wind power projects in Bayannur and Linxo in Inner Mongolia, expanding total installed capacity to 1,768MW 2009 Datang Chifeng Saihanba was renamed to China Datang Corp. Renewable Power Co., Ltd. Inherited 12 wind farms from Datang Group with installed capacity of 549MW. Total installed capacity reached 2,620MW; ranked second in China, eighth in the world according to BTM 2010 Acquired two wind power projects under construction from Datang Group with installed capacity of 49.5MW each and 2% equity interest in Datang Hailin Wind Power at a consideration of RMB1.7m. Listed on the main board of Hong Kong’s stock exchange in December 2010 2011 Won a bid in China’s first solar thermal power generation project, located in Inner Mongolia, with 50MW capacity Source: Company data, CCBIS

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Business description – wind and solar power generation

Datang is the primary entity through which its controlling shareholder Datang Group is engaged in renewable energy, with a focus on wind power generation. Unlike China Longyuan Power, Datang is not involved in coal-related businesses.

Datang Renewable develops, manages and operates wind farms in China. Sale of electricity to local grid companies drives company revenue. Its wind power projects are currently located in Inner Mongolia and northeastern provinces, central and western China, and the southeastern coastline of China.

Up to December 2010, the company had installed capacity of 4,028MW and wind resources reserves of approximately 59GW for future development. Most of its operating projects are located in Inner Mongolia and the northeastern provinces, accounting for 74% of total capacity.

According to management, Datang regards development of solar projects in China as the next growth driver. In January 2011, bid results of public tendering of the first solar thermal project in China were announced. Datang’s bid was the lowest among the participants and the company successfully won this 50MW solar thermal project in Inner Mongolia.

Operating projects (December 2010)

Inner Mongolia, and the northeast provinces Central and western regions Southeastern coastline Total Geographical coverage Inner Mongolia, Liaoning, Jilin and Heilongjiang Hebei, Henan and Gansu Shandong and Shanghai Installed capacity (MW) 2,994 597 437 4,028 % of total installed capacity (%) 74 15 11 100 Wind resources reserve (MW) 38,140 15,325 5,370 58,835 % of total wind resources reserve (%) 65 26 9 100 Source: Company data, CCBIS

Installed capacity by region (2008-2010) Gross power generation (2008-2010)

MW MW 4,500 6,000 4,000 3,500 5,000 3,000 4,000 2,500 2,000 3,000 1,500 1,000 2,000 500 0 1,000 2008 2009 2010 Southeastern Coastline 0 Central and Western 2008 2009 2010 Inner Mongolia and the three northeast provinces Total gross power generation (GWh)

Source: Company data, CCBIS Source: Company data, CCBIS

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Major customers

Datang’s main customers are local grid companies controlled by the Chinese government. Its top-five customers have historically accounted for over 90% of total revenue in the sale of electricity. Major suppliers

Datang has established long-term relationships with Vestas, Goldwind and Sinovel, its major wind turbine manufacturers. Other suppliers, for spare parts and consumables, include Eulkind and Nordex. Datang’s top-five major suppliers account for approximately 80% of its total purchases. Shareholder structure

Shareholder structure (March 2011)

Other public investors, 22.46% China Power Int'l, 0.46% State Grid Int'l Dev, 2.29%

High Action Ltd, 0.92%

China Longyuan, 1.38% China Yangtze Int'l, 2.29% Datang and Datang Jilin, Angang Group HK, 65.61% 2.29% Aluminum Corp of China Overseas, 2.29%

Source: Company data, CCBIS Use of IPO proceeds

The company plans to use 65% of its IPO proceeds received in December 2010 to increase installed capacity by developing wind power projects and towards the purchase of wind turbines, while 25% will be used to repay bank loans. The remaining 10% will be used as future working capital.

Use of IPO proceeds

Working capital, 10%

Purchase wind turbines, 20% Develop wind power projects, 45%

Repayment of bank loan, 25%

Source: Company data, CCBIS

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Board of directors and senior management

Name Age Position Key experience Chen Jinhang 55 Non-executive Professor-grade senior engineer; Director and Joined the group and appointed Director in July 2010; Chairman of the Previously director and general manager of Datang Group; Board Served various management positions in state-owned power conglomerates, including Datang and State Grid Corp of China Wu Jing 53 Non-executive Professor-grade senior engineer; Director and Joined the group and appointed Director in July 2010; Vice Chairman Previously chief economist of Datang Group; the of Board Served various management positions in state-owned power conglomerates. Yin Li 59 Non-executive Senior engineer; Director Joined the group and appointed Director in July 2010; Previously chief of Strategic Planning and Development of Datang Group; Served various management positions in state-owned power conglomerates. Jian Yingjun 47 Non-executive Senior engineer; Director Joined the group and appointed Director in July 2010;; Previously president of Datang Jilin; Served various management positions in state-owned power conglomerates. Hu Yongsheng 47 Executive Senior economist; Director and Master in management engineering; President Joined the group and appointed Director in September 2004; Previously served various management positions in state-owned power conglomerates. Zhang Xunkui 42 Executive Master in Engineering Thermophysics; Director and Joined the group and appointed Director in November 2009; Vice President Previously served various management positions in state-owned power conglomerates. Wang Guogang 55 Independent Doctor in Economics; non-executive Director general and researcher of Financial Research Institute of Chinese Academy of Social Sciences; Director Executive Director of China Society for Finance & Banking; Appointed Director in July 2010. Yu Hon To David 62 Independent Vice chairman of MCL Partners Limited; non-executive Independent non-executive Director of various Hong Kong listed companies; appointed Director in July 2010. Director Liu Chaoan 54 Independent Chairman of board of China Power Engineering Consulting Corp North China Power Engineering; non-executive Independent non-executive Director of various Hong Kong listed companies; appointed Director in July 2010. Director Wang Guoping 53 Chief Appointed supervisor in July 2010; Supervisor Senior accountant; Chief of auditing department of Datang Group. Zhang Xiaochun 38 Supervisor Appointed supervisor in July 2010; Senior accountant; Chief of auditing department of Datang Jilin. Dong Jianhua 50 Employee Appointed supervisor in July 2010; Representative Senior political officer; Assistant to president and chief of politics department. Hu Guodong 47 Vice President, Senior engineer; Secretary of Joined the group in August 2004, appointed Vice President in 2009; Board & Joint Previously served various management positions in state-owned power conglomerates. Company Secretary Wang Wenpang 44 Vice-president Senior engineer; Joined the group in August 2004; Previously served various management positions in state-owned power conglomerates. Meng Lingbin 48 Vice-president Engineer; Joined the group in January 2007; Previously served various management positions in state-owned power conglomerates. Zhang Xuefeng 42 Chief Financial Senior accountant; Officer Joined the group in February 2005. Source: Company data, CCBIS

