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ALTERNATIVE ENERGY | Neutral

China Wind Power

4 April 2011

Taking the wind out of its sales


We initiate coverage on Chinas wind power sector with a Neutral rating decelerating growth, grid bottlenecks, carbon income uncertainty, and rising interest rates being major concerns. Yet its not all doom and gloom: the development of overseas markets and offshore wind are potential growth drivers from 2012. As the sector 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).
Analysts
Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com

Alan Lau
(852) 2533 2479 alanlau@ccbintl.com

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


Taking the wind out of its sales
We initiate coverage on Chinas wind power sector with a Neutral rating. Decelerating growth, grid bottlenecks, carbon income uncertainty, and rising interest rates are major concerns for the industry. Yet its not all doom and gloom. The development of overseas markets and offshore wind are potential growth drivers from 2012. As the sector 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 (Goldwind, 2208 HK, Outperform) and China High Speed Transmission Equipment (CHST, 658 HK, Outperform) over wind farm operators China Longyuan Power (Longyuan, 916 HK, Neutral) and China Datang Renewable Power (Datang, 1798 HK, Underperform). Growth deceleration due to serious grid bottlenecks. Although China is likely to remain the largest wind market globally, we project CAGR of annual wind installation in China at 1% in 2010-2015F, down sharply from 120% in 2006-2009, due mainly to grid bottlenecks, an issue we expect to persist for another three-to-five years. Other industry overhangs include carbon income uncertainty post expiration of the Kyoto Protocol, potential interest hikes in China, overcapacity of wind turbine generator (WTG) manufacturing, and pressure on pricing and margins. Next wave of growth from overseas expansion and offshore wind from 2012F onwards. We estimate overseas shipments will be c.13% of total shipments of the leading Chinese wind equipment producers by 2012F. We also expect Chinas cumulative offshore wind capacity to reach 5GW by 2015F, implying a 90% CAGR in 2010-2015F. Our contrarian stock view: prefer selective wind equipment producers over wind operators. Some consider Chinese wind operators superior to wind equipment manufacturers owing to their higher earnings CAGR. We disagree believing that wind operators current 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 industry leading positions and believe current valuations, at historical trough levels, provide good entry points for the long-term. We have a Neutral rating on China Ming Yang Wind Power (Mingyang, MY US) due to the high risk involved in its new product launch.

Sector Rating:

Neutral
(initiation)

Stock price vs HSCEI


130% 120% 110% 100% 90% 80% 70% 60% Jul 10 CHST

Aug 10

Sep 10 Goldwind

Oct 10

Nov 10

Dec 10 Longyuan

Jan 11

Feb 11 Datang

Mar 11 HSCEI

Mingyang

Source: Bloomberg

Valuations summary
CHST Goldwind Mingyang Longyuan Datang (MY US) (916 HK) (1798 HK) (658 HK) (2208 HK)

Rating* O O N N U Share price HK$12.54 HK$14.56 US$10.52 HK$8.47 HK$2.38 Target price HK$15.60 HK$16.60 US$11.00 HK$9.10 HK$2.00 Upside/downside (%) 24 14 5 0 (16) PER (x) 2011F 2012F EV/EBITDA(x) 2011F 2012F ROE (%) 2011F 2012F 10.1 9.4 6.9 6.3 16.9 16.2 13.2 12.9 15.2 14.0 17.1 15.4 8.4 7.1 6.6 5.7 22.6 21.0 19.7 15.3 5.7 4.5 8.9 10.1 35 28 14.2 10.9 3.3 2.4 8.6 10.0 122 30

EPS YoY change (%) 2011F (5) 10 48 2012F 7 3 18 * O = Outperfom; N = Neutral; U = Underperform Source: CCBIS estimates Data as of 1 April 2011

Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com

Alan Lau
(852) 2533 2479 alanlau@ccbintl.com

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 governments target of 150GW, which we believe to be far too conservative. In our view, there is a mismatch in Chinas targets for renewable energy capacity and renewable energy consumption. To achieve its goal of having 15% energy consumption from renewable energy sources by 2020F, China needs to take a much more aggressive renewable capacity installation target, in our opinion. Moreover, we believe wind power could be the beneficiary if the Chinese government decides to adopt a more cautious stance on nuclear power development post the nuclear crisis in Fukujima, Japan, earlier this year.

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 Chinas 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 Chinas energy supply (good scalability); moreover, the offshore projects are located much nearer than onshore projects to Chinas 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 Chinas cumulative offshore capacity was merely 120MW by the end of 2010 based on our estimate. Our forecast for Chinas offshore wind power capacity in 2015 is more conservative at 5GW, still implying a 90% CAGR in 2010-2015F, significantly higher than the overall wind capacity CAGR of 1% in China over the same period. Despite rapid growth potential, we highlight that offshore demand will remain less than 3% and 7% of annual wind power capacity in China by 2012F and 2015F, respectively. This is much smaller than the contribution from overseas. According to our estimates overseas demand will be c.13% of leading WTG manufacturer 2012F shipments. Overall, offshore development is an attractive theme though it lacks material business impact, at least for the next few years.

Competition landscape wind farm operators in China


Chinas 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 Longyuans wind operation and the better quality of its balance sheet.

Competitive landscape WTG manufacturers in China


Chinas 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 Sinovels 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 CHSTs 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. CHSTs 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 CHSTs 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 companys 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 Longyuans leading industry position and earnings CAGR of 31% for 2010-2012F, and we expect the companys ROE to remain low at 8-10%. Longyuan has underperformed the HSCEI by 13% over the past 12 months and we believe industry concerns are priced in. Nonetheless, we would have to see near-term catalysts before turning positive on the stock. In the meantime, we initiate coverage with a Neutral rating and target price of HK$9.10. Datang Renewable (Datang, 1798 HK, Underperform) is the second-largest wind farm operator in China. By 2010 it had a 9% share of Chinas wind installed capacity. In our view, Datangs net gearing ratio of 270-290% for 2011F-2012F is a major concern, as it entails high equity refinancing risk. Its ROE range of 9% to 10% in 2011F-2012F also falls short of peers, particularly considering Datang is a pure play wind project operator, with ostensibly higher ROE than coal-fired power operators. We initiate coverage on Datang with an Underperform rating and target price of HK$2.00. Valuation comparison
Stock code 658 HK HSN LN 044490 KS 053660 KS Market EPS Share price cap PER (x) growth PEG PBV (x) ROE (%) Rating (local currency) (US$m) 2010A 2011F 2012F (%) 2011F 2010A 2011F 2012F 2010A 2011F 2012F O NR NR NR O NR NR N NR NR NR NR NR NR NR NR NR NR 12.54 49.50 52,300 17,100 14.56 20.65 74.14 10.52 223.30 7.37 145.00 8.26 44.60 26.70 3.96 17.17 41.85 8.58 2,217 534 796 232 7,858 7,857 11,381 1,315 8,685 2,576 1,900 786 1,778 8,237 13,355 580 1,278 383 9.6 N/A 42.7 N/A 14.6 N/A 23.4 12.3 38.9 18.6 22.9 26.6 N/A 17.3 15.2 44.0 35.5 N/A 10.1 N/A 22.3 10.9 13.2 16.9 20.6 8.4 20.2 18.6 25.7 27.9 N/A 14.0 13.3 27.4 23.5 N/A 9.4 N/A 16.0 7.6 12.9 13.4 17.0 7.1 15.8 18.6 21.5 21.0 24.3 11.8 12.0 21.7 16.9 N/A 15.3 10.9 10.5 8.2 22.3 15.6 25.7 17.7 29.1 N/A 8.5 (5) N/M 79 N/M 10 24 14 48 93 31 (11) (5) N/M 24 15 61 51 N/M 35 122 33 32 4 N/M 19 24 36 N/M N/M (2.1) N/M 0.3 N/M 1.3 0.7 1.5 0.2 0.2 0.6 (2.3) (6.2) N/M 0.6 0.9 0.5 0.5 N/M 0.6 0.1 0.4 0.3 7.8 N/M 1.7 0.9 1.2 N/M N/M 1.8 0.6 2.1 1.3 2.4 N/A 13.9 2.4 2.2 1.1 2.8 1.5 1.1 2.4 1.6 8.1 3.8 N/A 1.9 1.4 0.9 1.6 0.8 0.4 1.1 2.1 0.8 0.4 0.7 1.7 0.6 2.0 1.2 2.3 3.6 4.1 1.9 2.0 1.1 2.7 1.5 1.1 3.0 1.4 N/A N/A N/A 1.7 1.2 0.8 1.5 0.8 0.3 1.1 1.9 0.8 0.4 0.5 1.5 0.6 1.8 1.0 2.0 2.8 3.3 1.5 1.8 1.0 2.5 1.4 1.1 2.4 1.3 N/A N/A N/A 1.5 1.1 0.7 1.3 0.8 0.3 1.1 1.8 0.8 0.4 0.4 18.7 (1.7) 2.9 (12.8) 16.9 (1.5) 5.5 (1.0) 16.2 0.9 9.3 10.8 15.4 21.9 20.5 21.0 12.7 5.6 11.5 6.0 3.8 23.0 11.0 N/A N/A N/A 10.1 10.0 7.1 16.7 4.0 2.4 4.0 10.8 2.6 (2.9) 5.2

Company Wind turbine component CHST Hansen Transmissions Taewoong Hyunjin Materials

Wind turbine Xinjiang Goldwind H- share 2208 HK Xinjiang Goldwind A-share 002202 CH Sinovel 601558 CH Mingyang MY US Vestas VWS DC Gamesa GAM SM Repower RPW GR Nordex NDX1 GR Suzlon SUEL IN Dongfang Electric 1072 HK Shanghai Electric 2727 HK Blade Jiangsu Miracle 002009 CH Sinoma Science & Technology 002080 CH Tianjin Xinmao 000836 CH

16.7 17.1 39.1 24.6 77.5 19.9 19.8 22.6 5.9 11.1 3.1 4.2 11.6 10.6 5.9 4.6 (12.9) (12.2) 33.0 24.5 11.3 11.0 13.8 11.8 N/A 7.3 4.3 5.1 13.4 2.9 (21.2) 3.0 7.9 1.5 (11.1) (24.9) N/A N/A N/A 8.9 8.6 5.9 14.8 3.3 (3.8) 3.5 9.2 1.8 (6.4) 4.7

Wind Farm Operator China Longyuan 916 HK N 8.47 8,128 26.5 19.7 Datang Renewable 1798 HK U 2.38 2,230 31.4 14.2 China Power New Energy 735 HK NR 0.65 659 17.7 13.3 China WindPower 182 HK NR 0.84 798 14.4 10.9 Acciona ANA SM NR 77.21 6,986 28.3 27.3 Theolia TEO FP NR 1.33 211 N/A N/A Iberdrola Renovables IBR SM NR 3.09 18,553 36.2 30.5 EDF Energies Nouvelles EEN FP NR 37.18 4,106 27.1 21.9 EDP Renovaveis EDPR PL NR 5.01 6,222 55.7 41.1 Infigen Energy IFN AU NR 0.37 293 N/A N/A Greentech GES DC NR 17.30 175 N/A 9.8 All prices are as at 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS Source: Bloomberg, CCBIS

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%. Although our forecasts have factored in drastic growth deceleration for wind power in China going forward, our estimate for wind power capacity, both onshore and offshore, of 245GW by end-2020F is much higher than the governments target of 150GW, which we believe to be far too conservative. In our view, there is a mismatch between Chinas targets for renewable energy capacity and renewable energy consumption. To achieve its goal of having 15% energy consumption from renewable energy sources by 2020F, China needs to take a much more aggressive renewable capacity installation target, in our opinion. Moreover, we believe wind power could be the beneficiary if the Chinese government decides to adopt a more cautious stance on nuclear power development post the nuclear crisis in Fukujima, Japan, earlier this year.

China is the largest wind power market globally


China has been one of the most important markets for wind power globally since 2006. Despite Chinas 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, Chinas wind power industry entered a transition period, with annual capacity installation growth slowing significantly to 37% YoY based on statistics from CWEA. We estimate Chinas 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), Chinas 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 worlds wind power industry hard with the tightened credit market which resulted in difficult access to project financing, Chinas annual

China Wind Power

4 April 2011

wind capacity installation still increased by an impressive 124% YoY to 14GW, making China the worlds largest wind power market, 36% bigger than the second-largest player, the US, at 10GW. Chinas annual wind power installation and YoY growth
MW 20,000 160%

China and global wind power YoY growth comparison


160% 140% 120% 100%

16,000

130%

12,000

100%

80% 60%

8,000

70%

40% 20% 0%

4,000

40%

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

10%

(20)% 2004 2005 2006 2007 2008 2009 2010 China YoY growth Global YoY growth

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

Source: CWEA, GWEC, CCBIS estimates

In 2010, Chinas annual wind power installation continued to surpass that of other countries, according to CWEA. Moreover, Chinas cumulative wind power capacity overtook that of the US for the first time in 2010. Based on data from CWEA and GWEC, Chinas annual and cumulative wind power capacity installation reached 19GW and 45GW, respectively, in 2010, against 5GW and 40GW for the US, the second largest wind power player worldwide. 2010 top-ten wind power countries by annual installation 2010 top-ten wind power countries by cumulative capacity
Denmark Canada UK France Italy India Spain Germany USA China 0 3,300 6,600 9,900 MW 13,200 16,500 19,800 0 7,000 14,000 21,000 MW 28,000 35,000 42,000

Turkey Canada Italy UK France India Spain Germany USA China

Source: GWEC, CWEA, CCBIS estimates

Source: GWEC, CWEA, CCBIS estimates

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

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China Wind Power

4 April 2011

Chinas clean energy-related government targets


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

Power supply structure

Energy conservation

Emission reduction

Carbon emissions per GDP to decline by 40-45% from 2005 level by end-2020 Source: National Development and Reform Commission (NDRC), CCBIS

Scale characteristic comparison between renewable energy sources


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

Generation cost comparison between power sources


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

Source: REN21 (July 2010), CCBIS estimates

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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 Chinas 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 markets 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 Chinas 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%. Chinas wind power capacity installation forecasts
MW 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2009 2010 2011F 2012F 2013F 2014F 2015F China cumulative wind capacity (LHS) China annual wind installation (RHS) MW 20,200 20,000 19,800 19,600 19,400 19,200 19,000 18,800 18,600 18,400 18,200

Source: CCBIS estimates

CCBIS China wind power installation forecast model


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

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Overall, we expect Chinas cumulative wind power capacity, both onshore and offshore, to reach 145GW and 245GW by the end of 2015F and 2020F, respectively. Our 2020F wind power capacity estimate is much higher than the governments unofficial target of 150GW, which we believe is far too conservative. In our view, there is a mismatch between Chinas renewable energy capacity target and renewable energy consumption. To achieve the governments goal of 15% energy consumption from renewable energy sources by 2020F, China needs to take a much more aggressive renewable capacity installation target, in our opinion. Wind power stands to benefit greatly should the Chinese government decide to adopt a more cautious stance on nuclear power development. Post nuclear crisis in Fukujima, Japan, the Chinese State Council announced that the nation will temporarily suspend approvals for new nuclear projects until official guidelines on nuclear security are published in China. The Chinese government will also initiate strict safety examinations of its nuclear projects in operation and under construction. CCBIS China power capacity forecast model
2009 Power capacity (MW) Renewable energy: Small hydro (50MW) Large hydro (>50MW) Wind energy Biomass energy Solar PV Total renewable energy Nuclear power Total alternative energy Thermal coal power Overall power capacity Power capacity (%) Renewable energy: Small hydro (50MW) Large hydro (>50MW) Wind energy Biomass energy Solar PV Total renewable energy Nuclear power Total alternative energy Thermal coal power Overall power capacity Source: CCBIS estimates 55,120 141,670 25,828 4,500 240 227,358 9,078 236,436 651,076 887,512 62,000 151,400 44,751 5,200 800 264,151 10,820 274,971 706,630 981,601 80,000 204,000 144,566 10,000 9,000 447,566 42,940 490,506 900,000 1,390,506 100,000 330,000 244,964 20,000 47,000 741,964 90,000 831,964 1,000,000 1,831,964 2010 2015F 2020F

6.2 16.0 2.9 0.5 0.0 25.6 1.0 26.6 73.4 100.0

6.3 15.4 4.6 0.5 0.1 26.9 1.1 28.0 72.0 100.0

5.8 14.7 10.4 0.7 0.6 32.2 3.1 35.3 64.7 100.0

5.5 18.0 13.4 1.1 2.6 40.5 4.9 45.4 54.6 100.0

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CCBIS China energy consumption forecasts


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

Factors to slowing growth in Chinas wind power sector


We believe that there are three major factors contributing to slow growth within Chinas 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 Chinas wind power industry over the next three-to-five years. Grid connection bottlenecks have been an issue for Chinas 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. Chinas installed and grid-connected wind capacity
MW 60,000 50,000 40,000 30,000 20,000 10,000 0 2007 2008 2009 2010 2011F Total installed wind capacity (LHS) % not grid-connected* (RHS) Total grid-connected wind capacity (LHS) 36% 34% 32% 30% 28% 26% 24%

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

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Listing of government-owned wind farm operators: In our view, this is a complementary factor to the grid connection bottleneck factor, as state-owned wind operators, which we estimate to aggregately dominate 70-80% of wind installations in China, start monitoring their projects return more closely. Since the listing of China Longyuan Power Group (Longyuan, 916 HK) in December 2009, there has been a trend for major state-owned independent power producers (IPPs) to list their wind farm subsidiaries, including China Datang Corporation Renewable Power (Datang Renewable, 1798 HK) listed in December 2010, Huaneng Renewables (planning to list 2011), and Huadian New Energy (planning to list in 2011). In the past, lacking grid connection did not seem to be a constraining factor to Chinas wind capacity growth. State-owned IPPs have been aggressively increasing their wind capacity as they are required to have 3% and 8% installed capacity slated for non-hydro renewable sources by 2010 and 2020, respectively. Since the regulatory target is set for capacity installation, not power generation, we believe some of the state-owned operators were purely pursuing the scale of their wind assets instead of caring about project returns. As a result, we estimate that 33% of wind capacity installed at the end of 2010 was sitting idle due to a lack of physical grid connection. Nonetheless, since more and more state-owned wind farm operators have become or would like to become publicly listed companies, we expect wind farm operators in China to start slowing down their capacity growth to meet the expansion pace of grid operators as their shareholders would not tolerate low project ROEs and waste of capital investments. Large base effect: After four years of exponential growth, Chinas annual wind capacity installation already accounted for 36% and 49% of global market size in 2009 and 2010, respectively, making the country the worlds largest wind market in terms of annual new installations. Another implication was that such a pace of development made it difficult for the nation to continue doubling its installation every year, particularly when we expect global annual wind capacity installations to grow at only a 9% CAGR over the next five years (2010-2015F). Chinas cumulative wind capacity and global share
MW 145,000 33% 30% 27% 87,000 24% 58,000 21% 29,000 18% 15% 2009 2010 2011F 2012F 2013F 2014F 2015F China cumulative wind installation (LHS) China global share (RHS) 9,000 6,000 10% 3,000 0 2009 2010 2011F 2012F China annual wind installation (LHS) 2013F 2014F 2015F China global share (RHS) 0% 20%

Chinas annual wind installation and global share


MW 21,000 18,000 40% 15,000 12,000 30% 50%

116,000

Source: CCBIS estimates

Source: CCBIS estimates

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CCBIS Global wind cumulative capacity forecast model


MW Global cumulative YoY growth (%) Europe Asia Pacific North America Latin America Africa Others Source: GWEC, CWEA, CCBIS estimates 76,049 41,944 38,587 1,070 794 61 2009 158,505 2010 196,854 24 86,075 63,591 44,708 1,456 958 66 2011F 238,602 21 97,352 86,623 51,492 1,864 1,193 79 2012F 284,814 19 110,007 110,881 59,779 2,563 1,488 95 2013F 335,535 18 125,360 135,221 69,326 3,674 1,840 114 2014F 390,330 16 143,518 160,067 79,777 4,549 2,282 136 2015F 449,010 15 162,641 186,003 91,832 5,577 2,797 159 287,284 315,737 148,515 11,752 6,475 323 2020F 770,086

CCBIS Global wind annual installation forecast model


MW Global annual installation YoY growth (%) Europe Asia North America Latin America Africa Others Source: GWEC, CWEA, CCBIS estimates 2009 38,209 2010 38,349 0 10,026 21,652 6,121 386 164 0 2011F 41,748 9 11,277 23,032 6,784 408 235 13 2012F 46,212 11 12,656 24,258 8,287 700 295 16 2013F 50,721 10 15,353 24,340 9,547 1,111 352 19 2014F 54,795 8 18,158 24,846 10,452 875 442 22 2015F 58,680 7 19,123 25,936 12,055 1,028 515 23

10,308 16,028 11,065 502 246 60

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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. 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.

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 50,000 40,000 30,000 20,000 10,000 0 2007 2008 Total installed wind capacity (LHS) % not grid-connected* (RHS) 2009 2010 2011F Total grid-connected wind capacity (LHS) 36% 34% 32% 30% 28% 26% 24%

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

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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)
Central 1% East 9% South 4%

Wind power generated but not sold to grid (1H10)


m kwh 1,600 1,400 1,200 12% 9% 6% 3% 0% North North eastern North western East Central South 15%

Northwestern 12%

1,000 North 42% 800 600 400 200 0

North eastern 32%

Electricity not sold to grid (LHS) 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 Chinas 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 Chinas 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 Chinas overall power consumption in 2009.

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Distribution of Chinas 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

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Lack of a centralized plan to match grid networks and wind farm construction Due to poor economics, grid operators normally have less incentive to construct networks in remote provinces, where wind resources are richer. The difference of construction lead time between grid operators (over two years) and wind farm operators (one year) intensifies a mismatch in the construction of grid networks and wind farms, in our view. To incentivize grid operators to provide connection to wind farms, NDRC announced Temporary Measures for Renewable Energy Surcharge Distribution, through which grid construction to renewable energy projects, including wind farms, would be refunded. Nonetheless, the measures were not very effective given it took a year for grid operators to receive deserved refund. Subsidies for wind farm grid construction, sourcing from renewable energy surcharge
RMB m 300 250 200 150 100 50 0 2006 2007 2008 2009 1Q-3Q10 Subsidy for grid construction to wind farms (LHS) As % of total grid construction subsidy (RHS) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

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.

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Grid construction funding breakdown by source


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

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.

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CDM (carbon trading) income uncertainty


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.

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 farms annual cash inflow at the project level, and accounts for 42-85% of a wind farms 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
18% 16% 120% 14% 12% 10% 8% 6% 4% 2% 0% Project IRR With CDM Without CDM Equity IRR CDM as % of project CF CDM as % of equity CF 0% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 11-20 annual CDM as % of net income Year 9 Year 10 60% 90%

CDM income share of wind farm cash flow and earnings


150%

30%

Source: CCBIS estimates

Source: CCBIS estimates

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

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

Source: World Bank, CCBIS research

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

Source: EU Parliament The EUs emission reduction target, intended use of CDM and its + 2C

We believe China is likely to establish a domestic carbon emission trading system over the next few years, which would enhance carbon credit income of Chinese wind farm operators. According to China Securities Journal and Xinhua News, officials from the National Coordination Committee on Climate Change of the National Development and Reform Commission (NDRC) disclosed that in 2009 the Chinese government started drafting temporary management measures for voluntary GHG emission trading activities in China and the regulation could be announced in 2011. Chinas energy and environmental targets
Field Energy conservation Chinas targets Energy consumption per unit of GDP by end- 2010 to decline by 20% from 2005 level Energy consumption per unit of GDP will become one of the ten major new indicators the Chinese government closely monitors in the 12th Five-Year Plan period Carbon emission per unit of GDP by end-2020 to decline by 40-45% from 2005 level Carbon emission per unit of GDP, sulfur dioxide emission, chemical oxygen demand (COD), ammonia nitrogen, and nitrogen oxides will become among the ten major new indicators the Chinese government closely monitors in the 12th Five-Year Plan period Renewable energy to account for 10% of total energy consumption by end-2010 Renewable energy to account for 15% of total energy consumption by end-2020 We expect the Chinese government to include a new target in the 12th Five-Year Plan: Renewable energy to account for 11.4% of total energy consumption by end-2015

Emission reduction

Energy structure

Source: CCBIS Research

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Risks post-2012
Although we expect Chinese wind farm operators to maintain a certain level of income from carbon credit sales post-2012 due to existence of EU ETS and a potential domestic carbon market in China, we believe that such income stream remains at risk in terms of volume and price, for the following reasons: (1) EU has set a legally binding emission reduction target for member states by 2020 regardless of whether other countries are reducing emissions aggressively. We feel this could potentially hinder EU enterprise competitiveness in international markets over the long term. Consequently, it might be risky to assume that EU governments will continue to support EU ETS post-2020, when other countries do not make meaningful efforts and commitment to carbon reduction. EU emission projections and target by 2020

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).

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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 EBs 51st meeting, which ended on 4 December 2009, ten Chinese wind projects were rejected for CDM registration, as CDM EB believed that the Chinese government intentionally kept wind power tariffs too low for Chinese wind projects to qualify for the CDM application. In February 2010, another six projects were rejected although a green light was given to 32 Chinese wind farms at the same time. We believe that Chinese wind farm operators will continue to face challenges registering additional capacity under CDM. Longyuans wind capacity registered under CDM
MW 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1H09 2H09 1H10 Registered capacity (LHS) 2H10 1H11F 2H11F % of capacity registered (RHS) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0 1H09 2H09 1H10 CDM income (LHS) 2H10 1H11F 2H11F As % of total revenue (RHS) 0% 50 100 5% 150 200 10%

Datang Renewable CDM income and share of sales


MW 250 15%

Source: CCBIS estimates

Source: CCBIS estimates

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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 Chinas 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 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).

