Comments on capital injection to Guiguan power (600236.SS) from SASAC
——Power industry may benefit from government support

January 9, 2009

Investment Highlight:

􀂄 Guiguan Power (600236.SS) announced that it received an appropriate fund from SASAC of 30 million yuan, to compensate its loss in Sichuan earthquake. It is the first time that SASAC allocated funds to power industry.
􀂄 Although the funds were to be used to reconstruct the devastated units, we believe favorable policy or even direct capital injection to China power industry is becoming more and more likely. In which grid companies may be the next beneficiaries because it suffered big loss in the snowstorm and earthquake in the past year. But coal-fired IPP companies may enjoy favorable policy from government due to its high gearing and constrained cash flow.
􀂄 We believe industrial outlook will be improved if government support initiate. China IPPs suffered a huge loss due to the coal price surge and utilization rate cut. To ensure macro economy safety, we believe it is natural for government to adopt more favorable policies to IPP industry including direct capital injection.
􀂄 Although we are still cautious on power industry outlook due to the gloomy profit prospect in 2009E, possible favorable policy will still trigger short-term trading opportunity. The biggest potential beneficiaries should be Huadian Power (1071.HK) because it has the highest gearing and large capex need. We also recommend other IPP companies including our sector top pick Huaneng Power (0902.HK) and Datang Power (0991.HK)