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Financial summary

Income statement forecasts Balance sheet forecasts

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F FYE 31 Dec (RMB m) 2009 2010 2011F 2012F Revenue 1,428 2,380 4,219 6,034 Fixed assets 21,472 31,243 44,582 53,173 Other income 207 369 754 971 Other intangible assets 410 403 403 403 Operating expenses (775) (1,246) (2,233) (3,190) Long-term investments 65 72 70 70 Operating profit 860 1,503 2,740 3,815 Other long-term assets 4 59 59 59 Total non-current assets 21,951 31,777 45,114 53,705 EBIT 860 1,503 2,740 3,815 Other current assets 1,190 2,629 4,652 6,648 Depreciation and amortisation (553) (886) (1,672) (2,303) Inventories 6 10 11 18 EBITDA 1,413 2,389 4,412 6,118 Accounts receivable 862 1,495 1,850 2,480 Net interest expense (475) (766) (1,416) (2,101) Cash & equivalents 531 5,031 4,626 6,096 Share of results of an associate (1) (2) (2) 0 Total current assets 2,589 9,165 11,139 15,242 Extraordinary items 0 0 0 0 Total assets 24,540 40,942 56,253 68,895 Profit before tax 384 735 1,322 1,714 Accounts payable 6 85 117 208 Income tax (17) (57) (132) (171) Short-term debt 1,528 3,619 3,619 3,619 Net profit after tax 367 677 1,189 1,543 Other current liabilities 3,007 4,684 8,265 11,799 Minorities (118) (222) (178) (231) Total current liabilities 4,540 8,388 12,001 15,627 Reported net profit after tax 248 456 1,011 1,311 Long-term debt 14,290 21,957 32,465 40,091 Dividends 0 0 (100) (152) Other long-term liabilities 64 66 66 66 Transfer to reserves 248 456 911 1,180 Total non-current liabilities 14,354 22,023 32,531 40,157 Normalized net profit after tax 248 456 1,011 1,311 Total liabilities 18,894 30,411 44,532 55,784

Total shareholders' equity 5,645 10,530 11,720 13,162 Total equity and liabilities 24,540 40,942 56,253 68,946

Financial ratios Cash flow projections FYE 31 Dec (RMB m) 2009 2010 2011F 2012F FYE 31 Dec (RMB m) 2009 2010 2011F 2012F Profitability (%) EBITDA 1,413 2,389 4,412 6,118 EBIT margin 60.2 63.1 64.9 63.2 Change in working capital (374) (338) 1,235 992 EBITDA margin 98.9 100.4 104.6 101.4 Other operating cash flow (30) 90 (132) (171) Net margin 17.4 19.2 24.0 21.7 Cash flow from operations 1,008 2,141 5,515 6,939 ROE 4.4 4.3 8.6 10.0 Capital expenditure (8,141) (10,650) (15,011) (10,894) Growth (%) Addition in investments (62) (9) 0 0 Revenue 66.0 66.6 77.3 43.0 Net acquisitions (163) 0 0 0 EBIT 86.2 74.8 82.4 39.2 Other cash flow from investing EBITDA 109.5 69.1 84.7 38.7 activities 112 20 48 53 Net profit growth 77.6 83.5 121.8 29.7 Cash flow from investing activities (8,253) (10,639) (14,963) (10,841) Valuation and ratio analysis (x) Cash dividends (57) 0 0 (100)

Normalized PER 40.3 31.4 14.2 10.9 Equity issue 0 4,175 0 0 Reported PER 40.3 31.4 14.2 10.9 Net debt issue 7,071 9,759 10,508 7,626 Dividend yield 0.0 0.0 0.7 0.9 Other cash flow from financing 217 (835) (1,464) (2,154) Price/cash flow N/A 3.2 N/A 9.7 activities PBV 1.8 1.4 1.2 1.1 Cash flow from financial activities 7,231 13,098 9,044 5,371 EV/EBIT 17.0 9.7 5.3 3.8 Net cash flow (14) 4,500 (405) 1,470 EV/EBITDA 10.3 6.1 3.3 2.4 Beginning cash 545 531 5,031 4,626 Liquidity and leverage (%) Forex 0 0 0 0 Current ratio 0.6 1.1 0.9 1.0 Ending cash 531 5,031 4,626 6,096 Interest cover (x) 1.8 2.0 1.9 1.8 Gearing ratio 280 243 308 332 Net gearing ratio 271 195 268 283 Source: Company data, CCBIS estimates

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Appendix 1: Introduction to wind power

Wind power – an effective tool to curb GHG emissions

To achieve sustainable development and combat global warming, the governments around the globe are working together towards the reduction of greenhouse gasses

(GHG) emissions, such as carbon dioxide (CO 2).

According to the International Energy Agency (IEA), electricity and heat generation is

the largest source of CO 2 emission and accounted for 41% of total emission in 2008. Without the use of fossil fuels, wind energy can reduce CO 2 emission by replacing fossil electricity generation, such as coal-fired power.

As per the Global Wind Energy Association (GWEC)’s estimation, the expected

annual CO 2 savings from wind energy in 2010 is 243m tonnes, over 500m tonnes per year between 2015 and 2020, and 842m tonnes per year by 2030.

Global electricity generation by source (2008)

Solar PV Wind 0.1% 1.1% Other sources Hydro 0.3% 16.2%

Coal 40.8% Nuclear 13.5%

Biomass and waste 1.3%

Gas Oil 21.2% 5.5%

Source: IEA

Wind power potential – 45x of global 2008 power demand

Wind power currently represents around 1% of total electricity generation globally. According to a research jointly conducted by the Harvard University, Cambridge University and the VTT Technical Research Centre of Finland and published in 2010, there are around 690PWh onshore and 157PWh offshore wind resources worldwide, after imposing a 20% capacity factor limit. The findings of the research, compared to the global electricity consumption at 18,603TWh in 2008 as cited by IEA, suggest that the world’s overall wind resources are 45 times of global electricity demand.

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Global annual wind energy potential

PWh 1,400

1,200

1,000

800

600

400

200

0 Onshore Offshore 0-20m Offshore 20-50m Offshore 50-200m Total resources No capacity factor limitations 20% capacity factor limitations

Source: Global Potential for Wind-Generated Electricity by Xi Lu, Harvard University, Michael B. McElroy, Harvard University and Cambridge University, Juha Kiviluoma, VTT Technical Research Centre of Finland, CCBIS

The research also found that wind power would be an effective tool to curb CO 2 emission, since there are plenty of wind resources, both onshore and offshore, in the

top CO 2 emission countries, including China, the US, India, Russia and Japan.

Global top-five CO 2 emission countries - CO 2 emission (2005-2009)

CO2 emission (m tonnes) 8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000 2005 2006 2007 2008 2009 China United States India Russia Japan

Source: Energy Information Administration

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Global top-five CO 2 emission countries – annual wind energy potential vs . electricity consumption (2008)

TWh 125,000

100,000

75,000

50,000

25,000

0 China United States India Russia Japan Electricity consumption Potential wind energy – onshore Potential wind energy – offshore

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Appendix 2: Wind power and other energy sources comparison

Wind power is clean, safe, and having relatively low operating costs compared with other energy sources. Another advantage of wind power generation is that wind power does not consume fuel and, thus, has very stable generation costs for a wind power project. Also, rural land is what a wind power project requires and it is not bounded by water constraints, and therefore wind power has high development potential.

