UBS Investment Research － Chinese Independent Power Producers

Coal prices: up really means down

􀂄 Media reports say the government is pushing for contracts to be signed
Several mainland Chinese media sources are saying the agreed VAT-inclusive
2009 contract price could be about 4% higher than in 2008 (to cover an increase in
VAT on coal). However, the increase is relative to the price agreed at the
beginning of 2008. During the year, contract prices were renegotiated upwards and
the numbers mentioned are a decline from the average for year overall. The
reported 2009 price is below our forecast and would be positive for the IPPs, in our
view. We think spot prices have the potential to fall, once contracts are signed,
which would be a further positive.

􀂄 Up on beginning of 2008 prices, but down compared to 2008 average
At the beginning of 2008, most contracts signed were increases of 8% to 10%,
implying an average price of about Rmb540/t (incl. VAT), so a 4% increase would
suggest a 2009 price of about Rmb560/t. During 2008 however, the IPPs were
forced to agree to further price increases on many contracts to avoid outright
default as spot prices rose to over Rmb1,000/t. On average we think the contract
price for the IPPs was close to Rmb700/t for the year. Our current assumption for
2009, is Rmb600/t, down about 15% from last year’s average price – and higher
than the Rmb560/t being discussed in the media. The prices are consistent with the
forecasts used for the Chinese coal companies under coverage.

􀂄 Huaneng-H and CR Power are our top picks
Huaneng is most levered to further weakness in coal prices. Longer-term, CR
Power is the least sensitive to changes in coal prices but is best placed for mediumterm
growth, in our view.