Chinese Independent Power Producers
C ut in coal price forecast a key positive
􀂄 Coal price forecast cut further; significant 2009-10E earnings upgrades
We make significant increases to our 2009-10 earnings forecasts to reflect the
benefit of UBS’s new lower coal price forecast. UBS’s mining research team now
expects the 2009 coal contract price to decline 31% YoY (previously 7%). The low
coal price will also put downward pressure on previously expected increases in
contract coal prices.
􀂄 Tariff cuts reflected for heavy industry provinces, but impact limited
Based on the lower coal price and the weak economic environment, we remove our
previously assumed 7.5% mid-2009 tariff increase. We now factor in a temporary
10% on-grid tariff cut for full-year 2009 for several inland provinces that have a high
reliance on heavy industry, including some areas where no tariff cut has been
announced. The impact on valuations is insignificant, however.
􀂄 Weak power demand in the near term, but capacity additions also low
We have lowered our 2008 earnings estimates to reflect weaker demand in the near
term. November power demand fell 7.8% YoY, but we maintain our 2009 demand
forecast of 5.4%, implying only a modest decline in the utilisation rate due to
coincidentally low capacity growth. We view a moderate trend growth rate of 7-8%
after 2009 to be positive, as coal supply growth could then keep pace with power
demand.
􀂄 Our preferred picks are China Resources Power and Huaneng - H
China Resources Power is the least sensitive to demand weakness based on its higher
margin. Huaneng Power’s more geographically diverse assets could help counter
regional demand weakness, and its earnings are highly sensitive to declines in the
coal price. We downgrade China Power from Buy to Sell, and upgrade Huadian
Power - H from Sell to Neutral and Huadian Power - A from Sell to Buy.

Contents page
Summary and Investment Case 3
— Earnings estimates lifted as key costs fall ............................................................3
— We raise our share price targets ..........................................................................5
— Ratings changes ..................................................................................................5
Valuation 6
— Valuations remain close to historical lows ............................................................6
— Upside to our DCF-based targets.........................................................................8
— Valuations versus regional peers..........................................................................9
Earnings upgrades 15
— Coal price more important to earnings than utilisation rates................................15
— Lower coal price forecasts..................................................................................17
— Effect of tariff cuts in inland areas incorporated ..................................................19
— Near-term demand weakness ............................................................................20
— But new capacity additions slowing sharply, too .................................................22
— Diverse power plant portfolio helps lower risk.....................................................22
Company pages 25
— China Resources Power.....................................................................................26
— Huaneng Power International .............................................................................29
— Datang International Power ................................................................................34
— Huadian Power International ..............................................................................39
— China Power ......................................................................................................44
— Yangtze Power...................................................................................................47

Summary and Investment Case
We believe that Chinese IPPs stand to benefit from the more modest growth
outlook for the Chinese economy. The sharp slowdown is reducing coal costs,
which account for almost two-thirds of revenues on average. As gearing for the
sector is also somewhat high, the government’s cut in lending rates will also
help earnings. Our preferred picks are China Resources Power (CR Power) and
Huaneng Power - H.
CR Power is our preferred long-term pick in the sector based on our view that its
superior return profile will mean it is best positioned for long-term growth. We
think the company can justify a higher price-to-book value multiple because of
its superior returns.
Nearer term, Huaneng - H looks attractive, as the company’s earnings are more
leveraged to lower coal prices and the broad geographic diversification of its
power plants makes the company less sensitive to demand weakness in one
particular grid or province. The table below summarises our sector valuations.

Earnings estimates lifted as key costs fall
We raise our 12-month share price targets for the Chinese IPPs and increase our
2009 and subsequent earnings estimates primarily to reflect the benefits of low
coal prices (offset somewhat by lower tariff forecasts). The key changes made to
our forecasts are:
􀁑 Lower assumed coal prices in 2009 and 2010 (contract and spot).
􀁑 Removal of our assumed 7.5% mid-2009 tariff increase (less necessary and
unlikely based on the weak economic environment and lower coal prices).
􀁑 A tariff reduction in 2009 for heavy-industry-intensive and relatively
undeveloped inland provinces.
􀁑 A lower interest rate and finance expenses in 2009 to reflect a cut in the
benchmark lending rate by 108bp announced on 27 November 2008.
􀁑 Weaker Q408 power demand.

We raise our share price targets
Changes in our earnings estimates together with adjustments to UBS’s
standardised risk-free rate assumptions result in our higher share price targets in
most cases. We update the risk-free rate used in DCF to 6.1% (previously 6.0%)
for H shares and 3.9% (previously 4.0%) for A shares. A reconciliation of our
new and old targets is shown in the table below.

Ratings changes
After raising our earnings forecasts and price targets, we upgrade Huadian - H
from Sell to Neutral and Huadian - A from Sell to Buy. Since April 2008,
Huadian - H’s share price has declined 35% versus a 27% decline on average for
the other H-share IPPs. Our share price target for Huadian - A implies a c300%
premium over H shares, close to the historical premium range. This is mainly
due to the different risk-free rate used in our DCF calculation.
On the other hand, we downgrade China Power from Buy to Sell, as the share
price is currently above our target price.

Valuation
Valuations remain close to historical lows
The charts below show historical P/BV and ROE for each IPP. For each H-share,
the P/BV is close to, or even below, historical trough levels despite 7-30% share
price rises over the past month (versus an 14% rise for HSCEI).
Given our assumption that the companies’ returns will return to previous levels
(in order to enable the financial capability to build power plants to meet future
demand growth), current valuation levels are generally attractive especially for
the H shares, in our view.