Pros and Cons of wind power

Pros Cons

Environmentally friendly; nil CO 2 emission in power generation, this is critical for The unpredictability of climate changes causes no controllability over power governments to meet CO 2 emission targets. generation; and with a lack of sufficient power storage system, wind power generation cannot meet power demand in real time. Wind farm operators can sell carbon credits and earn income through carbon credit trades Occupying a large area of land for onshore wind farms; increasing use of under the CDM and verified emission reductions (VERs) (please refer to Appendix 7: WTGs will raise electricity generation and enjoy economies of scale in Carbon Credit trading markets and CDM) operations. But more WTGs means larger land requirements. Utilizing rural area land and supplying electricity to towns located in rural areas where Affecting signal reception such as cellular communications and telephone connection of grids is expensive or technically difficult. systems. Fuel free, no costs for fuel, and generally safe to use when compared with nuclear, coal, oil Noisy and producing constant sound and movements of the rotor blades may and natural gas. annoy neighborhood. Attracting tourists. Killing birds around the area, especially during migration seasons. Source: CCBIS

Operation requirement comparisons between different power sources

Thermal Nuclear Wind Solar PV Hydro Biomass Geo-thermal Controllability/predictability high high low low medium high low Land area requirement low medium medium medium high high medium Water resources requirement nil medium nil nil high high low Impact on the environment high mid to high low nil high nil high Technological difficulties low high low low medium medium high Energy level of the whole life cycle medium medium low high medium low medium Development potential low medium high high low medium medium Source: CCBIS

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Appendix 3: How does a WTG work?

WTGs are the most important component in a wind power project. WTGs perform the best in areas with strong and steady winds, like coastal areas and higher latitude areas.

The wind vane on the tail of a WTG turns the rotor at the wind, causing it to spin. The rotor turns the shaft (low-speed draft), and the shaft turns the generator to generate electricity. In conventional WTGs with gearboxes, the gearbox can enhance the turning speed and torque conversions using gear ratios. The converter makes the AC into DC power. The power transformer converts the low-to-medium voltage to a high voltage level suitable to flow to the local grid at a pre-determined voltage.

WTGs are designed to operate under a spectrum of wind speed. The designated maximum speed below is the survival speed, above which WTGs cannot operate. On average, commercial WTGs survive a range of 144km/h to 259km/h. WTGs are installed with a control system which stalls, pitches and yaws the rotor blades and the whole turbine according to the wind speed in order to increase efficiency or ceases operation when wind is above the survival speed.

WTGs connected to households Interior of a WTG

Source: LP Electric Srl Source: National Renewable Energy Laboratory, U.S. Department of Energy

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Appendix 4: Global development of wind power

Status of global wind power development

The global wind market has experienced healthy growth at a CAGR of 22% in 2001-2010. For many years until 2009, European countries and the US had been the main drivers of the growth of global wind installations. In 2001-2003, global new wind installations slowed down due to the financial crisis. Nonetheless, the industry picked up again in 2004-2008, following the recovery of the global economy, in our opinion.

In 2006, the Chinese government passed ‘The Renewable Energy Law’ and stated its target to increase the use of renewable energy to 15% of annual power consumption by 2020. Since then, China has taken the lead to expand wind power installation capacity. China’s new wind installations grew at a 96% CAGR in 2006-2010 versus global growth at a 26% CAGR.

Global cumulative installed wind power capacity Global (ex-China) cumulative installed wind power (2001-2010) capacity (2001-2010)

200,000 40% 160,000 40%

180,000 38% 38% 140,000 36% 160,000 36% 120,000 34% 140,000 34% 32% 100,000 120,000 32% 30% 28% 100,000 30% 80,000 26% 80,000 28% 60,000 24% 60,000 26% 22% 40,000 20% 40,000 24% 18% 20,000 20,000 22% 16% 0 20% 0 14% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Cumulative installed capacity (MW) (LHS) Growth rate (RHS) Cumulative installed capacity (MW) (LHS) Growth rate (RHS)

Source: GWEC, CWEA, CCBIS Source: GWEC, CWEA, CCBIS

Global newly installed wind power capacity (2001-2010) Global (ex-China) newly installed wind power capacity (2001-2010)

40,000 80% 25,000 80% 70% 35,000 70% 60% 60% 20,000 30,000 50% 50% 40% 25,000 15,000 40% 30% 20,000 30% 20% 10,000 15,000 10% 20% 0% 10,000 10% 5,000 (10)% 5,000 0% (20)%

0 (10)% 0 (30)% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Newly installed capacity (MW) (LHS) Growth rate (RHS) Newly installed capacity (MW) (LHS) Growth rate (RHS)

Source: GWEC, CWEA, CCBIS Source: GWEC, CWEA, CCBIS

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Government’s RPS a fundamental driver for wind power globally

To combat climate change issues, governments around the world have adopted various policies, including the most populous Renewable Portfolio Standard (RPS). It is a target set by a government of a percentage of energy consumption or generation from renewable energy sources by a certain period of time.

Although most of the RPS announced by governments are not specified with types of energy sources to be used to achieve the targets, given wind power’s cost competitiveness and scalability among renewable energy sources, we believe that RPS would be a fundamental driver for wind power development globally.

Target share of primary and final energy from renewables

Primary energy Final energy Existing share Existing share in 2008 (%) Future target in 2008 (%) Future target EU countries Austria 29.0 28.5 34% by 2020 Belgium 3.0 3.3 13% by 2020 Bulgaria 5.1 9.4 16% by 2020 Cyprus 2.1 9% by 2010 4.1 13% by 2020 Czech Republic 4.9 8.6–10% by 2020 7.2 13% by 2020 Denmark 18.0 20% by 2011, 30% by 2025 18.8 30% by 2025 Estonia 12.0 19.1 25% by 2020 Finland 25.0 30.5 38% by 2020 France 7.5 7% by 2010 11.0 23% by 2020 Germany 8.1 4% by 2010, 18% by 2020, 50% by 2050 8.9 18% by 2020 Greece 5.1 8.0 18% by 2020 Hungary 6.1 6.6 13% by 2020 Ireland 3.8 3.8 16% by 2020 Italy 8.2 6.8 17% by 2020 Latvia 28.0 6% by 2010 29.9 40% by 2020 Lithuania 10.0 12% by 2010, 20% by 2025 15.3 23% by 2020 Luxembourg 3.6 2.1 11% by 2020 Malta 0.5 0.2 10% by 2020 Netherlands 3.4 3.2 14% by 2020 Poland 5.8 14% by 2020 7.9 15% by 2020 Portugal 17.6 23.2 31% by 2020 Romania 14.0 20.4 24% by 2020 Slovakia 5.2 8.4 14% by 2020 Slovenia 12.0 15.1 25% by 2020 Spain 7.6 10.7 20% by 2020 Sweden 32.0 44.4 49% by 2020 United Kingdom 2.6 2.2 15% by 2020

Other developed/OECD/transition countries Albania 18% by 2020 Israel 10–20% by 2020 South Korea 2.4 4.3% by 2015, 6.1% by 2020, 11% by 2030 Switzerland 16.0 24% by 2020 18.0 (to be continued)

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Target share of primary and final energy from renewables (continued)

Primary energy Final energy Existing share Existing share in 2008 (%) Future target in 2008 (%) Future target Developing countries China 9.9 10% by 2010 15% by 2020 Egypt 14% by 2020 Fiji 100% by 2013 Indonesia 5.0 17% by 2025 Jordan 7% by 2015, 10% by 2020 Kuwait 5% by 2020 Lebanon 12% by 2020 Madagascar 54% by 2020 Malawi 7% by 2020 Mali 15% by 2020 Morocco 8% by 2012 10% by 2012 Nigeria 20% by 2012 Pakistan 10% by 2012 Palestine 20% by 2012 Senegal 15% by 2025 Syria 4.3% by 2011 Thailand 20% by 2022 Tonga 100% by 2013 Tunisia 10% by 2011 10% by 2011 Uganda 61% by 2017 Vietnam 3% by 2010, 5% by 2020, 11% by 2050 Source: REN21

Leading countries for wind power

According to the GWEC, global cumulative installed wind capacity reached 197GW by the end of 2010. China was the largest wind market in terms of cumulative capacity, followed by the US, Germany, Spain and India. China has the largest new wind installation and accounted for 50% of the global market in 2010.

