initiation of china wind power 4 april 2011

ALTERNATIVE ENERGY | Neutral

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China Wind Power 4 April 2011

Taking the wind out of its sales

We initiate coverage on China’s wind power sector with a Neutral

rating – decelerating growth, grid bottlenecks, carbon income

uncertainty, and rising interest rates being major concerns. Yet it’s

not all doom and gloom: the development of overseas markets and

offshore wind are potential growth drivers from 2012. As the sector

has underperformed the Hang Seng China Enterprises Index

(HSCEI) by 28% since 3Q10, we believe most market concerns

have been priced in and we see long-term investment opportunities

for industry leaders with historical trough valuations. We prefer wind

equipment producers Xinjiang Goldwind Science & Technology

(2208 HK, Outperform) and China High Speed Transmission

Equipment (658 HK, Outperform) over wind farm operators China

Longyuan Power (916 HK, Neutral) and China Datang Corporation

Renewable Power (1798 HK, Underperform).

Analysts

Clarisse Pan (852) 2533 2400 [email protected] Alan Lau (852) 2533 2479 [email protected]


2

Table of Contents

Taking the wind out of its sales .................................................................................................................3

Executive summary ..................................................................................................................................4

China sees decelerating growth in wind power capacity ...........................................................................9

Grid-related problems remain a serious challenge..................................................................................17

CDM (carbon trading) income uncertainty ..............................................................................................22

Overseas expansion a growth driver from 2012......................................................................................27

Offshore wind power – attractive theme by 2012 ....................................................................................34

Competition landscape – wind farm operators in China ..........................................................................40

Competition landscape – WTG manufacturers in China .........................................................................45

China High Speed Transmission Equipment (658 HK)............................................................................53

Xinjiang Goldwind Science & Technology (2208 HK) ..............................................................................70

China Ming Yang Wind Power (MY US)..................................................................................................89

China Longyuan Power (916 HK) .........................................................................................................107

China Datang Corporation Renewable Power (1798 HK) .....................................................................124

Appendices ..........................................................................................................................................138


3

China Wind Power

Taking the wind out of its sales Sector Rating:

Neutral (initiation)

We initiate coverage on China’s wind power sector with a Neutral

rating. Decelerating growth, grid bottlenecks, carbon income

uncertainty, and rising interest rates are major concerns for the

industry. Yet it’s not all doom and gloom. The development of

overseas markets and offshore wind are potential growth drivers

from 2012. As the sector has underperformed the Hang Seng

China Enterprises Index (HSCEI) by 28% since 3Q10, we believe

most market concerns have been priced in and we see long-term

investment opportunities for industry leaders with historical trough

valuations. We prefer wind equipment producers Xinjiang

Goldwind Science & Technology (Goldwind, 2208 HK,

Outperform) and China High Speed Transmission Equipment

(CHST, 658 HK, Outperform) over wind farm operators

China Longyuan Power (Longyuan, 916 HK, Neutral) and China

Datang Renewable Power (Datang, 1798 HK, Underperform).

� Growth deceleration due to serious grid bottlenecks.

Although China is likely to remain the largest wind market

globally, we project CAGR of annual wind installation in

China at 1% in 2010-2015F, down sharply from 120% in

2006-2009, due mainly to grid bottlenecks, an issue we

expect to persist for another three-to-five years.

� Other industry overhangs include carbon income

uncertainty post expiration of the Kyoto Protocol, potential

interest hikes in China, overcapacity of wind turbine

generator (WTG) manufacturing, and pressure on pricing

and margins.

� Next wave of growth from overseas expansion and

offshore wind from 2012F onwards. We estimate

overseas shipments will be c.13% of total shipments of the

leading Chinese wind equipment producers by 2012F. We

also expect China’s cumulative offshore wind capacity to

reach 5GW by 2015F, implying a 90% CAGR in

2010-2015F.

� Our contrarian stock view: prefer selective wind

equipment producers over wind operators. Some

consider Chinese wind operators superior to wind

equipment manufacturers owing to their higher earnings

CAGR. We disagree believing that wind operators’ current

valuations are either fair (Longyuan) or too demanding

(Datang) given low company ROEs (9-10%), stretched

balance sheet positions and high earnings dilution risk from

refinancing activities. We like CHST and Goldwind for their

industry leading positions and believe current valuations, at

historical trough levels, provide good entry points for the

long-term. We have a Neutral rating on China Ming Yang

Wind Power (Mingyang, MY US) due to the high risk

involved in its new product launch.

Stock price vs HSCEI

60%

70%

80%

90%

100%

110%

120%

130%

Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11

CHST Goldwind Mingyang Longyuan Datang HSCEI

Source: Bloomberg

Valuations summary

CHST

(658 HK)

Goldwind

(2208 HK)

Mingyang

(MY US)

Longyuan

(916 HK)

Datang

(1798 HK)

Rating* O O N N U

Share price HK$12.54 HK$14.56 US$10.52 HK$8.47 HK$2.38

Target price HK$15.60 HK$16.60 US$11.00 HK$9.10 HK$2.00

Upside/downside (%) 24 14 5 0 (16)

PER (x)

2011F 10.1 13.2 8.4 19.7 14.2

2012F 9.4 12.9 7.1 15.3 10.9

EV/EBITDA(x)

2011F 6.9 15.2 6.6 5.7 3.3

2012F 6.3 14.0 5.7 4.5 2.4

ROE (%)

2011F 16.9 17.1 22.6 8.9 8.6

2012F 16.2 15.4 21.0 10.1 10.0

EPS YoY change (%)

2011F (5) 10 48 35 122

2012F 7 3 18 28 30

* O = Outperfom; N = Neutral; U = Underperform

Source: CCBIS estimates

Data as of 1 April 2011



4

Executive summary

China faces decelerating growth in wind power capacity

In 2010, China overtook the US to become the country with the largest cumulative

wind power capacity globally. Wind installation had an impressive 120% CAGR in

2006-2009. But 2010 represented a major stumbling block for wind installation, when

annual installation growth slowed significantly to 37% YoY due mainly to a grid

connection bottlenecks in the shape of a lack of physical grid connections and power

curtailment.

As we do not expect the grid connection problems to be resolved any time soon, we

project annual wind installation growth could slow to a paltry 3% YoY for both 2011F

and 2012F. Over the five-year period from 2010 to 2015F, we forecast that annual

wind installation in China will grow at a CAGR of 1% with cumulative wind installation

at a CAGR of 26%.

Although our forecasts have factored in drastic growth deceleration for wind power in

China going forward, our estimate for wind power capacity, both onshore and offshore,

of 245GW by end-2020F is much higher than the government’s target of 150GW,

which we believe to be far too conservative.

In our view, there is a mismatch in China’s targets for renewable energy capacity and

renewable energy consumption. To achieve its goal of having 15% energy

consumption from renewable energy sources by 2020F, China needs to take a much

more aggressive renewable capacity installation target, in our opinion. Moreover, we

believe wind power could be the beneficiary if the Chinese government decides to

adopt a more cautious stance on nuclear power development post the nuclear crisis in

Fukujima, Japan, earlier this year.

Grid-related problems remain a serious challenge

We found two types of grid-related problems within the Chinese wind power industry:

(1) installed wind capacity lacking physical grid connections; and (2) wind power

curtailment. These problems will reduce the profitability of wind farm operators as they

either let wind capacity idle, lower effective capacity utilization hours of wind farms or

cap capacity growth potential of wind farm operators.

Based on our estimates, 30% of installed wind capacity will not be connected to the

grid by end-2011. Moreover, according to data from China Electricity Council (CEC),

approximately 11% of wind power generated in China was not procured by grid

operators in 1H10.

While the central government has been grappling with such issues since 2009 and is

expected to adopt measures to improve grid connection and wind power generation

conditions, we only expect grid-related problems to be resolved gradually over the

next three-to-five years.


5

CDM income uncertainty remains an overhang up to 2012F

In addition to wind power tariffs, wind farm operators in China generate income from

the sale of carbon credits, most of which are allocated under the UN Clean

Development Mechanism (CDM). We estimate that income from carbon trading

materially impacts the IRR of a typical wind farm in China by raising project and equity

IRR by 230bp and 510bp to 10.7% and 16.8%, respectively. Such income is likely to

account for 16-18% of the annual cash flow of Chinese wind farms.

In our view, there are two types of risks associated with the carbon credit income of

Chinese wind farm operators. The first is project registration risk with the UN CDM

executive board (EB). The second is transaction volume and pricing risk post-2012

when the Kyoto Protocol, the primary regulation governing global emission trading,

expires.

With regard to the risks attendant on the expiration of the Kyoto Protocol, we believe

that post-2012, the EU Emission Trading System (ETS) will continue to support CDM

projects while China has plans to put in place a domestic carbon trading

system/market over the next few years. However, uncertainty towards carbon

transaction volume and prices remains high.

Overseas expansion a growth driver from 2012

We recognize overseas expansion as the new growth driver for Chinese wind power

companies. Overseas markets used to be neglected by Chinese wind companies due

mainly to robust wind capacity growth in China historically. Over the past three years,

overseas sales contributed on average to less than 1% of Chinese wind companies’

revenue. But that seems to be changing. We expect Chinese wind companies to place

greater focus on overseas expansion to sustain growth in the coming few years, given

our forecast that China’s wind installation growth will decline, from a 120% CAGR in

2006-2009 to a 1% CAGR in 2010-2015F.

Despite challenges facing Chinese wind companies, including inadequate product

track records, concerns on product quality, and the risks inherent in trade policy

intervention by foreign governments, Chinese WTG and component manufacturers

have undeniable competitive advantages, such as easier access to project financing

from Chinese banks and superior cost structures which make their ASPs on average

40-50% cheaper than their foreign counterparts.

We estimate that shipments from overseas markets will represent on average c.13%

of leading Chinese WTG and component manufacturers shipments by 2012F, though

our forecast implies that the top-five Chinese WTG manufacturers are expanding

share in non-China markets rapidly from c.0% in 2010 to c.11% by 2012F and

increasing aggregate export shipments from less than 20MW in 2010 to c.2.8GW in

2012F (1,237% CAGR in 2010-2012F).

