Utilites & Renewables:Positive outlook with declining uncertainty

Event

    Macquarie hosted its AP ITU Corporate Day on 3-4 Nov, with 20 companiesfrom the Utilities and Renewables space (2 China coal-fired IPPs, 5 China gasutilities, 2 Hong Kong Utilities, 6 Water and Environmental companies, 3 solarcompanies and 2 wind companies). Overall, outlook for clean energy relatedsectors should remain positive, with declining uncertainty for gas utilities (gascost pass-through negotiation on track) near term, and solar (amendment inpolicies on distributed solar) and wind (improving wind resources) sectors inthe medium term. Moreover, we see opportunities for asset injection/capacityexpansion for coal-fired IPPs, and sizeable M&A opportunities for CKI/PAH.Our top picks are CR Power, CPI, CR Gas, BEH, CEI, Singyes, ChinaWindpower, HNR and Goldwind.

    Impact

    Coal-fired IPPs. October power generation showed improvement but bothIPPs expect no significant rebound without the launch of stimulus measures.The company expects the coal price to stabilize; hence, another tariff cut in2015 seems unlikely. It is optimistic about a potential asset injection from theparent or the development of more greenfield projects, given the strong cashinflows.

    Gas utilities. Gas cost pass-through negotiation is on track with 30-90% ofthe affected projects’ gas sales having already been approved for a tariff hike.Although economic slowdown will slow gas sales volume growth, targets onnewly added households are unchanged, as the focus shifts to connection tosocial housing and new buildings. If oil prices stay weak in the next 12months, gas utilities believe another gas cost hike seems unlikely.

    Water & environment protection. Presenting cos. shared a +ve prospect asChina needs to curb pollution. Our speaker, Dr. Jiang of CAEP, expects the‘water pollution prevention plan’ to be announced soon. Raising sewagecollection penetrations in small cities and raising WWT emission standardsare some measures he thinks the govt needs to implement to clean the water.We see supportive policy as a +ve near-term catalyst.

    Solar. China demand has not spiked yet in 4Q but we expect installations tobe back-end loaded towards the year-end. China’s amendment of policies onsolar power distribution should accelerate demand in 1H15. However, in thenear term, demand could be affected by the government’s tight control viaforbidding sales and transfer of preliminary project approvals.§。

    Wind. Wind levels have been consistently weak in the 9 months of 2014 butwe see signs of a recovery in October. The rushed installations have not beenas strong as consensus thinks, given the wind tariff cut has become a longerterm overhang (less likely to be cut from July 2015). In general, profitability ofwind sector in 2015 will be driven by increase of utilization hours fromstronger wind level but more evidence is needed to prove this.

    CKI/PAH. The UK regulatory regime is close to being finalized, thus removinguncertainties for the outlook of UK Power Networks and Northumbrian Waterin the next 5-8 years. Moreover, we see sizeable M&A opportunities for theconsortium in Australia (privatisation of power t&d assets).