Top-10 countries in cumulative installed capacity (2010) Global new wind installations (2010)

MW Turkey Rest of world 45,000 1% 12% Canada 40,000 2% Italy 35,000 UK 2% 30,000 3% 25,000 France 3% China 20,000 Germany 50% 15,000 4% Spain 10,000 4% 5,000 India 6% 0 UK Italy USA India Spain China USA France Canada Denmark Germany 13%

Restof world Source: GWEC, CWEA, CCBIS Source: GWEC, CWEA, CCBIS

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Global top WTG manufacturers

The world’s top WTG manufacturers include Vestas (VWS DC, Not Rated), GE Wind, Enercon, and Gamesa (GAM SM, Not Rated). The market environment has changed in light of China’s rapid growth in its new installations over the past few years. The global market share of European and American WTG manufacturers has been diluted and replaced by Chinese leading WTG manufacturers, such as Sinovel (601558 CH, Not Rated), Goldwind and Dongfang Electric (1072 HK, Not Rated) which together accounted for 22.9% of the world’s new WTG installations in 2009.

Global WTG market share – newly installed capacity Global WTG market share – newly installed capacity (2009) (2008)

Vestas Others Vestas Others 12.5% 15.8% 21.3% 17.8%

Nordex GE 3.4% 12.4% Acciona REpower 4.5% 3.4% GE Siemens Siemens 16.7% 6.2% 5.9% Sinovel 9.2% Suzlon Suzlon 6.4% 8.1% Sinovel Dongfang Enercon 3.6% 6.5% 8.5% Gamesa Enercon Gamesa Goldwind 10.8% Goldwind 9.0% 6.7% 7.2% 4.1%

Source: BTM Source: BTM

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Appendix 5: Wind power development in China

China’s wind power growth

The Chinese government is keen to develop renewable energy sources due to China’s strong energy demand and efforts to combat global warming. Wind power is one of its priorities among the different energy sources available in the country. In 2010, China added 19GW wind power capacity to reach cumulative capacity of 45GW.

China’s cumulative installed wind power capacity (2001-2010)

45,000 135%

40,000 115% 35,000

30,000 95%

25,000 75% 20,000

15,000 55%

10,000 35% 5,000

0 15% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Cumulative installed capacity (MW) (LHS) Growth rate (RHS)

Source: CWEA, CCBIS

China’s newly installed wind power capacity (2001-2010)

20,000 170% 18,000 150% 16,000 130% 14,000 110% 12,000 90% 10,000 70% 8,000 50% 6,000 30% 4,000 10% 2,000 (10)% 0 (30)% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Newly installed capacity (MW) (LHS) Growth rate (RHS)

Source: CWEA, CCBIS

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Policy support from the Chinese government

The Chinese government introduced and revised regulations to encourage the use of wind power in national power generation. Price-driven incentives include fixed feed-in-tariffs, government grants and value-added tax (VAT) credits. Quantity-driven incentives include compulsory renewable energy capacity requirements with large independent power producers (IPPs) and renewable energy consumption targets by 2020.

According to the price policy notice issued by the National Development and Reform Commission (NDRC) in July 2009, fixed feed-in-tariffs are formed in accordance with the status of wind energy resources and conditions of construction.

Feed-in tariffs in China

RMB0.51/kWh RMB0.54/kWh RMB0.58/kWh RMB0.61/kWh

Source: National Energy Administration

Feed-in tariff level per location in China

Tariff level Location RMB 0.51 per kWh Northern Xinjiang Central & western Inner Mongolia RMB 0.54 per kWh Western Gansu Eastern Inner Mongolia Northern Hebei RMB 0.58 per kWh Central and southern Xinjiang Ningxia Eastern Gansu Western Liaoning North, central and eastern Heilongjiang RMB 0.61 per kWh All other locations Source: National Energy Administration

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Major renewable energy policies in China

Subject Effective year Authority Key points CDMs – Measures for Operation and Management of 2005 NDRC Only CDM projects by companies controlled by Chinese parties will be eligible CDM Projects for approval. The approval procedures of CDM projects include review by experts appointed by NDRC, MOST, MFA, MOF and the National CDM Board. Renewable Energy Law 2006 People’s Congress Defines the responsibility of each relevant ministry in promoting renewable energy. It also mandates full dispatch, the principle of setting tariffs and a renewable energy fund. Grid-connection – Provisions on the Administration of 2006 NDRC Grid-connection system for power generation from renewable energy shall be Power Generation from Renewable Energy constructed and administered by power grid enterprises. Interim Measures on Administration of Designated Fund 2006 MOF MOF will allocate funds from the PRC central financial budget to support the for the Development of Renewable Energy development of renewable energy. Mandatory Purchase – Supervision Measures on 2007 SERC Grid enterprises must buy out the grid-connection volume in the area for all Purchase of the Full Amount of Renewable Energy power generated by renewable sources. They will be penalized for failure to Power by Grid Enterprises do so. Medium and long-term development plan for the 2007 NDRC Development plan states China's target to reach installed wind power capacity development of renewable energy of 5GW by 2010 and 30GW by 2020; further amended to 10GW by 2010 in 2008. Taxation – Catalogue of Public Infrastructure Projects 2008 MPF Wind farm operators are allowed to receive a three-year income tax exemption Entitled for Preferential Tax Treatment and 50% reduction for the following three years, for all wind projects approved after January 2008. VAT – Circular on VAT Policy Regarding Comprehensive 2008 MOF Wind power generators receive a 50% tax rebate on VAT on wind power sales. Utilization of Resources and Other Products

CO 2 emission target in a standing meeting 2009 State Council By 2020, CO2 emission per unit of GDP of China is to be reduced to 40-45% under 2005 levels. Feed-in-tariff – Circular Regarding the Furtherance of 2009 NDRC Onshore feed-in-tariffs are fixed at four ranges according to location; On-grid Pricing Policy of Wind Power RMB0.51/0.54/0.58/0.61 per kWh (including VAT). Taxation – Notification on Chinese CDM Fund and CDM 2009 MPF, SAT 2% of the income from sales of green gas reduction quota can be deducted from Projects subject to Corporate Income Tax tax income. VAT – Tax refund policy for Purchase of Domestically 2009 MPF, SAT Foreign invested enterprises that purchase domestically manufactured Manufactured Equipment by Foreign invested equipment can receive VAT refunds. Enterprises Mandatory Purchase – Renewable Energy Law 2010 People’s Congress China will carry out a renewable energy-related full purchase system. The Sub-clauses 1 and 2 of Rule 14 energy supervisory, electricity regulatory and finance supervisory departments of the State Council will ensure full repurchase of renewable energy to be formulated. Renewable Energy Law Amendment 2010 People’s Congress Regulatory framework for the development and use of renewable energy Offshore wind power – Provisional Measures for the 2010 NEA Regulates the administration organization management and technical quality Administration of Offshore Wind Power Construction administration for offshore wind power development planning, project granting, project approval, use of sea area, marine environmental protection, construction completion and acceptance, operation information management, etc. Source: People’s Congress, NDRC, Ministry of Finance, State Council

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Appendix 6: Economy of wind farms

Cost comparisons between renewable energy sources

In our view, wind power’s cost advantage over other renewable energy sources is in upfront capex requirement and generation costs.