Offshore wind – attractive theme but little real impact by 2012

The Chinese government encourages the development of offshore wind power

projects as offshore wind power could be an effective tool to enhance China’s energy

supply (good scalability); moreover, the offshore projects are located much nearer

than onshore projects to China’s eastern coastal provinces where power consumption

is highly concentrated.


6

At present, local governments of five coastal provinces plan to achieve a total of

15GW and 33GW in offshore wind power capacity by 2015F and 2020F, respectively,

while China’s cumulative offshore capacity was merely 120MW by the end of 2010

based on our estimate. Our forecast for China’s offshore wind power capacity in 2015

is more conservative at 5GW, still implying a 90% CAGR in 2010-2015F, significantly

higher than the overall wind capacity CAGR of 1% in China over the same period.

Despite rapid growth potential, we highlight that offshore demand will remain less than

3% and 7% of annual wind power capacity in China by 2012F and 2015F, respectively.

This is much smaller than the contribution from overseas. According to our estimates

overseas demand will be c.13% of leading WTG manufacturer 2012F shipments.

Overall, offshore development is an attractive theme though it lacks material business

impact, at least for the next few years.

Competition landscape – wind farm operators in China

China’s wind farm operation segment has been dominated by government-owned

enterprises. According to China Wind Energy Association (CWEA), all top-ten wind

farm operators in China are central or provincial government-owned companies with

aggregate market share of 76% in 2009.

Government-owned enterprises are better equipped to maintain a competitive position

in the wind farm operation segment than private or foreign-funded companies thanks

to their closer relationships with grid operators, Chinese banks and government

officials, availing them of good wind sites, grid connections, project financing and

project approvals.

Although theoretically we do not expect a material difference in wind farm operating

results between government-owned companies given their similar bargaining power,

we found Longyuan a better managed wind operator than Datang Renewable given

the better operating efficiency of Longyuan’s wind operation and the better quality of

its balance sheet.

Competitive landscape – WTG manufacturers in China

China’s WTG market has been dominated by Chinese WTG manufacturers, the

majority of which are government-owned enterprises. According to CWEA, Chinese

WTG manufacturers have steadily increased their market share in China over the past

few years, from 45% in 2006 to 90% in 2010, a trend we expect to continue in the

future.

In September 2009, the Chinese central government pointed out that WTG

manufacturing was facing over-investment and over-capacity. In light of intense price

competition among Chinese WTG manufacturers, we see a trend towards industry

consolidation encouraged by the Chinese government and vertical integration within

the WTG sector over the next few years.

Among the three listed pure play WTG manufacturers, Goldwind, Mingyang, and

Sinovel (601558 CH), we believe Goldwind and Mingyang have better profitability

while Sinovel’s production costs are least competitive. Between Goldwind and

Mingyang, we expect Mingyang to enjoy better growth thanks to its much smaller

base. However, we believe risks with Mingyang are much higher as the company is

switching to a new technology platform for its 2.5/3.0MW WTG products.


7

Our stock calls:

We prefer wind equipment producers over wind operators

In general, we prefer wind equipment manufacturers with attractive valuations,

including Goldwind and CHST, over wind farm operators, such as Longyuan and

Datang Renewable.

Although listed Chinese wind farm operators on average have better earnings CAGR

in 2010-2012F than listed Chinese wind equipment manufacturers, we highlight that

earnings growth of Chinese wind farm operators derive mainly from continuous

investment into projects with unattractive ROE, which we expect to fall in the range of

9-10% at the company level over the next two years. Significant capex requirements

together with extremely high net gearing ratios imply not only that refinancing risk is

high for listed wind farm operators, but also that their free cash flow will remain

negative at least until 2015F, in our view.

On the other hand, we like leading wind equipment manufacturers with attractive

valuations. We have Outperform ratings on Goldwind and CHST, both of which have

been industry leaders over the past four-to-five years with competitive advantages in

cost and product quality. Despite threats from declining wind demand growth in China

and margin pressure from intensifying industry competition, we believe major

concerns have been priced in. Goldwind and CHST’s current valuations on our

conservative estimates are very compelling at 13x and 10x 2011F P/E, respectively,

both at discounts to global peer average valuations at 17x and at the low end of their

historical valuation range.

� China High Speed Transmission Equipment (CHST) (658 HK, Outperform)

is the second-largest wind gearbox producer globally. CHST’s shares have

underperformed the HSCEI by 33% over the past 12 months amid concerns on

muted demand growth, margin pressure, and development of direct-drive

WTGs. We believe that CHST’s shares have been oversold and their current

valuation of 10x 2011F PER is very attractive. Thus we initiate coverage on

CHST with an Outperform rating and target price of HK$15.60.

� Goldwind (2208 HK, Outperform) is the second-largest WTG producer in

China with a 21% market share in 2010. Despite near-term industry concerns

including muted demand growth and margin pressure, which have been priced

in, we consider Goldwind one of the major beneficiaries of

government-encouraged industry consolidation in the medium term. The

company’s current valuation of 13x FY11F PER provides a good entry

opportunity. We initiate coverage on the stock with an Outperform rating and

target price of HK$16.60.

� Mingyang Wind Power (Mingyang, MY US, Neutral) is the fifth-largest WTG

producer in China, with 6% market share in 2010. Despite being the only

non-government-owned company among the top-five WTG makers in China,

Mingyang, nevertheless, remains a beneficiary of industry consolidation.

Mingyang is trading at 8x 2011F PER and a 51% discount to the global peer

average, a valuation we feel is justifiable owing to high risk from the launch of

2.5/3.0MW super-compact-driven (SCD) WTGs based on disruptively different

technology. We initiate coverage on the stock with a Neutral rating and target

price of US$11.00.


8

� China Longyuan Power Group (Longyuan, 916 HK, Neutral) is the largest

wind farm operator in China. By 2010 it owned 15% of domestic installed wind

capacity. While we like Longyuan’s leading industry position and earnings CAGR

of 31% for 2010-2012F, and we expect the company’s ROE to remain low at

8-10%. Longyuan has underperformed the HSCEI by 13% over the past 12

months and we believe industry concerns are priced in. Nonetheless, we would

have to see near-term catalysts before turning positive on the stock. In the

meantime, we initiate coverage with a Neutral rating and target price of HK$9.10.

� Datang Renewable (Datang, 1798 HK, Underperform) is the second-largest

wind farm operator in China. By 2010 it had a 9% share of China’s wind

installed capacity. In our view, Datang’s net gearing ratio of 270-290% for

2011F-2012F is a major concern, as it entails high equity refinancing risk. Its

ROE range of 9% to 10% in 2011F-2012F also falls short of peers, particularly

considering Datang is a pure play wind project operator, with ostensibly higher

ROE than coal-fired power operators. We initiate coverage on Datang with an

Underperform rating and target price of HK$2.00.

Valuation comparison

Stock Share price

Market

cap PER (x)

EPS

growth PEG PBV (x) ROE (%)

Company code Rating (local currency) (US$m) 2010A 2011F 2012F (%) 2011F 2010A 2011F 2012F 2010A 2011F 2012F

Wind turbine component

CHST 658 HK O 12.54 2,217 9.6 10.1 9.4 (5) (2.1) 1.8 1.7 1.5 18.7 16.9 16.2

Hansen Transmissions HSN LN NR 49.50 534 N/A N/A N/A N/M N/M 0.6 0.6 0.6 (1.7) (1.5) 0.9

Taewoong 044490 KS NR 52,300 796 42.7 22.3 16.0 79 0.3 2.1 2.0 1.8 2.9 5.5 9.3

Hyunjin Materials 053660 KS NR 17,100 232 N/A 10.9 7.6 N/M N/M 1.3 1.2 1.0 (12.8) (1.0) 10.8

Wind turbine

Xinjiang Goldwind – H- share 2208 HK O 14.56 7,858 14.6 13.2 12.9 10 1.3 2.4 2.3 2.0 16.7 17.1 15.4

Xinjiang Goldwind – A-share 002202 CH NR 20.65 7,857 N/A 16.9 13.4 24 0.7 N/A 3.6 2.8 39.1 24.6 21.9

Sinovel 601558 CH NR 74.14 11,381 23.4 20.6 17.0 14 1.5 13.9 4.1 3.3 77.5 19.9 20.5

Mingyang MY US N 10.52 1,315 12.3 8.4 7.1 48 0.2 2.4 1.9 1.5 19.8 22.6 21.0

Vestas VWS DC NR 223.30 8,685 38.9 20.2 15.8 93 0.2 2.2 2.0 1.8 5.9 11.1 12.7

Gamesa GAM SM NR 7.37 2,576 18.6 18.6 18.6 31 0.6 1.1 1.1 1.0 3.1 4.2 5.6

Repower RPW GR NR 145.00 1,900 22.9 25.7 21.5 (11) (2.3) 2.8 2.7 2.5 11.6 10.6 11.5

Nordex NDX1 GR NR 8.26 786 26.6 27.9 21.0 (5) (6.2) 1.5 1.5 1.4 5.9 4.6 6.0

Suzlon SUEL IN NR 44.60 1,778 N/A N/A 24.3 N/M N/M 1.1 1.1 1.1 (12.9) (12.2) 3.8

Dongfang Electric 1072 HK NR 26.70 8,237 17.3 14.0 11.8 24 0.6 2.4 3.0 2.4 33.0 24.5 23.0

Shanghai Electric 2727 HK NR 3.96 13,355 15.2 13.3 12.0 15 0.9 1.6 1.4 1.3 11.3 11.0 11.0

Blade

Jiangsu Miracle 002009 CH NR 17.17 580 44.0 27.4 21.7 61 0.5 8.1 N/A N/A 13.8 N/A N/A

Sinoma Science & Technology 002080 CH NR 41.85 1,278 35.5 23.5 16.9 51 0.5 3.8 N/A N/A 11.8 N/A N/A

Tianjin Xinmao 000836 CH NR 8.58 383 N/A N/A N/A N/M N/M N/A N/A N/A N/A N/A N/A

Wind Farm Operator

China Longyuan 916 HK N 8.47 8,128 26.5 19.7 15.3 35 0.6 1.9 1.7 1.5 7.3 8.9 10.1

Datang Renewable 1798 HK U 2.38 2,230 31.4 14.2 10.9 122 0.1 1.4 1.2 1.1 4.3 8.6 10.0

