Bottoming out in 2013
We upgrade our view on the China wind sector to Positive given we believe the ROE of wind developers bottomed in 3Q12 and will improve to 10%+ in 2013-14, from 4-11% in 2012, underpinned by their high operating leverage to utilization. We expect utilization hours to
increase by 3-5% pa due to better grid connection while on-grid tariffs/unit investment/interest rate should remain flat in 2013-14, and there should be upside risk on CER income. We upgrade Huaneng Renewable (958 HK) and Datang Renewable (1798 HK) to Outperform, and keep Longyuan (916 HK) and Huaneng Renewable as our top picks in the sector.
Utilization hours rebounded sharply in 2H12 (+3% yoy), from a decline of 9% yoy in 1H12. This is expected to improve continuously by 3-5% pa, equivalent to a ~30% sector EBIT growth pa. This is supported by NEA targets to reduce wind curtailment to below 10% in 2013 from 15% in 2012 by improving the grid power dispatch, strictly controlling the new projects in regions with wind curtailment and accelerating construction of UHV transmission lines (one year ahead of expectation).
Our detailed study on the technical aspect of the wind curtailment issue (Figure 4), like LVRT and loading switch, reveals that the above target is achievable and the recovery on utilization is on track.
We lift China’s new grid connected capacity to 16.1GW in 2013, from 13GW, slightly lower than the surprisingly high targets of 18GW raised by NEA. More wind power installations are expected in southern/central provinces with higher than national grid connection and utilization.
In July 2012, the NEA completed the Renewable Portfolio System draft, which enforces mandatory consumption of renewable power. We expect RPS to be introduced in 2H13 as a major share price catalyst. We also see upside risk of CER prices when CER market slowly re-balances in late 2013 and 2014.
Stock to action
We prefer Longyuan because it has the strongest project pipeline, and enjoys the highest utilization/ROE with lowest gearing. We also like Huaneng Renewable in anticipation of a significant rebound in utilization and profitability after potentially penetrating south/central provinces in 2013. Datang Renewable is highly leveraged to improvement in utilization in western Inner Mongolia, which should see the most upside risk in earnings. Suntien should have the least upside in utilization but its valuation is attractive in view of its solid earnings from gas distribution.