Overseas business contribution has been minimal


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

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In our view, the slow progress in wind equipment exports is mainly due to three reasons: Robust domestic demand growth historically. Given the explosive wind capacity growth at a 120% CAGR in 2006-2009, and the fact that Chinese WTG and component manufacturers only generally started scaling up their production capacity since 2007, there was a severe supply shortage in WTGs and components between 2006 and 2008, although supply and demand finally became more balanced in 2009. Chinese WTG and component manufacturers have thus historically been busy fulfilling domestic orders and consequently lacking resources or reluctant to build distribution channels and business overseas. Short product track record. Most of the leading Chinese WTG manufacturers only started commercial production of their 1MW+ products in 2H07 or 2008. Their short track record has made foreign wind farm operators hesitant to adopt Chinese WTG products. We note that WTG costs account for c.70% of capital costs of a wind farm and depreciation c.70% of wind power generation cost, so defect or malfunction of WTGs would have significantly negative impacts on wind farm operators project returns, particularly when most of the WTG manufacturers only carry a two-to-five year product warranty, much shorter than WTGs designed life of 20-30 years. Export restriction clause in technology licensing agreement. We believe that the majority of Chinese WTG manufacturers have attained design and technology knowhow of their initial products through technology licensing with foreign WTG manufacturers. As there is usually an export restriction clause in such technology licensing agreement, Chinese WTG manufacturers cannot sell their products out of China until they obtain intellectual property rights of the WTG design, or succeed in in-house WTG technology development. Chinese WTG manufacturers and technology source
Company Beizhong Changzhou Dongfang Electric United Power Goldwind Haizhuang Huayi Mingyang Sewind Sinovel Xiangdian ZELRI Source: Suzlon China, CCBIS Technology source DeWind U Erlangen Repower Aerodyn Vensys* Aerodyn Aerodyn Aerodyn Aerodyn, Dewind Fuhrlander Zephyrus Windtec

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

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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
Date October 2009 Company A-Power Export destination US (Texas) Expected delivery Originally March 2010 but delayed Contract details 240 units of 2.05MW WTG Project size 600MW Total investment of US$1.5b; A-Power responsible for wind farm investment Adopting Goldwinds 1.5MW direct-drive WTG Construction starts in 2011 and operation 2012 Goldwind responsible for wind farm investment, construction and equipment procurement Project size no more than 120MW First meaningful WTG export contract inked by Chinese WTG producers Adopting 166 units of Dongfang Electrics 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)

December Goldwind 2010

US (Illinois)

2H11 or 1H12

December Dongfang Electric India 2010

Delivery completed by March 2012

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

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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.

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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% Vestas GE Wind 2005 Sinovel Enercon Goldwind 2007 Gamesa Dongfang Suzlon Siemens 2009 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 WTGs design life of 20-30 years. As for wind project financing, banks tend not to lend money to projects using unreliable WTGs, given the present tight credit environment in Europe and US. Most of the Chinese WTG manufacturers launched their 1.5MW products in late 2007 or 2008, so track record of their products is fairly short. Although Chinese WTGs are 40-50% cheaper than foreign WTGs based on our estimates, several western WTG manufacturers claimed that the efficiency-adjusted price of Chinese WTGs is not as low as it seems to be.

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Foreign governments intervention in international trade Since 2009, there have been incidences of foreign governments or industry unions appealing to restrict Chinese renewable equipment manufacturers, including those from the solar and wind power sectors, from exporting products to their countries. They argue that foreign countries have used significant resources to sustain renewable energy subsidies and boost renewable energy demand for the purpose of creating local employment and tax income as opposed to benefitting unrelated Chinese companies. Furthermore, some believe that the superior cost advantage of Chinese renewable equipment manufacturers is a result of unfair subsidies issued by the Chinese government. Lastly, in the national-level concession project biddings held by the Chinese government over the past two years, none of the foreign equipment manufacturers won any bids, implying that there might be excessive local protectionism in China. Specifically for wind power, in September 2010, United Steelworkers (USW) in the US filed a petition accusing China of five general infractions: (1) restriction of access to critical materials; (2) discrimination against imported goods and foreign companies; (3) technology transfer requirements for foreign investors; (4) subsidies contingent on domestic content; and (5) trade-distorting domestic subsidies. In response to the petition, the Office of the US Trade Representative (USTR) requested a World Trade Organization (WTO) dispute settlement with the Chinese government in December 2010. Some of the issues were addressed during the US-China Joint Commission on Commerce Trade conference in December 2010, while some concerns were dismissed after investigation. For example, the USTR obtained clarification that two Chinese subsidy programs, Export Research and Development Fund and Ride the Wind had already been terminated. China also agreed to change some of its rules to open up the Chinese wind power market. However, we believe that the risk of unfavorable trade policies in Europe and the US remains high for Chinese WTG and component manufacturers. Some Chinese wind power companies, such as Goldwind and CHST, have plans to establish production facilities and possibly supply chains in the US to be eligible for selling in the US market. We expect this to have negative implications for their production costs. In such cases Chinese companies need to carefully balance between volume and profitability.

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.

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Chinese WTG exports and aggregate share in non-China markets


MW 3,200 2,800 2,400 2,000 1,600 1,200 800 400 0 2011F Goldwind (LHS) United Power (LHS) Mingyang (LHS) Sinovel (LHS) Dongfang (LHS) Aggregate share in non-China markets (RHS) 2012F 0% 6% 3% 12% 9% 15%

Source: CCBIS estimates

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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 Chinas energy supply (good scalability); moreover, offshore projects are much nearer than onshore projects to Chinas 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 Chinas cumulative offshore capacity was merely 120MW by end-2010 based on our estimate. Our forecast for Chinas offshore wind power capacity in 2015 is more conservative at 5GW, still implying a 90% CAGR in 2010-2015F, significantly higher than the overall wind capacity CAGR of 1% in China over the same period. Despite rapid growth potential, we 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, Chinas 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. Chinas 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 Chinas 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), Chinas 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 Chinas onshore wind resources. More importantly, Chinas 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.

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Chinas 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 Shanghai Donghai Bridge Type of WTG 3MW from Sinovel Project size Investor 102MW China Power New Energy, China Datang, China Guangdong Nuclear Power, Shanghai Green Energy Datang Renewable China Power Investment China Longyuan Power Luneng Group Status In operation since mid 2010

Jiangsu Binhai Jiangsu Sheyang Jiangsu Dongtai Jiangsu Dafeng Source: CWEA, CCBIS

3MW from Sinovel 3MW from Sinovel 2.5MW from Goldwind 3.6MW from Shanghai Electric

300MW 300MW 200MW 200MW

Construction should be completed by 2014 Construction should be completed by 2014 Construction should be completed by 2014 Construction should be completed by 2014

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In 2010, the central government requested local governments of coastal provinces to complete planning for offshore development up to 2015F and 2020F. According to CWEA, total offshore capacity proposed by five coastal provinces reaches 15GW and 33GW for 2015F and 2020F, respectively, increasing sharply from the 120MW as of end-2010F. Provincial government plans for offshore wind capacity
Region Shanghai Jiangsu Zhejiang Shandong Fujian Others (tentative) Total Source: CWEA, CCBIS 2015F 700 4,600 1,500 3,000 300 5,000 15,100 2020F 1,550 9,450 3,700 7,000 1,100 10,000 32,800

According to Azure International, near-term offshore pipeline of top offshore wind farm developers in China amounts to around 514MW, while cumulative pipeline (including those with long-term potential) could amount to 13.7GW. Top offshore developers pipeline
Developer China National Offshore Oil Corp (CNOOC) Longyuan China Three Gorges Project Corp. Huaneng (China) Group Guangdong Baolihua New Energy Guodian Group Shenhua Group Datang Corporation Changdao Wind Power Development Shangdong Sanrong Group Zhejiang Luneng Source: Azure International, CCBIS Pipeline (MW) 3,102 2,465 2,010 1,302 1,250 800 500 329 300 300 196

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 Chinas 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 Chinas overall annual wind capacity CAGR of 1% over the same period.

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China annual offshore installation and growth


MW 1,600 1,400 1,200 1,000 800 120% 600 400 200 0 2009 2010F 2011F 2012F 2013F 2014F 2015F Offshore annual (LHS) YoY growth (RHS) 90% 60% 30% 0% 270% 240%

China cumulative offshore capacity and growth


MW 5,200 240% 200% 210% 180% 150% 2,600 120% 80% 1,300 40% 0 2009 2010F 2011F 2012F 2013F 2014F 2015F Offshore cumulative (LHS) YoY growth (RHS) 0% 3,900 160%

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 Chinas 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 Chinas wind power industry but without material business impact over the next few years. Chinas annual offshore installation share of total
MW 1,600 1,400 1,200 1,000 800 600 400 200 0 2009 2010F 2011F Offshore annual (LHS) 2012F 2013F 2014F 2015F Offshore as % of total annual (RHS) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 0 2009 2010F 2011F Offshore cumulative (LHS) 2012F 2013F 2014F 2015F Offshore as % of total cumulative (RHS) 1,300 2,600 3,900

Chinas cumulative offshore capacity share of total


MW 5,200 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Source: CCBIS estimates

Source: CCBIS estimates

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

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

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Wind turbine R&D status of Chinese manufacturers


Company Sinovel Research, development and trial product 3.0MW wind turbines successfully installed and under operations in Shanghai Donghai Bridge project Company predicts 5.0MW turbine to be launched in 2011

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

Goldwind

Absence of mature technology and equipment for installation Installation technology for offshore wind projects has been a challenging issue globally. Moreover, half of the offshore projects currently under construction in China are in the intertidal zone, where it is difficult for ships and cars to operate. According to CWEA, even international markets have limited experience with intertidal installation. Therefore China will need to lead the global market and develop its own technology to overcome this challenge. Due to an absence of mature technology, it is highly costly to produce equipment for offshore project installations in China. We believe the Chinese government is likely to encourage equipment development capability along with the national concession project biddings, in which project developers could cooperate with state-owned heavy machinery manufacturers and leverage their experience for cost savings and knowledge accumulation.

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Competition landscape wind farm operators in China


Chinas 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. 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 Longyuans wind operation and the better quality of its balance sheet.

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 Chinas cumulative wind capacity by end-2009, based on data from CWEA. New wind capacity by operator (2009)
Others 24% China Resources Power 2% China Power Investment (CPI) 2% China Energy Conservation Investment (CECIC) 3% Datang** 13% Guodian* 19%

Cumulative wind capacity by operator (2009)


Others 26% JOINTO 2% Datang** 14% Guodian* 19%

China Energy Conservation Investment (CECIC) 3%

Guohua 4% Jingneng 6% China Guangdong Nuclear Power (CGNP) 6% Huadian 9%

Huaneng 12%

China Power Investment (CPI) Jingneng 3% 5% China Guangdong Nuclear Power (CGNP) 5% Guohua 6% Huadian 6%

Huaneng 11%

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

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

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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.

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China power capacity by source


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

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 18 15 12 9 6 3 0 Longyuan Datang China WindPower

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

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

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.

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Longyuan is better managed than Datang Renewable


In our view, Longyuan is a better managed wind farm operator than Datang Renewable given Longyuans better operating efficiency as reflected in its higher operating margins (excluding coal-related business), lower gearing ratios and similar overall net margins despite Longyuans 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 Datangs 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 Longyuans overall operating margins to be lower than Datang Renewables, this is due mainly to Longyuans business contribution from coal related business. If we compare non-coal operating margins of Longyuan to Datang Renewables, Longyuans margins are 110-130bp better than those of Datang Renewable based on to our forecasts. Another key difference is Longyuans better gearing ratio and lower financing costs. We forecast that Longyuans net gearing ratio will be in the range of 121-161% in 2010-2012F, while Datang Renewables will be in the range of 195-286%. Comparison between Longyuan and Datang Renewable
2010 6,556 2,217 9,442 0.489 6,071 392 4,081 6,320 2,007 Longyuan 2011F 8,600 2,242 14,371 0.499 7,778 672 5,950 9,301 2,705 2012F 11,000 2,309 19,244 0.501 10,235 953 7,773 11,862 3,468 Datang Renewable 2010 2011F 2012F 4,028 5,600 7,100 2,134 2,240 2,274 4,829 8,437 12,083 0.493 0.500 0.499 2,378 4,219 6,034 229 450 607 1,503 2,740 3,815 2,389 4,412 6,118 456 1,011 1,311

Installed wind capacity (MW) Wind utilization hours Wind power generation (net) (GWh) Average wind power tariff ex VAT (RMB/kWh) Wind power revenue (RMB m) CER/VER income (RMB m) Operating profit (RMB m) EBITDA (RMB m) Net profit (RMB m) Growth (YoY, %) Installed wind capacity Wind power generation (net) Wind power revenue CER/VER income Operating profit EBITDA Net profit Other P&L ratios (%) Wind power revenue as % of total revenue CER/VER income as % of PBT Operating margin Operating margin - non coal power EBITDA margin Net margin Balance sheet ratios (%) Gearing ratio Net gearing ratio ROE Source: Company data, CCBIS estimates

46 66 67 86 43 42 124 43 12 29 66 44 14

31 52 28 71 46 47 35 47 17 36 76 56 16

28 34 32 42 31 28 28 54 18 41 76 62 18

54 68 68 67 75 69 84 100 31 63 63 100 19

39 75 75 96 82 85 122 100 34 65 65 105 24

27 43 43 35 39 39 30 100 35 63 63 101 22

136 121 7.3

179 157 8.8

194 161 9.8

243 195 4.3

308 268 8.6

333 287 10.0

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Competition landscape WTG manufacturers in China


Chinas 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, we believe Goldwind and Mingyang have better profitability while Sinovels 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.

Chinas 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. Closer relationship with major wind farm operators, majority of which are government-owned enterprises. Better after-sales services thanks to geographical proximity. Chinas 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.

2.

3. 4.

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Chinas WTG market breakdown by manufacturer


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

Source: CWEA, CCBIS estimates

Market structure: concentrated yet fragmented


Less than ten producers dominate Chinas 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, Chinas 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. Chinas WTG market breakdown by manufacturer (2010)
Others 10% Huachuang 3% XEMC Wind Power 3% Gamesa 3% Shanghai Electric 3% Vestas 5% Mingyang 6% United Power 9% Dongfang Electric 14% Goldwind 21% Sinovel 23%

Source: CWEA, CCBIS estimates

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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).

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Vertical integration by major WTG manufacturers


WTG producer Sinovel Blade x Generator x Gearbox x* ** x *** x ** x Control system x*

Goldwind Dongfang Electric United Power Mingyang XEMC x Vestas Gamesa GE Wind x Enercon Suzlon Repower Nordex Siemens * Partially supplied by an affiliated company ** Product does not require gearbox *** Pilot production phase Source: CCBIS

x x

x x

** x x x x x x

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

Industry trend III: 10-15% decline in ASP YoY starting from 2010
Based on data from CWEA, ASP of WTGs started to increase in 2004, peaked in mid-2008 before declining afterwards. We forecast average WTG ASP in China will fall 10-15% YoY in 2010-2012F. We believe the WTG ASP increase in 2004-2008 was mainly due to tight WTG supply and rising raw material costs. According to CWEA, the average ASP increased from RMB4,800 per kW in April 2004 to RMB6,200 per kW at the beginning of 2008. However, prices began to fall in 2H08 and declined rapidly in 2009. By the end of 2009, the ASP of Chinese WTGs decreased to below RMB5,000 per kW (down over 20%). Chinas ASP trends for WTGs

Source: CWEA

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

Direct-drive or gearbox?
The global WTG market has so far been dominated by gearbox WTGs. According to BTM Consult, gearbox WTGs accounted for more than 85% of the global market as of 2009, while Enercon and Goldwind were the only two companies among the global top ten WTG manufacturers that had a meaningful share of direct-drive products. Global direct-drive WTG penetration
MW 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2005 2007 Global WTG shipment (LHS) 2009 Direct-drive % (RHS) 2010F 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Source: CCBIS estimates

Over the past year, the presence of direct-drive technology has increased, as demonstrated by Goldwinds rapid market share expansion in China, from 15% in 2009 to 21% in 2010 based on our estimates, on the back of the increasing penetration of its direct-drive WTGs. We believe that Goldwind has also contributed greatly to the rise of direct-drive WTG global market share from the historical average of low teens to slightly above 20% in 2010. Goldwinds WTG shipment volume and market share in China
MW 6,000 5,000 4,000 60% 3,000 40% 2,000 1,000 0 2007 2008 Shipment (LHS) 2009 2010 China market share (RHS) 2011F 20% 100%

80%

0%

Source: CCBIS estimates

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Several global leading WTG manufacturers, including GE Wind, Siemens and Dongfang Electric, which were involved in only gearbox WTG manufacturing historically, started to tap direct-drive WTG R&D and production. According to Goldwind and Mingyang, direct-drive WTGs have several advantages over doubly-fed (gearbox) WTGs, such as higher energy yield, grid friendly, light weight and most importantly savings from repair and maintenance (R&M) costs. (see Appendix 9, page 159-161 for more details). However, we would like to highlight that we have no preference between gearbox and direct-drive WTGs for the following three reasons: 1. No material cost/performance difference for onshore wind applications, which remain over 90% of wind installation in China and globally:

Based on our channel check with wind farm operators, there is no material cost/performance difference between gearbox and direct-drive WTGs for onshore applications, which will remain over 90% of annual installation globally and in China for the next five years in our view. We believe Goldwinds market share expansion is mainly due to its aggressive pricing strategy, supported by its cost reduction efforts on the back of economies of scale and vertical integration instead of end-customer preference of direct-drive technology. 2. Too early to draw conclusions on advantages of direct-drive WTGs for offshore wind applications:

Theoretically, direct-drive WTGs could very well have stronger cost competitiveness over gearbox WTGs for offshore wind farms, especially given their lighter weight and lower R&M expense. However, given the limited operating track record for offshore wind farms globally, it remains too early to draw conclusions. In fact, according to EWEA, among the top global offshore WTG suppliers, only Siemens adopts direct-drive technology. Global leading offshore WTG suppliers
Manufacturer Siemens Vestas Nordex Repower BARD Engineering Multibrid Source: EWEA, CCBIS Type of WTG 3.6MW 3MW 2.5MW 5MW / 6MW 5MW 5MW Technology Direct-drive Gearbox Gearbox Gearbox Gearbox Gearbox

3.

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

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

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Siemens acquired its direct-drive technology through the acquisition of Bonus Energy in 2004. It installed three 3.6MW direct-drive offshore WTGs in Denmark and is planning to launch full-scale production in 2011. Meanwhile, another global producer GE acquired ScanWind and its direct-drive technology in 2009 and is planning to commercialize its 3.5MW direct-drive WTGs in 2012. Nonetheless, we maintain our view that it remains too early to conclude whether direct-drive is the better technology of choice for offshore wind farms.

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 Mingyangs leading positions in Chinas WTG market, we expect the three to benefit from the industry consolidation trend going forward. Snapshot of listed pure China WTG plays
Goldwind Year for first shipment Company status Shipment (2010, MW) Cumulative shipment (2010, MW) China market share (2010) (%) Cumulative share in China (2010) (%) Main products Source: Company data, CCBIS 2001 Government-owned 4,007 9,358 21 21 1.5MW (direct-drive) 2.5MW (direct-drive) Mingyang 2008 Private 1,220 1,455 6 3 1.5MW (gearbox) 3.0MW (hybrid-direct-drive) Sinovel 2006 Government-owned 4,386 10,038 23 22 1.5MW (gearbox) 3.0MW (gearbox)

In general, we believe that Goldwind and Mingyang have similar profitability performance in terms of margins. Both companies have a better production cost structure than Sinovel. On the other hand, all of the three WTG manufacturers have a very strong balance sheet with net cash position or minimal net debt position through 2012F, based on our estimates. Compared with Goldwind, we expect Mingyang to enjoy higher growth due to its much smaller base. However, we would like to highlight that Mingyangs earnings growth comes with much higher risk as Mingyang is switching its WTG technology platform from doubly-fed (gearbox) WTGs to SCD (super-compact-direct-drive) WTGs for its 2.5/3.0MW products, shipments of which are to be launched after 2H11F. As for 2.5MW WTGs, Goldwind uses direct-drive technology currently used in its 1.5MW WTGs. We forecast 30% of Mingyangs gross profit will come from its 2.5/3.0MW WTG products by 2012F.

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Fundamental comparison between listed pure WTG plays


Goldwind Order book Order backlog (GW) (Jan 2011) Book to bill (2011F) Shipment and market share Shipment (MW) 2010 2011F 2012F Shipment CAGR (2010-2012F) (%) China market share (2011F) (%) Profitability Gross margin (%) 2010 2011F 2012F Net margin (%) 2010 2011F 2012F EPS (RMB/share) 2010 2011F 2012F EPS CAGR (2010-2012F) (%) ROE 2010 2011F 2012F 7.0 1.2 3.2 1.3 15.0 2.8 Mingyang* Sinovel**

4,007 5,800 6,685 29 27

1,203 2,400 3,315 66 12

4,386 5,350 6,238 19 26

23.0 20.7 21.9 13.0 11.4 11.4 0.98 1.06 1.10 6 17 17 15

23.0* 21.9* 22.0* 12.6 11.5 11.4 5.57 8.25 9.73 32 20 23 21

21.1 21.1 21.3 14.8 15.2 14.8 2.79 3.60 4.52 27 19 20 21

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

Net cash Net cash Net cash

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China High Speed Transmission Equipment (658 HK)


Company Rating: Outperform

Excessive concern provides buying opportunity


China High Speed Transmission Equipment (CHST) is the second-largest wind gearbox producer globally. CHSTs shares have underperformed the HSCEI by 33% over the past 12 months amid concerns over muted demand growth, margin pressure, and the development of direct-drive WTGs. We believe that CHSTs shares have been oversold and current valuation of 10x 2011F PE is very attractive. We initiate coverage with an Outperform rating and target price of HK$15.60. Solid industry position. CHSTs market share of 43% in China and 24% worldwide in 2010 are a testament to its solid industry leadership. We believe that the gearbox segment remains the most favorable among the wind equipment value chain given its high barriers to entry. Excessive concern over direct-drive development. We see no material operational benefit for wind operators to adopt direct-drive over doubly-fed WTGs, particularly for onshore applications, which will account for over 90% of global annual installation by 2015. Flattish year-on-year earnings growth in 2011F priced in. Our 2011F estimates assume the lower-end of management guidance in terms of pricing (down 9% YoY) and gross margins (28%). Based on our conservative estimates, CHST trades at 10x 2011F PE, and over 41% discount to the global peer average and at CHSTs historical valuation trough. We believe concerns surrounding the stock have been priced in. Initiate with Outperform; attractive valuation. Our target price of HK$15.60 is based on DCF valuation, implying 13x 2011F PE, in line with the average valuation of Chinese wind equipment manufacturers. Forecast and valuation
Year to 31 Dec 2008 2009 5,647 965 0.78 39 13.6 9.3 3.0 2.5 21.7 47.1 2010 7,393 1,403 1.10 41 9.6 7.7 1.8 3.5 18.7 15.0 2011F 9,267 1,435 1.04 (5) 10.1 6.9 1.7 3.4 16.9 23.1 2012F 9,959 1,542 1.12 7 9.4 6.3 1.5 3.6 16.2 16.6 Revenue (RMB m) 3,439 Reported net profit (RMB m) 693 Normalized EPS (RMB) 0.56 Normalized EPS growth (%) 94 PER (x) 19.0 EV/EBITDA (x) 20.5 PBV (x) 3.5 Dividend yield (%) 2.1 ROE (%) 18.6 Net gearing ratio (%) 18.2 Source: Company data, CCBIS estimates

(initiation)

Sector Rating:

Neutral
(initiation)

Price: Target:

HK$12.54 HK$15.60
(initiation)

Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) Expected return (%) 1 year Closing price on 1 April 2011 HK$10.52-19.30 HK$17,243/US$2,216 1,375 85 8.3 24

Stock price and HSCEI


HK$ 23.0 22.0 21.0 20.0 19.0 18.0 17.0 16.0 15.0 14.0 13.0 12.0 11.0 10.0 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 CHST (LHS) HSCEI (RHS) Feb 11 Mar 11 15,000 14,500 14,000 13,500 13,000 12,500 12,000 11,500 11,000 10,500 10,000 9,500 9,000 8,500

Source: Bloomberg

Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com

Alan Lau
(852) 2533 2479 alanlau@ccbintl.com

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Financial analysis
Revenue mix and growth
CHSTs principle product is wind gearboxes used in wind turbines, which accounted for 74% of its revenue in 2010. We expect wind gearboxes to remain CHSTs largest sales contributor, accounting for c.70% of total revenue in 2011F-2012F. Revenue contribution
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2009
Wind Gear Marine Gear

2010
Rail Gear

2011F
Others

2012F

Source: Company data, CCBIS estimates

We forecast that CHSTs overall revenue will grow 25% YoY in 2011F and 7% YoY in 2012F. We believe that growth will be mainly driven by wind gearboxes and marine gearboxes. Our wind gearbox revenue growth estimate of 3% YoY for 2012F is conservative, and assumes no capacity expansion, no introduction of new wind products and no ASP increase from product mix improvement. Our 2012F estimate does, however, include an increase in sales in yaw motors and drive products. On the back of our conservative assumptions for 2012F wind revenue growth, we forecast CHSTs revenue growth will slow from 72% CAGR in 2007-2009, to 16% CAGR in 2010-2012F.