China Power New Energy 735 HK NR 0.65 659 17.7 13.3 10.5 33 0.4 0.9 0.8 0.7 5.1 5.9 7.1

China WindPower 182 HK NR 0.84 798 14.4 10.9 8.2 32 0.3 1.6 1.5 1.3 13.4 14.8 16.7

Acciona ANA SM NR 77.21 6,986 28.3 27.3 22.3 4 7.8 0.8 0.8 0.8 2.9 3.3 4.0

Theolia TEO FP NR 1.33 211 N/A N/A 15.6 N/M N/M 0.4 0.3 0.3 (21.2) (3.8) 2.4

Iberdrola Renovables IBR SM NR 3.09 18,553 36.2 30.5 25.7 19 1.7 1.1 1.1 1.1 3.0 3.5 4.0

EDF Energies Nouvelles EEN FP NR 37.18 4,106 27.1 21.9 17.7 24 0.9 2.1 1.9 1.8 7.9 9.2 10.8

EDP Renovaveis EDPR PL NR 5.01 6,222 55.7 41.1 29.1 36 1.2 0.8 0.8 0.8 1.5 1.8 2.6

Infigen Energy IFN AU NR 0.37 293 N/A N/A N/A N/M N/M 0.4 0.4 0.4 (11.1) (6.4) (2.9)

Greentech GES DC NR 17.30 175 N/A 9.8 8.5 N/M N/M 0.7 0.5 0.4 (24.9) 4.7 5.2

All prices are as at 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS

Source: Bloomberg, CCBIS


9

China sees decelerating growth in wind power capacity

In 2010, China overtook the US to become the country with the largest cumulative

wind power capacity globally. Wind installation had an impressive 120% CAGR in

2006-2009. But 2010 saw a major stumbling block for wind installation, when annual

installation growth slowed significantly to 37% YoY due mainly to a grid connection

bottleneck in the form of a lack of physical grid connections and power curtailment.

As we do not expect the grid connection problems to be resolved any time soon, we

project that annual wind installation growth could slow to a paltry 3% YoY for both

2011F and 2012F. Over the five-year period from 2010 to 2015F, we forecast that

annual wind installation in China will grow at a CAGR of 1% with cumulative wind

installation at a CAGR of 26%.

Although our forecasts have factored in drastic growth deceleration for wind power in

China going forward, our estimate for wind power capacity, both onshore and offshore,

of 245GW by end-2020F is much higher than the government’s target of 150GW,

which we believe to be far too conservative.

In our view, there is a mismatch between China’s targets for renewable energy

capacity and renewable energy consumption. To achieve its goal of having 15%

energy consumption from renewable energy sources by 2020F, China needs to take a

much more aggressive renewable capacity installation target, in our opinion. Moreover,

we believe wind power could be the beneficiary if the Chinese government decides to

adopt a more cautious stance on nuclear power development post the nuclear crisis in

Fukujima, Japan, earlier this year.

China is the largest wind power market globally

China has been one of the most important markets for wind power globally since 2006.

Despite China’s late start in wind power development compared with other major wind

power countries like Germany, Spain and the US, China caught up quickly to become

the largest wind power market worldwide in terms of annual capacity installation in

2009. It took over the US as the player with the largest cumulative wind power

capacity globally in 2010.

Players in the value chain of the wind power industry in China, including component

manufacturers, WTG assemblers and wind farm operators, all enjoyed exponential

growth over the past few years as annual wind capacity installation in the country

grew at a 120% CAGR in 2006-2009.

We believe China will remain the largest wind market globally over the next five years

with more than 34% market share by annual capacity installation; however, in 2010,

China’s wind power industry entered a transition period, with annual capacity

installation growth slowing significantly to 37% YoY based on statistics from CWEA.

We estimate China’s annual installation growth and cumulative capacity growth will

further decline to a CAGR of 1% and 26%, respectively, in 2010-2015F.

China has been the fastest growing wind power market worldwide since 2006. Based

on statistics by Global Wind Energy Council (GWEC), China’s annual wind capacity

installation grew at a CAGR of 120% in 2006-2009, while global annual wind

installation grew at a CAGR of only 36% over the same period. Even in 2009, when

the global financial crisis hit the world’s wind power industry hard with the tightened

credit market which resulted in difficult access to project financing, China’s annual


10

wind capacity installation still increased by an impressive 124% YoY to 14GW, making

China the world’s largest wind power market, 36% bigger than the second-largest

player, the US, at 10GW.

China’s annual wind power installation and YoY growth China and global wind power YoY growth comparison

0

4,000

8,000

12,000

16,000

20,000

2004 2005 2006 2007 2008 2009 2010

MW

10%

40%

70%

100%

130%

160%

China annual wind capacity (LHS) China YoY growth (RHS)

(20)%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2004 2005 2006 2007 2008 2009 2010

China YoY growth Global YoY growth

Source: China Wind Energy Association (CWEA), CCBIS estimates Source: CWEA, GWEC, CCBIS estimates

In 2010, China’s annual wind power installation continued to surpass that of other

countries, according to CWEA. Moreover, China’s cumulative wind power capacity

overtook that of the US for the first time in 2010. Based on data from CWEA and

GWEC, China’s annual and cumulative wind power capacity installation reached

19GW and 45GW, respectively, in 2010, against 5GW and 40GW for the US, the

second largest wind power player worldwide.

2010 top-ten wind power countries by annual installation 2010 top-ten wind power countries by cumulative

capacity

0 3,300 6,600 9,900 13,200 16,500 19,800

China

USA

Germany

Spain

India

France

UK

Italy

Canada

Turkey

MW

0 7,000 14,000 21,000 28,000 35,000 42,000

China

USA

Germany

Spain

India

Italy

France

UK

Canada

Denmark

MW

Source: GWEC, CWEA, CCBIS estimates Source: GWEC, CWEA, CCBIS estimates

We believe that the robust growth within China’s wind power industry so far is due

mainly to the Chinese government’s commitment in developing renewable energy and

the fact that wind power, among various types of renewable energy, is the most

effective tool for China to achieve its renewable energy targets, given wind power’s

lower generation cost and better scalability.


11

China’s clean energy-related government targets

Category Target Note

Energy consumption � Renewable energy to account for 10% of energy consumption by

end-2010

� Renewable energy to account for 15% of energy consumption by

end-2020

� CCBIS estimates that China fell short of the target and achieved

8-9%

� CCBIS expects the Chinese government to set a new target at

11% for 2015

Power supply structure � Power producers need to have 5% of total capacity from renewable

energy sources (3% from non-hydro renewable) by end-2010

� Power producers need to have 10% of total capacity from renewable

energy sources (8% from non-hydro renewable) by end-2020

� CCBIS believes that 5% of capacity was sourced from non-hydro

renewables by end-2010, exceeding the target

� CCBIS expects China to continue to hit this target by end-2020

Energy conservation � Energy consumption per GDP to decline by 20% from 2005 level by

end-2010

� CCBIS estimates that energy consumption per GDP declined by

19-20% at the end of the 11th Five-Year Plan period (2010)

� CCBIS expects energy consumption per GDP reduction target for

the 12th Five-Year period to be set at 15-20%

Emission reduction � Carbon emissions per GDP to decline by 40-45% from 2005 level by

end-2020

� CCBIS expects the Chinese government to include medium-term

emission reduction targets in the 12th Five-Year Plan

Source: National Development and Reform Commission (NDRC), CCBIS

Scale characteristic comparison between renewable energy sources

Power generation technology Characteristics

Large hydro Plant size: 10-18,000MW

Small hydro Plant size: 1-10MW

On-shore wind Turbine size: 1.5-3.5MW

Blade diameter: 60-100 meters

Offshore wind Turbine size: 1.5-5.0MW

Blade diameter: 70-125 meters

Biomass power Plant size: 1-20MW

Geothermal power Plant size: 1-100MW

Types: binary, single-and-double-flash, natural steam

Rooftop solar PV Peak capacity: 2-5kW

Utility-scale solar PV Peak capacity: 200kW-100MW

Concentrating solar thermal power (CSP) Plant size: 50-500MW (trough), 10-20MW (tower)

Types: trough, tower, dish

Sources: REN21 (July 2010), CCBIS

Generation cost comparison between power sources

0 5 10 15 20 25 30 35 40 45 50 55

Large hydro

Small hydro

Onshore wind

Offshore wind

Biomass

Geothermal

Rooftop solar PV

Utility-scale solar PV

CSP

Coal-fired

Gas

Nuclear

US cents / kwh

Source: REN21 (July 2010), CCBIS estimates


12

China wind power capacity growth to slow to 3% in 2011-12F

Despite rapid growth historically and our view that China will remain the largest wind

power market globally over the next few years, we expect China’s wind power industry

to experience a slowdown from 2010. According to CWEA, wind capacity installation

in China was 19GW in 2010, a much higher figure than the market’s previous

expectation of c.15GW, though the 37% YoY growth rate implied for 2010 in China

was a significant decline from the 120% CAGR between 2006 and 2009.

For 2011F, we expect China to add 19.5GW of wind power capacity, up 3% YoY,

bringing cumulative wind capacity to 64GW, up 44% YoY. For 2012F, we forecast that

China’s annual wind capacity installation will be 20.1GW, up 3% YoY. Over the

five-year period (2010-2015F), we forecast that annual wind installation in China will

grow at a CAGR of 1% and cumulative wind installation at a CAGR of 26%.

China’s wind power capacity installation forecasts

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2009 2010 2011F 2012F 2013F 2014F 2015F

MW

18,200

18,400

18,600

18,800

19,000

19,200

19,400

19,600

19,800

20,000

20,200

MW

China cumulative wind capacity (LHS) China annual wind installation (RHS)


CCBIS – China wind power installation forecast model

2009 2010 2011F 2012F 2013F 2014F 2015F 2020F

Annual new installation (MW) 13,803 18,928 19,496 20,080 20,080 20,080 20,080 20,080

Onshore 13,743 18,868 19,296 19,380 18,880 18,730 18,580 13,100

Offshore 60 60 200 700 1,200 1,350 1,500 6,980

Cumulative installation (MW) 25,823 44,751 64,247 84,326 104,406 124,486 144,566 244,964

Onshore 25,763 44,631 63,927 83,306 102,186 120,916 139,496 214,964

Offshore 60 120 320 1,020 2,220 3,570 5,070 30,000

YoY growth (%)

Annual new installation 124 37 3 3 0 0 0 N/A

Onshore 123 37 2 0 (3) (1) (1) N/A

Offshore N/A 0 233 250 71 13 11 N/A

Cumulative installation 115 73 44 31 24 19 16 N/A

Onshore 114 73 43 30 23 18 15 N/A

Offshore N/A 100 167 219 118 61 42 N/A



13

Overall, we expect China’s cumulative wind power capacity, both onshore and

offshore, to reach 145GW and 245GW by the end of 2015F and 2020F, respectively.

