26 Sept 2008, 94 pages

At present, the Chinese Government is rapidly introducing tariff
reforms in the sector. We anticipate two more rounds of on‐grid
tariff hikes in 4Q08 and next year totaling Rmb40/MWh. Fuel cost
pressures are subsiding and we expect margins to stabilise.

We do not believe the slowdown in generation growth is of great
concern, at least not for the listed independent power producers
(IPP). We anticipate that the listed companies’ assets will continue
to expand at an even pace. We also see vertical integration and
fuel diversification enhancing profitability.

We introduce an “ACEFIS” scorecard system based on the
following six factors: asset quality, cost control, capacity
expansion, fuel diversification, vertical integration and financial
strength to comprehensively assess companies’ fundamentals.

Among listed companies in the sector, we still prefer Datang
Power due to its vertical integration and fuel diversification
efforts. At current valuations, we are also interested in Huadian
for its growth story into non‐coal power and sensitivity to tariff
and coal, similar to Huaneng. China Power International could be
a dark horse in view of its depressed valuation despite its
respectable assets growth.