As part of the 13th five-year plan of China, the government has made it clear of its determination and support for renewable energy to curb the pollution issue in the country.
With limits being placed on coal fired generation, there is an increasing importance of green energy such as wind-powered generation.
Across eight provinces in China, the National Development and Reform Commission (NDRC) and National Energy Administration (NEA) has introduced a minimum utilisation hours.
The central government is serious about enforcing the policy and has issued red alerts to six provinces, which will ban new capacities until their curtailment issues are resolved.
In addition, 13 ultra-high-voltage (UHV) lines were built by the government as a solution to lowering curtailment.
These developments will show the importance of wind powered energy in China’s government policy and infrastructure plan.
In terms of the worries and confusion in regards to the green certificate scheme and feed-in tariff (FIT) cut, analysts from Maybank Kim Eng Research (MBKE) believe that the concerns are misplaced.
Green certificate scheme is similar to Australia’s carbon trading scheme and should improve the cash flows of the wind power companies.
FIT cut is aimed at lower the curtailment of solar energy, which has little to do with wind energy.
Overall, the central government’s policies are favourable for wind energy and there are hard quotas for provincial governments to meet.
This can also be seen with the deployment of Ezion’s rigs to facilitate faster building of offshore wind mills in China.
1. Huaneng Renewables Corporation (958:HK)
Huaneng Renewables Corporation (HNR) is the top buy as it is the best proxy to the wind energy segment.
Majority of its power comes from Zone 4 which has the lowest curtailment and highest utilisation rate. The group is estimated to deliver an internal rate of return (IRR) of 12% to 14%.
Based on price-earnings ratio (P/E) of MBKE’s three recommended stocks, HNR is the cheapest but with the strongest fundamentals.
MBKE believes that the shares of HNR is currently trading at a discount due to unfounded worries about the green certificate scheme and curtailment issues.
However, improvements have been seen from the curtailment and growth is expected in utilisation hours for 2H17.
HNR counts Fidelity and Value Partners as one of its major shareholders. Value Partners is a notable value investing fund manager in Asia.
Analysts from Maybank Kim Eng Research gave Huaneng Renewables Corporate (958:HK) a “Buy” call with a target price of HK$3.30.
2. China Datang Renewable (1798:HK)
China Datang Renewable (DTR) claimed the “top spot” for having the highest curtailment among the three stocks covered in this article with 21.2% in 2016.
However, it is believed that DTR has gone past its worst and have since dropped to 19.6% in 1H17.
New UHV lines are expected to further decrease the curtailment and benefit its plants in Inner Mongolia.
Given DTR’s high gearing ratio of 315%, it is extremely sensitive to fluctuations in its finance cost.
However, it is expected for DTR’s gearing ratio to lower in the absence of capital expenditure and supported by higher utilisation hours.
Analysts from Maybank Kim Eng Research gave China Datang Renewable (1798:HK) a “Buy” call with a target price of HK$1.25.
3. China Longyuan Power (916:HK)
China Longyuan Power (LY) is China’s largest and most established wind farm company.
At the same time, the group is operating coal-fired power plant as well. New UHV lines in Gansu will benefit LY and help it reduce its high curtailment rate.
Concerns about its coal fired business should be reduced as coal prices have since declined from its peak.
This will help aid the company in its cost and margin pressure in the segment.
However, investors may also view this as a diversification away from wind energy and provide a buffer if the plans for wind energy doesn’t materialise as planned.
Analysts from Maybank Kim Eng Research gave China Longyuan Power (916:HK) a “Buy” call with a target price of HK$7.10.