Our 2020F wind power capacity estimate is much higher than the government’s

unofficial target of 150GW, which we believe is far too conservative. In our view, there

is a mismatch between China’s renewable energy capacity target and renewable

energy consumption. To achieve the government’s goal of 15% energy consumption

from renewable energy sources by 2020F, China needs to take a much more

aggressive renewable capacity installation target, in our opinion.

Wind power stands to benefit greatly should the Chinese government decide to adopt

a more cautious stance on nuclear power development. Post nuclear crisis in

Fukujima, Japan, the Chinese State Council announced that the nation will

temporarily suspend approvals for new nuclear projects until official guidelines on

nuclear security are published in China. The Chinese government will also initiate

strict safety examinations of its nuclear projects in operation and under construction.

CCBIS – China power capacity forecast model

2009 2010 2015F 2020F

Power capacity (MW)

Renewable energy:

Small hydro (≤50MW) 55,120 62,000 80,000 100,000

Large hydro (>50MW) 141,670 151,400 204,000 330,000

Wind energy 25,828 44,751 144,566 244,964

Biomass energy 4,500 5,200 10,000 20,000

Solar PV 240 800 9,000 47,000

Total renewable energy 227,358 264,151 447,566 741,964

Nuclear power 9,078 10,820 42,940 90,000

Total alternative energy 236,436 274,971 490,506 831,964

Thermal coal power 651,076 706,630 900,000 1,000,000

Overall power capacity 887,512 981,601 1,390,506 1,831,964

Power capacity (%)

Renewable energy:

Small hydro (≤50MW) 6.2 6.3 5.8 5.5

Large hydro (>50MW) 16.0 15.4 14.7 18.0

Wind energy 2.9 4.6 10.4 13.4

Biomass energy 0.5 0.5 0.7 1.1

Solar PV 0.0 0.1 0.6 2.6

Total renewable energy 25.6 26.9 32.2 40.5

Nuclear power 1.0 1.1 3.1 4.9

Total alternative energy 26.6 28.0 35.3 45.4

Thermal coal power 73.4 72.0 64.7 54.6

Overall power capacity 100.0 100.0 100.0 100.0



14

CCBIS – China energy consumption forecasts

(%) 2009 2010 2015F 2020F

Energy consumption from power

Renewable energy:

Small hydro (≤50MW) 1.8 1.8 2.0 1.9

Large hydro (>50MW) 4.4 4.6 5.0 6.4

Wind energy 0.3 0.5 1.5 2.8

Biomass energy 0.1 0.1 0.2 0.3

Solar photovoltaic 0.0 0.0 0.1 0.3

Solar water heating 0.8 0.8 1.7 2.0

Landfill gas 0.4 0.5 0.6 0.7

Others 0.4 0.3 0.3 0.2

Energy consumption from renewable energy 8.2 8.7 11.5 14.7

Nuclear power 0.8 0.7 2.4 4.1

Energy consumption from alternative energy 8.9 9.4 13.8 18.7

Thermal coal power: 32.4 32.2 34.8 30.0

Total energy consumption from power 41.4 41.6 48.7 48.7


Factors to slowing growth in China’s wind power sector

We believe that there are three major factors contributing to slow growth within

China’s wind power industry in 2010:

� Grid connection bottlenecks:

We believe that this is the most important factor; moreover, the grid network will

remain a constraining factor on growth within China’s wind power industry over the

next three-to-five years. Grid connection bottlenecks have been an issue for China’s

wind power market since 2007 and became a constraining factor for industry growth

since 2H09. In our view, there are two grid connection bottlenecks: (1) lack of physical

grid-line connections and (2) power curtailment (more discussions on grid connection

challenges can be found on pages 17-21). In general, we believe that grid bottlenecks

will lead to low project returns for wind operators or else their inability to receive

project approvals from the government, both of which would slow the pace of capacity

expansion of the wind operators.

China’s installed and grid-connected wind capacity

0

10,000

20,000

30,000

40,000

50,000

60,000

2007 2008 2009 2010 2011F

MW

24%

26%

28%

30%

32%

34%

36%

Total installed wind capacity (LHS) Total grid-connected wind capacity (LHS)

% not grid-connected* (RHS)

* Assume lead time for capacity ramp up at three months



15

� Listing of government-owned wind farm operators:

In our view, this is a complementary factor to the “grid connection bottleneck” factor,

as state-owned wind operators, which we estimate to aggregately dominate 70-80%

of wind installations in China, start monitoring their projects return more closely. Since

the listing of China Longyuan Power Group (Longyuan, 916 HK) in December 2009,

there has been a trend for major state-owned independent power producers (IPPs) to

list their wind farm subsidiaries, including China Datang Corporation Renewable

Power (Datang Renewable, 1798 HK) listed in December 2010, Huaneng

Renewables (planning to list 2011), and Huadian New Energy (planning to list in

2011).

In the past, lacking grid connection did not seem to be a constraining factor to China’s

wind capacity growth. State-owned IPPs have been aggressively increasing their wind

capacity as they are required to have 3% and 8% installed capacity slated for

non-hydro renewable sources by 2010 and 2020, respectively. Since the regulatory

target is set for capacity installation, not power generation, we believe some of the

state-owned operators were purely pursuing the scale of their wind assets instead of

caring about project returns. As a result, we estimate that 33% of wind capacity

installed at the end of 2010 was sitting idle due to a lack of physical grid connection.

Nonetheless, since more and more state-owned wind farm operators have become or

would like to become publicly listed companies, we expect wind farm operators in

China to start slowing down their capacity growth to meet the expansion pace of grid

operators as their shareholders would not tolerate low project ROEs and waste of

capital investments.

� Large base effect:

After four years of exponential growth, China’s annual wind capacity installation

already accounted for 36% and 49% of global market size in 2009 and 2010,

respectively, making the country the world’s largest wind market in terms of annual

new installations. Another implication was that such a pace of development made it

difficult for the nation to continue doubling its installation every year, particularly when

we expect global annual wind capacity installations to grow at only a 9% CAGR over

the next five years (2010-2015F).

China’s cumulative wind capacity and global share China’s annual wind installation and global share

0

29,000

58,000

87,000

116,000

145,000

2009 2010 2011F 2012F 2013F 2014F 2015F

MW

15%

18%

21%

24%

27%

30%

33%

China cumulative wind installation (LHS) China global share (RHS)

0

3,000

6,000

9,000

12,000

15,000

18,000

21,000

2009 2010 2011F 2012F 2013F 2014F 2015F

MW

0%

10%

20%

30%

40%

50%

China annual wind installation (LHS) China global share (RHS)

Source: CCBIS estimates Source: CCBIS estimates


16

CCBIS – Global wind cumulative capacity forecast model

MW 2009 2010 2011F 2012F 2013F 2014F 2015F 2020F

Global cumulative 158,505 196,854 238,602 284,814 335,535 390,330 449,010 770,086

YoY growth (%) 24 21 19 18 16 15

Europe 76,049 86,075 97,352 110,007 125,360 143,518 162,641 287,284

Asia Pacific 41,944 63,591 86,623 110,881 135,221 160,067 186,003 315,737

North America 38,587 44,708 51,492 59,779 69,326 79,777 91,832 148,515

Latin America 1,070 1,456 1,864 2,563 3,674 4,549 5,577 11,752

Africa 794 958 1,193 1,488 1,840 2,282 2,797 6,475

Others 61 66 79 95 114 136 159 323

Source: GWEC, CWEA, CCBIS estimates

CCBIS – Global wind annual installation forecast model

MW 2009 2010 2011F 2012F 2013F 2014F 2015F

Global annual installation 38,209 38,349 41,748 46,212 50,721 54,795 58,680

YoY growth (%) 0 9 11 10 8 7

Europe 10,308 10,026 11,277 12,656 15,353 18,158 19,123

Asia 16,028 21,652 23,032 24,258 24,340 24,846 25,936

North America 11,065 6,121 6,784 8,287 9,547 10,452 12,055

Latin America 502 386 408 700 1,111 875 1,028

Africa 246 164 235 295 352 442 515

Others 60 0 13 16 19 22 23

Source: GWEC, CWEA, CCBIS estimates


17

Grid-related problems remain a serious challenge

We found that there are two types of grid-related problems within the Chinese wind

power industry: (1) installed wind capacity lacking physical grid connections; and (2)

wind power curtailment. These problems will reduce the profitability of wind farm

operators as they either let wind capacity idle, lower effective capacity utilization hours

of wind farms or cap capacity growth potential of wind farm operators.

Based on our estimates, 30% of installed wind capacity will not be connected to the

grid by end-2011. Moreover, according to data from CEC, approximately 11% of wind

power generated in China was not procured by grid operators in 1H10.

While the central government has been grappling with such issues since 2009 and is

expected to adopt measures to improve grid connection and wind power generation

conditions, we only expect grid-related problems to be resolved gradually over the

next three-to-five years.

30% of installed wind capacity not connected to grid in 2011

Based on cumulative wind capacity data from CWEA and CEC, as well as our

expectation of a three-month lead time for grid-connected wind capacity to be fully

functional, we estimate that the ratio of installed wind capacity not connected to the

grid in China will increase from 30% in 2007 to 35% in 2009 but decline YoY to 33% in

2010. We believe that this is due mainly to a much slower YoY growth in new wind

capacity installation in 2010 and does not serve as evidence of improving grid

connection in China.

Although we expect the gap between installed wind capacity and grid-connected wind

capacity to trend slightly downwards YoY again to 30% in 2011F, we believe that grid

connection bottlenecks will remain a serious challenge for wind power companies in

China over the next few years.