We estimate wind power currently has the lowest capex requirement (capex per kilowatt of capacity installed) among various energy sources, while solar PV has the highest capex requirement in China.

Capex comparisons between different power sources in China

Natural gas

Wind

Solar PV

Waste (Biomass)

Hydro

6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 Capital expenditure (in RMB) per kW

Source: CPNE, CCBIS

According to Renewable Energy Policy Network for the 21st Century (REN21), onshore wind power generation cost is among the lowest compared with other energy sources. However, offshore wind generation cost currently remains high due to the immaturity of offshore wind technology and consequent difficulties in electricity connections as well as higher construction and maintenance costs.

Generation cost comparison between power sources

Nuclear Gas Coal-fired CSP Utility-scale solar PV Rooftop solar PV Geothermal Biomass Offshore wind Onshore wind Small hydro Large hydro 0 5 10 15 20 25 30 35 40 45 50 55 US cents / kwh

Source: REN21 (July 2010), CCBIS estimates

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Cost breakdown of wind farms

WTG are the principal component of a wind farm. We estimate that WTGs (excluding tower tube) normally account for c.50-60% of Chinese wind farm construction costs. Construction (c.20%) and tower tube (c.10-15%) are other major cost components of a wind farm. Grid connection and land both account for around 2% of construction cost of a typical wind farm in China.

Onshore wind farm costs distribution

Interest Design Land Development 2% 1% 2% Grid connection 1% 2% Other E&M 10%

Tower tube 12% Wind turbines 51%

Construction 19%

Source: China WindPower, CCBIS

IRR analysis of a typical wind farm in China

Based on assumptions listed in the table below, we estimate that the IRR of a typical 49.5MW wind farm in China is around 11.7%, given the CDM scheme ceases end-2012. However, if the CDM scheme continues after 2012, we expect wind farm IRRs in China to increase to 16.9%.

We note that our analysis assumes no other issues, such as physical grid connection bottleneck or power curtailment.

Assumptions

Capacity of wind farm 49.5W Utilization hours 2,200 hours CERs EUR10/MT or RMB87/MT; 1MT CERs per 1MWh electricity generation WTG costs RMB4,400 per kW; being 51% of wind farm investment Total project investment RMB420m Bank loan RMB342m; being 80% of project investment Capital RMB85m; being 20% of project investment Interest rate 5.5% per annum Construction period 12 months VAT credit VAT of CAPEX offset by VAT from power sales, total RMB 50m Income tax rate 25%, First three years income tax free, the following three years 50% on income tax for foreign investments Source: CCBIS estimates

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Analysis of a typical 49.5MW capacity wind farm in China – CDM ceases end-2012

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Total capacity (MW) 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 Utilization hours (hours) 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 Gross power generated (MWh) 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 Power loss (%) 9 9 9 9 9 9 9 9 9 9 9 9 Electricity sold (MWh) 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 Fixed tariff including VAT (RMB/kWh) 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 Fixed tariff excluding VAT (RMB/kWh) 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 Net electricity tariff (RMB m) 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 Net CDM income (RMB m) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 VAT refund – power generation (RMB m) 0.0 0.0 0.0 0.0 0.0 0.0 0.1 4.2 4.2 4.2 4.2 4.2 Total revenue (RMB m) 49.0 49.0 49.0 49.0 49.0 49.0 49.1 53.1 53.1 53.1 53.1 53.1

CAPEX (RMB m) (427) Depreciation (RMB m) (d) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) Maintenance costs (RMB m/kWh) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) Maintenance fund (RMB m) (1.5) (1.5) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) Total (RMB m) (27.3) (27.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3)

Gross profit (RMB m) 21.7 21.7 20.7 20.7 20.7 20.7 20.8 24.9 24.9 24.9 24.9 24.9 Operating expense (RMB m) (3.4) (3.4) (3.4) (3.4) (3.4) (3.4) (3.4) (3.7) (3.7) (3.7) (3.7) (3.7) Operating profit (RMB m) 18.3 18.3 17.3 17.3 17.3 17.3 17.4 21.1 21.1 21.1 21.1 21.1 Loan balance at end of year (RMB m) 342 307.5 273.3 239.2 205.0 170.8 136.7 102.5 68.3 34.2 0.0 0.0 0.0 Interest expense (RMB m) (e) (17.9) (16.0) (14.1) (12.2) (10.3) (8.5) (6.6) (4.7) (2.8) (0.9) 0.0 0.0 Profit before tax (RMB m) (a) 0.4 2.3 3.2 5.1 6.9 8.8 10.8 16.4 18.3 20.2 21.1 21.1 Taxation (RMB m) 0.0 0.0 0.0 (0.6) (0.9) (1.1) (2.7) (4.1) (4.6) (5.1) (5.3) (5.3) Net profits (RMB m) 0.4 2.3 3.2 4.4 6.1 7.7 8.1 12.3 13.7 15.2 15.9 15.9

Capital (RMB m) 85 VAT offset (RMB m) (b) 8.3 8.3 8.3 8.3 8.3 8.3 4.1 0.0 0.0 0.0 0.0 0.0 Loan repayment (RMB m) (c) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) 0.0 0.0 Cash flow – equity level (RMB m) (a)+(b)+(c)-(d) (85) (4.1) (2.2) (1.3) 0.6 2.5 4.3 2.0 3.6 5.5 7.4 42.5 42.5 Cash flow – project level (RMB m) (a)+(b)-(d)-(e) 47.9 47.9 47.0 47.0 47.0 47.0 42.8 42.5 42.5 42.5 42.5 42.5 20-year equity IRR (%) 11.66 20-year project IRR (%) 8.12 ROE (%) 0.47 2.67 3.73 5.19 7.11 9.04 9.48 14.44 16.09 17.74 18.57 18.57 Source: CCBIS estimates

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Analysis of a typical 49.5MW capacity wind farm in China – CDM continues after 2012

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Total capacity (MW) 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 Utilization hours (hours) 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 Gross power generated (MWh) 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 Power loss (%) 9 9 9 9 9 9 9 9 9 9 9 9 Electricity sold (MWh) 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 Fixed tariff including VAT (RMB/kWh) 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 Fixed tariff excluding VAT (RMB/kWh) 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 Net electricity tariff (RMB m) 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 Net CDM income (RMB m) 0.0 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 VAT refund – power generation (RMB m) 0.0 0.0 0.0 0.0 0.0 0.0 0.1 4.2 4.2 4.2 4.2 4.2 Total revenue (RMB m) 49.0 58.2 58.2 58.2 58.2 58.2 58.4 62.4 62.4 62.4 62.4 62.4