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Key operation data


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

151 193 N/M 18 81

111 (47) N/M 30 64

43 12 154 3 31

25 55 98 20 25

3 18 80 17 7

52 12 0 36

67 4 0 29

74 3 0 23

74 4 1 21

71 4 1 24

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 CHSTs gross margin will face downward pressure in 2011F and 2012F, due mainly to margin pressure from its wind gearbox product line. We forecast CHSTs 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 2,500 2,000 1,500 15% 1,000 500 0 2008
Wind Gear

35% 30% 25% 20%

10% 5% 0% 2009
Marine Gear

2010
Rail Gear

2011F
Others

2012F
Gross margin

Source: Company data, CCBIS estimates

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Gross margin by product


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

Operating expenses
The companys operating expenses comprise distribution costs, administrative expenses and R&D cost. Due to stable cost management of CHST, we expect operating expenses over sales to remain stable in 2011F-2012F at 10%, a slight drop from 11% in 2010 due to savings from distribution costs for wind products. Operating expenses
2008 Distribution costs Administrative expenses Research development costs Total YoY (%) Operating expense as % of revenue Distribution costs Administrative expenses Research development costs Overall Source: Company data, CCBIS estimates 107 284 55 447 16 2009 139 318 70 528 18 2010 287 460 50 798 51 2011F 278 570 111 959 20 2012F 274 646 120 1,040 8

3 8 2 13

2 6 1 9

4 6 1 11

3 6 1 10

3 6 1 10

Operating profit and margin


Assuming stable operating expenses of 10% over sales in 2011F-2012F, we expect CHSTs operating margin to fall from 20% in 2010 to 18% in 2011F and remain flat for 2012F. Operating profit trend
RMB m 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2008 2009 2010 Operating profit 2011F Operating margin 2012F 0% 5% 10% 15% 20% 25%

Source: Company data, CCBIS estimates

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Net profit and margin


In 2008-2010, a major component of non-operating expenses was revaluation gains/losses from CHSTs 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 1,600 1,400 1,200 1,000 800 600 400 200 0 2008 2009 2010
Net profit Net margin

21% 18% 15% 12% 9% 6% 3% 0% 2011F 2012F

Source: Company data, CCBIS estimates

Capex and PPE turnover


After construction completion of the second wind gearbox production base in 2010, we believe CHSTs 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

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Debt and gearing


CHSTs 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 CHSTs cash conversion cycle will shorten from 101 days in 2010 to 55 days and 40 days in 2011F and 2012F, respectively. We saw a surge in accounts receivable days in 2010 due to incidences with customers including GE and Sinovel. However, we believe that the problems have been resolved and we now forecast an improvement in accounts receivable days going forward. Turnover days
(days) Inventory turnover Accounts receivable turnover Accounts payable turnover Cash conversion Source: Company data, CCBIS estimates 2008 148 103 239 11 2009 128 126 174 80 2010 92 159 150 101 2011F 115 125 185 55 2012F 110 120 190 40

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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 companys 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 0 (1,000) (2,000) (3,000) (4,000) 2008
Cash flow from operations

2009

2010

2011F
Cash flow from financing activities

2012F
Net cash flow

Cash flow from investing activities

Source: Company data, CCBIS estimates

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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 CHSTs current valuation of 10x FY11 PER. Valuation comparison
Price (local Company Stock code Rating currency) Market cap (US$m) PER (x) 2010A 2011F 2012F EPS growth (%) PEG (x) 2011F 2010A PBV (x) 2011F 2012F 2010A ROE (%) 2011F 2012F

WTG component manufacturers China High Speed Transmission Hansen Transmission Taewoong Hyunjin Materials 658 HK HSN LN 044490 KS 053660 KS O NR NR NR 12.54 49.50 52,300 17,100 2,217 534 796 232 9.6 N/A 42.7 N/A 10.1 N/A 22.3 10.9 9.4 N/A 16.0 7.6 (5) N/M 79 N/M (2.1) N/M 0.3 N/M 1.8 0.6 2.1 1.3 1.7 0.6 2.0 1.2 1.5 0.6 1.8 1.0 18.7 (1.7) 2.9 (12.8) 16.9 (1.5) 5.5 (1.0) 16.2 0.9 9.3 10.8

WTG manufacturers Xinjiang Goldwind - H share 2208 HK O 14.56 7,858 14.6 13.2 12.9 Xinjiang Goldwind - A share 002202 CH NR 20.65 7,857 N/A 16.9 13.4 Sinovel Wind 601558 CH NR 74.14 11,381 23.4 20.6 17.0 China Ming Yang Wind Power MY US N 10.52 1,315 12.3 8.4 7.1 Vestas VWS DC NR 223.30 8,685 38.9 20.2 15.8 Gamesa GAM SM NR 7.37 2,576 18.6 18.6 18.6 Repower RPW GR NR 145.00 1,900 22.9 25.7 21.5 Nordex NDX1 GR NR 8.26 786 26.6 27.9 21.0 Suzlon SUEL IN NR 44.60 1,778 N/A N/A 24.3 Dongfang Electric 1072 HK NR 26.70 8,237 17.3 14.0 11.8 Shanghai Electric 2727 HK NR 3.96 13,355 15.2 13.3 12.0 All prices are as of 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS

10 24 14 48 93 31 (11) (5) N/M 24 15

1.3 0.7 1.5 0.2 0.2 0.6 (2.3) (6.2) N/M 0.6 0.9

2.4 N/A 13.9 2.4 2.2 1.1 2.8 1.5 1.1 2.4 1.6

2.3 3.6 4.1 1.9 2.0 1.1 2.7 1.5 1.1 3.0 1.4

2.0 2.8 3.3 1.5 1.8 1.0 2.5 1.4 1.1 2.4 1.3

16.7 17.1 39.1 24.6 77.5 19.9 19.8 22.6 5.9 11.1 3.1 4.2 11.6 10.6 5.9 4.6 (12.9) (12.2) 33.0 24.5 11.3 11.0

15.4 21.9 20.5 21.0 12.7 5.6 11.5 6.0 3.8 23.0 11.0

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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$15.60, CHSTs shares will trade at 13x FY11 PER, in line with the average valuation of Chinese wind equipment manufacturers. CHST DCF valuation model
Free cash flow (RMB m) Sales EBITDA margin (%) Less: tax Working capital CAPEX FCF FY11F 9,267 2,114 23 (264) 514 (1,285) 1,079 FY12F 9,959 2,314 23 (284) 142 (1,131) 1,041 FY13F 10,691 2,553 24 (325) (177) (1,126) 925 FY14F 11,599 2,708 23 (347) (192) (1,079) 1,090 Net debt (FY10) (RMB m) 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 1,128 FY15F 12,642 2,932 23 (381) 18 (1,064) 1,505 Equity value (RMB m) 21,714 21,396 21,086 20,785 20,490 20,204 19,924 19,651 19,385 19,125 18,872 18,624 18,382 18,146 17,915 17,689 17,469 17,253 17,042 16,835 16,633 FY16F 13,811 3,142 23 (413) (225) (1,139) 1,365 FY17F 15,077 3,295 22 (438) (228) (1,033) 1,596 Value per share (HK$) 17.7 17.4 17.2 16.9 16.7 16.5 16.2 16.0 15.8 15.6 15.4 15.2 15.0 14.8 14.6 14.4 14.2 14.1 13.9 13.7 13.6 FY18F 16,418 3,395 21 (465) (230) (1,024) 1,677 FY19F 17,818 3,490 20 (482) (240) (1,180) 1,587 FY20F 19,378 3,746 19 (526) (85) (1,046) 2,089

WACC (%) 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 10.0 10.1 10.2 Source: CCBIS

Sum of PV (RMB m) 9,530 9,490 9,451 9,413 9,374 9,336 9,298 9,260 9,222 9,185 9,148 9,111 9,074 9,038 9,002 8,966 8,931 8,895 8,860 8,825 8,791

PV of TV (RMB m) 13,312 13,034 12,763 12,500 12,244 11,996 11,754 11,519 11,291 11,068 10,852 10,641 10,436 10,236 10,041 9,851 9,666 9,485 9,309 9,138 8,970

EV (RMB m) 22,842 22,524 22,214 21,912 21,618 21,332 21,052 20,779 20,513 20,253 20,000 19,752 19,510 19,274 19,043 18,817 18,596 18,381 18,170 17,963 17,761

Shares (m shares) 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458 1,458

WACC calculation Equity Beta Risk-free rate (%) Equity risk premium (%) Country risk premium (%) Cost of equity (%) Cost of debt (%) Debt/capital (%) Tax (%) WACC (%) Terminal growth rate (%) 0.94 3.92 6 1 11 7 30 15 9.1 1

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Risks
Wind policy changes: As an upstream key component supplier to the wind industry, CHST sales orders are highly sensitive to WTG demand, which, in turn, is very dependent on the prevailing Chinese government wind policies. Chinas WTG installation grew at a 120% CAGR in 2006-2009 thanks to Chinas target of generating 15% of total energy from renewable energy by 2020. We believe policy changes could have both positive and negative impacts to the WTG manufacturing industry and our earnings estimates. Development of direct-drive WTG: The direct-drive WTG does not employ a gearbox component and its market share is a sliver next to the market share of the mainstream gearbox-using doubly fed WTGs. Among the top manufacturers in the Chinese WTG market, only Goldwind and Xemc produce direct drive WTGs. In our opinion, CHSTs future wind gearbox sales growth is dependent on technology trend development. However, there is currently no apparent operational benefit for one technology over the other. Overall, technology developments could have both positive and negative implications for our earnings estimates depending on the choices made by wind farm operators over time. Key component shortage: One of the key components of gearboxes is the main bearing. Due to the limited number of suppliers of this part in the Chinese market, CHST relies on global suppliers such as FAG, SKF and Timken for its main bearing supply. Supply of main bearings can be precarious at times. In fact, market supply of main bearings experienced shortages in 2007-2008 due to rapid growth in WTGs. At the moment, no large Chinese main bearing supplier has the technology and capacity to replace overseas suppliers, so we expect CHST to continue to rely on these major global suppliers for its main bearing supply, resulting in a potential slowdown in sales growth in times of rapid WTG growth due to limited component supply. Raw material cost fluctuations: CHSTs raw materials include cast iron, forged steel and other spare parts such as bearings and steel plates. According to management, raw materials accounted for approximately 77% of total cost of sales in 2010. Price fluctuations in forged steel and other major raw materials could lead to both upside and downside surprises in our cost and earnings estimates. Product diversification: Although wind gear sales currently account for approximately 70-75% of CHSTs total revenue, the company is keen on developing new production lines like wind control systems, high speed rail products, numerical control systems and coal and agricultural machinery. New products require investment and time for market acceptance to gain market share. We think the launch of new production lines is positive to CHSTs development because these new lines can reduce the companys dependence on wind gear sales and wind sector growth, though they entail the risk of product failure in the product launching period.

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Company profile
Company history
CHST is one of the leading mechanical transmission equipment producers in China, according to China Gear Industry Yearbook 2010. CHSTs major operational subsidiary, Nanjing High Speed & Accurate Gear (Group) Co., Ltd (NGC), was founded in 1969 with the name Nanjing Machine Tool Repairing Plant. In 1976, the company was transformed into a professional gear manufacturer and renamed Nanjing Gear Box Factory. In 2001, the company evolved once again, this time in to an incorporated (private) company and renamed NGC. The listed holding company CHST was incorporated in 2005 and acquired a stake in NGC in 2006. CHST successfully listed on the Main Board of the Stock Exchange of Hong Kong in July 2007. Major milestones
Date 1969 1976 1997 2001 Development Established in Nanjing through the merger of Second Machinery Maintenance Station of Nanjing and Nanjing Mechanic School; began mechanical transmission equipment production business

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

Business description
CHST is principally engaged in the research, design, development, manufacture and distribution of a broad range of mechanical transmission equipment (gearboxes) used in a variety of industrial applications. CHST acquires raw materials, such as forged steel, cast iron, foundry steel bearings, and steel plates, which it subsequently employs in the manufacture of gears, gear drafts and gear housings. It then assembles the components into gearboxes. The production includes nine fundamental procedures described in the chart below.

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Production procedures

Source: Company data, CCBIS

Production facilities
CHSTs production facilities are currently all located in Nanjing, including two wind power gearbox production facilities with total capacity of approximately 12,000MW and three production bases for marine gearboxes, rail gearboxes and other traditional gearboxes. Production facilities
Production base Wind gear transmission equipment I Wind gear transmission equipment II Traditional gear transmission equipment Main product Wind power gearbox with production capacity of about 4,000MW Wind power gearbox with production capacity of about 6,000MW Gear transmission equipment for construction; gearbox transmission equipment for bar-rolling, wire-rolling and plate-rolling mills of metallurgy industry; gear transmission equipment for plate-rolling General purpose gearbox; standard gearbox Marine transmission system: pitch propeller, marine gearbox, tunnel thruster, hydraulic coupling, full circle swinging Plant size (sq. m) 172,000 266,000 110,000

Traditional gear transmission equipment Marine gear transmission equipment Source: Company data, CCBIS

69,000 67,000

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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
CHSTs products are used in various industries, including wind power generation, marine vessels, rail transport, aerospace, metallurgy, petrochemicals, construction and mining. Wind gearboxes have been the companys largest source of revenue over the past few years, with an increasing share of company revenue. Wind gear transmission equipment has contributed approximately 74% of 2010 revenue. Other major product groups include marine gearbox, rail gearbox, and other traditional products, accounting for 3%, 1% and 22% of CHSTs 2010 revenue, respectively. Revenue contribution by product
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 Wind Gear 2008 Marine Gear 2009 Rail Gear 2010 Other Traditional Gear

Source: Company data, CCBIS

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The 1.0MW-1.5MW gearbox series is currently the main wind gear transmission equipment produced by the company, accounting for 80% of CHSTs wind product revenue in 2010. Revenue contribution by wind gear transmission equipment
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2MW gearbox 2008 1.0,1.3,1.5MW gearbox 2009 750,850kW gearbox 2010 Yaw motor & drive Pitch

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 CHSTs largest customers. CHST is currently developing 2.5MW wind gearboxes for GE in expectation of receiving product certification. CHST also jointly developed 3MW gearboxes for hybrid-direct-drive WTGs with Goldwind in 2009-2010. The company jointly developed 570km/h high-speed train gears with Alstom, a French-based company specializing in manufacturing high speed rail components, such as rolling stock, infrastructure and information systems. CHST has also set up a jointly controlled company with ZF Friedrichshafen AG, a German-based marine gearbox manufacturer, to produce marine gear transmission equipment. CHST launched a new numerical control series product line in 1H10. According to management, CHST is developing other new products, such as wind control systems, transmission equipment for coal-mining and high-end agricultural transmission equipment. Although we do not expect near-term financial contribution from these new product lines, we believe new product development will be positive for the companys long-term growth profile, particularly post 2011.

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

Source: Company data, CCBIS

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

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

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

Directors and senior management background


Board of directors and senior management
Name Hu Yueming Age 60 Position Executive Director, Chairman of the board and CEO Executive Director and Vice President Key experience Senior engineer; Appointed Director since March 2007; Over 30 years of experience managing in machinery and industrial enterprises; Previously served various management positions in state-owned power conglomerates. Senior engineer; Appointed Director since March 2007; Over 20 years of experience in R&D and quality inspection of mechanical transmission equipment production. Senior engineer; Appointed Director since March 2007; Over 20 years of experience in marketing management and client resources in mechanical transmission equipment. Appointed Director since March 2007; Over 25 years of enterprise management experience and mechanical transmission equipment production. Senior engineer; Appointed Director since March 2007; Over 10 years experience in R&D of mechanical transmission equipment. Senior engineer; Appointed Director since March 2007; Over 20 years experience in heat treatment of metallic materials and technical and investment management. Senior engineer; Appointed Director since July 2006. Obtained a doctorate in Accountancy; Appointed Director since June 2007; Professor and head of Accounting and Financial Development Research Center of Nanjing Normal University. Vice President of Chinese Renewable Energy Society and Director of the Renewable Energy Professional Committee of China Association of Resource Comprehensive Utilisation; Appointed Director since June 2007. Obtained a doctorate in Accounting; Professor in Nanjing University and Shanghai University of Finance and Economics; Appointed Director since June 2007. Associate member of Australian Society of Certified Public Accountants and a member of Hong Kong Institute of Certified Public Accountants; Joined group in June 2006.

Chen Yongdao

47

Lu Xun

55

Executive Director

Li Shengqiang Liu Jiangguo

56 40

Executive Director Executive Director

Liao Enrong

49

Executive Director

Zhang Wei Jiang Xihe

45 51

Non-executive Director Independent Non-executive Director

Zhu Junsheng

70

Independent Non-executive Director Independent Non-executive Director Chief Financial Officer and Company Secretary

Chen Shimin

51

Lui Wing Hong, Edward

47

Source: Company data, CCBIS

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Financial summary
Income statement forecasts
FYE 31 Dec (RMB m) Revenue Cost of goods sold Gross profit Other income Selling and distribution expenses Administrative expenses R&D expenses Operating profit EBIT Depreciation and amortisation EBITDA Net interest expense Share of results of an associate Extraordinary items Profit before tax Taxation Net profit after tax Minorities Reported net profit after tax Dividends Transfer to reserves Normalized net profit after tax 2009 5,647 (3,786) 1,861 (139) (318) (70) 1,334 1,334 221 1,554 (74) 16 (110) 1,166 (200) 966 (1) 965 (327) 638 965 2010 7,393 (5,094) 2,299 (287) (460) (50) 1,501 1,501 376 1,878 (116) 41 223 1,650 (257) 1,393 10 1,403 (471) 933 1,403 2011F 9,267 (6,646) 2,621 (278) (570) (111) 1,662 1,662 452 2,114 (137) 46 128 1,699 (264) 1,435 0 1,435 (488) 947 1,435 2012F 9,959 (7,116) 2,843 (274) (646) (120) 1,803 1,803 510 2,314 (164) 50 137 1,826 (284) 1,542 0 1,542 (524) 1,017 1,542

Balance sheet forecasts


FYE 31 Dec (RMB m) Fixed assets Other intangible assets Long-term investments Other long-term assets Total non-current assets Other current assets Inventories Marketable securities Accounts receivable Cash & equivalents Total current assets Total assets Accounts payable Short-term debt Other current liabilities Total current liabilities Long-term debt Convertible debt Other long-term liabilities Total non-current liabilities Total liabilities Total shareholders' equity Total equity and liabilities 2009 4,116 120 722 240 5,198 640 1,313 0 2,613 471 5,037 10,235 1,566 1,556 166 3,288 1,012 1,369 115 2,496 5,785 4,450 10,235 2010 5,269 214 830 476 6,789 932 1,258 18 3,811 2,124 8,142 14,932 2,613 1,209 1,405 5,226 2,043 0 148 2,191 7,417 7,514 14,932 2011F 6,061 269 922 582 7,834 984 2,094 18 3,174 2,678 8,948 16,782 3,369 1,853 131 5,354 2,780 0 170 2,950 8,304 8,478 16,782 2012F 6,713 289 1,022 621 8,644 1,057 2,145 18 3,274 3,396 9,890 18,535 3,704 1,992 140 5,837 2,988 0 178 3,166 9,002 9,532 18,535

Financial ratios
FYE 31 Dec (RMB m) Profitability (%) EBIT margin EBITDA margin Net margin ROE Growth (%) Revenue EBIT EBITDA Net profit growth Valuation and ratio analysis (x) Normalized PER Reported PER Dividend yield Price/cash flow PBV EV/EBIT EV/EBITDA Liquidity and leverage (%) Current ratio Interest cover (x) Gearing ratio Net gearing ratio 2009 23.6 27.5 17.1 21.7 64.2 119.3 144.5 39.4 13.6 13.6 2.5 N/A 3.0 10.9 9.3 1.5 18.1 58 47 2010 20.3 25.4 19.0 18.7 30.9 20.8 12.6 44.3 9.6 9.6 3.5 8.2 1.8 9.7 7.7 1.6 13.0 43 15 2011F 17.9 22.8 15.5 16.9 25.4 12.6 10.7 3.0 10.1 10.1 3.4 26.2 1.7 8.7 6.9 1.7 12.1 55 23 2012F 18.1 23.2 15.5 16.2 7.5 9.4 8.5 7.5 9.4 9.4 3.6 20.2 1.5 8.1 6.3 1.7 11.0 52 17

Cash flow projections


FYE 31 Dec (RMB m) EBITDA Change in working capital Other operating cash flow Cash flow from operations Capital expenditure Addition in investments Net acquisitions Reduction/(addition) in other long-term assets Addition in other long-term liabilities Other cash flow from investing activities Cash flow from investing activities Cash dividends Equity issue Net debt issue Net convertible debt repayment Other cash flow from financing activities Cash flow from financial activities Net cash flow Beginning cash Forex Ending cash 2009 1,554 (1,784) (47) (277) (1,602) (2) 1 810 1 26 (766) (274) 0 1,206 0 (99) 832 (210) 682 0 471 2010 1,878 (121) 61 1,818 (1,717) (81) (41) 891 0 (112) (1,059) (327) 2,054 683 (1,369) (147) 894 1,653 471 0 2,124 2011F 2,114 514 (137) 2,491 (1,285) 0 (46) (1,268) 0 (52) (2,651) (471) 0 1,382 0 (197) 714 554 2,124 0 2,678 2012F 2,314 142 (92) 2,364 (1,131) 0 (50) (72) 0 (11) (1,264) (488) 0 346 0 (240) (382) 718 2,678 0 3,396

Source: Company data, CCBIS estimates

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Xinjiang Goldwind Science & Technology (2208 HK)


Company Rating: Outperform
(initiation)

Industry leader, compelling valuation


Goldwind is the second-largest WTG producer in China, with 21% market share in 2010. Near-term industry concerns over muted demand growth and margin pressure, we believe, have been priced in, and we consider Goldwind one of the main beneficiaries of government-encouraged industry consolidation in the medium term. 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. Continuous market share gains in China. We believe Goldwind will expand its market share in China thanks to its leadership in cost and brand equity. We expect shipment growth of 45% YoY in 2011F, implying a market share gain to 30%, from 21% in 2010. Goldwind claimed a 32% share in nationwide WTG public tendering in 2010. Well-positioned for overseas and offshore. Goldwind was among the first to produce 2.5/3.0MW WTGs in China. They now represent 25% of the companys order backlog. Goldwind is rare insofar as it has a track record in offshore wind in China. We also see it ramping up overseas sales contribution to 10% in 2011F and c.12% in 2012F. Industry and company negatives priced in. Our 2011F estimates factor into shipment of 5.8GW (guidance: 5.5-6.0GW), ASP decline of 14% YoY and gross margin decline of 230bp YoY to 20.7%. Based on our conservative estimates, Goldwind trades at 13x 2011F PE, a 23% discount to the global peer average, a compelling valuation. Initiate with Outperform. Our target price of HK$16.60 is based on DCF valuation, implying 15x 2011F PE, at a 13% discount to the global peer average valuation. Forecast and valuation
Year to 31 Dec 2008 2009 2010 17,475 2,272 0.84 7.7 14.6 16.9 2.4 7.7 16.7 Net Cash 2011F 21,489 2,494 0.93 10.2 13.2 15.2 2.3 2.6 17.1 Net Cash 2012F 22,282 2,568 0.95 3.0 12.9 14.0 2.0 1.6 15.4 Net Cash Revenue (RMB m) 6,417 10,667 Reported net profit (RMB m) 909 1,766 Normalized EPS (RMB) 0.40 0.78 Normalized EPS growth (%) 45.1 92.6 PER (x) 30.3 15.7 EV/EBITDA (x) 41.3 24.4 PBV (x) 6.6 5.0 Dividend yield (%) 2.7 2.0 ROE (%) 22.0 32.0 Net gearing ratio (%) Net Cash Net Cash Source: Company data, CCBIS estimates

Sector Rating:

Neutral
(initiation)

Price: Target:

HK$14.56 HK$16.60
(initiation)

Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) Expected return (%) 1 year Closing price on 1 April 2011 HK$12.2 21.3 HK$61,118/US$7,855 2,695 92 5.3 14

Stock price and HSCEI


HK$ 22.0 21.0 20.0 19.0 18.0 17.0 16.0 15.0 14.0 13.0 12.0 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Goldwind (LHS) HSCEI (RHS) 12,000 11,500 11,000 10,500 10,000 14,500 14,000 13,500 13,000 12,500

Source: Bloomberg

Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com

Alan Lau
(852) 2533 2479 alanlau@ccbintl.com

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Financial analysis
Revenue
We forecast Goldwinds top-line growth to continue in 2011F and 2012F at 23% YoY and 4% YoY, respectively. We believe Goldwinds revenue growth in 2010-2012F will be volume driven and expect its blended ASP of WTGs to decline 14% YoY and 11% YoY in 2011F and 2012F, respectively. Assuming its market share in China will increase and overseas sales will expand, we expect Goldwinds shipment growth to reach 45% YoY in 2011F and 15% YoY in 2012F. Goldwinds principal product, the 1.5MW WTG, contributed 94% of company revenue in 2010. We expect the 1.5MW WTG to continue to be its principal revenue contributor through 2012F. Despite production and shipments of 2.5MW WTG in 2011F and 2012F, we believe the 2.5MW WTG still requires one-to-two more years to gain market acceptance. Besides WTG sales, the company also generates revenue from wind power services and wind farm development. These two business lines aggregately accounted for approximately 3% of total revenue in 2010, and we expect revenue contribution (as share of overall revenue) to remain stable in 2011F and 2012F. Revenue trend
RMB m 25,000 20,000 15,000 10,000 5,000 0 2008 750 kw revenue Others 2009 1.5MW revenue Sales from wind power service 2010 2011F 2.5MW revenue Sales from wind farm development 2012F

Source: Company data, CCBIS estimates

1.5MW WTG
1.5MW WTG is currently the dominant product in the Chinese WTG market and Goldwinds core product since 2009. The product accounted for 94% of total revenue in 2010. We estimate this will gradually fall to 75% in 2011F and 63% in 2012F to be replaced by the sale of the new 2.5MW WTG. We expect product shipments to reach 4,525MW in 2011F, representing 18% YoY growth from 3,851MW in 2010, followed by a slight fall to 4,435MW or a 2% YoY decline in 2012F. Due to intensifying competition, we forecast that the ASP of 1.5MW WTG will fall from RMB4,253 per kW in 2010 to RMB3,555 per kW in 2011F and RMB3,164 per kW in 2012F. Based on our assumptions for ASP and shipment volume, we project revenue from 1.5MW WTG to decline by 2% YoY to RMB16.09b in 2011F and by 13% YoY to RMB14.03b in 2012F.