Share of installed wind capacity lacking grid connection in China

0

10,000

20,000

30,000

40,000

50,000

60,000

2007 2008 2009 2010 2011F

MW

24%

26%

28%

30%

32%

34%

36%

Total installed wind capacity (LHS) Total grid-connected wind capacity (LHS)

% not grid-connected* (RHS)

* Assuming lead time to reach full capacity at three months



18

11% of wind power generation was not procured by grid in 1H10

We believe that utilization hours of wind farms in certain regions, including north,

northeastern and northwestern China, are substantially lower owing to wind power

curtailment problems, i.e. grid operators refusing to procure power generated from

wind farms.

According to CEC, north China region generated but not sold to grid 1,588m kWh of

wind power in 1H10, accounting for 57.2% of the national amount generated but not

sold to grid, while northeastern and northwestern China accounted for 38.33% and

4.47%, respectively.

From a provincial point of view, Inner Mongolia had the highest amount of wind power

generated but not procured by grid operators (2,101m kWh) in China for 1H10,

accounting for 75.68% of the national unsold wind power. It was followed by Jinlin,

which claimed a national share of 9% in 1H10.

China wind power generation by region (1H10) Wind power generated but not sold to grid (1H10)

North

42%

North

eastern

32%

Northwestern

12%

East

9%

Central

1%

South

4%

0

200

400

600

800

1,000

1,200

1,400

1,600

North North

eastern

North

western

East Central South

m kwh

0%

3%

6%

9%

12%

15%

Electricity not sold to grid (LHS)

As % of total wind electricity generation in the region (RHS)

Source: China Electricity Council, CCBIS Source: China Electricity Council, CCBIS

Causes of grid-related problems and current remedies

In our view, the grid-related problems in China are caused by:

� Mismatch between locations of wind resources and power consumption

China’s onshore wind resources are concentrated in the northern, northwestern and

northeastern regions, while power consumption is higher in the southeastern coastal

areas. According to the CWEA, by end-2009, the five provinces with the highest

cumulative wind capacity were Inner Mongolia, Hebei, Liaoning, Jilin and Heilongjiang.

These five provinces comprised some 70% of China’s cumulative wind capacity at

end-2009. On the other hand, power consumption in Guangdong, Jiangsu, Shandong,

Zhejiang and Hebei provinces saw the highest in 2009, according to the CEC. These

five provinces accounted for some 40% of China’s overall power consumption in

2009.


19

Distribution of China’s average wind energy density

Source: The Third National Wind Energy Resources Census, CWEA

Regions with richer wind resources tend to have stronger heat demands due to

severe weather conditions in winter, while coal-fired power plants also get priority as

they generate heat at the same time. Therefore, when power supply exceeds system

demand, grid operators in these regions will request wind farms to stop feeding power

into the grid.

To resolve this issue, the Chinese government has been exploring the possibility of

establishing or relocating high energy consumption industry bases to provinces with

rich wind resources. Moreover, the government has plans to construct

ultra-high-voltage grid lines to transmit power from northern, northwestern and

northeastern China to Beijing, Tianjin, Tanggu and the middle of China.

Electricity delivery from the main wind power bases

Source: CWEA


20

� Lack of a centralized plan to match grid networks and wind farm construction

Due to poor economics, grid operators normally have less incentive to construct

networks in remote provinces, where wind resources are richer. The difference of

construction lead time between grid operators (over two years) and wind farm

operators (one year) intensifies a mismatch in the construction of grid networks and

wind farms, in our view.

To incentivize grid operators to provide connection to wind farms, NDRC announced

Temporary Measures for Renewable Energy Surcharge Distribution, through which

grid construction to renewable energy projects, including wind farms, would be

refunded. Nonetheless, the measures were not very effective given it took a year for

grid operators to receive deserved refund.

Subsidies for wind farm grid construction, sourcing from renewable energy

surcharge

0

50

100

150

200

250

300

2006 2007 2008 2009 1Q-3Q10

RMB m

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Subsidy for grid construction to wind farms (LHS) As % of total grid construction subsidy (RHS)

Source: NDRC, CCBIS

As grid operators have less incentive to construct networks in remote provinces, wind

farm operators started several years ago to finance grid construction to connect their

projects to the grid. Based on the statistics from CEC, in 1H10 approximately 43-49%

of grid construction in China was funded by grid operators, 50-56% by wind farm

operators and 1-2% jointly funded by grid operators and wind farm operators.


21

Grid construction funding breakdown by source

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

North Northeastern Northwestern East Central South China total

Grid operator Project operator Both

Source: CEC, CCBIS

At the national level, the Chinese government revised the Renewable Energy Law in

2H09. The law came into effect in April 2010, stating that the nation ought to have

centralized planning for grid network and wind farm construction. At the provincial

level, each province will have near-term and medium-term planning, while the central

government would provide long-term, bigger picture guidance and ensure consistency

between the plans of different provinces.

� Grid quality and operating technology need upgrade to handle wind power

effectively

The intermittence of wind power generation has increased the difficulty for grid

operators to manage and utilize wind power effectively. As major grid operators in

China lack adequate experience handling wind power and the quality of grid networks

in remote areas (with abundant wind resources) is poorer, wind farm operators will be

told at times by grid operators to halt feeding power into the grid for the sake of grid

network safety.

To resolve this issue, the Chinese government stated in the updated Renewable

Energy Law that grid operators are responsible for enhancing grid quality and

establishing a smart grid network to better utilize power generated by renewable

energy projects.

More importantly, the government specified that relevant government agencies would

soon announce minimum requirements on renewable energy purchases (in terms of a

percentage of overall power purchases) for grid operators to ensure there is no waste

of renewable energy.


22

CDM (carbon trading) income uncertainty

In addition to wind power tariffs, wind farm operators in China generate income from

the sale of carbon credits, most of which are allocated under the UN Clean

Development Mechanism (CDM). We estimate that income from carbon trading

materially impacts the IRR of a typical wind farm in China by raising project and equity

IRR by 230bp and 510bp to 10.7% and 16.8%, respectively. Such income is likely to

account for 16-18% of the annual cash flow of Chinese wind farms.

In our view, there are two types of risks associated with the carbon credit income of

Chinese wind farm operators. The first is project registration risk with the UN CDM

executive board (EB). The second is transaction volume and pricing risk post-2012

when the Kyoto Protocol, the primary regulation governing global emission trading,

expires.

With regard to the risks attendant on the expiration of the Kyoto Protocol, we believe

that post-2012, the EU Emission Trading System (ETS) will continue to support CDM

projects while China has plans to put in place a domestic carbon trading

system/market over the next few years. However, uncertainty towards carbon

transaction volume and prices remains high.

CDM income makes material difference in wind project IRR

Based on our estimates, continuous CDM income stream can enhance project and

equity IRR of a typical wind farm in China by 230bp and 510bp, respectively, to 10.7%

and 16.8%. In our view, CDM income is significant for wind farm operators in China,

as such income accounts for 16-18% of a wind farm’s annual cash inflow at the project

level, and accounts for 42-85% of a wind farm’s annual net income, according to our

calculation. (Details, including assumptions and analysis, are in Appendix 6 page

150-153).

Project and equity IRRs of a typical wind farm in China CDM income share of wind farm cash flow and earnings

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Project IRR Equity IRR

With CDM Without CDM

0%

30%

60%

90%

120%

150%

Year

1

Year

2

Year

3

Year

4

Year

5

Year

6

Year

7

Year

8

Year

9

Year

10

Year

11-20

annual

CDM as % of project CF CDM as % of equity CF CDM as % of net income


Based on our forecasts, 17% and 18% of Longyuan’s profit before tax will derive from

carbon credit income in 2011F and 2012F, respectively; while we forecast Datang

Renewable share of profit before tax deriving from carbon credit income will be 34%

and 35% in 2011F and 2012F, respectively.


23

CDM scheme becomes uncertain after 2012

The Emission Trading Scheme stated in Article 17 of Kyoto Protocol is the primary

regulation governing global emission trading markets. CDM, part of the global

emission trading market, is designed under Kyoto Protocol to incentivize non-Annex I

countries, which do not have emission reduction obligation, to invest in emission

reduction projects or technology. According to United Nations Framework Convention

on Climate Change (UNFCCC), China is the largest seller of Certified Emission

Reduction (CER) under CDM, accounting for 72% of the CDM market in 2009 (Details

about global emission markets and CDM are in Appendix 7 page 154-157).

Kyoto Protocol is set to expire end-2012 and an official, international agreement has

yet been achieved regarding greenhouse gas (GHG) reduction responsibility and

targets after 2012. We believe this will have negative implications for global emission

trading markets (including CDM) after 2012, as emission trading markets would not

function well without legally binding emission reduction targets. An extreme example

is the collapse of CCX (Chicago Climate Exchange), the first emission trading

exchange globally, in November 2010. The collapse resulted from an absence of US

government legally binding GHG emission targets.

Hopes for CDM post-2012

We maintain our view that there could still be room post-2012 for Chinese wind farm

operators to generate income from sales of carbon credits thanks to (1) the EU’s

legally binding carbon reduction targets through 2020, which would support current

EU ETS markets, and (2) a potential domestic carbon trading market in China.

EU member states have passed the EU Climate and Energy Package, in which

member countries commit to reducing GHG emissions to at least 20% below 1990

levels by 2020. The reduction target could be further raised to 30% by 2020 given that

other countries are doing their fair share of emission reduction. This is likely to support

EU ETS after 2012, in our view. EU ETS is now the largest emission trading

system/market globally and recognizes the procurement of CERs from CDM projects

as a mean for member countries to fulfill their emission reduction requirement.

Global carbon trading volume breakdown by system

0

1,500

3,000

4,500

6,000

7,500

9,000

2004 2005 2006 2007 2008 2009

MtCO2e

EU ETS New South Wales (NSW) Chicago Climate (CCX)

RGGI AAUs Spot and secondary offsets

Primary CDM Joint implementation (JI) Voluntary market

Source: World Bank, CCBIS research


24

According to the European Parliament, the use of emission credits from CDM projects

would greatly contribute to the emission reduction targets of 2020. They state that

CDM and Joint Implementation (JI) together would equal a third of the reduction effort

required in 2020 (defining a 10% reduction from 2005 level in 2020 as the reduction

effort, where 3% from CDM and JI are roughly a third).