Gross profit (RMB m) 21.7 31.0 30.0 30.0 30.0 30.0 30.1 34.2 34.2 34.2 34.2 34.2 Operating expense (RMB m) (3.4) (4.1) (4.1) (4.1) (4.1) (4.1) (4.1) (4.4) (4.4) (4.4) (4.4) (4.4) Operating profit (RMB m) 18.3 26.9 25.9 25.9 25.9 25.9 26.0 29.8 29.8 29.8 29.8 29.8 Loan balance at end of year (RMB m) 342 307.5 273.3 239.2 205.0 170.8 136.7 102.5 68.3 34.2 0.0 0.0 0.0 Interest expense (RMB m) (e) (17.9) (16.0) (14.1) (12.2) (10.3) (8.5) (6.6) (4.7) (2.8) (0.9) 0.0 0.0 Profit before tax (RMB m) (a) 0.4 10.9 11.8 13.7 15.6 17.5 19.4 25.1 27.0 28.8 29.8 29.8 Taxation (RMB m) 0.0 0.0 0.0 (1.7) (1.9) (2.2) (4.9) (6.3) (6.7) (7.2) (7.4) (7.4) Net profits (RMB m) 0.4 10.9 11.8 12.0 13.6 15.3 14.6 18.8 20.2 21.6 22.3 22.3

Capital (RMB m) 85 VAT offset (RMB m) (b) 8.3 8.3 8.3 8.3 8.3 8.3 4.1 0.0 0.0 0.0 0.0 0.0 Loan repayment (RMB m) (c) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) 0.0 0.0 Cash flow – equity level (RMB m) (a)+(b)+(c)-(d) (85) (4.1) 6.4 7.3 9.2 11.1 13.0 10.7 12.3 14.2 16.0 51.1 51.1 Cash flow – project level (RMB m) (a)+(b)-(d)-(e) 47.9 56.6 55.6 55.6 55.6 55.6 51.4 51.1 51.1 51.1 51.1 51.1 20-year equity IRR (%) 16.85 20-year project IRR (%) 10.50 ROE (%) 0.47 12.78 13.84 14.03 15.96 17.88 17.06 22.03 23.68 25.33 26.15 26.15 Source: CCBIS estimates

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Appendix 7: Carbon trading markets and CDM

Kyoto Protocol

Kyoto Protocol is an international agreement signed by 155 countries in the ‘United Nations Framework Convention on Climate Change (UNFCCC)’ held in Kyoto, Japan. The countries included in the “Annex I” of the agreement are industrialized countries and the European community which shall ensure that their aggregate greenhouse gases emissions do not exceed their assigned amounts, calculated at 5% below their 1990 emission levels in the commitment period from 2008 to 2012.

Carbon credit trades under Kyoto mechanisms

In order to meet the target emission level within the assigned amounts, Annex I countries may simply reduce their country emission or acquire carbon credits in the market through four types of carbon credit trades under Kyoto Protocol:

(1) Assigned Amount Units (AAUs): Annex I countries purchase excess AAUs from other Annex I countries. This happens when an Annex I country was successful in reducing its greenhouse emission level below its committed level and has extra quota to sell for income.

(2) Removal Units (RMUs): Annex I countries earn RMUs through investing in ‘land

use, land-use change, and forestry’ (LULUCF) activities that absorb CO 2, which can be used to meet carbon emission commitments.

(3) Clean Development Mechanism (CDM): CDM refers to the purchase of ‘Certified Emissions Reduction units’ (CERs) by Annex I countries from non-Annex I countries (developing countries). Projects eligible for trade must be pre-approved by the CDM Executive Board (CDM EB) and registered on the CDM Registry.

(4) Joint Implementation (JI): Emission Reduction Units (ERUs) are earned through co-investments in emission reduction projects between Annex I countries under the supervision of the JI Supervisory Committee.

Four types of carbon credit trades under Kyoto Protocol

Source: CCBIS

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Voluntary Emission Reduction Units (VERs)

The fifth type of carbon credit trades involves the sale of VERs between two undesignated countries. Participating projects are usually those which fail to meet all the requirements or obligations under Kyoto Protocol for certification. As projects that trade as VERs are not approved by a regulatory board like those that trade as CDM schemes, they are only audited by independent third parties. These projects will usually trade at discounts to CDM registered projects to compensate for the inherent risk faced by the VER buyers.

Current development of carbon credit market

Since Kyoto Protocol came into effect in 2005, the carbon credit market has been one of the fastest growing international commodity markets. According to the World Bank, trading volume of the market reached US$143.7b in 2009, up 80% YoY, with 205% CAGR seen in 2005-2009. In aggregate, trade volume in 2004-2009 was US$384.5b.

From the price chart below, we can see how the per unit carbon credit price moves in line with the global economy. When the global economy was in prosperous times in 2007 and 2008, the per unit carbon credit unit rose to EUR35 per metric ton of carbon from EUR15 per metric ton, but quickly dropped to EUR10 per metric ton in difficult times in 2009. Since 2009, the per unit carbon credit price stabilized at around EUR15 per metric ton.

Carbon credit per unit price trend

EUR/MT 35

5 Jul-05 Jul-06 Jul-07 Jul-08 Oct-05 Oct-06 Oct-07 Oct-08 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Jan-06 Jan-07 Jan-08 Jun-10 Jan-09 Jun-09 Sep-10 Dec-10 Sep-09 Dec-09 Mar-11 Mar-10 Source: Bloomberg (ECX European Climate Exchange (ECX) from 22 April 2005 to 1 April 2011)

At present, the major carbon credit trading markets are located in Europe. The eight largest exchanges include the Paris Bluenext Exchange, the Netherlands Climex Exchange, the Austria EXAA Energy Exchange, the European Climate Exchange (ECX), the European Energy Exchange (EEX), the Italian Power Exchange (IPEX), the London Energy Brokers’ Association (LEBA) and the Nord Pool Exchange. Carbon credit exchanges were also established in Canada, Japan, Russia, the US, and Australia. We expect that developing countries such as China, South Korea and India will establish their own carbon credit exchanges within three-to-five years.

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CDM registration procedures

Project operators, including wind farms and other renewable project operators, may be eligible to register as a CDM with the CDM executive board through nine procedures.

CDM registration procedures

(1) Planning a CDM project activity CDM project participants (PPs) plan a CDM project activity according to the conditions set in order to be registered as a CDM project activity. The projects should meet: Additionally: applicants should ensure the project reduces emissions more than the world would have occurred in the absence of the project. Baseline: applicants should ascertain the amount of emissions that would have occurred without the project, otherwise known as the “baseline” of the project. It may be estimated through reference to emissions from similar activities and technologies, or to actual emissions prior to project implementations. (2) Preparing the project design document (PDD) PPs prepare the project design document (CDM-PDD) for a CDM project activity. The CDM-PDD presents information on the essential technical and organizational aspects of the project activity, the approved baseline methodology applied to the project activity and the approved monitoring methodology applied to the project. (3) Getting approval from each party involved PPs shall get written approval of voluntary participation from the designated national authority (DNA). A party involved is a party that provides a written approval. The registration of a project activity can take place without an Annex I p arty being involved at this stage of registration. (* China is not included in the Annex I party list) (4) Validation Validation is the process of independent evaluation of a project activity against the requirements of the CDM on the basis of the PDD. Validation is carried out by a designated operational entity (DOE). (5) Registration Registration is the formal acceptance of a validated project as a CDM project activity. Registration is done by the CDM executive board. (6) Monitoring a CDM project activity PPs collect and archive all relevant data necessary for calculating greenhouse gas (GHG) emission reductions by a CDM project activity, in accordance with the monitoring plan written in the PDD. (7) Verification and certification Verification is the periodic independent review and ex-post determination of the monitored GHG emission reductions. Verification is carried out by a DOE. Certification is the written assurance by a DOE that a project activity achieved the reductions in GHG emissions as verified. (8) Issuance of CERs The executive board will issue CERs equal to the verified amount of GHG emission reductions. The issuance of CERs, in accordance with the distribution agreement, shall be affected only when the share of proceeds to cover administrative expenses (SOP-Admin) of the CDM has been received. (9) Distribution of CERs CERs will be distributed among PPs. The decision on the distribution of CERs from a CDM project activity shall exclusively be taken by PPs. Source: China Carbon N.V.