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2.5MW WTG
The company began delivering the 2.5MW WTG in 2H10. We expect the product to earn a pricing premium over the 1.5MW WTG as it is an advanced model. We forecast shipment volume of the 2.5MW WTG to grow significantly, from 2.5MW in 2010 to 1,125MW in 2011F and 2,250MW in 2012F. Despite our assumption for rapid volume growth YoY over the next two years, we believe that 1.5MW WTG will remain Goldwinds dominant product through 2012F as more time is needed for the new 2.5MW WTG product to gain market acceptance. We expect revenue contribution from 2.5MW WTG to grow from 0.07% in 2010 to 21.00% in 2011F and 34.00% in 2012F. We believe an ASP drop for WTGs is inevitable given the market trend, even for advanced 2.5MW WTG models. We forecast product ASP to fall from RMB4,800 per kW in 2010 to RMB3,984 per kW in 2011F and RMB3,370 per kW in 2012F. According to our estimate, due to rapid shipment volume growth in 2011F and 2012F, we forecast revenue contribution from the 2.5MW WTG to ramp up from RMB12m in 2010 to RMB4.48b in 2011F, and grow 69% YoY to RMB7.58b in 2012F.

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

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Key operation data


2008 Sales from wind turbines 750kW turbines Shipments (unit) Shipments (MW) ASP (RMB per kW) - 750MW Revenue from 750kW WTG (RMB m) YoY (%) 1.5MW turbines Shipments (unit) Shipments (MW) ASP (RMB per kW) Revenue from 1.5MW WTG (RMB m) YoY (%) 2.5MW turbines Shipments (unit) Shipments (MW) ASP (RMB per kW) Revenue from 2.5MW WTG (RMB m) YoY (%) Other WTG sales (RMB m) Total shipment volume (MW) Total WTG sales revenue (RMB m) YoY (%) Sales from wind power services (RMB m) Sales from wind farm development (RMB m) Total revenue (RMB m) YoY (%) CAGR 2010-12F (%) Source: Company data, CCBIS estimates 2009 2010 2011F 2012F

1,138 854 3,868 3,301 31 346 519 5,327 2,765 468 0 0 0 0 N/M 233 1,373 6,299 110 30 88 6,417 113

592 444 3,941 1,750 (47) 1,061 1,592 5,333 8,487 207 0 0 0 0 N/M 110 2,036 10,347 64 215 104 10,667 66

205 154 3,522 542 (69) 2,567 3,851 4,253 16,374 93 1 3 4,800 12 N/M 77 4,007 17,005 64 293 178 17,475 64

200 150 3,274 491 (9) 3,017 4,525 3,555 16,086 (2) 450 1,125 3,984 4,482 37,250 0 5,800 21,059 24 215 215 21,489 23

0 0 3,126 0 (100) 2,956 4,435 3,164 14,030 (13) 900 2,250 3,370 7,584 69 0 6,685 21,614 3 334 334 22,282 4 13

Gross profit and margin


We forecast company gross margin to be 21% and 22% in 2011F and 2012F, respectively. We expect Goldwinds 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.

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Status of in-house production of components Component


Blades

Share of total Produced in-house WTG cost (%) as of 2010 (%)


20 Nil

Management estimate
Acquired 2 blade factories in 2010, target to produce 800-1,000 blades in 2011, around 10% of supply 100% in 2011F-2012F 60-70% by 2011F Obtained license from Infeneon Technologies (IFFNY US, Not Rated), to produce 100% of insulated-gate bipolar transistor (IGBT) from 2011.

Generators Electrical control system Others

27 26 27

100 50 Nil

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 750kW WTG 1.5MW WTG 2010 2.5MW WTG 2011F Blended cost of sales 2012F

Source: Company data, CCBIS estimates

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Gross profit trend


RMB m 6,000

27% 24% 21%

5,000 4,000 3,000 2,000 1,000

18% 15% 12% 9% 6% 3%

0 2008 750kW WTG 2009 1.5MW WTG 2010 2.5MW WTG 2011F Others WTG 2012F Gross margin

0%

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 Goldwinds 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% 16%

3,500 3,000 2,500 2,000 1,500 1,000 500 0 2008 2009 2010 Operating profit 2011F Operating margin 2012F 0% 8%

12%

4%

Source: Company data, CCBIS estimates

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

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 7 6 5 4 3 2 2008 2009 2010 2011F 2012F

Source: Company data, CCBIS estimates

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Working capital
Goldwind has a relative stable cash conversion cycle at approximately 58 and 57days in 2009 and 2010, respectfully, and we forecast it to maintain at approximately 39 days in 2011F and 2012F each. Turnover days
(days) Inventory turnover Accounts receivable turnover Accounts payable turnover Cash conversion Source: Company data, CCBIS estimates 2008 158 149 190 117 2009 132 100 174 58 2010 119 158 221 57 2011F 110 150 221 39 2012F 110 150 221 39

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 companys 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 Cash flow from operations 2009 2010 2011F Cash flow from financing activities 2012F Net cash flow Cash flow from investing activities

Source: Company data, CCBIS estimates

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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$14.56 or 13x FY11F PER, we believe Goldwinds solid financial position and continuously expanding market share will bring valuation recovery in the medium-to-long term. Valuation comparison
Price (local Company Stock code Rating currency) Market cap (US$m) PER (x) 2010A 2011F 2012F EPS growth (%) PEG (x) 2011F 2010A PBV (x) 2011F 2012F 2010A ROE (%) 2011F 2012F

WTG component manufacturers China High Speed Transmission Hansen Transmission Taewoong Hyunjin Materials 658 HK HSN LN 044490 KS 053660 KS O NR NR NR 12.54 49.50 52,300 17,100 2,217 534 796 232 9.6 N/A 42.7 N/A 10.1 N/A 22.3 10.9 9.4 N/A 16.0 7.6 (5) N/M 79 N/M (2.1) N/M 0.3 N/M 1.8 0.6 2.1 1.3 1.7 0.6 2.0 1.2 1.5 0.6 1.8 1.0 18.7 (1.7) 2.9 (12.8) 16.9 (1.5) 5.5 (1.0) 16.2 0.9 9.3 10.8

WTG manufacturers Xinjiang Goldwind - H share 2208 HK O 14.56 7,858 14.6 13.2 12.9 Xinjiang Goldwind - A share 002202 CH NR 20.65 7,857 N/A 16.9 13.4 Sinovel Wind 601558 CH NR 74.14 11,381 23.4 20.6 17.0 China Ming Yang Wind Power MY US N 10.52 1,315 12.3 8.4 7.1 Vestas VWS DC NR 223.30 8,685 38.9 20.2 15.8 Gamesa GAM SM NR 7.37 2,576 18.6 18.6 18.6 Repower RPW GR NR 145.00 1,900 22.9 25.7 21.5 Nordex NDX1 GR NR 8.26 786 26.6 27.9 21.0 Suzlon SUEL IN NR 44.60 1,778 N/A N/A 24.3 Dongfang Electric 1072 HK NR 26.70 8,237 17.3 14.0 11.8 Shanghai Electric 2727 HK NR 3.96 13,355 15.2 13.3 12.0 All prices are as of 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS

10 24 14 48 93 31 (11) (5) N/M 24 15

1.3 0.7 1.5 0.2 0.2 0.6 (2.3) (6.2) N/M 0.6 0.9

2.4 N/A 13.9 2.4 2.2 1.1 2.8 1.5 1.1 2.4 1.6

2.3 3.6 4.1 1.9 2.0 1.1 2.7 1.5 1.1 3.0 1.4

2.0 2.8 3.3 1.5 1.8 1.0 2.5 1.4 1.1 2.4 1.3

16.7 17.1 39.1 24.6 77.5 19.9 19.8 22.6 5.9 11.1 3.1 4.2 11.6 10.6 5.9 4.6 (12.9) (12.2) 33.0 24.5 11.3 11.0

15.4 21.9 20.5 21.0 12.7 5.6 11.5 6.0 3.8 23.0 11.0

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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$16.60, Goldwind trades at 15x FY11F PER, a 13% discount to its global peer average of 17x. Goldwind DCF valuation model
Free cash flow (RMB m) Sales EBITDA margin (%) Less: tax Minority interest Working capital CAPEX FCF FY11F 21,489 3,385 16% (463) 131 1,702 (2,816) 1,939 FY12F 22,282 3,687 17% (676) 135 (178) (2,924) 44 FY13F 22,270 3,563 16% (651) 130 652 (2,441) 1,252 FY14F 20,784 3,339 16% (612) 122 (3) (1,922) 925 Net debt (FY10) (RMB m) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) (6,357) FY15F 19,762 3,177 16% (578) 116 22 (2,547) 190 Equity value (RMB m) 44,470 43,597 42,759 41,955 41,182 40,439 39,724 39,035 38,372 37,732 37,116 36,520 35,945 35,390 34,852 34,333 33,830 33,343 32,872 32,415 31,972 FY16F 20,580 3,102 15% (562) 112 1,169 (2,215) 1,607 FY17F 22,266 3,308 15% (599) 120 84 (2,201) 712 Value per share (HK$) 19.6 19.2 18.8 18.5 18.2 17.8 17.5 17.2 16.9 16.6 16.4 16.1 15.8 15.6 15.4 15.1 14.9 14.7 14.5 14.3 14.1 FY18F 23,691 3,264 14% (589) 118 199 (2,278) 714 FY19F 24,757 3,391 14% (614) 123 398 (2,244) 1,053 FY20F 25,871 3,534 14% (642) 128 1,197 (1,715) 2,502

WACC (%) 5.9 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 Source: CCBIS

Sum of PV (RMB m) 8,381 8,347 8,313 8,279 8,246 8,212 8,179 8,146 8,114 8,082 8,049 8,018 7,986 7,955 7,923 7,892 7,862 7,831 7,801 7,771 7,741

PV of TV (RMB m) 29,732 28,893 28,089 27,319 26,580 25,870 25,188 24,532 23,901 23,294 22,709 22,146 21,602 21,078 20,572 20,084 19,612 19,155 18,714 18,287 17,874

EV (RMB m) 38,113 37,240 36,402 35,598 34,825 34,082 33,367 32,679 32,015 31,376 30,759 30,163 29,588 29,033 28,496 27,976 27,473 26,987 26,515 26,058 25,615

Shares (m shares) 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695 2,695

WACC Calculation Equity beta Risk-free rate (%) Equity risk premium (%) Country risk premium (%) Cost of equity (%) Cost of debt (%) Debt/capital (%) Tax (%) WACC (%) Terminal growth rate (%) 0.52 3.92 6 1 7 7 30 15 6.8 1

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Risks
Launch of new product model: Goldwind has announced plans to develop 3.0MW and larger capacity WTGs using hybrid drive technology. Because hybrid drive WTGs have yet to enter the market, we are unsure of the markets response to the new technology. However, if the market response is better than expected, it may bring potential upside to our earnings estimate. Overseas market expansion: Goldwinds management expressed its plan to deliver WTGs overseas to North America, Europe and Africa. To expand overseas, the company will have to incur significant investment to build its brand, establish delivery and originate after-sales service teams. Operating in foreign countries may incur additional costs entailed by complying with local legal requirements and meeting certain financial requirements for wind project investments. That said, expanding overseas market may also allow the company to diversify its customer portfolio and obtain a higher return. The move could be beneficial to the company in the long run, if successfully implemented. Wind policy changes: Demand for WTG highly susceptible to the Chinese government wind policy. For the past few years, Chinas WTG installation grew at a 120% CAGR in 2006-2009 thanks to Chinas target to generate 15% of total energy from renewable energy by 2020. We think policy changes could have both positive and negative impact to the WTG manufacturing industry and our earnings estimate. Competition in China: Competition in the Chinese WTG market has increased since the listing of top domestic WTG manufacturers, including Sinovel (A-shares), Goldwind (A+H shares) and Mingyang (US listed). By listing, these companies improve corporate governance and provide cash for technology, production and distribution upgrades. In order to gain market share, WTG manufacturers compete by launching new products and lowering ASP, resulting in downward pressure on Goldwind earnings if it is unsuccessfully in implementing cost-cut measures and maintaining gross and operating margins. At the same time, it may become an opportunity for market share expansion in the long term if less-competitive WTG suppliers leave the market.

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Company profile
Company history
Goldwind is Chinas second-largest and the worlds fifth-largest WTG manufacturer in 2010, accounting for 21% of Chinas installed capacity according to CWEA. It is also engaged in the provision of wind power services and the development of wind farms for sale to wind farm operators. Founded in February 1998, Goldwind has one of the richest operating histories among Chinese wind turbine manufacturers. It successfully made its initial public offering on the Shenzhen Stock Exchange in December 2007 and a secondary listing on the Main Board of the Stock Exchange of Hong Kong in October 2010. Goldwind has sales network in four main regions of China, namely (1) Inner Mongolia, (2) northeast China, (3) northern China, and (4) northwest and south China. Further afield, it began distributing wind turbines in the US and Germany and also established branches in Australia. Major milestones
Year 1998 Development Xinjiang New Wind, Goldwinds predecessor company, was established in Urumqi, Xinjiang, by Xinjiang Wind Power; Developed its 600kW wind turbine.

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

2000

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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 Chinas 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 Goldwinds 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, Goldwinds 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 750kW WTG 1.5MW DDPM WTG 2.5MW DDPM WTG Features The product was developed by the company in 2001 and has been for sale since then; however, it is currently no longer one of Goldwinds main products.

The companys main product, which can be used both on-shore and off-shore. Launched in the second half of 2010 and currently an advance product to the mainstream 1.5MW WTGs in the China market. The product can be used both on-shore and off-shore. 3.0MW hybrid-drive WTG Adopts the hybrid of direct-drive and conventional gearbox technology. The prototype has been successfully developed but has not yet begun mass production. 6.0MW WTG Currently under development. Source: Company data, CCBIS

WTG revenue contribution by product (2010)


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

Source: Company data, CCBIS

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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 16%

Impeller 12%

Source: Company data, CCBIS

Component production status


Component Blades Gearboxes Generators Electrical control system Others Suppliers 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 Nanjing High Speed (CHST), Chongqing Gearbox 100% in-house production 50% in-house production 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
Goldwinds production bases are located in Chinas northern and coastal regions where Chinese wind farms are concentrated. Up to December 2010, the company had total production capacity of 4,300 units of 1.5MW/2.5MW WTG, 2,500 units of turbine rotor and nacelle, 1,000 units of generators and 3,000 units of electric control system.

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Production facilities (December 2010)


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

Germang Neunkirchen Base Shaanxi Xian Base Jiangsu Nanjing Base Jiangsu Dafeng Base Total

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.

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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 Goldwinds total sales revenue in 2010. The company is keen to expand its customer base to overseas markets. It began installing WTGs in a wind farm in Minnesota and won a bid to provide wind turbines to a wind farm in Illinois. Currently, Goldwind has representative offices in the US, Germany and Australia.

Shareholder structure
Goldwind has 2,695m shares outstanding as of end-March 2011, of which 81% are A-shares and 19% H-shares. Shareholder structure (March 2011)
Other H share holders, 17.06%

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

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Use of IPO proceeds


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

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Board of directors and senior management background


Board of directors and senior management
Name Wu Gang Guo Jian Age 52 47 Position Chairman of Board, CEO and Executive Director President and Executive Director Vice President and Executive Director Vice Chairman and non-executive Director Non-executive Director Non-executive Director Independent non-executive Director Independent non-executive Director Independent non-executive Director Chief Financial Officer Vice President and Chief Technology Officer Vice President Vice President Chief Engineer Vice President, Secretary of Board and Company Secretary Key experience Senior engineer, with above 20 years of experience in wind power industry; Awarded World Wind Energy Award by World Wind Energy Association in 2006. Senior engineer, with above 20 years of experience in wind power industry; Received rewards in science and management of business, including the Xinjiang Elite Entrepreneur in 2009. Responsible for capital management and investment; 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. Senior engineer; Previously served various management positions in state-owned renewable energy enterprises. Senior political officer; Previously served various management positions in state-owned enterprises. Doctor in economics and a qualified senior economist; Previously served various management positions in large financial institutions. A qualified senior economist; Previously served various positions in the Xinjiang local government and state-owned enterprises. Senior engineer; Member of the expert committee of China Hydropower Consulting Group and vice chairman of Chinese Wind Energy Association. Deputy chief executive of The Bank of Asia; Independent non-executive director of Towngas China and an alternate director of AFFIN Bank Berhad. Chartered Financial and Treasury Professional; Previously financial director of Alstom and other subsidiaries of leading global conglomerates. Responsible for financial, R&D, sales, and licensing aspects of Vensys AGs business; Previously general manager of Vensys Energiesysteme GmbH; joined the group since Vensys AG was acquired by Goldwind. Previously director of Marketing Center and Investment Development Department of the group; Has substantial experience in the development of operation of wind farm projects. Senior engineer, above 15 years of experience in wind power industry; Considerable experience in product development, client management and technology services Professor grade engineer; above 10 years of experience in R&D of wind power generation, advanced technology application, industrialization of products and on-site technological services. Senior economist; Previously served as a secretary of the board and company secretary for Hong Kong-listed Dalian Port.

Wei Hongliang

38

Li Ying Gao Zhong Lv Houjun Wang Yousan Shi Pengfei

75 51 47 75 69

Li Man Bun, Brian David Sun Liang Jrgen Rinck

35 40 47

Wang Haibo Wang Xiangming Cui Xinwei Ma Jinru

36 40 49 44

Source: Company data, CCBIS

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Financial summary
Income statement forecasts
FYE 31 Dec (RMB m) Revenue Cost of goods sold Gross profit Other income Selling and distribution expenses Administrative expenses Research and development expenses Operating profit EBIT Depreciation and amortisation EBITDA Net interest expense Share of results of an associate Extraordinary items Profit before tax Taxation Net profit after tax Minorities Reported net profit after tax Dividends Transfer to reserves Normalized net profit after tax 2009 10,667 (7,909) 2,758 312 (690) (276) (77) 2,026 2,026 (82) 2,108 (39) 4 21 2,011 (200) 1,812 (45) 1,766 (540) 1,226 1,746 2010 17,475 (13,454) 4,021 637 (1,096) (418) (272) 2,872 2,872 (167) 3,039 (88) 16 10 2,810 (416) 2,394 (122) 2,272 (2,540) (268) 2,262 2011F 21,489 (17,047) 4,442 705 (1,289) (494) (301) 3,084 3,084 (301) 3,385 (33) 37 0 3,088 (463) 2,625 (131) 2,494 (857) 1,637 2,494 2012F 22,282 (17,401) 4,882 655 (1,337) (512) (312) 3,375 3,375 (312) 3,687 (33) 37 0 3,379 (676) 2,703 (135) 2,568 (514) 2,054 2,568

Balance sheet forecasts


FYE 31 Dec (RMB m) Fixed assets Goodwill Other intangible assets Long-term investments Other long-term assets Total non-current assets Other current assets Inventories Accounts receivable Cash & equivalents Total current assets Total assets Accounts payable Short-term debt Other current liabilities Total current liabilities Long-term debt Other long-term liabilities Total non-current liabilities Total liabilities Total shareholders' equity Total equity and liabilities 2009 2,682 250 347 126 192 3,597 1,134 2,854 2,920 4,379 11,286 14,883 3,760 602 2,520 6,882 2,022 451 2,473 9,356 5,527 14,883 2010 4,131 257 353 323 497 5,562 1,539 4,391 7,583 9,324 22,836 28,398 8,130 1,502 2,824 12,456 1,465 845 2,311 14,767 13,631 28,398 2011F 6,647 257 353 360 497 8,113 2,484 5,137 8,831 9,299 25,751 33,864 10,302 1,502 5,304 17,108 1,365 836 2,201 19,309 14,556 33,864 2012F 9,259 257 353 396 497 10,763 2,563 5,244 9,157 8,540 25,504 36,266 10,515 1,502 5,396 17,413 1,265 863 2,129 19,542 16,724 36,266

Financial ratios
FYE 31 Dec (RMB m) 2009 2010 16.4 17.4 13.0 16.7 63.8 41.8 44.2 28.6 14.6 14.5 7.7 6.6 2.4 17.9 16.9 1.8 32.6 22 Net cash 2011F 14.4 15.8 11.6 17.1 23.0 7.4 11.4 9.8 13.2 13.2 2.6 N/A 2.3 16.7 15.2 1.5 94.8 20 Net cash 2012F 15.1 16.5 11.5 15.4 3.7 9.4 8.9 3.0 12.9 12.9 1.6 N/A 2.0 15.2 14.0 1.5 101.6 17 Net cash Profitability (%) EBIT margin 19.0 EBITDA margin 19.8 Net margin 16.6 ROE 32.0 Growth (%) Revenue 66.2 EBIT 73.3 EBITDA 69.3 Net profit growth 94.3 Valuation and ratio analysis (x) Normalized PER 15.7 Reported PER 15.5 Dividend yield 2.0 Price/cash flow 25.2 PBV 5.0 EV/EBIT 25.4 EV/EBITDA 24.4 Liquidity and leverage (%) Current ratio 1.6 Interest cover (x) 52.1 Gearing ratio 47 Net gearing ratio Net cash Source: Company data, CCBIS estimates

Cash flow projections


FYE 31 Dec (RMB m) EBITDA Change in working capital Other operating cash flow Cash flow from operations Capital expenditure Addition in investments Net acquisitions Addition in other long-term assets Other cash flow from investing activities Cash flow from investing activities Cash dividends Equity issue Net debt issue/(repayment) Other cash flow from financing activities Cash flow from financial activities Net cash flow Beginning cash Effect of foreign exchange rate changes Ending cash 2009 2,108 (313) (493) 1,302 (1,678) (72) 295 (299) 137 (1,616) (280) 0 1,825 (140) 1,405 1,091 3,286 2 4,379 2010 3,039 (2,186) (667) 186 (2,667) (10) 276 (117) 23 (2,495) (924) 6,769 1,636 (203) 7,279 4,970 4,379 (25) 9,324 2011F 3,363 1,702 (463) 4,624 (2,816) 0 0 0 58 (2,758) (1,700) 0 (100) (90) (1,891) (25) 9,324 0 9,299 2012F 3,687 (178) (676) 2,833 (2,924) 0 0 0 55 (2,869) (535) 0 (100) (89) (723) (759) 9,299 0 8,540

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China Ming Yang Wind Power (MY US)


Company Rating: Neutral

Cheap but risky


China Ming Yang Wind (Mingyang) 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. While Mingyang is trading at 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 2.5/3.0MW super-compact-drive technology (SCD) WTGs based on disruptively different technology. We initiate coverage with a Neutral rating and target price of US$11.00.
Solid order book. According to Mingyang, its orders on hand are more than 3GW as of December 2010, sufficient to cover 100% of its 2011F shipments and c.20% of 2012F shipments, based on our estimates. We expect Mingyangs book-to-bill ratio to be 1.3x, similar to Goldwinds 1.2x. Stronger growth allowed by lower base. We estimate Mingyangs earnings growth at 31% CAGR in 2010-2012F, at the higher end of peers 10-30%. We believe earnings growth is driven by Mingyangs much smaller scale, c.30% of the scale of leading peers like Goldwind and Sinovel. High risk from technology platform switch. We see high risk from the launch of SCD WTG as it is based on a different technology platform (hybrid direct drive) from existing manufactured 1.5MW WTG (doubly-fed). Our forecasts include 13% and 19% sales contribution from SCD in 2011F and 2012F, respectively. Initiate with Neutral. Our target price of US$11.00 is based on DCF valuation, implying 9x 2011F PE, at a 49% discount to the global peer average, justifiable given the high execution risk of new SCD product launch.