Share of CDM/JI use in non EU ETS sectors

Source: EU Parliament “The EU’s emission reduction target, intended use of CDM and its + 2°C”

We believe China is likely to establish a domestic carbon emission trading system

over the next few years, which would enhance carbon credit income of Chinese wind

farm operators. According to China Securities Journal and Xinhua News, officials from

the National Coordination Committee on Climate Change of the National

Development and Reform Commission (NDRC) disclosed that in 2009 the Chinese

government started drafting temporary management measures for voluntary GHG

emission trading activities in China and the regulation could be announced in 2011.

China’s energy and environmental targets

Field China’s targets

Energy conservation � Energy consumption per unit of GDP by end- 2010 to decline by 20% from 2005 level

� Energy consumption per unit of GDP will become one of the ten major new indicators the Chinese government closely monitors in the 12th

Five-Year Plan period

Emission reduction � Carbon emission per unit of GDP by end-2020 to decline by 40-45% from 2005 level

� Carbon emission per unit of GDP, sulfur dioxide emission, chemical oxygen demand (COD), ammonia nitrogen, and nitrogen oxides will become

among the ten major new indicators the Chinese government closely monitors in the 12th Five-Year Plan period

Energy structure � Renewable energy to account for 10% of total energy consumption by end-2010

� Renewable energy to account for 15% of total energy consumption by end-2020

� We expect the Chinese government to include a new target in the 12th Five-Year Plan: Renewable energy to account for 11.4% of total energy

consumption by end-2015

Source: CCBIS Research


25

Risks post-2012

Although we expect Chinese wind farm operators to maintain a certain level of income

from carbon credit sales post-2012 due to existence of EU ETS and a potential

domestic carbon market in China, we believe that such income stream remains at risk

in terms of volume and price, for the following reasons:

(1) EU has set a legally binding emission reduction target for member states by 2020

regardless of whether other countries are reducing emissions aggressively. We feel

this could potentially hinder EU enterprise competitiveness in international markets

over the long term. Consequently, it might be risky to assume that EU governments

will continue to support EU ETS post-2020, when other countries do not make

meaningful efforts and commitment to carbon reduction.

EU emission projections and target by 2020

Source: European Environment Agency (EEA)

(2) We believe it would take several years for the Chinese carbon market to mature

and reach meaningful transaction volume. The Chinese government is currently only

drafting regulations on voluntary emission reduction trades, which have little trading

volume in other countries. Moreover, we expect the Chinese government to

implement a real “cap and trade” system only gradually to avoid any pressure to the

cost competitiveness of Chinese enterprises with their international peers.

(3) The price of carbon credits could be lower in the Chinese carbon market than in

international markets as we expect carbon credit buyers in China (energy suppliers,

power utilities or other high emission manufacturers) to have larger bargaining power

than sellers in China (clean energy project owners, etc).


26

Chinese wind projects face registration risks with CDM EB

Based on the rules set by the Chinese government and UNFCCC, to qualify for CDM,

Chinese wind projects need to first attain approval from the NDRC and then from

Clean Development Mechanism Executive Board (CDM EB). According to the World

Bank, lead time for the entire CDM registration process expanded from 8-10 months

in 2004-2007, to 18-19 months in 2008-2009. The process time of CDM registration

with EB increased from three months in 2004-2007 to six months in 2008-2009.

In addition to registration risk of extended approval lead time, wind operators in China

also started facing rejection risk as of December 2009. During the CDM EB’s 51st

meeting, which ended on 4 December 2009, ten Chinese wind projects were rejected

for CDM registration, as CDM EB believed that the Chinese government intentionally

kept wind power tariffs too low for Chinese wind projects to qualify for the CDM

application. In February 2010, another six projects were rejected although a green

light was given to 32 Chinese wind farms at the same time. We believe that Chinese

wind farm operators will continue to face challenges registering additional capacity

under CDM.

Longyuan’s wind capacity registered under CDM Datang Renewable — CDM income and share of sales

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1H09 2H09 1H10 2H10 1H11F 2H11F

MW

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Registered capacity (LHS) % of capacity registered (RHS)

0

50

100

150

200

250

1H09 2H09 1H10 2H10 1H11F 2H11F

MW

0%

5%

10%

15%

CDM income (LHS) As % of total revenue (RHS)



27

Overseas expansion a growth driver from 2012

We recognize overseas expansion as the new growth driver for Chinese wind power

companies. Overseas markets used to be neglected by Chinese wind companies due

mainly to robust wind capacity growth in China historically. Over the past three years,

overseas sales contributed on average to less than 1% of Chinese wind companies’

revenue. But that seems to be changing. We expect Chinese wind companies to place

greater focus on overseas expansion to sustain growth in the coming few years, given

our forecast that China’s wind installation growth will decline to a 1% CAGR in

2010-2015F from a 120% CAGR in 2006-2009.

Despite challenges facing Chinese wind companies, including inadequate product

track records, concerns on product quality and the risks inherent in trade policy

intervention by foreign governments, Chinese WTG and component manufacturers

have undeniable competitive advantages, such as easier access to project financing

from Chinese banks and superior cost structures which make their ASPs on average

40-50% cheaper than their foreign counterparts.

We estimate that shipments from overseas markets will represent on average c.13%

of leading Chinese WTG and component manufacturers shipments by 2012F, though

our forecast implies that the top-five Chinese WTG manufacturers are expanding

share in non-China markets rapidly from c.0% in 2010 to c.11% by 2012F and

increasing aggregate export shipments from less than 20MW in 2010 to c.2.8GW in

2012F (1,237% CAGR in 2010-2012F).

Overseas business contribution has been minimal

We believe that currently most Chinese wind power component and equipment

manufacturers, with a few exceptions such as China High Speed Transmission (CHST)

which had 10-15% wind product sales from overseas for the past three years, on

average record less than 1% of revenue from overseas markets. Chinese WTG

manufacturers started exploring overseas markets since 2007 but the progress so far

has been fairly slow.

According to CWEA, Chinese WTG manufacturers in aggregate had c.42MW of

cumulative shipments overseas by the end of 2010, up 62% YoY from c.26MW by the

end of 2009, but remained much smaller than their cumulative shipments of 45GW

and cumulative wind capacity of 152GW globally excluding China.

China’s historical WTG exports

Year Company Export destination Unit Capacity per unit Export volume (MW)

2008 Huide US 10 1MW 10

2008 Huayi Chile 3 780kW 2.34

2008 Goldwind Cuba 6 750kW 4.5

2009 Sinovel India 10 1.5MW 15

2009 Shanghai Electric Thailand 2 1.25MW 2.5

2009 Shanghai Electric UK 3 1.25MW 3.75

2009 Xinyu Thailand 1 1.5MW 1.5

2009 Xinyu US 1 1.5MW 1.5

2009 Goldwind US 3 1.5MW 4.5

2010 Goldwind Cuba 6 750kW 4.5

2010 Mingyang US 1 1.5MW 1.5

2010 Huayi Chile, Russia 3 1.5MW 4.5

2010 Xinyu USA, Thailand 2 1.5MW 3.0

2010 A-Power US 1 2.05MW 2.05

Source: CWEA, CCBIS


28

In our view, the slow progress in wind equipment exports is mainly due to three

reasons:

� Robust domestic demand growth historically. Given the explosive wind

capacity growth at a 120% CAGR in 2006-2009, and the fact that Chinese WTG

and component manufacturers only generally started scaling up their production

capacity since 2007, there was a severe supply shortage in WTGs and

components between 2006 and 2008, although supply and demand finally

became more balanced in 2009. Chinese WTG and component manufacturers

have thus historically been busy fulfilling domestic orders and consequently

lacking resources or reluctant to build distribution channels and business

overseas.

� Short product track record. Most of the leading Chinese WTG manufacturers

only started commercial production of their 1MW+ products in 2H07 or 2008.

Their short track record has made foreign wind farm operators hesitant to adopt

Chinese WTG products. We note that WTG costs account for c.70% of capital

costs of a wind farm and depreciation c.70% of wind power generation cost, so

defect or malfunction of WTGs would have significantly negative impacts on

wind farm operators’ project returns, particularly when most of the WTG

manufacturers only carry a two-to-five year product warranty, much shorter than

WTG’s designed life of 20-30 years.

� “Export restriction” clause in technology licensing agreement. We believe

that the majority of Chinese WTG manufacturers have attained design and

technology knowhow of their initial products through technology licensing with

foreign WTG manufacturers. As there is usually an export restriction clause in

such technology licensing agreement, Chinese WTG manufacturers cannot sell

their products out of China until they obtain intellectual property rights of the

WTG design, or succeed in in-house WTG technology development.

Chinese WTG manufacturers and technology source

Company Technology source

Beizhong DeWind

Changzhou U Erlangen

Dongfang Electric Repower

United Power Aerodyn

Goldwind Vensys*

Haizhuang Aerodyn

Huayi Aerodyn

Mingyang Aerodyn

Sewind Aerodyn, Dewind

Sinovel Fuhrlander

Xiangdian Zephyrus

ZELRI Windtec

Source: Suzlon China, CCBIS

Compared with Chinese WTG manufacturers, Chinese wind farm operators have less

exposure to international markets. We believe that currently none of the leading wind

farm operators in China holds any wind projects overseas. In our view, this is a natural

result of the capital flow and foreign exchange controls in China and the fact that local

regulatory and administrative barriers to enter the industry tend to be high for

overseas wind projects.


29

More focus on cultivating overseas potential

Wind installation growth in China is expected to lose momentum; hence, there is a

pressing need for Chinese wind component and WTG manufacturers to expand into

international markets to sustain future volume growth. Moreover, we expect them to

realize higher ASP in overseas markets, c.20-30% higher than in the Chinese market

which sees fierce competition.

Since 2H09, most of the listed wind power companies in China have put more

emphasis on overseas expansion, with several larger-scale WTG export contracts

being announced by listed WTG companies including A-Power, Goldwind and

Dongfang Electric. In particular, the contract inked by Dongfang Electric and KSK

Energy in December 2010 for the supply of 166 units of 1.5MW WTG is viewed as the

first "meaningful" export contract by Chinese WTG manufacturers.