Timeline for CDM registration

1st to 2 nd months 4th to 5 th months 6th month 7th to 12 months - Plan CDM project activity - Validation - Registration - Monitoring a CDM - Prepare project design project activity document (PDD) - Verification & certification - Get approval from - Issuance of CERs each Party involved - Distribution of CERs

Source: Longyuan, CCBIS

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CDM – current status

As of 1 April 2011, there are approximately 2,947 CDM projects registered globally. China plays a leading role in the CDM market selling carbon credits. It has more than 1,200 projects registered with the CDM EB as of March 2011. Other Asian countries, Brazil, and Mexico are also major carbon credit sellers.

Breakdown of registered CDM projects by country (March 2011)

Others 15.2%

Republic of Korea 1.8% Vietnam 1.9% China Indonesia 43.8% 2.1% Malaysia 3.1% Mexico 4.2% Brazil 6.4%

India 21.5%

Source: UNFCCC

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Appendix 8: China WTG industry overview

Leading Chinese WTG manufacturers, such as Sinovel, Goldwind, Mingyang, and Shanghai Electric, have the ability to deliver 2.0MW WTGs and are developing WTGs with capacity up to 6.0MW, in our view. However, at the current stage, the 1.5MW WTG remains dominant in China, and accounts for 67.1% of new installations in 2009 based on CWEA data.

China distribution of newly installed WTG (2009)

Others capacities 750kW WTG 4% 12%

850kW WTG 9%

2.0MW WTG 6% 1.5MW WTG 1.25MW WTG 66% 3%

Source: CWEA

According to China Wind Engery Association (CWEA), the top-five WTG manufacturers accounted for above 70% of newly installed wind power capacity in 2010. We estimate that doubly-fed WTG is now main stream, accounting for 76% of total installations in China in 2010. Direct-drive WTGs accounted for the remaining 24%.

China WTG market share in newly installed wind power capacity (2010)

Others 10% Sinovel Huachuang 23% 3% XEMC Wind Power 3% Gamesa 3% Shanghai Electric 3%

Vestas Mingyang 5% 6% Goldwind 21% United Power 9% Dongfang Electric 14%

Source: CWEA, CCIBS estimates

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Appendix 9: Comparison of doubly-fed, direct-drive, and hybrid-drive WTGs

Doubly-fed WTGs dominate the global WTG market, including China. It employs a gearbox component which enhances turning speed and electricity generation. The technology has a relatively long track record at a relatively low manufacturing cost. Many top WTG manufacturers, such as Sinovel, Dongfang Electric, Guodian United Power and Mingyang, manufacture WTGs using doubly-fed induction generator (DFIG) technology.

Direct-drive full-converter technology is employed by the Goldwind WTGs. This design eliminates the gearbox component used in most conventional WTGs. To further reduce the number of rotating components, a large single main bearing links the rotor assembly and generator rotor. The turbine feeds generated power into the grid by means of a “back-to-back”- (AC to DC to AC) type full-converter equipment. The generator operates at varying frequencies, directly proportional to the rotor speed.

Hybrid-drive WTGs are produced by Goldwind and Mingyang. It is a new technology employing a hybrid gearbox, which is lighter in weight than traditional WTGs and is more reliable and cheaper to manufacturers. Up to 2010, there were several hybrid-drive WTGs being delivered. It will take time before large-scale deliveries are made as the product gains the confidence and acceptance of the market.

Comparison of mainstream commercial WTGs in China

Doubly-fed induction Direct-drive generator with Direct-drive generator with Hybrid-drive/super Remarks generator direct-current excitation permanent-magnet excitation compact drive (SCD) Vestas, Sinovel, Gamesa, Nordex, Repower, GE, Dongfang Electric, VENSYS, Goldwind, Scanwind, Main suppliers United Power, Mingyang Enercon, Mtorres, Lagerwey Xmec Windpower Goldwind, Mingyang Length of track record ✓✓✓ ✓✓ ✓ ✘ Gearbox component 1 ✓ ✘ ✘ ✓ Reliability 1 ✓ ✓✓ ✓✓ ✓✓ Low maintenance cost 1 ✓ ✓✓ ✓✓ ✓✓ Smaller size and weight 2 ✓✓ ✓ ✓ ✓✓✓ Low manufacturing cost 2 ✓✓ ✓ ✓ ✓✓✓ Low-voltage ride through (LVRT) capability 3 ✓ ✓✓ ✓✓ ✓✓ Power generation productivity ✓ ✓✓ ✓✓ ✓✓ Source: Company data, CCBIS estimates

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Remarks

1. Gearbox component and reliability

In a conventional WTG, the gearbox component has a relatively higher failure rate. Elimination of the gearbox simplifies the transmission structure and increases operational reliability. Maintenance costs associated with oil replacement are also reduced.

2. Size, weight, and manufacturing cost

Of the three main types of WTGs, doubly-fed, direct-drive, and hybrid WTGs, hybrid WTGs have the smallest size and consume the least materials to construct. As a result, hybrid WTGs have a lower manufacturing cost per kilowatt capacity. Since doubly-fed WTGs employ the gearbox component to enhance turning speed, their sizes are smaller in comparison with a direct-drive WTGs under the same capacity.

3. Low-voltage ride through (LVRT) capability

LVRT capability enables a more stable grid connection and prevents the WTG from going off-line in the event of major grid disturbances. This is why LVRT enabled WTGs are a requirement of the State Grid towards power generators. Studies suggest that direct-drive WTGs have better LVRT capability than doubly-fed WTGs.

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Appendix 10: WTG technology development in China

Historical development of WTGs

Rotor Diameter (m)

Source: Energy Research Institute Nationl Development and Reform Commission

In order to increase the power generation of wind farms and further exploit wind resources, WTG manufacturers have continued developing larger capacity WTGs. Megawatt-capacity WTGs began commercial used in the 21st century. Currently, the main stream of WTGs used ranges from 1.5MW to 3.0MW. Leading European WTG manufacturers are developing 6.0/7.0MW WTG prototypes, such as Vestas, Siemens and REpower, as well as Chinese WTG manufacturers.

A WTG’s power generation capabilities are proportional to its rotor blade length. Longer rotor blades allow for larger rotor surface area and the increase in a WTG’s tip-speed ratio, which effectively increases the power generation capability of the WTG.

Rotor size and maximum power output

Rotor diameter (meters) Power output (kW) 10 25kW 17 100 kW 27 225 kW 33 300 kW 40 500 kW 44 600 kW 48 750 kW 54 1.0MW 64 1.5MW 72 2.0MW 80 2.5MW 88 3.0MW Source: Danish Wind Industry Association, American Wind Energy Association

Future WTGs are expected to have longer rotor diameters, larger capacity, and will be adaptive to offshore operations, where wind resources are rich but have yet to be harnessed.