(initiation)

Sector Rating:

Neutral
(initiation)

Price: Target:

US$10.52 US$11.00
(initiation)

Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) Expected return (%) 1 year Closing price on 1 April 2011 US$9.19 14.48 US$1,315 125 100 0.3 5

Stock price and S&P 500


US$ 22.0 20.0 18.0 16.0 14.0 12.0 10.0 8.0 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Mingyang (LHS) Dec 10 Jan 11 S&P 500 (RHS) Feb 11 Mar 11 1,350 1,300 1,250 1,200 1,150 1,100 1,050 1,000

Source: Bloomberg

Forecast and valuation


Year to 31 Dec Revenue (RMB m) 2008 125 2009 1,173 2010 5,518 698 5.58 N/M 12.3 10.7 2.4 0.0 19.8 Net Cash 2011F 8,999 1,032 8.25 47.8 8.4 6.6 1.9 0.0 22.6 Net Cash 2012F 10,641 1,217 9.73 17.9 7.1 5.7 1.5 0.0 21.0 Net Cash

Reported net profit (RMB m) (494) (221) Normalized EPS (RMB) (4.94) (2.21) Normalized EPS growth (%) N/M N/M PER (x) N/A N/A EV/EBITDA (x) N/A N/A PBV (x) 23.2 12.0 Dividend yield (%) 0.0 0.0 ROE (%) (166.5) (38.4) Net gearing ratio (%) 7.8 Net Cash Source: Company data, CCBIS estimates

Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com

Alan Lau
(852) 2533 2479 alanlau@ccbintl.com

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Financial analysis
Revenue
Mingyang commissioned its first WTG in 2008. Until 2010, all of its revenue was generated from Mingyangs 1.5MW WTG. The company launched its SCD 2.5/3.0 WTG in 2010 and successfully delivered two units in the same year. Assuming time is needed for the market to accept the new SCD technology, we estimate that the 1.5MW WTG will continue to be Mingyangs main revenue contributor in 2011F-2012F. We expect Mingyang to have rapid top-line growth of 63% YoY in 2011F and 18% YoY in 2012F on the back of capacity expansion of wind farm operators in China. We forecast total shipment volume to grow from 1,203MW in 2010 to 2,400MW in 2011F and 3,315MW in 2012F, representing year-on-year growth of 99% and 38% in 2011F and 2012F, respectively. Due to the falling WTG ASP industry trend, we forecast blended WTG ASP of the company to decrease in order to maintain competitiveness, from RMB4,587 per kW in 2010 to RMB3,750 per kW in 2011F and RMB3,210 per kW in 2012F. Despite the expected fall in ASP, we expect Mingyangs revenue to ramp up given growth in shipment volume over 2011F-2012F. Revenue trend
RMB m 12,000
10,000 8,000 6,000 4,000 2,000 0 2008 2009 1.5MW WTG 2010 2.5/3.0MW WTG 2011F 6.0MW WTG 2012F

Source: Company data, CCBIS estimates

WTG ASP trend


RMB / kW
7,000

6,000

5,000

4,000

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

Source: Company data, CCBIS estimates

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1.5MW WTG
The 1.5MW WTG is Mingyangs main product and accounted for its entire revenue through 2008-2010. We believe the product will continue to be Mingyangs main source of revenue for 2011F-2012F, with an expected shipment volume growth of 75% YoY to 2,100MW in 2011F, from 1,203MW in 2010. We expect ASP for 1.5MW WTGs to face continuous downward pressure, triggered by intense competition among WTG producers in China. We see Mingyang ASP falling 19% YoY in 2011F and 16% in 2012F. Nonetheless, we expect overall product revenue to grow 42% YoY in 2011F due to a rapid increase in its shipment volume.

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.

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Key operation data


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

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.

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WTG cost of sales trend


RMB / kW
8,000 7,000 6,000 5,000 4,000 3,000 2,000 2008 2009 1.5MW turbines 2010 2011F 2012F 2.5/3.0MW turbines

Source: Company data, CCBIS estimates

Gross profit trend


RMB m 2,500
2,000 1,500 1,000 500 0 2008 (500) 1.5MW turbines 2.5/3.0MW turbines 6.0MW turbines Gross margin 2009 2010 2011F 2012F (30)% 30% 20% 10% 0% (10)% (20)%

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 companys shipment volume. We expect Mingyangs operating profit to grow 66% YoY in 2011F and 16% YoY in 2012F due to continuing growth in Mingyangs 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.

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Operating profit trend


RMB m
2,000 1,500 1,000 500 0 (500) (1,000) 2008 2009 2010 Operating profit 2011F Operating margin 2012F 50% 0% (50)% (100)% (150)% (200)% (250)% (300)% (350)%

Source: Company data, CCBIS estimates

Net profit and margin


We forecast Mingyangs 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 2010s net margin of 13%. Net profit trend
RMB m
1,400 1,200 1,000 800 600 400 200 0 (200) (400) (600) 2008 2009 2010 Net profit Net margin 2011F 2012F 50% 0% (50)% (100)% (150)% (200)% (250)% (300)% (350)% (400)% (450)%

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

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decrease from 22x in 2010 to 14x in 2011F and 9x in 2012F, mainly based on our assumption that sales ramp up of SCD WTGs will lag capex growth in the short term. In other words, we believe sales growth of SCD WTG will not be very strong in the early phases of the launching period, so capex growth will exceed sales growth. PPE turnover trend
(x) 25

20

15

10

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
Mingyangs inventory, accounts receivable and accounts payable turnover in 2008 and 2009 was significantly higher than industry peers because the company began to deliver products in 2007 and the commissioning of those products usually takes about a year. Assuming that Mingyang boosts commissioning of wind turbines previously delivered, sales and cost of sales will normalize and stabilize turnover days. Hence, we expect cash conversion days to remain stable at 20 days in 2011F-2012F. Turnover days
(days) Inventory turnover Accounts receivable turnover Accounts payable turnover Cash conversion Source: Company data, CCBIS estimates 2008 1,543 1,156 1,601 1,098 2009 657 506 733 430 2010 156 192 299 48 2011F 140 160 280 20 2012F 140 160 280 20

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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 Mingyangs 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 managements production facility expansion targets. The companys 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 Mingyangs 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 0 (500) (1,000) 2008 Cash flow from operations 2009 2010 2011F Cash flow from financing activities 2012F Net cash flow Cash flow from investing activities

Source: Company data, CCBIS estimates

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Valuation and risks


Mingyangs 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 Mingyangs 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 Mingyangs blue sky scenario fail to materialize. Valuation comparison
Price (local Company Stock code Rating currency) Market cap (US$m) PER (x) 2010A 2011F 2012F EPS growth (%) PEG (x) 2011F 2010A PBV (x) 2011F 2012F 2010A ROE (%) 2011F 2012F

WTG component manufacturers China High Speed Transmission Hansen Transmission Taewoong Hyunjin Materials 658HK HSNLN 044490KS 053660KS O NR NR NR 12.54 49.50 52,300 17,100 2,217 534 796 232 9.6 N/A 42.7 N/A 10.1 N/A 22.3 10.9 9.4 N/A 16.0 7.6 (5) N/M 79 N/M (2.1) N/M 0.3 N/M 1.8 0.6 2.1 1.3 1.7 0.6 2.0 1.2 1.5 0.6 1.8 1.0 18.7 (1.7) 2.9 (12.8) 16.9 (1.5) 5.5 (1.0) 16.2 0.9 9.3 10.8

WTG manufacturers Xinjiang Goldwind - H share 2208HK O 14.56 7,858 14.6 13.2 12.9 Xinjiang Goldwind - A share 002202CH NR 20.65 7,857 N/A 16.9 13.4 Sinovel Wind 601558CH NR 74.14 11,381 23.4 20.6 17.0 China Ming Yang Wind Power MYUS N 10.52 1,315 12.3 8.4 7.1 Vestas VWSDC NR 223.30 8,685 38.9 20.2 15.8 Gamesa GAMSM NR 7.37 2,576 18.6 18.6 18.6 Repower RPWGR NR 145.00 1,900 22.9 25.7 21.5 Nordex NDX1GR NR 8.26 786 26.6 27.9 21.0 Suzlon SUELIN NR 44.60 1,778 N/A N/A 24.3 Dongfang Electric 1072HK NR 26.70 8,237 17.3 14.0 11.8 Shanghai Electric 2727HK NR 3.96 13,355 15.2 13.3 12.0 All prices are as of 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS estimates

10 24 14 48 93 31 (11) (5) N/A 24 15

1.3 0.7 1.5 0.2 0.2 0.6 (2.3) (6.2) N/M 0.6 0.9

2.4 N/A 13.9 2.4 2.2 1.1 2.8 1.5 1.1 2.4 1.6

2.3 3.6 4.1 1.9 2.0 1.1 2.7 1.5 1.1 3.0 1.4

2.0 2.8 3.3 1.5 1.8 1.0 2.5 1.4 1.1 2.4 1.3

16.7 17.1 39.1 24.6 77.5 19.9 19.8 22.6 5.9 11.1 3.1 4.2 11.6 10.6 5.9 4.6 (12.9) (12.2) 33.0 24.5 11.3 11.0

15.4 21.9 20.5 21.0 12.7 5.6 11.5 6.0 3.8 23.0 11.0

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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, Mingyangs 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) Sales EBITDA margin (%) less:tax minority interest working capital CAPEX FCF FY11F 8,999 1,308 15% (184) 11 (623) (651) (139) FY12F 10,641 1,514 14% (216) 9 (65) (503) 740 FY13F 14,166 2,105 15% (308) 13 (185) (405) 1,220 FY14F 15,970 2,156 13% (320) 13 (85) (469) 1,295 Net debt (FY10) (RMB m) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) (2,006) FY15F 16,858 1,964 12% (296) 12 389 (474) 1,596 Equity value (RMB m) 9,425 9,374 9,325 9,276 9,228 9,180 9,133 9,087 9,042 8,997 8,953 8,910 8,867 8,825 8,783 8,742 8,702 8,662 8,622 8,583 8,545 FY16F 17,794 2,094 12% (317) 13 (464) (524) 802 FY17F 18,864 2,034 11% (310) 13 (76) (472) 1,189 FY18F 20,214 2,193 11% (336) 14 (165) (655) 1,051 FY19F 19,604 1,915 10% (297) 13 236 (848) 1,018 FY20F 18,874 1,659 9% (261) 11 (313) (754) 342

WACC (%) 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 11.0 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 12.0 12.1 Source: CCBIS

Sum of PV (RMB m) 5,911 5,888 5,865 5,843 5,820 5,798 5,776 5,754 5,732 5,710 5,688 5,667 5,645 5,624 5,603 5,581 5,560 5,540 5,519 5,498 5,478

PV of TV (RMB m) 1,508 1,480 1,453 1,427 1,401 1,376 1,352 1,328 1,304 1,281 1,259 1,237 1,216 1,195 1,175 1,155 1,135 1,116 1,097 1,079 1,061

EV (RMB m) 7,419 7,368 7,319 7,270 7,222 7,174 7,127 7,081 7,036 6,991 6,947 6,904 6,861 6,819 6,777 6,736 6,696 6,656 6,616 6,577 6,539

Shares (m shares) 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125 125

Value per share WACC Calculation (US$) Equity beta 11.5 11.4 11.4 11.3 11.3 11.2 11.1 11.1 11.0 11.0 10.9 10.9 10.8 10.8 10.7 10.7 10.6 10.6 10.5 10.5 10.4 Risk-free rate (%) Equity risk premium (%) Country risk premium (%) Cost of equity (%) Cost of debt (%) Debt/capital (%) Tax (%) WACC (%) Terminal growth rate (%)

1.2 3.92 6 1 13 7 30 15 11.0 1

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Risks
Launch of a new product model: Mingyang uses doubly-fed induction technology for its 1.5MW WTG model. We believe that execution risks are high for Mingyangs launch of SCD 2.5/3.0MW and 6.0MW WTGs, not only because these are new models and require time for track records to be established, but also because SCD WTGs adopt a disruptively new hybrid-direct-drive and two-blade technology. However, if market response is better-than-expected, it might bring upside surprise to our earnings estimates. Overseas market expansion: Mingyang management has expressed its intention to penetrate overseas markets, including the US. In our view, while overseas markets could provide upside to Mingyangs WTG ASP, the risk inherent in building sales channels in new markets include establishing significantly more expensive after-sale-service workforce overseas and rising exposure to foreign policy changes and foreign currency fluctuations. The impact could be positive or negative depending whether Mingyangs product can meet market expectations, answer foreign customer requirements and adapt to foreign government regulations. Short track record: Mingyang has less than five years of operating history and its WTG has a relatively short track record in comparison with WTGs of other top WTG suppliers, such as Goldwind, Siemens, Vestas and Dongfang Electric. Although Mingyangs WTG has not encountered serious defaults or accidents, its limited track record length may need time to earn larger market acceptance. Vertical integration strategy: Although Mingyang management has experience in the production of WTG components, such as blades and electric control systems, they might encounter problems implementing vertical integration producing other major WTG components such as gearboxes. Depending on the success of Mingyangs component production lines, the vertical integration strategy could bring positive or negative impact to WTG qualities and production costs. Wind policy changes: The demand for WTG can be greatly affected by government wind policy as wind power currently remains dependent on subsidies to be economically viable. For the past few years, Chinas WTG installation has grown at 120% CAGR in 2006-2009 thanks to Chinas target to generate 15% renewable energy of total energy by 2020. We think policy changes could have both positive and negative effects on the WTG manufacturing industry and our earnings estimates. Competition in China: Competition in the Chinese WTG market has been getting more intense due to the listing of top domestic WTG manufacturers, such as Sinovel (A-shares), Goldwind (A+H shares) and Mingyang (US listed). The listing of these companies will improve their corporate governance and provide cash for technology, production and distribution upgrades. In order to gain market share, WTG manufacturers compete by launching new products and lowering ASP. Mingyang will need to successfully implement cost cut measures in order to maintain its gross and operating margins, as earnings will suffer downward pressure if the company fails to do so. However, greater competition may become an opportunity for market share expansion in the long term once less competitive WTG suppliers exit the market.

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Company profile
Company history
On 1 October 2010, Mingyang became the first Chinese WTG manufacturer listed on the New York Stock Exchange. According to CWEA, Mingyang is the fifth-largest WTG manufacturer and largest non-state owned manufacturer in China, with market share of 5.5% in 2010. The company was established in Zhongshan, Guangzhou in 2006. In 2007, it acquired the intellectual property (IP) rights to produce 1.5MW WTGs from Mingyang Electric, its former major shareholder. In addition to IP rights, Mingyang obtained substantial WTG manufacturing technology and experience from Mingyang Electric, which has been manufacturing WTG components since 1995. Major milestones
Date 2006 2007 Development Guangdong Mingyang, Mingyangs predecessor company, was established in Zhongshan, Guangdong province.

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

Major products
Currently, the 1.5MW WTG is Mingyangs dominant product. The company customized this product into two separate models, a typhoon resistant model and a cold-weather resistant model. Both 1.5MW models are designed to use three rotor blades, doubly-fed induction generators and a three-stage gearbox. In 2H10, Mingyang developed its SCD WTG, which uses a two-rotor blade design and is equipped with a compact integrated two-stage gearbox and a medium slow-running synchronous generator. Management expects the product to be commercialized in 2011.

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

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


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

SCD WTG royalties


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

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

Production facilities
Mingyangs production facilities are located in Guangdong, Jilin, Tianjin and Jiangsu. By the end of 2010, Mingyang had annual production capacity of 1,598 units of 1.5MW WTG, 500 units of SCD 2.5/3.0MW WTG, and 2,010 sets of rotor blades. Production facilities (December 2010)
Production base Guangdong Zhongshan headquarters Main product 1.5MW WTG SCD 2.5/3.0MW WTG Rotor blades 1.5MW WTG Rotor blades 1.5MW WTG SCD 2.5/3.0MW WTG Rotor blades 1.5MW WTG SCD 2.5/3.0MW WTG Rotor blades 1.5MW WTG SCD 2.5/3.0MW WTG Rotor blades Source: Company data, CCBIS Annual capacity as at Dec 2010 288 units 200 units 288 units 524 units 672 units 524 units 200 units 570 units 262 units 100 units 480 units 1,598 units 500 units 2,010 units

Jilin base Tianjin base

Rudong, Jiangsu base

Total

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WTG comparison: hybrid-drive

Mingyangs

SCD

versus

Goldwinds

Both Mingyangs SCD 3.0MW WTG and Goldwinds hybrid-drive 3.0MW WTG employ a hybrid design of a gearbox and gearless direct drive technology. Since both designs have not yet been introduced commercially, they both have limited track records. The main features of the SCD 2.5/3.0MW WTG include a reduction in size and weight and an improvement in operational reliability. This is achieved by using a compact generator and two-rotor blade design. Weight reduction is possible by decreasing the amount of material inside the nacelle and tower as they are the center of weight in a WTG. Weight is also reduced as a result of removing a rotor blade (two instead of three). WTG weight reduction can help save installation costs. A second feature is the lower bearings operational speed of the two-stage gearbox, which reduces the wear of the gearbox component, thereby increasing operational reliability. Weight comparison between Mingyang, Goldwind and Sinovels 3.0MW WTG
tonnes 500
450 400 350 300 250 200 150 100 50 0 Ming Yang SCD 3.0MW Goldwind hybrid-drive 3.0MW Tower Nacelle Hubs Rotor blades Sinovel 3.0MW

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

Three blades

Two blades

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

Shareholder structure
Shareholder structure (March 2011)
ICBC Int'l Inv Mgt Ltd, 8.79% Pre-IPO investors (note 1), 24.42%

China Opportunity S.A. SICAR (SOPAF), 10.64%

Clarity Investors, 13.17%

Chairman Zhang and family, 22.98%

Public, 20.00%

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

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Use of IPO proceeds


Working capital, 15.58% Production base construction, 32.68%

Construction of research 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 Chuanwei Zhang Age 48 Position Key experience 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. 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. 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. Executive Director Founder and chairman of China Opportunity Fund SA Sicar, a fund that invests in renewable energy, insurance and retail industries, and a company investor. Senior Vice President In charge of general administration and human resources; Over 20 years of experience in the wind power industry. 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. 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. 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 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 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 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

Xian Wang

39

Song Wang

46

Niccolo Magnoni Jinfa Wang Renjing Cao

35 46 41

Xianzhong Zhang

48

Jiawan Cheng

47

Yunshan Jin

44

Manfred Loong Yiguo Hao

55 41

Source: Company data, CCBIS

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Financial summary
Income statement forecasts
FYE 31 Dec (RMB m) Revenue Cost of goods sold Gross profit Other income Selling and distribution expenses Administrative expenses Research and development expenses Operating profit EBIT Depreciation and amortisation EBITDA Net interest expense Share of results of an associate Extraordinary items Profit before tax Taxation Net profit after tax Minorities Reported net profit after tax Dividends Transfer to reserves Normalized net profit after tax 2009 1,173 (1,097) 76 0 (91) (67) (53) (135) (135) (28) (107) (50) (0) 0 (185) (38) (223) 2 (221) 0 (221) (221) 2010 5,518 (4,430) 1,087 18 (149) (151) (43) 763 765 (43) 808 (34) 3 0 731 (21) 711 (13) 698 0 698 698 2011F 8,999 (7,328) 1,671 45 (292) (115) (45) 1,263 1,263 (45) 1,308 (37) 0 0 1,226 (184) 1,042 (11) 1,032 0 1,032 1,032 2012F 10,641 (8,648) 1,993 53 (372) (160) (53) 1,461 1,461 (53) 1,514 (19) 0 0 1,442 (216) 1,226 (9) 1,217 0 1,217 1,217

Balance sheet forecasts


FYE 31 Dec (RMB m) Fixed assets Other intangible assets Long-term investments Other long-term assets Total non-current assets Other current assets Inventories Marketable securities Accounts receivable Cash & equivalents Total current assets Total assets Accounts payable Short-term debt Other current liabilities Total current liabilities Other long-term liabilities Total non-current liabilities Total liabilities Total shareholders' equity Total equity and liabilities 2009 169 22 29 112 331 269 1,973 42 1,627 722 4,634 4,965 2,203 182 1,959 4,344 45 45 4,388 577 4,965 2010 418 86 41 325 870 345 1,895 0 2,896 2,486 7,622 8,492 3,633 480 585 4,698 267 267 4,965 3,527 8,492 2011F 1,024 86 41 717 1,869 1,243 2,811 0 3,945 2,119 10,117 11,986 5,622 300 1,002 6,923 493 493 7,417 4,570 11,986 2012F 1,473 86 41 833 2,434 1,441 3,317 0 4,665 2,731 12,153 14,587 6,634 200 1,274 8,108 684 684 8,792 5,795 14,587

Financial ratios
FYE 31 Dec (RMB m) Profitability (%) EBIT margin (11.5) EBITDA margin (9.2) Net margin (18.9) ROE (38.4) Growth (%) Revenue 840.6 EBIT N/M EBITDA N/M Net profit growth N/M Valuation and ratio analysis (x) Normalized PER N/A Reported PER N/A Dividend yield 0.0 Price/cash flow 10.1 PBV 12.0 EV/EBIT N/A EV/EBITDA N/A Liquidity and leverage (%) Current ratio 1.1 Interest cover (x) N/A Gearing ratio 0.3 Net gearing ratio Net Cash Source: Company data, CCBIS estimates 13.9 14.6 12.7 19.8 370.5 N/M N/M N/M 12.3 12.3 0.0 4.9 2.4 11.3 10.7 1.6 22.7 0.1 Net Cash 14.0 14.5 11.5 22.6 63.1 65.1 61.9 47.8 8.4 8.4 0.0 N/A 1.9 6.8 6.6 1.5 34.0 0.1 Net Cash 13.7 14.2 11.4 21.0 18.2 15.7 15.7 17.9 7.1 7.1 0.0 14.1 1.5 5.9 5.7 1.5 76.3 0.0 Net Cash 2009 2010 2011F 2012F

Cash flow projections


FYE 31 Dec (RMB m) EBITDA Change in working capital Other operating cash flow Cash flow from operations Capital expenditure (Addition)/reduction in investments Net acquisitions Reduction/(addition) in other long-term assets Reduction in other long-term liabilities Other cash flow from investing activities Cash flow from investing activities Equity issue Net debt issue/(repayment) Other cash flow from financing activities Cash flow from financial activities Net cash flow Beginning cash Effect of foreign exchange rate changes Ending cash 2009 (107) 533 3 428 (73) (71) (45) (79) (44) 4 (309) 0 117 445 562 681 42 (1) 722 2010 808 (1,137) (103) (432) (356) 32 0 14 0 44 (267) 2,241 298 (77) 2,462 1,764 722 0 2,486 2011F 1,308 (623) (184) 502 (651) 0 0 0 0 49 (603) 0 (180) (86) (266) (367) 2,486 0 2,119 2012F 1,514 (65) (216) 1,233 (503) 0 0 0 0 38 (464) 0 (100) (58) (158) 611 2,119 0 2,731

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China Longyuan Power (916 HK)


Company Rating: Neutral

Quality company with fair valuation


Longyuan is the largest wind farm operator in China. By 2010 it owned 15% of domestic installed wind capacity. While we like Longyuans leading industry position and earnings CAGR of 31% for 2010-2012F, we expect the companys ROE to remain low at 8-10%. Longyuan has underperformed the HSCEI by 13% over the past 12 months and we believe the price now reflects industry concerns and has bottomed. Nonetheless, we would have to see near-term catalysts before turning positive on the stock. We initiate coverage with a Neutral rating on the shares and target price of HK$9.10. Leader in wind farm operations in China. Longyuan, in our view, outperforms Chinese peers in terms of scale, wind project efficiency and balance sheet management. We expect Longyuan to maintain this leadership and claim c.15% market share in China in 2010-2012F. Earnings CAGR of 31% for 2010-12F but low ROE. Backed by robust capacity expansion, we estimate Longyuans earnings will grow at a 31% CAGR in 2010-2012F. However, we consider ROE of 8-10% in 2010-2012F quite low and attended by high refinancing risk, particularly in 2012F. Limited near-term catalysts. Chinese wind operators face challenges including grid connection bottlenecks, power curtailments, CDM uncertainty and the possibility of interest rate hikes. We believe these concerns are priced in, yet we fail to see any near-term positive catalysts for the stock. Initiate with Neutral. Our target price of HK$9.10 is based 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 9,744 894 0.15 124 48.5 12.0 1.7 0.0 3.5 65 2010 14,213 2,007 0.27 83 26.5 8.4 1.9 0.8 7.3 121 2011F 16,473 2,705 0.36 35 19.7 5.7 1.7 1.0 8.9 157 2012F 19,103 3,468 0.46 28 15.3 4.5 1.5 1.3 10.1 161 Revenue (RMB m) 8,555 Reported net profit (RMB m) 337 Normalized EPS (RMB) 0.06 Normalized EPS growth (%) 165 PER (x) 112.8 EV/EBITDA (x) 21.4 PBV (x) 5.0 Dividend yield (%) 0.0 ROE (%) 4.8 Net gearing ratio (%) 297 Source: Company data, CCBIS estimates

(initiation)

Sector Rating:

Neutral
(initiation)

Price: Target:

HK$8.47 HK$9.10
(initiation)

Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) Expected return (%) 1 year Closing price on 1 April 2011 HK$6.63 9.28 HK$63,223/US$8,126 7,464 72 12.9 7

Stock price and HSCEI


HK$ 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Longyuan (LHS) HSCEI (RHS) 10,000 9,000 13,000 12,000 11,000 15,000 14,000