Major China WTG export contracts announced

Date Company

Export

destination Expected delivery Contract details

October

2009

A-Power US (Texas) Originally March 2010 but delayed � 240 units of 2.05MW WTG

� Project size 600MW

� Total investment of US$1.5b; A-Power responsible for wind farm investment

December

2010

Goldwind US (Illinois) 2H11 or 1H12 � Adopting Goldwind’s 1.5MW direct-drive WTG

� Construction starts in 2011 and operation 2012

� Goldwind responsible for wind farm investment, construction and equipment

procurement

� Project size no more than 120MW

December

2010

Dongfang Electric India Delivery completed by March 2012 � First “meaningful” WTG export contract inked by Chinese WTG producers

� Adopting 166 units of Dongfang Electric’s 1.5MW direct-drive WTG

� Contract value at US$230m, implying WTG ASP at RMB 5,400/kW (c.35%

higher than ASP in China)

Source: Company data, CCBIS

We believe Chinese wind farm operators will begin exploring explore overseas

opportunities due to higher capacity growth and project returns. We note that

subsidies (feed-in tariff) and grid condition might be better in other countries than in

China and this will bring them higher project returns. Additionally, we expect both

China’s encouraging overseas investments and ample monetary supply from Chinese

banks to contribute to investments by Chinese wind farm operators in overseas

projects.

Longyuan disclosed in 2H10 that the company is close to completing a deal in South

Africa and is currently studying business opportunities (40-50 projects) in other

regions and countries, such as North America, Eastern Europe (Hungary), Australia

and Kasakstan. Meanwhile, Datang Renewable is also working on wind project

development in countries like the US, Canada and Australia and expects one project

in Australia to commence operation in 2011.


30

Low cost and access to financing are key advantages

In our view, low-cost production and easier access to project financing are competitive

advantages of Chinese wind power companies compared with their foreign peers.

Based on the 1H10 results of WTG producers, we estimate that leading foreign WTG

manufacturers, particularly those in Europe, generally have production costs that are

30-50% higher than those of Chinese WTG manufacturers. Due to their competitive

cost structure, we estimate that Chinese WTG manufacturers could set their ASPs

approximately 40-50% lower than those of their foreign peers. We believe cheaper

steel cost (steel-related cost is estimated to account for 65-70% of WTG cost) and

better production efficiency (including revenue generation per headcount) in China,

both quite sustainable as long as manufacturing base remains in China, contribute to

the cost competitiveness of Chinese WTG manufacturers.

Global WTG producers - cost comparison (1H10)

0

1,000

2,000

3,000

4,000

5,000

6,000

Vestas Gamesa Suzlon Dongfang Goldwind Mingyang Sinovel

RMB/kw


We believe it will take time for Chinese manufacturers to penetrate international

markets simply based on the cost factor, as overseas wind project investors and

foreign banks providing project financing tend to be very selective in WTG brand

adoption for a project.

Before Chinese WTG manufacturers attain adequate track record and customer

confidence, which we believe will take another couple of years, they will secure

additional sizable sales orders overseas through leveraging their access to project

financing from Chinese banks. In our view, this is particularly important as credit

conditions in major wind power markets such as the US and Europe have not

recovered much after the global financial crisis in late 2008.

For example, according to the WTG export contract signed in December 2010,

Goldwind would not only provide WTGs but also provide project financing to a wind

farm in Illinois. Meanwhile, we note that the contract announced by A-Power in 2009

regarding WTG exports to a wind project in Texas is also under similar arrangement.

We believe that such a trend is likely to continue as Chinese WTG manufacturers are

keen on overseas expansion while backed by Chinese government patronage for the

purpose of furthering overseas investment.


31

Quality concerns and foreign government intervention are obstacles

In our opinion, inadequate track record and concerns on product quality, as well as

foreign government intervention in international trade are major obstacles to overseas

expansion of Chinese WTG manufacturers. However, the export restriction clause in

technology licensing agreement, which used to be an important factor limiting export

potential in the past, will have less impact going forward as most of the Chinese WTG

manufacturers will launch their next generation products using in-house technology.

� Inadequate track record and concerns on product quality

The global WTG market has been dominated by a handful of companies due to

end-customers’ high requirements on product quality and track record. According to

BTM Consult, the same group of global top 10 WTG manufacturers aggregately

accounted for 80-90% of the global market between 2005 and 2009.

Global WTG shipment breakdown by manufacturer

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2007 2009

Vestas GE Wind Sinovel Enercon Goldwind Gamesa Dongfang Suzlon Siemens RePower Others


We acknowledge that defect or malfunction of WTGs would have significant negative

impact on project returns of wind farm operators, as WTG cost accounts for c.70% of

capital cost of a wind farm and depreciation c.70% of wind power generation cost.

Moreover, most of the WTG manufacturers only give a two-to-five year product

warranty, much shorter than WTG’s design life of 20-30 years. As for wind project

financing, banks tend not to lend money to projects using unreliable WTGs, given the

present tight credit environment in Europe and US.

Most of the Chinese WTG manufacturers launched their 1.5MW products in late 2007

or 2008, so track record of their products is fairly short. Although Chinese WTGs are

40-50% cheaper than foreign WTGs based on our estimates, several western WTG

manufacturers claimed that the efficiency-adjusted price of Chinese WTGs is not as

low as it seems to be.


32

� Foreign governments’ intervention in international trade

Since 2009, there have been incidences of foreign governments or industry unions

appealing to restrict Chinese renewable equipment manufacturers, including those

from the solar and wind power sectors, from exporting products to their countries.

They argue that foreign countries have used significant resources to sustain

renewable energy subsidies and boost renewable energy demand for the purpose of

creating local employment and tax income as opposed to benefitting unrelated

Chinese companies. Furthermore, some believe that the superior cost advantage of

Chinese renewable equipment manufacturers is a result of unfair subsidies issued by

the Chinese government. Lastly, in the national-level concession project biddings held

by the Chinese government over the past two years, none of the foreign equipment

manufacturers won any bids, implying that there might be excessive local

protectionism in China.

Specifically for wind power, in September 2010, United Steelworkers (USW) in the US

filed a petition accusing China of five general infractions: (1) restriction of access to

critical materials; (2) discrimination against imported goods and foreign companies; (3)

technology transfer requirements for foreign investors; (4) subsidies contingent on

domestic content; and (5) trade-distorting domestic subsidies. In response to the

petition, the Office of the US Trade Representative (USTR) requested a World Trade

Organization (WTO) dispute settlement with the Chinese government in December

2010. Some of the issues were addressed during the US-China Joint Commission on

Commerce Trade conference in December 2010, while some concerns were

dismissed after investigation. For example, the USTR obtained clarification that two

Chinese subsidy programs, “Export Research and Development Fund” and “Ride the

Wind” had already been terminated. China also agreed to change some of its rules to

open up the Chinese wind power market.

However, we believe that the risk of unfavorable trade policies in Europe and the US

remains high for Chinese WTG and component manufacturers. Some Chinese wind

power companies, such as Goldwind and CHST, have plans to establish production

facilities and possibly supply chains in the US to be eligible for selling in the US

market. We expect this to have negative implications for their production costs. In

such cases Chinese companies need to carefully balance between volume and

profitability.

We expect exports to account for c.13% of shipments by 2012

In our view, overseas demand could pick up from 2012 onward, as quality concerns

on Chinese WTGs are gradually dismissed after Chinese companies have their WTGs

running for close to five years in China and close to two years in their overseas

“demonstrative” projects.

Leading Chinese WTG manufacturers have aggressive targets for overseas

expansion. Goldwind and Sinovel target 30% and 1/3 of shipments overseas over the

next three-five years, respectively, while Mingyang expects to generate meaningful

volume from international markets in 2012. We expect leading Chinese WTG

manufacturers on average to generate about 13% of shipment overseas by 2012,

implying that top-five Chinese WTG manufacturers would increase their share in

non-China markets from c.0% presently to c.11% by 2012.


33

Chinese WTG exports and aggregate share in non-China markets

0

400

800

1,200

1,600

2,000

2,400

2,800

3,200

2011F 2012F

MW

0%

3%

6%

9%

12%

15%

Goldwind (LHS) Sinovel (LHS)

United Power (LHS) Dongfang (LHS)

Mingyang (LHS) Aggregate share in non-China markets (RHS)



34

Offshore wind power – attractive theme by 2012

The Chinese government encourages the development of offshore wind power

projects as offshore wind power could be an effective tool to enhance China’s energy

supply (good scalability); moreover, offshore projects are much nearer than onshore

projects to China’s eastern coastal provinces where power consumption is highly

concentrated.

At present, local governments of five coastal provinces plan to achieve a total of

15GW and 33GW in offshore wind power capacity by 2015F and 2020F, respectively,

while China’s cumulative offshore capacity was merely 120MW by end-2010 based on

our estimate. Our forecast for China’s offshore wind power capacity in 2015 is more

conservative at 5GW, still implying a 90% CAGR in 2010-2015F, significantly higher

than the overall wind capacity CAGR of 1% in China over the same period.

Despite rapid growth potential, we note that offshore demand will remain less than 3%

and 7% of annual wind power capacity in China by 2012F and 2015F, respectively.

This is much smaller than the contribution from overseas, demand of which we

estimate at c.13% of leading WTG manufacturers’ 2012F shipments. We believe

offshore development is more of an attractive theme though it lacks material business

impact, at least for the next few years.

China with great potential for offshore wind power development

The Chinese government has had development of offshore wind power technology in

its agenda since 2007, shortly after China started to install more completed wind

equipment and component supply chain domestically. In 2007, the Shanghai

government held bidding for the “Shanghai Donghai Bridge” project, China’s first

offshore wind farm, power generation kicked off in June 2010. In May 2010, China

held its first national-level bidding for four offshore wind concession projects with

aggregate size of 1GW of power capacity.

China’s rapid move into offshore development since 2007 could be seen as overly

ambitious as offshore wind technology remains an immature and challenging field with

high project costs and risks, even for countries with more advanced wind technology.

However, China, unlike some European countries which have been developing

onshore wind resources for decades, still has abundant unexploited wind resources

onshore.

Nonetheless, we believe that China’s long-term goal will not only use offshore wind as

a tool to enhance energy supply but also gain leadership in the manufacturing of

offshore wind equipment.

