2018 may be an important year for natural gas and renewable energy in China as the street expects some long-awaited policies to be introduced. When these policies are introduced, clean energy in China will be expected to gain market traction.

Natural Gas

On an ongoing basis, the Chinese government is rolling out its initiatives city by city to convert the usage of coal to natural gas. Growth forecast for natural gas consumption in the next two year remains strong at a compounded annual growth rate of 18 percent.

With the current gas shortage and growing demand, the government is expected to liberate the country’s gas supply chain. This will require the separation of pipelines from the state-owned enterprises and pave way for city gas operators to source for cheaper gas by importing.

Renewable Energy

With the introduction of green certificate scheme, renewable energy producers will be able to solve the issue of delayed payments of subsidies. However, the risk remains that the green certificates could be traded at a discount to the subsidies and will eat into the margin of some renewable projects.

As a result, analysts from CIMB Research are looking at the wind power sector and solar power sector.

China Gas

With the Chinese government’s push to clean up the environment, the replacement of coal with natural gas as a form of energy is being implemented at various levels which include retail segment. China Gas has been negotiating with city governments to connect gas pipes into households and have gained good traction in the rural areas.

Impact from the higher prices of gas during winter will be limited despite the fact that PetroChina will be raising gas prices by 10 to 15 percent. This comes as China Gas has reached agreements with over 70 percent of their customers to pass on the higher cost to them. In addition, the increased Liquefied Natural Gas price will have limited pressure on the margin as they only account for two to three percent of the group’s sales.

There are two main expectations that analysts expect to continue to drive China Gas. Firstly, the government’s likelihood to restructure the gas transmission pipeline will benefit non-state owned companies such as China Gas. Secondly, equipment sales will be contributing to their profits strongly.

Analysts from CIMB Research gave China Gas a “Buy” call with a target price of HK$28.50.

Huaneng Renewables

Huaneng Renewables have seen stronger performance in 2017 as their wind power generation increased by over 14 percent year-on-year (YoY). This surpassed the expectations by the street of 10 percent YoY.

Dragged by the stringent environmental requirements and lengthy process to obtain approvals for land, adding on additional capacity was difficult in 2017. However, the company has been preparing the necessary preparation work which should yield results in 2018.

The new green certificate system by the government is expected to improve cashflow for Huaneng Renewables but may not fully compensate for the renewable subsidy and may lead to a decline in profit. Decline in profit from the implementation of the new system is expected to be within 2.5 percent to 8.2 percent.

Given the attractive valuation and potential minimal effect from the implementation of the green certificate system, analysts from CIMB Research reiterated their “Buy” call with a target price of HK$3.80.

Xinyi Solar

As the market price for solar glass recovers, outlook of Xinyi Solar improves. However, the average selling price of solar glass will continue to see a fall this year due to the higher base. This should have a minimal impact on Xinyi Solar as the demand for its products remain strong and should make up for some of the differences. Currently, Xinyi’s solar glass inventory is running low while its production lines are running close to full capacity.

The upgrade of its production line has led to higher production efficiency that has added 2,900 tonnes per day. As a result, the gross margin of Xinyi Solar is increasing and is expected to reach 31.8 percent.

Prospect of its business remains strong as the street projects a 10 percent rise in solar installation in 2018. The key driver is the lower than expected cut in the subsidies of distributed solar power. Half of its distributed solar power should be subsidised by the government.

A potential catalyst to the stock is the proposed spinoff of its solar power division. Analysts from CIMB Research reiterated their “Buy” call with a target price of HK$4.03.

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