Source: Bloomberg

Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com

Alan Lau
(852) 2533 2479 alanlau@ccbintl.com

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Financial analysis
Revenue
Longyuan engages mainly in wind power and coal-fired power generation in China. In 2010, wind power and coal-fired power sales accounted for 43% and 54% of the companys total revenue, respectively. The company is also engaged in power generation from other renewable energy sources, which accounted for 3% of total revenue. Overall, we expect Longyuans total revenue to grow 16% YoY in both 2011F and 2012F. We forecast Longyuans revenue growth to mainly come from its wind power business, with CAGR of c.30% for 2010-2012F. In contrast, we expect its coal-related and other businesses to remain largely stable year-on-year for the next two years. As a result of wind power sales growth, we forecast revenue contribution from wind power sales will grow from 43% in 2010 to 47% in 2011F. On the other hand, we expect revenue contribution from coal-related business to fall from 54% in 2010, to 48% in 2011F, and revenue from other business lines to slightly grow, from 3% in 2010 to 5% in 2011F, mainly due to the companys plan to expand solar and geothermal power generation. Revenue trend
RMB m
20,000 50% 45% 15,000 40% 35% 30% 10,000 25% 20% 5,000 15% 10% 5% 0 2008 Wind power 2009 Coal power 2010 Other business 2011F 2012F Total revenue YoY growth 0%

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 Longyuans utilisation hours will gradually increase from 2,217 hours in 2010 to 2,242 hours in 2011F and 2,309 hours in 2012F and for wind power tariffs to reach RMB 0.5 per kWh in both 2011F and 2012F, up from RMB 0.49 per kWh in 2010. Key operation data wind power
2008 Consolidated installed capacity (MW) YoY (%) Average utilization hours YoY (%) Net electricity generation (GWh) YoY (%) Average tariff exclude VAT (RMB/kWh) Wind electricity sales (RMB m) Others (RMB m) Total wind revenue (RMB m) YoY (%) CAGR 2010-2012F (%) Source: Company data, CCBIS estimates 2,503 93 1,923 20 3,407 140 0.48 1,635 3 1,638 125 2009 4,504 80 2,268 18 5,684 67 0.48 2,752 2 2,754 68 2010 6,556 46 2,217 (2) 9,442 66 0.49 4,613 7 4,620 68 2011F 8,600 31 2,242 1 14,371 52 0.50 7,178 0 7,178 55 2012F 11,000 28 2,309 3 19,244 34 0.50 9,635 0 9,635 34 44

Coal-related businesses
According to the companys strategies, Longyuans coal-related businesses will not be a company priority even though the company has no intention of scaling down this business line. We expect revenue from the companys coal-related business to grow 3% YoY in 2011F and remain flat in 2012F. According to management, the company is planning to upgrade its coal power plant capacity by 1GW in 2012F. Coal power capacity expansion is still subject to the approval from relevant government bodies, with the requisite approvals likely to be granted in late 2011F or 2012F. With this in mind, we expect capacity upgrades to be completed by end-2012F and sales increases to come into effect from 2013F. Key operation data coal-related businesses
Consolidated installed capacity (MW) YoY (%) Average utilization hours YoY (%) Net electricity generation (GWh) YoY (%) Average tariff exclude VAT (RMB/kWh) Coal electricity sales (RMB m) Coal steam sales (RMB m) Coal trading sales (RMB m) Others (RMB m) Total coal revenue (RMB m) YoY (%) CAGR 2010-2012F (%) Source: Company data, CCBIS estimates 2008 1,875 (23) 5,893 15 11,863 2 0.34 4,090 121 163 4,373 9 2009 1,875 0 5,819 (1) 10,207 (14) 0.36 3,669 230 1,974 5,873 34 2010 1,875 0 6,055 4 10,670 5 0.36 3,859 311 3,276 267 7,714 31 2011F 1,875 0 6,100 1 10,866 2 0.36 3,942 302 3,371 317 7,933 3 2012F 2,875 53 6,100 0 10,866 0 0.36 3,942 302 3,371 317 7,933 0 1

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Other businesses
Longyuans other businesses include power generation from non-wind renewable energy sources, such as solar power, geothermal power, tidal power and biomass power. We expect revenue from the companys other businesses will grow by 78% YoY in 2011F and 23% YoY in 2012F, assuming capacity expansion of the companys solar and geothermal power generation projects. Key operation data other renewable power
2008 Consolidated installed capacity (MW) YoY (%) Average utilization hours YoY (%) Net electricity generation (GWh) YoY (%) Average tariff exclude VAT (RMB/kWh) Other renewable power sales (RMB m) Others business Total other sales (RMB m) YoY (%) CAGR 2010-2012F (%) Source: Company data, CCBIS estimates 28 615 1,247 (31) 23 234 1.22 28 428 455 93 2009 29 4 2,172 74 54 138 0.84 46 518 563 24 2010 42 45 2,524 16 94 74 0.76 71 624 695 23 2011F 80 90 2,079 (18) 148 57 0.73 108 971 1,079 55 2012F 96 20 2,096 1 179 21 0.73 131 1,175 1,306 21 37

Other income
Other income mainly includes income from sales of CERs and VERs as well as from government grants. We estimate that other income will increase at 24% YoY in 2011F and 33% YoY in 2012F, thanks to rising income from sales of CERs and VERs. In our current forecasts, we assume that the current CDM system and related income will continue after 2012F, which is generous in our view. CER and VER income assumptions
1H10 Capacity registered (MW) 1,902 % of capacity registered (%) 42 CER/VER blended price (/t) 10.3 CERs and VERs income 162 Source: Company data, CCBIS estimates 2H10 2,854 44 9.8 230 1H11F 3,435 48 10.8 305 2H11F 4,128 48 10.8 367 1H12F 4,576 52 11.2 423 2H12F 5,720 52 11.2 529

Operating expenses
Longyuans major operating expenses include coal consumption, coal sales costs and depreciation and amortisation. We forecast the operating expenses of Longyuan will grow 6% YoY in 2011F and 10% in 2012F. The main drivers for the increase are the larger depreciation arising from the increase in plant and equipment, and the increase in the costs for coal trading and power generation. In terms of operating expenses as a percentage of total revenue, we expect the ratio to fall from 78% in 2010 to 71% in 2011F and 68% in 2012F. The conclusion was based on our estimate that the average investment cost for wind farms will decrease accordingly with the decrease in WTG ASP per kW. The fall in average cost per kW capacity will decrease depreciation per sales.

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Operating expenses trend


RMB m 14,000
12,000 10,000 8,000 6,000 4,000 2,000 0 2008 Coal consumption Personnel costs As a % of sales 2009 2010 Coal sales costs Other operating expenses 2011F 2012F Depreciation and amortization SCC costs 100% 90% 80% 70% 60% 50% 40% 30%

Source: Company data, CCBIS estimates

Operating profit and margin


The improvement in revenue mix has provided upward momentum in Longyuans operating profit. We believe continuing expansion of the companys 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 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2008 2009 Operating profit 2010 2011F Operating margin 2012F 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

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 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2008 2009 Net profit 2010 Net margin 2011F 2012F 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Source: Company data, CCBIS estimates

Return on equity (ROE)


While we expect Longyuans 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 companys coal-related business. Nevertheless, we believe that Longyuans 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 Longyuans 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 companys net gearing ratio (net debt over total equity) to grow from 121% in 2010 to 157% in 2011F and reach 161% in 2012F. Given the stretched balance sheet and further capex needs, going forward, we would not be surprised if the company taps the equity market to satisfy its financial needs. This would likely lower the companys net gearing ratio even further; however, we have not factored this possible outcome in our estimates. Net gearing trend
300%

250%

200%

150%

100%

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, Longyuans free cash flow is likely to remain negative throughout 2012F. Due to rising earnings and an improving working capital position, we expect Longyuans cash flow from operations to grow from RMB4,021m in 2010 to RMB8,744m and RMB9,413m in 2011F and 2012F, respectively. Longyuans 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 Longyuans 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 0 (10,000) (20,000) (30,000) 2008 Cash flow from operations 2009 2010 2011F Cash flow from financing activ ities 2012F Net cash flow

Cash flow from inv esting activ ities

Source: Company data, CCBIS estimates

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Valuation and risks


Longyuans current valuation at 20x FY11F PER seems fair
Longyuans shares currently trade at 20x FY11F PER, similar to the average for global peers of 21x, which seems fair in our view. However, Longyuans 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 Longyuans industry leadership, better operating efficiency, higher wind project ROEs, and relatively healthier balance sheet and cash flows. Valuation comparison
Price (local Company Stock code Rating currency) Market cap (US$m) 2010A PER (x) 2011F 2012F EPS growth (%) PEG 2011F 2010A PBV (x) 2011F 2012F ROE (%) 2010A 2011F 2012F

China Longyuan Power Group

916 HK

8.47

8,128

26.5

19.7

15.3

35 122 33 32 4 N/M 19 24 36 N/M N/M

0.6 0.1 0.4 0.3 7.8 N/M 1.7 0.9 1.2 N/M N/M

1.9 1.4 0.9 1.6 0.8 0.4 1.1 2.1 0.8 0.4 0.7

1.7 1.2 0.8 1.5 0.8 0.3 1.1 1.9 0.8 0.4 0.5

1.5 1.1 0.7 1.3 0.8 0.3 1.1 1.8 0.8 0.4 0.4

7.3 4.3

8.9 8.6

10.1 10.0 7.1 16.7 4.0 2.4 4.0 10.8 2.6 (2.9) 5.2

China Datang Corporation 1798 HK U 2.38 2,230 31.4 14.2 10.9 Renewable China Power New Energy 735 HK NR 0.65 659 17.7 13.3 10.5 China Windpower Group 182 HK NR 0.84 798 14.4 10.9 8.2 Acciona ANA SM NR 77.21 6,986 28.3 27.3 22.3 Theolia TEO FP NR 1.33 211 N/A N/A 15.6 Iberdrola Renovables IBR SM NR 3.09 18,553 36.2 30.5 25.7 EDF Energies Nouvelles EEN FP NR 37.18 4,106 27.1 21.9 17.7 EDP Renovaveis EDPR PL NR 5.01 6,222 55.7 41.1 29.1 Infigen Energy IFN AU NR 0.37 293 N/A N/A N/A Greentech GES DC NR 17.30 175 N/A 9.8 8.5 All prices are as at 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS

5.1 5.9 13.4 14.8 2.9 3.3 (21.2) (3.8) 3.0 3.5 7.9 9.2 1.5 1.8 (11.1) (6.4) (24.9) 4.7

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


Our target price estimate of HK$9.10 is based on DCF valuation. We assume WACC of 8.8%, and terminal growth of 1% after FY2020F. At our price target, Longyuans shares would be trading at 21x FY11F earnings, in line with the average for its global peers of 21x.. Despite a high earnings CAGR of 31% in 2010-2012F, we believe that the companys ROE remains low at 8-10% level and there are several downside risks to our current earnings estimates, including: (1) grid connection bottlenecks in China; (2) risks attendant on overseas project returns; (3) the risk that CER and VER income could fall short of expectations; (4) uncertainty on government subsidies and policies; and (5) the risk of increasing gearing and interest rates. Longyuan DCF valuation model
Free cash flow (RMB m) Sales EBITDA ...margin less:tax minority interest working capital CAPEX FCF FY11F 16,473 9,301 56% (565) 763 1,155 (22,467) (11,812) Sum of PV (RMB m) (2,303) (2,423) (2,542) (2,660) (2,777) (2,893) (3,008) (3,122) (3,235) (3,347) (3,458) (3,567) (3,676) (3,784) (3,890) (3,996) (4,101) (4,204) (4,307) (4,409) (4,510) FY12F 19,103 11,862 62% (724) 978 (181) (15,285) (3,350) FY13F 21,211 14,828 70% (987) 1,231 (1,069) (15,701) (1,698) FY14F 25,657 18,587 72% (1,403) 1,749 (520) (23,365) (4,953) Net debt (FY10) (RMB m) 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 33,086 FY15F 29,347 22,133 75% (1,683) 2,098 (489) (22,713) (653) Equity Value (RMB m) 77,630 75,085 72,613 70,212 67,878 65,608 63,401 61,254 59,164 57,130 55,150 53,222 51,343 49,512 47,728 45,989 44,293 42,638 41,025 39,450 37,913 FY16F 33,830 26,487 78% (2,721) 2,394 (212) (25,372) 577 FY17F 39,595 32,028 81% (3,348) 2,947 (715) (30,083) 828 Value per share (HK$) 12.4 12.0 11.6 11.2 10.8 10.4 10.1 9.7 9.4 9.1 8.8 8.5 8.2 7.9 7.6 7.3 7.0 6.8 6.5 6.3 6.0 FY18F 46,802 38,955 83% (4,153) 3,655 (411) (31,692) 6,354 FY19F 54,729 46,575 85% (5,046) 4,440 (1,028) (34,835) 10,107 FY20F 64,400 55,871 87% (6,243) 5,493 (639) (37,839) 16,643

WACC (%) 7.9 8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 Source: CCBIS estimates

PV of TV (RMB m) 113,018 110,594 108,241 105,958 103,741 101,587 99,495 97,461 95,485 93,563 91,693 89,874 88,104 86,381 84,704 83,070 81,479 79,928 78,417 76,944 75,508

EV (RMB m) 110,716 108,171 105,699 103,297 100,963 98,694 96,486 94,339 92,250 90,216 88,236 86,307 84,428 82,598 80,814 79,074 77,378 75,724 74,110 72,535 70,999

Shares (m shares) 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464 7,464

WACC Calculation Equity Beta Risk-free rate (%) Equity-risk premium (%) Country-risk premium (%) Cost of equity (%) Cost of debt (%) Debt/capital (%) Tax (%) WACC (%) Terminal growth rate (%)

1.07 3.92 6 1 12 7 50 15 8.8 1

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Risks
Grid connection bottleneck in China: Grid network construction within Chinas richest wind areas, such as Inner Mongolia, the three northeast provinces, and Xinjiang, is lagging the expansion of wind farms. We believe the issue could be gradually resolved in the coming three-to-five years, from higher spending in ultra high voltage (UHV) transmission lines and the new smart grid system that will be part of the th state grid, all part of the governments 12 Five-Year Plan. If China could enhance its power grid network more rapidly, or alternatively, if the progress on the power grid is slower than we expect, there could be upside or downside surprise, respectively, to our earnings forecasts. Overseas project execution risk: Longyuan management has laid out its plan to develop projects overseas which will entail higher return potential. Targeted regions include South Africa, North America and Eastern Europe. In our view, investment returns from overseas projects could be affected by changes in the policies of the foreign governments in the countries it is dealing with. Obtaining financing for projects can be more difficult from flow of fund restrictions between country borders and the absence of business relationships with overseas banks. Finally, foreign currency fluctuations add additional investment risk to the companys overseas project returns. CER and VER income: CER income has risk inherent in project approval by the CDM EB, the UN body that oversees carbon credit trading. In December 2009, the CDM EB suspended approvals for some Chinese wind farms. Although the CDM EB has since approved some other Chinese wind farms, some uncertainty about the approval process still lingers. Continuation of the Kyoto Protocol and related carbon trading mechanisms also remain uncertain post 2012. Our current forecasts for Longyuan have factored in continuous CER/VER income streams post 2012F. Uncertainties on government subsidies and policies: We note that government subsidy income is a material part to the return from wind farms. Future government policies in China towards feed-in-tariffs, VAT rebates and preferential income tax rates can greatly affect our earnings estimates. Risk of increasing gearing and interest rates: Longyuan relies mainly on bank borrowings, corporate bonds and debentures to finance capex. We expect the companys gearing ratio to grow from 136% in 2010 to 194% in 2012F, which would lead to increasing interest risk exposure in the issuance of new debts and refinancing. In addition, since we foresee potential interest rate hikes by the PBOC to tackle inflation problems in China, we expect Longyuans financing costs would be on a rising trend in the near future. Based on our estimates, for every 1% (100bp) increase in Longyuans effective interest rate, Longyuans net profit would decline by 10%. Equity refinancing risks in 2012F: Longyuans management has publicly announced plans to issue new shares in 2012F. Although the decision is subject to the approval from the board of directors, if the new shares are issued, they may incur additional administrative costs and may also lead to the dilution to earnings per share post issuance.

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

Company history
Longyuan was established through reorganization of the former China Longyuan Electric Power Group Corporation, founded in January 1993 and one of the pioneers in new energy development in China. The company commenced construction of its first wind farm in 1991 which became operational in the following year with 1.2MW capacity. Longyuan has accumulated nearly 20 years of wind farm operation experience. In 1999, Longyuan was merged with China Fulin, a wind power generation company, and Zhongneng Power-Tech, which is specialized in the development and consultation of electricity technology. In 2002, under the restructuring of Chinas power industry by the State Council, the former State Power Corporation was reorganized and divided into two power grid companies and the five-largest independent power generation companies. It became a wholly owned subsidiary of Guodian, one of the five-largest independent power generation companies after the restructuring. In addition, Longyuan inherited 144MW wind power assets from the former State Power Corporation in 2003 and nine wind farms in 2004 to become Guodians wind power investment arm since then. In 2009, the company was successfully listed on the main board of Hong Kongs stock exchange. Major milestones
1991 1993 1996 1999 2002 Began construction of wind power plants in Xinjiang Established by the former Ministry of Energy Became a wholly owned subsidiary of the former State Power Corporation Merged with China Fulin and Zhongneng Power-Tech Became a wholly owned subsidiary of Guodian as a result of group restructuring of the former State Power Corporation 2003 Inherited 144MW wind power assets from the former State Power Corporation. Total wind installed capacity reached 231MW, accounting for 40% of China's total wind capacity. 2004 Won concession projects for Jiangsu Rudong and Juling Tongyu; began large-scale construction of wind power projects. 2006 Proposed the development plan of six major wind areas 2009 Listed on the main board of Hong Kongs stock exchange 2010 Won bid for Jiangsu Dafeng Intertidal Zone Concession Project for a capacity of 20MW. Gansu Guazhou wind farm with installed capacity of 300MW began operations. Added 35 wind power projects in 2010, installed capacity reached 2,053MW. 2011 56 wind projects and one biomass project were registered with CDM in January 2011, with combined installed capacity of 2,904MW. Source: Company data, CCBIS

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Business description
Longyuan is primarily engaged in the design, development, construction, management and operation of wind farms. In addition to its wind power business, Longyuan also operates other power projects in thermal power, solar power, tidal, biomass and geothermal energy. According to Longyuan, by the end of December 2010, the company had installed capacity of 8,473MW, of which 6,556MW (77.4%) coming from wind power, 1,875MW (22.1%) from coal-fired power and the remaining 42MW (0.5%) from other renewable sources. Revenue by segment (2008-2010)
RMB m 16,000 14,000 12,000 10,000 8,000 4,000 6,000 4,000 2,000 0 2008 Wind power 2009 Coal power 2010 Other revenue 3,000 2,000 1,000 0 2008 Wind power 2009 Coal power 2010 Other renewables

Installed capacity by segment (2008-2010)


MW 9,000 8,000 7,000 6,000 5,000

Source: Company data, CCBIS

Source: Company data, CCBIS

The companys wind projects are located in 13 provinces in China, including Heilongjiang, Jilin, Liaoning, Inner Mongolia, Jiangsu, Zhejiang, Fujian, Hainan, Gansu, Xinjiang, Hebei, Yunnan, and Anhui. Its capacity is concentrated in the northern regions of China, including three northeast provinces, Inner Mongolia and Hebei, which jointly accounted for 62% of Longyuans total capacity in 2010. Installed capacity by region (2008-2010)
MW 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2008 The three northeast provinces The southeast coastal provinces Xinjiang Others 2009 Inner Mongolia Gansu Hebei 2010 4,000 2,000 0 2008 The Three Northeast Provinces The Southeast Coastal Provinces Xinjiang Others 2009 Inner Mongolia Gansu Hebei 2010

Gross power generation by region (2008-2010)


GWh 12,000 10,000 8,000 6,000

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 companys 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 Longyuans overall revenue in 2010. Longyuans 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 companys 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 managements disclosure, Longyuans 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 Longyuans 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 companys coal power business, it has entered into long-term coal supply agreements with Shenhua Zhungeer Energy Company and China National Coal Group Corporation to secure coal prices. These contracts have minimum terms of no less than five years.

Shareholder structure
Shareholder structure (March 2011)

Public, 25%

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

Source: Company data, CCBIS

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Board of directors and senior management background


Board of directors and senior management
Name Xie Changjun Age 53 Position Executive Director and President Executive Director and Vice-President Executive Director Key experience Professor-grade senior engineer; Joined group in 1993; Previously served various management positions in state-owned power conglomerates. Professor-grade engineer; Joined group in 2006; Previously served various management positions in state-owned power conglomerates. Senior economist; Joined group in 1997; Previously served various management positions in state-owned power conglomerates. Professor-grade senior engineer; Joined group in 1993, appointed as Chairman of Board in July 2009; Served as an engineer in several government divisions; General manager of Guodian. 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. Senior accountant; Appointed as Director in July 2009; Head of Capital Operation and Ownership Management Department of Guodian. Director of academic members, deputy Director general and researcher of the Energy Research Institute under the NDRC; Appointed as Director in July 2009. Received JurisDoctor from Yale University; Previous department joint head of Morgan Stanley Asia Limited; Appointed as Director in July 2009. PRC CPA, Doctor in Economics (Accounting) 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. Appointed as a supervisor in July 2009; Deputy chief accountant and head of financial management department of Guodian Appointed as a supervisor in July 2009; Head of audit department of Guodian Appointed as a supervisor in July 2009; Chief of disciplinary inspection group and chairman of the trade union of Longyuan. Previously senior engineer in state-owned power conglomerates; Joined group in 1994. Previously senior engineer in state-owned power conglomerates; Joined group in 1993. Professor-grade senior engineer; Joined group in 2003; Previously served various management positions in state-owned power conglomerates. 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.

Tian Shicun

58

Wang Liansheng

59

Zhu Yongpeng

59

Non-executive Director and Chairman of Board

Wang Baole

54

Non-executive Director

Luan Baoxing

43

Non-executive Director

Li Junfeng

54

Independent Non-executive Director Independent Non-executive Director Independent Non-executive Director

Zhang Songyi

55

Meng Yan

55

Chen Bin Yu Yongping Wang Jianting Jia Nansong Huang Yuan Zhang Yuan

51 50 46 48 49 54

Supervisor Supervisor Employee Representative Supervisor Secretary of Board & Joint Company Secretary Vice-President Vice-President

Ngai Wai Fung

49

Joint Company Secretary

Source: Company data, CCBIS

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Financial summary
Income statement forecasts
FYE 31 Dec (RMB m) Revenue Other income Operating expenses Operating profit EBIT Depreciation and amortisation EBITDA Net interest expense Share of results of an associate Extraordinary items Profit before tax Income tax Net profit after tax Minorities Reported net profit after tax Dividends Transfer to reserves Normalized net profit after tax 2009 9,744 569 (7,459) 2,854 2,854 (1,590) 4,444 (1,020) 105 4 1,944 (296) 1,647 (753) 894 0 894 890 2010 14,213 989 (11,118) 4,084 4,084 (2,236) 6,320 (1,098) 228 (3) 3,211 (441) 2,770 (763) 2,007 (403) 1,604 2,010 2011F 16,473 1,220 (11,743) 5,950 5,950 (3,351) 9,301 (1,897) (20) 0 4,033 (565) 3,468 (763) 2,705 (541) 2,164 2,705 2012F 19,103 1,617 (12,947) 7,773 7,773 (4,089) 11,862 (2,583) (20) 0 5,170 (724) 4,446 (978) 3,468 (694) 2,774 3,468

Balance sheet forecasts


FYE 31 Dec (RMB m) Fixed assets Goodwill Other intangible assets Long-term investments Other long-term assets Total non-current assets Other current assets Inventories Marketable securities Accounts receivable Cash & equivalents Total current assets Total assets Accounts payable Short-term debt Other current liabilities Total current liabilities Long-term debt Other long-term liabilities Total non-current liabilities Total liabilities Total shareholders' equity Total equity and liabilities 2009 38,178 0 6,086 799 2,523 47,587 1,350 333 0 2,181 16,503 20,367 67,954 1,943 17,087 4,662 23,692 16,219 2,363 18,582 42,274 25,680 67,954 2010 51,619 12 7,661 1,315 3,665 64,271 1,985 632 181 3,474 4,089 10,362 74,634 1,515 17,200 6,200 24,915 19,975 2,330 22,304 47,220 27,414 74,634 2011F 70,735 12 7,661 1,315 3,665 83,387 2,295 536 181 3,159 6,444 12,615 96,002 3,215 17,600 5,553 26,368 36,825 2,330 39,155 65,523 30,479 96,002 2012F 81,931 12 7,661 1,315 3,665 94,583 2,775 589 181 3,664 11,200 18,410 112,993 3,536 17,600 6,089 27,226 49,053 2,330 51,383 78,609 34,384 112,993

Financial ratios
FYE 31 Dec (RMB m) 2009 2010 28.7 44.5 14.1 7.3 45.9 43.1 42.2 124.5 26.5 26.5 0.8 N/A 1.9 13.0 8.4 0.4 3.7 136 121 2011F 36.1 56.5 16.4 8.9 15.9 45.7 47.2 34.8 19.7 19.7 1.0 22.6 1.7 8.9 5.7 0.5 3.1 179 157 2012F 40.7 62.1 18.2 10.1 16.0 30.6 27.5 28.2 15.3 15.3 1.3 11.2 1.5 6.8 4.5 0.7 3.0 194 161 Profitability (%) EBIT margin 29.3 EBITDA margin 45.6 Net margin 9.2 ROE 3.5 Growth (%) Revenue 13.9 EBIT 103.9 EBITDA 79.0 Net profit growth 165.0 Valuation and ratio analysis (x) Normalized PER 48.5 Reported PER 48.2 Dividend yield 0.0 Price/cash flow 2.8 PBV 1.7 EV/EBIT 18.7 EV/EBITDA 12.0 Liquidity and leverage (%) Current ratio 0.9 Interest cover (x) 2.8 Gearing ratio 130 Net gearing ratio 65 Source: Company data, CCBIS estimates

Cash flow projections


FYE 31 Dec (RMB m) EBITDA Change in working capital Other operating cash flow Cash flow from operations Capital expenditure Addition in investments Net acquisitions Other cash flow from investing activities Cash flow from investing activities Cash dividends Equity issue Net debt issue Other cash flow from financing activities Cash flow from financial activities Net cash flow Beginning cash Forex Ending cash 2009 4,444 (83) (276) 4,085 (16,184) (340) 8 1,360 (15,156) 0 17,514 10,952 (1,891) 26,575 15,505 1,002 (3) 16,503 2010 6,320 (1,813) (486) 4,021 (17,845) (138) (65) 348 (17,700) (632) 126 3,677 (1,858) 1,313 (12,365) 16,503 (48) 4,089 2011F 9,301 1,155 (1,712) 8,744 (22,467) (20) 0 1,174 (21,312) (403) 0 17,250 (1,924) 14,923 2,355 4,089 0 6,444 2012F 11,862 (181) (2,269) 9,413 (15,285) (20) 0 1,589 (13,716) (541) 0 12,228 (2,627) 9,060 4,756 6,444 0 11,200

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4 April 2011

China Datang Corporation Renewable Power (1798 HK)


Company Rating: Underperform
(initiation)

Balance sheet a major concern


Datang is the second-largest wind farm operator in China. By 2010 it had a 9% share of Chinas wind installed capacity. In our view, Datangs net gearing ratio of between 270% and 290% for 2011F-2012F is a major concern, as it entails high equity refinancing risk. Its ROE in the 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 with an Underperform rating and target price of HK$2.00. Faster earnings growth thanks to scale effect. We expect Datang to enjoy earnings CAGR of 70% in 2010-2012F, better than Longyuans 31%, owing to Datangs smaller scale of c.60% of Longyuans in 2010. Stretched balance sheet: We forecast Datangs net gearing ratio will surge to 268% and 286% by 2011F and 2012F, respectively. Despite our view that state-owned enterprises in China carry minimal credit risk, Datangs tight cash position remains a concern for us. ROE at 9-10% in 2011-12F falls short of peers: We estimate Datangs ROE will be 9-10% in 2011F-2012F. While this is in line with Longyuans, we view Datangs performance as inferior. Unlike Longyuan, which operates a coal-fired business, Datang is a pure wind operator, and should theoretically have higher ROE. Initiate with Underperform. Our target price of HK$2.00 is based on DCF valuation, implying 12x 2011F PE, a 43% discount to the average of its global peers. We believe Datangs valuation discount is justifiable given its stretched balance sheet and inferior operating efficiency.