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Appendix 11: Global offshore wind power development

Europe – the offshore wind power leader

Up to 2009, there were 38 offshore wind farms around the globe, all operated in Europe. Other countries like China, the US and Canada have begun developing offshore wind farms, but Europe is still in the lead. The global offshore wind cumulative installed capacity reached 2.1GW in 2009, of which 2,056MW was installed in Europe.

Global cumulative offshore wind power installed capacity (2009)

Others Germany China 4% 2% 2% Sweden 8%

UK Netherlands 42% 12%

Denmark 30%

Source: EWEA, CCBIS

Global cumulative offshore wind power installed capacity (2009)

Cumulative installed Cumulative offshore capacity at end-2009 Cumulative installed wind farms under Ranking Countries Region (MW) WTG at end-2009 operations 1 UK Europe 882.8 287 12 2 Denmark Europe 639.2 305 9 3 Netherlands Europe 246.8 130 4 4 Sweden Europe 163.7 75 5 5 Germany Europe 42.0 9 4 6 China Asian Pacific 46.5 16 0(1) 7 Belgium Europe 30.0 6 1 8 Ireland Europe 25.2 7 1 9 Finland Europe 24.0 8 1 10 Norway Europe 2.3 1 1 11 Japan Asian Pacific 1.0 1 0(1) Total 2,103.4 845 38 (1) China began construction of its first offshore wind farm in April 2009. It has not yet been completed. Japan has its first offshore WTG installed but has not yet constructed any wind farms at end-2009. Source: EWEA, CCBIS estimates

According to the European Wind Energy Association (EWEA), newly installed offshore wind capacity for 2010 is 883MW. Europe’s cumulative installed offshore wind capacity has reached 2.9GW, representing 3.5% of total installed capacity in wind power. There were 45 offshore wind farms under operations in Europe at end-2010.

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For 2011, EWEA forecasts there will be 1.0GW to 1.5GW new offshore wind capacity on grid in Europe. There are ten wind farms with 3.0GW currently under construction. Offshore cumulative installed capacity will reach 6.2GW when these projects have been completed.

Offshore wind power development in the UK

The UK has the largest installed capacity of offshore wind power as at end-2009. It commissioned its first offshore wind farm in 2000. Up to end-2010, the UK had 33 offshore wind power farms under construction, consisting of 877 WTGs and expected capacity of 2,323MW. Major offshore wind farm manufacturers include Vestas, Siemens and REpower.

Wind farms under construction in the UK (2010)

Wind farms under construction Location Number of WTGs Expected capacity (MW) Average turbine size (MW) Developer Whitelee Phase I extension East Renfrewshire 36 108 3.0 Scottish Power Whitelee Phase II extension East Ayrshire 39 109.02 2.8 Scottish Power Kilbraur extension Highland 8 20 2.5 Falck Renewables Fullabrook Down Devon 22 66 3.0 Devon Wind Power Low Spinney Leicestershire 4 8 2.0 Broadview Energy Lynemouth Northumberland 13 30 2.3 Scottish Power Gairnieston Farm Aberdeenshire 1 2.3 2.3 Mr Philip Benzie High Haswell Durham 2 4 2.0 Hallam Land Management Lochelbank Perth & Kinross 12 9.6 0.8 RWE Npower Renewables Griffin Forrest Perth & Kinross 68 156.4 2.3 SSE Renewables Novar Extension Highland 16 36.8 2.3 RWE Npower Renewables Curryfree Co Londonderry 6 15 2.5 RES UK & Ireland Ltd Fairfield Farm Cumbria 5 6.5 1.3 Wind Prospect Crimp Cornwall 3 2.43 0.8 West Coast Energy Developments G24I 1 2.3 2.3 Ecotricity Gordonbush Highland 35 71.75 2.1 Scottish & Southern Hazlehead South Yorkshire 3 6 2.0 Banks Developments Mark Hill South Ayrshire 28 56 2.0 Scottish Power Renewables Ormonde Cumbria 30 150 5.0 Vattenfall Millennium Ext 2 Highland 6 15 2.5 West Coast Energy Developments Glenkerie Wind Farm Scottish Borders 11 22 2.0 Novera Ferndale - Power Factory Rhondda Cynon Taff 8 6.4 0.8 Infinergy Sheringham Shoal Norfolk 88 316.8 3.6 Scira Offshore Energy Ltd Butterwick Moor County Durham 10 20.5 2.1 E.ON UK Renewables Clyde Wind Farm South Lanarkshire 152 349.6 2.3 SSE Renewables Maesgwyn Neath Port Talbot 13 26 2.0 Pennant Walters Arecleoch South Ayrshire 60 120 2.0 Scottish Power Crockagarron Co Tyrone 6 15 2.5 Northern Wind Power Torrs Hill Dumfries & Galloway 2 4 2.0 Fred Olsen Renewables Greater Gabbard East Anglia 140 504 3.6 Scottish & Southern An Suidhe Argyll & Bute 23 19.3 0.8 RWE Npower Renewables Beinn an Tuirc Extension Argyll & Bute 19 38 2.0 Scottish Power Tangy Extension Argyll & Bute 7 5.95 0.9 Scottish & Southern Total 877 2,322.7 Source: RenewableUK

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Appendix 12: Offshore wind turbines Current status

Supply of offshore WTGs is dominated by Vestas and Siemens. According to EWEA data, above 80% of global offshore WTGs were installed by Vestas and Siemens as of 2010. Other major WTG manufacturers, such as GE, REpower, Multibrid and Nordex, are also entering the offshore wind market.

Market share (newly installed capacity) of offshore WTG manufacturers (2010)

REpower Bard 3% 2% Sinovel 11%

Vestas Simens 56% 28%

Source: EWEA, CCBIS estimates

Chinese WTG manufacturers, such as Sinovel, Goldwind and Mingyang, are still in their seminal stages within the offshore wind field. Except for the Donghai Bridge offshore wind farm, which deploys WTGs supplied by Sinovel, no other large offshore wind project installation has been completed in China so far. In our view, Chinese WTG manufacturers have a short track record and relative lack of experience in the manufacture and maintenance of offshore WTGs.

WTG R&D status of Chinese manufacturers

Company Research, development & trial product Chinese WTG manufacturers Sinovel 3.0MW WTGs successfully installed and operational in Shanghai Donghai Daqiao 108MW project; the company predicts the 5.0MW turbine will be launched in 2011. Goldwind First 1.5MW offshore WTG manufactured in 2007; 2.5MW, 3.0MW prototypes produced and operational; expected launched date in 2011; 5.0MW designs at research stage. Dongfang Electric 5.0MW offshore WTG at experimental stage. Guodian United Power Company expects 3.0MW to be launched in 2011. Mingyang Company expects 3.0MW to be launched in 2011. Xemc 5.0MW offshore WTG in experimental stage (XEMC Darwind). Sewind 3.6MW offshore WTG launched in June 2010. Haizhuang 5.0MW offshore WTG in experimental stage.

International WTG manufacturers Siemens Long track record in offshore WTG installation beginning in 1991. Launched 3.6MW WTGs and is developing 5.0/6.0 offshore WTGs. Vestas Long track record in offshore WTG installation beginning in 1990. 3.0MW WTGs launched; developing 5.0/6.0 offshore WTGs. Nordex 2.5MW WTGs launched. REpower Launched 5.0MW and 6.0MW WTGs offshore, with rotor diameter of 126m. BARD Launched 5.0MW WTGs. Multibrid Launched 5.0MW WTGs. Source: CWEA, CCBIS

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