Sector Rating:

Neutral
(initiation)

Price: Target:

HK$2.38 HK$2.00
(initiation)

Trading data
52-week range Market capitalization (m) Shares outstanding (m) Free float (%) 3M average daily T/O (m share) Expected return (%) 1 year Closing price on 1 April 2011 HK$1.85 2.43 HK$17,343/US$2,229 7,143 71 8.6 (16)

Stock price and HSCEI


HK$ 2.7 2.6 2.5 2.4 2.3 2.2 2.1 2.0 1.9 1.8 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Datang (LHS) Dec 10 Jan 11 HSCEI (RHS) Feb 11 Mar 11 14,500 14,000 13,500 13,000 12,500 12,000 11,500 11,000 10,500 10,000

Source: Bloomberg

Forecast and valuation


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

Clarisse Pan
(852) 2533 2400 clarissepan@ccbintl.com

Alan Lau
(852) 2533 2479 alanlau@ccbintl.com

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Financial analysis
Revenue
Datang is the second-largest wind power generation company in China, just behind Longyuan. It is only engaged in the generation of wind power. We anticipate rapid top-line growth for the company from the managements target of adding c.1.5GW capacity in 2011F in order to reach 5.6GW. We forecast capacity to reach 7.1GW by 2012F. Hence, we expect the companys revenue to experience rapid growth at 77% YoY in 2011F and 43% YoY in 2012F. We assume Datangs utilization hours will gradually increase from 2,134 hours in 2010 to 2,240 hours in 2011F and 2,274 hours in 2012F. We further assume its wind power tariffs will rise, from RMB0.49 in 2010 to RMB0.5 per kWh, in 2011F-2012F. In China, the government has put in place a wind tariff scheme with the aim of keeping wind project returns in the range of 8-10%. Thus wind projects in regions with higher utilization hours will theoretically receive lower wind power tariffs, in our view. Therefore, we believe we have given a quite generous assumption to Datangs utilization hours and wind tariffs in 2011F-2012F. Key operation data wind power 2008
Installed capacity (MW) YoY (%) Average utilization hours YoY (%) Net electricity generation (GWh) Average tariff exclude VAT (RMB/kWh) Sale of electricity (RMB m) YoY (%) CAGR 2010-2012F (%) Source: Company data, CCBIS estimates 1,768 92 2,255 5 1,279 0.48 613 114

2009
2,620 48 2,159 (4) 2,880 0.48 1,384 126

2010
4,028 54 2,134 (1) 4,829 0.49 2,378 72

2011F
5,600 39 2,240 5 8,437 0.50 4,219 77

2012F
7,100 27 2,274 1 12,083 0.50 6,034 43 59

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

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

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Operating expenses trend


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

Source: Company data, CCBIS estimates

Operating profit and margin


We expect Datangs 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
3,500 3,000 2,500 2,000 1,500 1,000 500 0 2008 2009 Operating profit 2010 2011F Operating margin 2012F 80% 70% 60% 50% 40% 30% 20% 10% 0%

Source: Company data, CCBIS estimates

Net profit and margin


Given strong growth in the companys 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 Datangs non-operating expenses. Due to the companys 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
1,200 20% 1,000 800 600 400 5% 200 0 2008 2009 2010 Net profit 2011F Net margin 2012F 0% 15% 25%

10%

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 Datangs 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 managements objective to expand installed capacity. Based on management guidance, Datangs 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


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

After 5 years 59%

After 2 years but within 5 years 27%

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 Datangs 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 companys cash flow generation to be weak in 2011F-2012F. Cash flow projections
RMB m 15,000 10,000 5,000 0 (5,000) (10,000) (15,000) 2008 Cash flow from operations 2009 2010 2011F Cash flow from financing activities 2012F Net cash flow Cash flow from investing activities

Source: Company data, CCBIS estimates

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Valuation and risks


Datangs current valuation discount to peers is justifiable
Datangs 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. Datangs 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 Datangs capacity expansion, we have concerns over the companys 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 (Local Company Stock code Rating currency) Market cap (US$m) 2010A PER (x) 2011F 2012F EPS growth (%) PEG 2011F 2010A PBV (x) 2011F 2012F 2010A ROE (%) 2011F 2012F

China Longyuan Power Group

916 HK

8.47

8,128

26.5

19.7

15.3

35 122 33 32 4 N/M 19 24 36 N/M N/M

0.6 0.1 0.4 0.3 7.8 N/M 1.7 0.9 1.2 N/M N/M

1.9 1.4 0.9 1.6 0.8 0.4 1.1 2.1 0.8 0.4 0.7

1.7 1.2 0.8 1.5 0.8 0.3 1.1 1.9 0.8 0.4 0.5

1.5 1.1 0.7 1.3 0.8 0.3 1.1 1.8 0.8 0.4 0.4

7.3 4.3 5.1 13.4 2.9 (21.2) 3.0 7.9 1.5 (11.1) (24.9)

8.9 8.6 5.9 14.8 3.3 (3.8) 3.5 9.2 1.8 (6.4) 4.7

10.1 10.0 7.1 16.7 4.0 2.4 4.0 10.8 2.6 (2.9) 5.2

China Datang Corporation 1798 HK U 2.38 2,230 31.4 14.2 10.9 Renewable China Power New Energy 735 HK NR 0.65 659 17.7 13.3 10.5 China Windpower Group 182 HK NR 0.84 798 14.4 10.9 8.2 Acciona ANA SM NR 77.21 6,986 28.3 27.3 22.3 Theolia TEO FP NR 1.33 211 N/A N/A 15.6 Iberdrola Renovables IBR SM NR 3.09 18,553 36.2 30.5 25.7 EDF Energies Nouvelles EEN FP NR 37.18 4,106 27.1 21.9 17.7 EDP Renovaveis EDPR PL NR 5.01 6,222 55.7 41.1 29.1 Infigen Energy IFN AU NR 0.37 293 N/A N/A N/A Greentech GES DC NR 17.30 175 N/A 9.8 8.5 All prices are as at 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS. Source: Bloomberg, CCBIS

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Our target price of HK$2.00 derived by DCF valuation method


Our target price of HK$2.00 was derived from DCF valuation based on a WACC of 9.5%, and terminal growth of 1% after FY2020F. At our target price, Datangs shares would be trading at 12x, a 40% discount over Longyuan and a 43% discount over global peers. Despite a high earnings CAGR of 70% in 2010-2012F, with an expected net gearing ratio wallowing in the range of 270-290%, high interest rate risk and high refinancing risk could have material impact over company earnings. Besides, we stress that Datangs ROE is inferior to Longyuans, although their overall ROE both remain at 9-10% in 2011F-2012F, because Longyuan also operates coal-fired power, which theoretically has lower return over wind power. We forecast Datang has lower average project ROE compared with Longyuans. There are several downside risks to our current earnings estimates, including: (1) Grid connection bottleneck in China; (2) risk attendant on overseas project returns; (3) risk arising from CER and VER income; (4) uncertainties on government subsidies and policies; and (5) risk of increasing gearing and interest rate. Datang DCF valuation model
Free cash flow (RMB m) Sales EBITDA ...margin Less:tax Minority interest Working capital CAPEX FCF FY11F 4,219 4,412 105% (132) 178 1,235 (15,011) (9,318) FY12F 6,034 6,118 101% (171) 231 992 (10,894) (3,723) FY13F 7,857 7,765 99% (299) 329 855 (12,729) (4,080) FY14F 9,955 9,838 99% (538) 457 1,528 (15,569) (4,284) Net debt (FY10) (RMB m) 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 20,545 FY15F 12,707 12,607 99% (780) 884 1,358 (19,667) (5,598) Equity value (RMB m) 23,504 22,094 20,727 19,401 18,115 16,868 15,656 14,480 13,338 12,228 11,149 10,101 9,081 8,089 7,125 6,186 5,272 4,382 3,516 2,672 1,850 FY16F 16,058 15,932 99% (1,091) 1,236 2,171 (21,061) (2,813) FY17F 20,135 20,017 99% (1,502) 1,702 2,217 (24,403) (1,969) Value per share (HK$) 3.9 3.7 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 1.9 1.7 1.5 1.3 1.2 1.0 0.9 0.7 0.6 0.4 0.3 FY18F 25,169 25,146 100% (2,046) 2,319 2,738 (28,818) (661) FY19F 31,228 31,199 100% (2,706) 3,067 3,295 (33,188) 1,667 FY20F 38,284 38,248 100% (3,513) 3,982 5,869 (34,173) 10,412

WACC (%) 8.6 8.7 8.8 8.9 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 10.0 10.1 10.2 10.3 10.4 10.5 10.6 Source: CCBIS

Sum of PV (RMB m) (21,190) (21,186) (21,182) (21,177) (21,173) (21,168) (21,163) (21,158) (21,153) (21,147) (21,142) (21,136) (21,130) (21,124) (21,118) (21,112) (21,105) (21,098) (21,091) (21,084) (21,077)

PV of TV (RMB m) 65,238 63,824 62,453 61,123 59,833 58,581 57,364 56,183 55,036 53,920 52,836 51,782 50,756 49,758 48,787 47,842 46,922 46,025 45,152 44,301 43,472

EV (RMB m) 44,049 42,639 41,272 39,946 38,660 37,413 36,201 35,025 33,883 32,773 31,694 30,646 29,626 28,634 27,669 26,731 25,817 24,927 24,061 23,217 22,395

Shares (m shares) 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143 7,143

WACC calculation Equity beta Risk-free rate (%) Equity risk premium (%) Country risk premium (%) Cost of equity (%) Cost of debt (%) Debt/capital (%) Tax (%) WACC (%) Terminal growth rate (%) 1.38 3.92 6 1 14 7 50 15 9.5 1

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Risks
Grid connection bottleneck in China: The grid network construction within Chinas richest wind areas, including Inner Mongolia and the three northeast provinces, is lagging behind the expansion of wind farms. We believe the issue could be resolved in the coming 3-5 years, from higher spending in UHV transmission lines and smart grid th systems by the State Grid as part of the 12 five year plan. If China could enhance its power grid network faster or slower than our expectation, there could be upside or downside surprises to our earnings forecasts. Overseas project execution risk: Datang management laid out its plan to develop projects overseas with higher return potential. Targeted regions include North and South America, Australia and Eastern Europe. In our view, investment returns of overseas projects could be affected by changes in foreign government policies. Besides, the means to obtain borrowings to finance projects can be more difficult due to flow of fund restrictions between country borders and the dearth of business relationships with overseas banks. Foreign currency fluctuations raise additional investment risk to the companys overseas project returns. CER and VER income: CER income is dependent on project approvals by the CDM EB, the UN body that oversees carbon credit trading. In December 2009, the CDM EB suspended the approvals for some Chinese wind farms. Although the CDM EB has approved other Chinese wind farms, there is still a degree of uncertainty surrounding the approval process. Moreover, the continuation of the Kyoto Protocol and related carbon trading mechanisms presently remains uncertain post-2012. Our current forecasts for Datang have factored in continuous CER/VER income streams post 2012F. Uncertainty surrounding government subsidies and policies: Government subsidy income is a material component of the return from wind farms. Government subsidies are also subject to annual government approval. Future government policies in China towards feed-in-tariffs, VAT rebates and preferential income tax rates can greatly affect our earnings estimates. Risk of interest rate exposure given high gearing: Datang relies on bank and other borrowings finance its wind farm constructions. We anticipate the companys net gearing ratio will reach c.286% in 2012F, which would lead to increasing interest risk exposure in the issuance of new debt and refinancing. In addition, since we foresee potential interest rate hikes by the PBOC to tackle inflation problems in China, we expect Datangs financing costs to steadily rise in the near future. Based on our estimates, for every 1% (100bp) increase in Datangs effective interest rate, net profit would decline by c.20%

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

Company history
Datang was established in July 2010, during the reorganization of its predecessor, Datang Chifeng Saihanba Wind Power Generation (Datang Chifeng Saihanba), established in September 2004. Through its predecessor, Datang Chifeng Saihanba, Datang has over six years of experience in wind farm development. The companys first wind power project (installed capacity of 30.6MW) commenced construction in October 2004 and began operations in August 2005. In April 2006, Datang formed its first wind power joint venture with KEPCO Neimenggu International in China, This represented Datangs first step towards leveraging the experience and advanced technology of overseas power companies. In 2009, parent Datang transferred to Datang 12 wind farms with total installed capacity of 549MW, reaffirming Datangs role as Datang Groups flagship company for its wind power business. In 2010, through the reorganization, Datang received all wind power businesses held by Datang Group and also the wind power businesses of Datang Groups subsidiary, Shanxi Renewable Power. Over the past six years, Datang rapidly built up its wind power business. The companys total installed capacity surged from 79.9MW in 2005 to 4,028MW in end-2010. In December 2010, Datang was listed on the Main Board of the Stock Exchange of Hong Kong. Major milestones Datang
Year 2004 Development Predecessor company, Datang Chifeng Saihanba, was established by Datang Group, and began construction of its first wind power project in Inner Mongolia 2005 First wind power farm in Chifeng, Inner Mongolia, began operations, with installed capacity of 30.6MW 2006 First wind power joint venture with KEPCO Neimenggu International in China 2008 Received approval from the NDRC to develop and construct the 102MW Shanghai Donghai Bridge Offshore wind power project Acquired wind power projects in Bayannur and Linxo in Inner Mongolia, expanding total installed capacity to 1,768MW 2009 Datang Chifeng Saihanba was renamed to China Datang Corp. Renewable Power Co., Ltd. Inherited 12 wind farms from Datang Group with installed capacity of 549MW. Total installed capacity reached 2,620MW; ranked second in China, eighth in the world according to BTM 2010 Acquired two wind power projects under construction from Datang Group with installed capacity of 49.5MW each and 2% equity interest in Datang Hailin Wind Power at a consideration of RMB1.7m. Listed on the main board of Hong Kongs stock exchange in December 2010 2011 Won a bid in Chinas first solar thermal power generation project, located in Inner Mongolia, with 50MW capacity Source: Company data, CCBIS

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

Installed capacity by region (2008-2010)


MW 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2008 2009 2010 Southeastern Coastline Central and Western Inner Mongolia and the three northeast provinces

Gross power generation (2008-2010)


MW 6,000 5,000 4,000 3,000 2,000 1,000 0 2008 2009 Total gross power generation (GWh) 2010

Source: Company data, CCBIS

Source: Company data, CCBIS

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

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

Shareholder structure
Shareholder structure (March 2011)
Other public investors, 22.46%

China Power Int'l, 0.46% State Grid Int'l Dev, 2.29% High Action Ltd, 0.92% China Longyuan, 1.38% China Yangtze Int'l, 2.29%

Angang Group HK, 2.29% Aluminum Corp of China Overseas, 2.29%

Datang and Datang Jilin, 65.61%

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


Board of directors and senior management
Name Chen Jinhang Age 55 Position Non-executive Director and Chairman of the Board Non-executive Director and Vice Chairman the of Board Non-executive Director Key experience Professor-grade senior engineer; Joined the group and appointed Director in July 2010; Previously director and general manager of Datang Group; Served various management positions in state-owned power conglomerates, including Datang and State Grid Corp of China Professor-grade senior engineer; Joined the group and appointed Director in July 2010; Previously chief economist of Datang Group; Served various management positions in state-owned power conglomerates. Senior engineer; 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. Senior engineer; Joined the group and appointed Director in July 2010;; Previously president of Datang Jilin; Served various management positions in state-owned power conglomerates. Senior economist; Master in management engineering; Joined the group and appointed Director in September 2004; Previously served various management positions in state-owned power conglomerates. Master in Engineering Thermophysics; Joined the group and appointed Director in November 2009; Previously served various management positions in state-owned power conglomerates. Doctor in Economics; Director general and researcher of Financial Research Institute of Chinese Academy of Social Sciences; Executive Director of China Society for Finance & Banking; Appointed Director in July 2010. Vice chairman of MCL Partners Limited; Independent non-executive Director of various Hong Kong listed companies; appointed Director in July 2010. Chairman of board of China Power Engineering Consulting Corp North China Power Engineering; Independent non-executive Director of various Hong Kong listed companies; appointed Director in July 2010. Appointed supervisor in July 2010; Senior accountant; Chief of auditing department of Datang Group. Appointed supervisor in July 2010; Senior accountant; Chief of auditing department of Datang Jilin. Appointed supervisor in July 2010; Senior political officer; Assistant to president and chief of politics department. Senior engineer; Joined the group in August 2004, appointed Vice President in 2009; Previously served various management positions in state-owned power conglomerates.

Wu Jing

53

Yin Li

59

Jian Yingjun

47

Non-executive Director

Hu Yongsheng

47

Executive Director and President Executive Director and Vice President Independent non-executive Director Independent non-executive Director Independent non-executive Director Chief Supervisor Supervisor

Zhang Xunkui

42

Wang Guogang

55

Yu Hon To David

62

Liu Chaoan

54

Wang Guoping

53

Zhang Xiaochun

38

Dong Jianhua

50

Employee Representative Vice President, Secretary of Board & Joint Company Secretary Vice-president

Hu Guodong

47

Wang Wenpang

44

Meng Lingbin

48

Vice-president

Zhang Xuefeng

Chief Financial Officer Source: Company data, CCBIS

42

Senior engineer; Joined the group in August 2004; Previously served various management positions in state-owned power conglomerates. Engineer; Joined the group in January 2007; Previously served various management positions in state-owned power conglomerates. Senior accountant; Joined the group in February 2005.

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Financial summary
Income statement forecasts
FYE 31 Dec (RMB m) Revenue Other income Operating expenses Operating profit EBIT Depreciation and amortisation EBITDA Net interest expense Share of results of an associate Extraordinary items Profit before tax Income tax Net profit after tax Minorities Reported net profit after tax Dividends Transfer to reserves Normalized net profit after tax 2009 1,428 207 (775) 860 860 (553) 1,413 (475) (1) 0 384 (17) 367 (118) 248 0 248 248 2010 2,380 369 (1,246) 1,503 1,503 (886) 2,389 (766) (2) 0 735 (57) 677 (222) 456 0 456 456 2011F 4,219 754 (2,233) 2,740 2,740 (1,672) 4,412 (1,416) (2) 0 1,322 (132) 1,189 (178) 1,011 (100) 911 1,011 2012F 6,034 971 (3,190) 3,815 3,815 (2,303) 6,118 (2,101) 0 0 1,714 (171) 1,543 (231) 1,311 (152) 1,180 1,311

Balance sheet forecasts


FYE 31 Dec (RMB m) Fixed assets Other intangible assets Long-term investments Other long-term assets Total non-current assets Other current assets Inventories Accounts receivable Cash & equivalents Total current assets Total assets Accounts payable Short-term debt Other current liabilities Total current liabilities Long-term debt Other long-term liabilities Total non-current liabilities Total liabilities Total shareholders' equity Total equity and liabilities 2009 21,472 410 65 4 21,951 1,190 6 862 531 2,589 24,540 6 1,528 3,007 4,540 14,290 64 14,354 18,894 5,645 24,540 2010 31,243 403 72 59 31,777 2,629 10 1,495 5,031 9,165 40,942 85 3,619 4,684 8,388 21,957 66 22,023 30,411 10,530 40,942 2011F 44,582 403 70 59 45,114 4,652 11 1,850 4,626 11,139 56,253 117 3,619 8,265 12,001 32,465 66 32,531 44,532 11,720 56,253 2012F 53,173 403 70 59 53,705 6,648 18 2,480 6,096 15,242 68,895 208 3,619 11,799 15,627 40,091 66 40,157 55,784 13,162 68,946

Financial ratios
FYE 31 Dec (RMB m) 2009 2010 63.1 100.4 19.2 4.3 66.6 74.8 69.1 83.5 31.4 31.4 0.0 3.2 1.4 9.7 6.1 1.1 2.0 243 195 2011F 64.9 104.6 24.0 8.6 77.3 82.4 84.7 121.8 14.2 14.2 0.7 N/A 1.2 5.3 3.3 0.9 1.9 308 268 2012F 63.2 101.4 21.7 10.0 43.0 39.2 38.7 29.7 10.9 10.9 0.9 9.7 1.1 3.8 2.4 1.0 1.8 332 283 Profitability (%) EBIT margin 60.2 EBITDA margin 98.9 Net margin 17.4 ROE 4.4 Growth (%) Revenue 66.0 EBIT 86.2 EBITDA 109.5 Net profit growth 77.6 Valuation and ratio analysis (x) Normalized PER 40.3 Reported PER 40.3 Dividend yield 0.0 Price/cash flow N/A PBV 1.8 EV/EBIT 17.0 EV/EBITDA 10.3 Liquidity and leverage (%) Current ratio 0.6 Interest cover (x) 1.8 Gearing ratio 280 Net gearing ratio 271 Source: Company data, CCBIS estimates

Cash flow projections


FYE 31 Dec (RMB m) EBITDA Change in working capital Other operating cash flow Cash flow from operations Capital expenditure Addition in investments Net acquisitions Other cash flow from investing activities Cash flow from investing activities Cash dividends Equity issue Net debt issue Other cash flow from financing activities Cash flow from financial activities Net cash flow Beginning cash Forex Ending cash 2009 1,413 (374) (30) 1,008 (8,141) (62) (163) 112 (8,253) (57) 0 7,071 217 7,231 (14) 545 0 531 2010 2,389 (338) 90 2,141 (10,650) (9) 0 20 (10,639) 0 4,175 9,759 (835) 13,098 4,500 531 0 5,031 2011F 4,412 1,235 (132) 5,515 (15,011) 0 0 48 (14,963) 0 0 10,508 (1,464) 9,044 (405) 5,031 0 4,626 2012F 6,118 992 (171) 6,939 (10,894) 0 0 53 (10,841) (100) 0 7,626 (2,154) 5,371 1,470 4,626 0 6,096

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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 (CO2). According to the International Energy Agency (IEA), electricity and heat generation is the largest source of CO2 emission and accounted for 41% of total emission in 2008. Without the use of fossil fuels, wind energy can reduce CO2 emission by replacing fossil electricity generation, such as coal-fired power. As per the Global Wind Energy Association (GWEC)s estimation, the expected annual CO2 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 0.1% Hydro 16.2% Wind 1.1% Other sources 0.3%

Coal 40.8% Nuclear 13.5%

Biomass and waste 1.3% Gas 21.2%

Oil 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 worlds 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 CO2 emission, since there are plenty of wind resources, both onshore and offshore, in the top CO2 emission countries, including China, the US, India, Russia and Japan. Global top-five CO2 emission countries - CO2 emission (2005-2009)
CO2 emission (m tonnes) 8,000
7,000 6,000 5,000 4,000 3,000 2,000 1,000 2005 2006 China 2007 United States India 2008 Russia 2009 Japan

Source: Energy Information Administration

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Global top-five CO2 emission countries annual wind energy potential vs. electricity consumption (2008)
TWh 125,000

100,000

75,000

50,000

25,000

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

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

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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 Environmentally friendly; nil CO2 emission in power generation, this is critical for governments to meet CO2 emission targets. Wind farm operators can sell carbon credits and earn income through carbon credit trades under the CDM and verified emission reductions (VERs) (please refer to Appendix 7: Carbon Credit trading markets and CDM) Utilizing rural area land and supplying electricity to towns located in rural areas where connection of grids is expensive or technically difficult. Fuel free, no costs for fuel, and generally safe to use when compared with nuclear, coal, oil and natural gas. Attracting tourists. Source: CCBIS Cons The unpredictability of climate changes causes no controllability over power generation; and with a lack of sufficient power storage system, wind power generation cannot meet power demand in real time. Occupying a large area of land for onshore wind farms; increasing use of WTGs will raise electricity generation and enjoy economies of scale in operations. But more WTGs means larger land requirements. Affecting signal reception such as cellular communications and telephone systems. Noisy and producing constant sound and movements of the rotor blades may annoy neighborhood. Killing birds around the area, especially during migration seasons.

Operation requirement comparisons between different power sources


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

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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. Chinas new wind installations grew at a 96% CAGR in 2006-2010 versus global growth at a 26% CAGR. Global cumulative installed wind power capacity (2001-2010)
200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Cumulative installed capacity (MW) (LHS) Growth rate (RHS) 40% 38% 36% 120,000 34% 32% 30% 28% 26% 40,000 24% 22% 20% 20,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Cumulative installed capacity (MW) (LHS) Growth rate (RHS) 100,000 80,000 60,000

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


160,000 140,000 40% 38% 36% 34% 32% 30% 28% 26% 24% 22% 20% 18% 16% 14%

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)


25,000 80% 70% 20,000 60% 50%

40,000 35,000 30,000 25,000 20,000

80% 70% 60% 50%

15,000 40% 30% 10,000

40% 30% 20% 10% 0%

15,000 10,000 5,000 0 2001 2002 2003 2004 2005 2006 2007 Newly installed capacity (MW) (LHS) 2008 2009 2010 Growth rate (RHS)

20% 10% 0% (10)% 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Newly installed capacity (MW) (LHS) Growth rate (RHS) 5,000

(10)% (20)% (30)%

Source: GWEC, CWEA, CCBIS

Source: GWEC, CWEA, CCBIS

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

9% by 2010 8.610% by 2020 20% by 2011, 30% by 2025

7% by 2010 4% by 2010, 18% by 2020, 50% by 2050

6% by 2010 12% by 2010, 20% by 2025

14% by 2020

Other developed/OECD/transition countries Albania 18% by 2020 Israel South Korea 2.4 4.3% by 2015, 6.1% by 2020, 11% by 2030 Switzerland 16.0 24% by 2020

1020% by 2020 18.0 (to be continued)

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


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

10% by 2012

20% by 2012

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)
MW 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Rest of world Germany Denmark USA Italy UK Canada China Spain France India

Global new wind installations (2010)


Turkey 1% Canada 2% Italy UK 2% 3% France 3% Germany 4% Spain 4% India 6% USA 13% Rest of world 12%

China 50%

Source: GWEC, CWEA, CCBIS

Source: GWEC, CWEA, CCBIS

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Global top WTG manufacturers


The worlds 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 Chinas 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 worlds new WTG installations in 2009. Global WTG market share newly installed capacity (2009)
Others 21.3% Vestas 12.5%

Global WTG market share newly installed capacity (2008)


Others 15.8% Nordex 3.4% Acciona 4.5% Siemens 6.2% GE 16.7% Vestas 17.8%

GE 12.4% REpower 3.4% Siemens 5.9% Suzlon 6.4% Dongfang 6.5% Enercon 8.5%

Sinovel 9.2%

Suzlon 8.1% Gamesa 10.8% Enercon 9.0%

Sinovel 3.6% Goldwind 4.1%

Gamesa 6.7%

Goldwind 7.2%

Source: BTM

Source: BTM

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Appendix 5: Wind power development in China


Chinas wind power growth
The Chinese government is keen to develop renewable energy sources due to Chinas 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. Chinas cumulative installed wind power capacity (2001-2010)
45,000 40,000 115% 35,000 30,000 25,000 75% 20,000 15,000 10,000 35% 5,000 0 2001 2002 2003 2004 2005 2006 Cumulative installed capacity (MW) (LHS) 2007 2008 2009 Growth rate (RHS) 2010 15% 55% 95% 135%

Source: CWEA, CCBIS

Chinas newly installed wind power capacity (2001-2010)


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

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 RMB 0.51 per kWh RMB 0.54 per kWh Location Northern Xinjiang Central & western Inner Mongolia Western Gansu Eastern Inner Mongolia Northern Hebei Central and southern Xinjiang Ningxia Eastern Gansu Western Liaoning North, central and eastern Heilongjiang All other locations

RMB 0.58 per kWh

RMB 0.61 per kWh Source: National Energy Administration

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Major renewable energy policies in China


Subject CDMs Measures for Operation and Management of CDM Projects Renewable Energy Law Effective year 2005 Authority NDRC Key points Only CDM projects by companies controlled by Chinese parties will be eligible for approval. The approval procedures of CDM projects include review by experts appointed by NDRC, MOST, MFA, MOF and the National CDM Board.

2006

Grid-connection Provisions on the Administration of Power Generation from Renewable Energy Interim Measures on Administration of Designated Fund for the Development of Renewable Energy Mandatory Purchase Supervision Measures on Purchase of the Full Amount of Renewable Energy Power by Grid Enterprises Medium and long-term development plan for the development of renewable energy Taxation Catalogue of Public Infrastructure Projects Entitled for Preferential Tax Treatment VAT Circular on VAT Policy Regarding Comprehensive Utilization of Resources and Other Products CO2 emission target in a standing meeting Feed-in-tariff Circular Regarding the Furtherance of On-grid Pricing Policy of Wind Power Taxation Notification on Chinese CDM Fund and CDM Projects subject to Corporate Income Tax VAT Tax refund policy for Purchase of Domestically Manufactured Equipment by Foreign invested Enterprises Mandatory Purchase Renewable Energy Law Sub-clauses 1 and 2 of Rule 14

2006 2006 2007

2007

2008

2008 2009 2009 2009 2009

Peoples Congress Defines the responsibility of each relevant ministry in promoting renewable energy. It also mandates full dispatch, the principle of setting tariffs and a renewable energy fund. NDRC Grid-connection system for power generation from renewable energy shall be constructed and administered by power grid enterprises. MOF MOF will allocate funds from the PRC central financial budget to support the development of renewable energy. SERC Grid enterprises must buy out the grid-connection volume in the area for all power generated by renewable sources. They will be penalized for failure to do so. NDRC Development plan states China's target to reach installed wind power capacity of 5GW by 2010 and 30GW by 2020; further amended to 10GW by 2010 in 2008. MPF Wind farm operators are allowed to receive a three-year income tax exemption and 50% reduction for the following three years, for all wind projects approved after January 2008. MOF Wind power generators receive a 50% tax rebate on VAT on wind power sales. State Council NDRC MPF, SAT MPF, SAT By 2020, CO2 emission per unit of GDP of China is to be reduced to 40-45% under 2005 levels. Onshore feed-in-tariffs are fixed at four ranges according to location; RMB0.51/0.54/0.58/0.61 per kWh (including VAT). 2% of the income from sales of green gas reduction quota can be deducted from tax income. Foreign invested enterprises that purchase domestically manufactured equipment can receive VAT refunds.

2010

Renewable Energy Law Amendment Offshore wind power Provisional Measures for the Administration of Offshore Wind Power Construction

2010 2010

Peoples Congress China will carry out a renewable energy-related full purchase system. The energy supervisory, electricity regulatory and finance supervisory departments of the State Council will ensure full repurchase of renewable energy to be formulated. Peoples Congress Regulatory framework for the development and use of renewable energy NEA Regulates the administration organization management and technical quality administration for offshore wind power development planning, project granting, project approval, use of sea area, marine environmental protection, construction completion and acceptance, operation information management, etc.

Source: Peoples 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 powers 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 US cents / kwh 35 40 45 50 55

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

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

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Analysis of a typical 49.5MW capacity wind farm in China CDM ceases end-2012
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Total capacity (MW) Utilization hours (hours) Gross power generated (MWh) Power loss (%) Electricity sold (MWh) Fixed tariff including VAT (RMB/kWh) Fixed tariff excluding VAT (RMB/kWh) Net electricity tariff (RMB m) Net CDM income (RMB m) VAT refund power generation (RMB m) Total revenue (RMB m) CAPEX (RMB m) Depreciation (RMB m) Maintenance costs (RMB m/kWh) Maintenance fund (RMB m) Total (RMB m) Gross profit (RMB m) Operating expense (RMB m) Operating profit (RMB m) Loan balance at end of year (RMB m) Interest expense (RMB m) Profit before tax (RMB m) Taxation (RMB m) Net profits (RMB m) Capital (RMB m) VAT offset (RMB m) Loan repayment (RMB m) Cash flow equity level (RMB m) Cash flow project level (RMB m) 20-year equity IRR (%) 20-year project IRR (%) ROE (%) Source: CCBIS estimates (427) (d) (21.4) (4.5) (1.5) (27.3) 21.7 (3.4) 18.3 307.5 (17.9) 0.4 0.0 0.4 (21.4) (4.5) (1.5) (27.3) 21.7 (3.4) 18.3 273.3 (16.0) 2.3 0.0 2.3 (21.4) (4.5) (2.4) (28.3) 20.7 (3.4) 17.3 239.2 (14.1) 3.2 0.0 3.2 (21.4) (4.5) (2.4) (28.3) 20.7 (3.4) 17.3 205.0 (12.2) 5.1 (0.6) 4.4 (21.4) (4.5) (2.4) (28.3) 20.7 (3.4) 17.3 170.8 (10.3) 6.9 (0.9) 6.1 (21.4) (4.5) (2.4) (28.3) 20.7 (3.4) 17.3 136.7 (8.5) 8.8 (1.1) 7.7 (21.4) (4.5) (2.4) (28.3) 20.8 (3.4) 17.4 102.5 (6.6) 10.8 (2.7) 8.1 (21.4) (4.5) (2.4) (28.3) 24.9 (3.7) 21.1 68.3 (4.7) 16.4 (4.1) 12.3 (21.4) (4.5) (2.4) (28.3) 24.9 (3.7) 21.1 34.2 (2.8) 18.3 (4.6) 13.7 (21.4) (4.5) (2.4) (28.3) 24.9 (3.7) 21.1 0.0 (0.9) 20.2 (5.1) 15.2 (21.4) (4.5) (2.4) (28.3) 24.9 (3.7) 21.1 0.0 0.0 21.1 (5.3) 15.9 (21.4) (4.5) (2.4) (28.3) 24.9 (3.7) 21.1 0.0 0.0 21.1 (5.3) 15.9 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 9 9 9 9 9 9 9 9 9 9 9 9 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 4.2 4.2 4.2 4.2 4.2 49.0 49.0 49.0 49.0 49.0 49.0 49.1 53.1 53.1 53.1 53.1 53.1

342 (e) (a)

85 (b) (c) (a)+(b)+(c)-(d) (a)+(b)-(d)-(e) 8.3 (34.2) (4.1) 47.9 8.3 (34.2) (2.2) 47.9 8.3 (34.2) (1.3) 47.0 8.3 (34.2) 0.6 47.0 8.3 (34.2) 2.5 47.0 8.3 (34.2) 4.3 47.0 4.1 (34.2) 2.0 42.8 0.0 (34.2) 3.6 42.5 0.0 (34.2) 5.5 42.5 0.0 (34.2) 7.4 42.5 0.0 0.0 42.5 42.5 0.0 0.0 42.5 42.5

(85) 11.66 8.12

0.47

2.67

3.73

5.19

7.11

9.04

9.48

14.44

16.09

17.74

18.57

18.57

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Analysis of a typical 49.5MW capacity wind farm in China CDM continues after 2012
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Total capacity (MW) Utilization hours (hours) Gross power generated (MWh) Power loss (%) Electricity sold (MWh) Fixed tariff including VAT (RMB/kWh) Fixed tariff excluding VAT (RMB/kWh) Net electricity tariff (RMB m) Net CDM income (RMB m) VAT refund power generation (RMB m) Total revenue (RMB m) CAPEX (RMB m) Depreciation (RMB m) Maintenance costs (RMB m/kWh) Maintenance fund (RMB m) Total (RMB m) Gross profit (RMB m) Operating expense (RMB m) Operating profit (RMB m) Loan balance at end of year (RMB m) Interest expense (RMB m) Profit before tax (RMB m) Taxation (RMB m) Net profits (RMB m) Capital (RMB m) VAT offset (RMB m) Loan repayment (RMB m) Cash flow equity level (RMB m) Cash flow project level (RMB m) 20-year equity IRR (%) 20-year project IRR (%) ROE (%) Source: CCBIS estimates (427) (d) (21.4) (4.5) (1.5) (27.3) 21.7 (3.4) 18.3 307.5 (17.9) 0.4 0.0 0.4 (21.4) (4.5) (1.5) (27.3) 31.0 (4.1) 26.9 273.3 (16.0) 10.9 0.0 10.9 (21.4) (4.5) (2.4) (28.3) 30.0 (4.1) 25.9 239.2 (14.1) 11.8 0.0 11.8 (21.4) (4.5) (2.4) (28.3) 30.0 (4.1) 25.9 205.0 (12.2) 13.7 (1.7) 12.0 (21.4) (4.5) (2.4) (28.3) 30.0 (4.1) 25.9 170.8 (10.3) 15.6 (1.9) 13.6 (21.4) (4.5) (2.4) (28.3) 30.0 (4.1) 25.9 136.7 (8.5) 17.5 (2.2) 15.3 (21.4) (4.5) (2.4) (28.3) 30.1 (4.1) 26.0 102.5 (6.6) 19.4 (4.9) 14.6 (21.4) (4.5) (2.4) (28.3) 34.2 (4.4) 29.8 68.3 (4.7) 25.1 (6.3) 18.8 (21.4) (4.5) (2.4) (28.3) 34.2 (4.4) 29.8 34.2 (2.8) 27.0 (6.7) 20.2 (21.4) (4.5) (2.4) (28.3) 34.2 (4.4) 29.8 0.0 (0.9) 28.8 (7.2) 21.6 (21.4) (4.5) (2.4) (28.3) 34.2 (4.4) 29.8 0.0 0.0 29.8 (7.4) 22.3 (21.4) (4.5) (2.4) (28.3) 34.2 (4.4) 29.8 0.0 0.0 29.8 (7.4) 22.3 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 9 9 9 9 9 9 9 9 9 9 9 9 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 0.0 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 0.0 0.0 0.0 0.0 0.0 0.0 0.1 4.2 4.2 4.2 4.2 4.2 49.0 58.2 58.2 58.2 58.2 58.2 58.4 62.4 62.4 62.4 62.4 62.4

342 (e) (a)

85 (b) (c) (a)+(b)+(c)-(d) (a)+(b)-(d)-(e) 8.3 (34.2) (4.1) 47.9 8.3 (34.2) 6.4 56.6 8.3 (34.2) 7.3 55.6 8.3 (34.2) 9.2 55.6 8.3 (34.2) 11.1 55.6 8.3 (34.2) 13.0 55.6 4.1 (34.2) 10.7 51.4 0.0 (34.2) 12.3 51.1 0.0 (34.2) 14.2 51.1 0.0 (34.2) 16.0 51.1 0.0 0.0 51.1 51.1 0.0 0.0 51.1 51.1

(85) 16.85 10.50

0.47

12.78

13.84

14.03

15.96

17.88

17.06

22.03

23.68

25.33

26.15

26.15

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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 CO2, 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 30 25 20 15 10 5
Jul-05 Jul-06 Jul-07 Oct-05 Oct-06 Oct-07 Jul-08 Apr-05 Apr-06 Apr-07 Apr-08 Oct-08 Apr-09 Sep-09 Sep-10 Dec-09 Dec-10 Jan-06 Jan-07 Jan-08 Jan-09 Jun-09 Jun-10 Mar-10 Mar-11

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 party 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 2nd months - Plan CDM project activity - Prepare project design document (PDD) - Get approval from each Party involved

4th to 5th months - Validation

6th month - Registration

7th to 12 months - Monitoring a CDM project activity - Verification & certification - Issuance of CERs - 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% Indonesia 2.1% Malaysia 3.1% Mexico 4.2% China 43.8%

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 4% 750kW WTG 12% 850kW WTG 9%

2.0MW WTG 6% 1.5MW WTG 66% 1.25MW WTG 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% Huachuang 3% XEMC Wind Power 3% Gamesa 3% Shanghai Electric 3% Vestas 5% Mingyang 6% United Power 9% Dongfang Electric 14% Goldwind 21% Sinovel 23%

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
Remarks Doubly-fed induction generator Direct-drive generator with direct-current excitation Direct-drive generator with permanent-magnet excitation Hybrid-drive/super compact drive (SCD)

Main suppliers Length of track record Gearbox component Reliability Low maintenance cost Smaller size and weight Low manufacturing cost Low-voltage ride through (LVRT) capability Power generation productivity Source: Company data, CCBIS estimates 1 1 1 2 2 3

Vestas, Sinovel, Gamesa, Nordex, Repower, GE, Dongfang Electric, United Power, Mingyang Enercon, Mtorres, Lagerwey

VENSYS, Goldwind, Scanwind, Xmec Windpower

Goldwind, Mingyang

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Remarks
1. Gearbox component and reliability

In a conventional WTG, the gearbox component has a relatively higher failure rate. Elimination of the gearbox simplifies the transmission structure and increases operational reliability. Maintenance costs associated with oil replacement are also reduced. 2. Size, weight, and manufacturing cost

Of the three main types of WTGs, doubly-fed, direct-drive, and hybrid WTGs, hybrid WTGs have the smallest size and consume the least materials to construct. As a result, hybrid WTGs have a lower manufacturing cost per kilowatt capacity. Since doubly-fed WTGs employ the gearbox component to enhance turning speed, their sizes are smaller in comparison with a direct-drive WTGs under the same capacity. 3. Low-voltage ride through (LVRT) capability

LVRT capability enables a more stable grid connection and prevents the WTG from going off-line in the event of major grid disturbances. This is why LVRT enabled WTGs are a requirement of the State Grid towards power generators. Studies suggest that direct-drive WTGs have better LVRT capability than doubly-fed WTGs.

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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 WTGs power generation capabilities are proportional to its rotor blade length. Longer rotor blades allow for larger rotor surface area and the increase in a WTGs tip-speed ratio, which effectively increases the power generation capability of the WTG. Rotor size and maximum power output
Rotor diameter (meters) Power output (kW) 25kW 100 kW 225 kW 300 kW 500 kW 600 kW 750 kW 1.0MW 1.5MW 2.0MW 2.5MW 3.0MW 10 17 27 33 40 44 48 54 64 72 80 88 Source: Danish Wind Industry Association, American Wind Energy Association

Future WTGs are expected to have longer rotor diameters, larger capacity, and will be adaptive to offshore operations, where wind resources are rich but have yet to be harnessed.

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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)
Germany 2% Sweden 8% UK 42% China Others 2% 4%

Netherlands 12%

Denmark 30%

Source: EWEA, CCBIS

Global cumulative offshore wind power installed capacity (2009)


Cumulative installed capacity at end-2009 (MW) Cumulative installed WTG at end-2009 Cumulative offshore wind farms under operations

Ranking Countries

Region

1 UK Europe 882.8 287 12 2 Denmark Europe 639.2 305 9 3 Netherlands Europe 246.8 130 4 4 Sweden Europe 163.7 75 5 5 Germany Europe 42.0 9 4 6 China Asian Pacific 46.5 16 0(1) 7 Belgium Europe 30.0 6 1 8 Ireland Europe 25.2 7 1 9 Finland Europe 24.0 8 1 10 Norway Europe 2.3 1 1 11 Japan Asian Pacific 1.0 1 0(1) Total 2,103.4 845 38 (1) China began construction of its first offshore wind farm in April 2009. It has not yet been completed. Japan has its first offshore WTG installed but has not yet constructed any wind farms at end-2009. Source: EWEA, CCBIS estimates

According to the European Wind Energy Association (EWEA), newly installed offshore wind capacity for 2010 is 883MW. Europes cumulative installed offshore wind capacity has reached 2.9GW, representing 3.5% of total installed capacity in wind power. There were 45 offshore wind farms under operations in Europe at end-2010.

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For 2011, EWEA forecasts there will be 1.0GW to 1.5GW new offshore wind capacity on grid in Europe. There are ten wind farms with 3.0GW currently under construction. Offshore cumulative installed capacity will reach 6.2GW when these projects have been completed.

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 Whitelee Phase I extension Whitelee Phase II extension Kilbraur extension Fullabrook Down Low Spinney Lynemouth Gairnieston Farm High Haswell Lochelbank Griffin Forrest Novar Extension Curryfree Fairfield Farm Crimp G24I Gordonbush Hazlehead Mark Hill Ormonde Millennium Ext 2 Glenkerie Wind Farm Ferndale - Power Factory Sheringham Shoal Butterwick Moor Clyde Wind Farm Maesgwyn Arecleoch Crockagarron Torrs Hill Greater Gabbard An Suidhe Beinn an Tuirc Extension Tangy Extension Total Source: RenewableUK Location East Renfrewshire East Ayrshire Highland Devon Leicestershire Northumberland Aberdeenshire Durham Perth & Kinross Perth & Kinross Highland Co Londonderry Cumbria Cornwall Highland South Yorkshire South Ayrshire Cumbria Highland Scottish Borders Rhondda Cynon Taff Norfolk County Durham South Lanarkshire Neath Port Talbot South Ayrshire Co Tyrone Dumfries & Galloway East Anglia Argyll & Bute Argyll & Bute Argyll & Bute Number of WTGs Expected capacity (MW) 36 39 8 22 4 13 1 2 12 68 16 6 5 3 1 35 3 28 30 6 11 8 88 10 152 13 60 6 2 140 23 19 7 877 108 109.02 20 66 8 30 2.3 4 9.6 156.4 36.8 15 6.5 2.43 2.3 71.75 6 56 150 15 22 6.4 316.8 20.5 349.6 26 120 15 4 504 19.3 38 5.95 2,322.7 Average turbine size (MW) 3.0 2.8 2.5 3.0 2.0 2.3 2.3 2.0 0.8 2.3 2.3 2.5 1.3 0.8 2.3 2.1 2.0 2.0 5.0 2.5 2.0 0.8 3.6 2.1 2.3 2.0 2.0 2.5 2.0 3.6 0.8 2.0 0.9 Developer Scottish Power Scottish Power Falck Renewables Devon Wind Power Broadview Energy Scottish Power Mr Philip Benzie Hallam Land Management RWE Npower Renewables SSE Renewables RWE Npower Renewables RES UK & Ireland Ltd Wind Prospect West Coast Energy Developments Ecotricity Scottish & Southern Banks Developments Scottish Power Renewables Vattenfall West Coast Energy Developments Novera Infinergy Scira Offshore Energy Ltd E.ON UK Renewables SSE Renewables Pennant Walters Scottish Power Northern Wind Power Fred Olsen Renewables Scottish & Southern RWE Npower Renewables Scottish Power Scottish & Southern

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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 3% Sinovel 11% Bard 2%

Simens 28%

Vestas 56%

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 Chinese WTG manufacturers Sinovel Goldwind Dongfang Electric Guodian United Power Mingyang Xemc Sewind Haizhuang International WTG manufacturers Siemens Vestas Nordex REpower BARD Multibrid Source: CWEA, CCBIS Research, development & trial product 3.0MW WTGs successfully installed and operational in Shanghai Donghai Daqiao 108MW project; the company predicts the 5.0MW turbine will be launched in 2011. First 1.5MW offshore WTG manufactured in 2007; 2.5MW, 3.0MW prototypes produced and operational; expected launched date in 2011; 5.0MW designs at research stage. 5.0MW offshore WTG at experimental stage. Company expects 3.0MW to be launched in 2011. Company expects 3.0MW to be launched in 2011. 5.0MW offshore WTG in experimental stage (XEMC Darwind). 3.6MW offshore WTG launched in June 2010. 5.0MW offshore WTG in experimental stage. Long track record in offshore WTG installation beginning in 1991. Launched 3.6MW WTGs and is developing 5.0/6.0 offshore WTGs. Long track record in offshore WTG installation beginning in 1990. 3.0MW WTGs launched; developing 5.0/6.0 offshore WTGs. 2.5MW WTGs launched. Launched 5.0MW and 6.0MW WTGs offshore, with rotor diameter of 126m. Launched 5.0MW WTGs. Launched 5.0MW WTGs.

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Rating definitions
Outperform (O) expected return 10% over the next twelve months Neutral (N) expected return between -10% to 10% over the next twelve months Underperform (U) expected return < -10% over the next twelve months

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