China has great potential for offshore wind power development. Based on research

conducted by China Meteorological Administration (CMA), China’s technically

exploitable offshore wind resource is around 200GW (near-shore area with 5-25m

water depth; 50m above sea level), which accounts for 20-30% of China’s onshore

wind resources.

More importantly, China’s power consumption is highly concentrated along the

eastern coastal line. Thus, transmitting power from offshore wind farms could make

economic sense compared with transmitting power long distance from onshore wind

farms in the north and west, even after considering the much higher capital

investment required for offshore wind projects.


35

China’s offshore wind resources

Source: Azure International

China has huge offshore wind pipeline

We estimate that at the end of 2010, China had cumulative offshore capacity of

120MW. This includes the 102MW Donghai Bridge project already in operation since

June 2010, as well as several experimental offshore WTG installations by WTG

manufacturers, including 1.5MW by Xinjiang Goldwind, 3MW (1.5MW x2) by China

Mingyang Power, 3MW (1.5MW x2) by United Power, 4MW (2MW x2) by Shanghai

Electric, 3MW (1.5MW x 2) by Envision Energy and 2MW (2MW x1) by Sany Electric.

Offshore wind project development in China (2010)

Project Type of WTG Project size Investor Status

Shanghai Donghai Bridge 3MW from Sinovel 102MW China Power New Energy, China Datang,

China Guangdong Nuclear Power,

Shanghai Green Energy

In operation since mid 2010

Jiangsu Binhai 3MW from Sinovel 300MW Datang Renewable Construction should be completed by 2014

Jiangsu Sheyang 3MW from Sinovel 300MW China Power Investment Construction should be completed by 2014

Jiangsu Dongtai 2.5MW from Goldwind 200MW China Longyuan Power Construction should be completed by 2014

Jiangsu Dafeng 3.6MW from Shanghai Electric 200MW Luneng Group Construction should be completed by 2014

Source: CWEA, CCBIS


36

In 2010, the central government requested local governments of coastal provinces to

complete planning for offshore development up to 2015F and 2020F. According to

CWEA, total offshore capacity proposed by five coastal provinces reaches 15GW and

33GW for 2015F and 2020F, respectively, increasing sharply from the 120MW as of

end-2010F.

Provincial government plans for offshore wind capacity

Region 2015F 2020F

Shanghai 700 1,550

Jiangsu 4,600 9,450

Zhejiang 1,500 3,700

Shandong 3,000 7,000

Fujian 300 1,100

Others (tentative) 5,000 10,000

Total 15,100 32,800

Source: CWEA, CCBIS

According to Azure International, near-term offshore pipeline of top offshore wind farm

developers in China amounts to around 514MW, while cumulative pipeline (including

those with long-term potential) could amount to 13.7GW.

Top offshore developers’ pipeline

Developer Pipeline (MW)

China National Offshore Oil Corp (CNOOC) 3,102

Longyuan 2,465

China Three Gorges Project Corp. 2,010

Huaneng (China) Group 1,302

Guangdong Baolihua New Energy 1,250

Guodian Group 800

Shenhua Group 500

Datang Corporation 329

Changdao Wind Power Development 300

Shangdong Sanrong Group 300

Zhejiang Luneng 196

Source: Azure International, CCBIS

Offshore wind power to grow 90% CAGR in 2010-2015F…

Despite Chinese local government aggressive plans for offshore wind development up

till 2020F, our channel check with CWEA and project developers lead us to

conservatively forecast China’s annual offshore capacity installation will rise to

200MW and 700MW, up 233% and 250% in 2011F and 2012F, respectively, from

60MW in 2010.

We estimate cumulative offshore wind capacity in China to reach 5GW by 2015F,

implying a CAGR of 90% in annual offshore capacity installation in 2010-2015F, much

faster than China’s overall annual wind capacity CAGR of 1% over the same period.


37

China annual offshore installation and growth China cumulative offshore capacity and growth

0

200

400

600

800

1,000

1,200

1,400

1,600

2009 2010F 2011F 2012F 2013F 2014F 2015F

MW

0%

30%

60%

90%

120%

150%

180%

210%

240%

270%

Offshore – annual (LHS) YoY growth (RHS)

0

1,300

2,600

3,900

5,200

2009 2010F 2011F 2012F 2013F 2014F 2015F

MW

0%

40%

80%

120%

160%

200%

240%

Offshore – cumulative (LHS) YoY growth (RHS)


… but remain under 7% of China total capacity until 2015F

We expect offshore capacity installation in China to grow rapidly at 233% YoY in

2011F and 250% YoY in 2012F. However, offshore wind demand should remain at a

small fraction of China’s wind market over the next five years. Based on our forecasts,

offshore installation will account for 3% of annual wind installation by 2012F and less

than 7% by 2015F. We believe offshore development is an attractive theme for

China’s wind power industry but without material business impact over the next few

years.

China’s annual offshore installation share of total China’s cumulative offshore capacity share of total

0

200

400

600

800

1,000

1,200

1,400

1,600

2009 2010F 2011F 2012F 2013F 2014F 2015F

MW

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Offshore – annual (LHS) Offshore as % of total annual (RHS)

0

1,300

2,600

3,900

5,200

2009 2010F 2011F 2012F 2013F 2014F 2015F

MW

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Offshore – cumulative (LHS) Offshore as % of total cumulative (RHS)



38

Challenges in offshore wind development in China

In our view, there are three challenges for offshore wind development in China that

public and private segments need to address:

� No reasonable and standardized feed-in tariff for offshore projects

Development of offshore wind projects in China are in infant stage. We believe that

the Chinese government is highly likely to build a tariff scheme for offshore projects,

similar to the wind-tariff scheme created for onshore projects. In our view, the

government will host several rounds of national-level concession bidding to discover

reasonable wind power tariffs that project developers will accept.

However, experience from onshore wind tariff development in China has been that

project developers, most of which are state-owned enterprises, tend to bid too

aggressively, thus keeping tariffs at unreasonably low levels.

In China’s latest concession bidding, we observed a similar pattern with four offshore

projects held in 2010. According to information from CWEA, we believe that the ROEs

of these four offshore projects are very likely to be lower than 8.5%, which is not

attractive in our view.

Results from latest national-level concession bidding for offshore projects in China (2010)

Project Tariff granted (RMB/kWh) Investment cost (RMB/kW) Average tariff bidded (RMB/kWh)

Average expected ROE by all

participating bidders (%)

Jiangsu Binhai 0.7370 16,197 0.7675 9.49

Jiangsu Sheyang 0.7047 16,518 0.6818 8.54

Jiangsu Dafeng 0.6396 13,795 0.6846 9.37

Jiangsu Dongtai 0.6235 N/A 0.6846 8.78

Source: CWEA, CCBIS

� Chinese WTG and component manufacturers lack mature technology for

large-scale wind equipment

In our opinion, offshore wind projects require at least 2MW WTGs, while WTGs above

3MW would yield better performance. In Europe, some offshore wind farms are

currently experimenting with WTGs producing over 4MW. Nonetheless, most Chinese

WTG manufacturers only commenced commercial production of 2MW products less

than a year ago and schedule to launch their 3MW products in 2011F (with exception

to Sinovel which supplied 34 units of 3MW WTG to the Shanghai Donghai Bridge

project in 2009/2010). We believe that Chinese WTG and component manufacturers

have to speed up related R&D to ensure quality and cost effectiveness of offshore

projects in China.


39

Wind turbine R&D status of Chinese manufacturers

Company Research, development and trial product

Sinovel � 3.0MW wind turbines successfully installed and under operations in Shanghai Donghai

Bridge project

� Company predicts 5.0MW turbine to be launched in 2011

Goldwind � First 1.5MW offshore wind turbine manufactured in 2007

� 2.5MW and 3.0MW prototypes produced and under experimental operations are expected to

be launched commercially in 2011F

� 5.0MW product under research and development

Dongfang Electric � 5.0MW offshore wind turbine under research

United Power � Company targets to launch 3.0MW in 2011F

Mingyang � Company targets to launch 3.0MW in 2011F

Xemc � 5.0MW offshore wind turbine under research (XEMC Darwind)

Sewind � 3.6MW offshore wind turbine launched in June 2010

Haizhuang � 5.0MW offshore wind turbine under research


� Absence of mature technology and equipment for installation

Installation technology for offshore wind projects has been a challenging issue globally.

Moreover, half of the offshore projects currently under construction in China are in the

“intertidal” zone, where it is difficult for ships and cars to operate. According to CWEA,

even international markets have limited experience with intertidal installation.

Therefore China will need to lead the global market and develop its own technology to

overcome this challenge.

Due to an absence of mature technology, it is highly costly to produce equipment for

offshore project installations in China. We believe the Chinese government is likely to

encourage equipment development capability along with the national concession

project biddings, in which project developers could cooperate with state-owned heavy

machinery manufacturers and leverage their experience for cost savings and

knowledge accumulation.


40

Competition landscape – wind farm operators in China

China’s wind farm operation segment has been dominated by government-owned

enterprises. According to CWEA, all top-ten wind farm operators in China are central

or provincial government-owned companies with aggregate market share of 76% in

2009.

We believe government-owned enterprises versus private or foreign-funded

companies will better maintain a competitive position in the wind farm operation

segment thanks to their closer relationships with grid operators, Chinese banks and

government officials, allowing access to good wind sites, grid connections, project

financing and project approvals.

Although theoretically we do not expect a material difference in wind farm operating

results between government-owned companies given their similar bargaining power,

we found Longyuan a better managed wind operator than Datang Renewable given

the better operating efficiency of Longyuan’s wind operation and the better quality of

its balance sheet.

Wind operation dominated by government-owned enterprises

The wind farm operation segment in China has been dominated by

government-owned enterprises. According to CWEA, among the top-20 wind farm

operators in China (in terms of new capacity installation in 2009), ten are central

government-owned enterprises, six are state-owned provincial energy enterprises,

and only four are private or foreign-funded enterprises.

Furthermore, all of the top ten wind farm operators in China are central or provincial

government-owned enterprises with aggregate share of 76% in terms of new wind

capacity installation in 2009. They also jointly accounted for 71% of China’s

cumulative wind capacity by end-2009, based on data from CWEA.

New wind capacity by operator (2009) Cumulative wind capacity by operator (2009)

Datang**

13%

Guohua

4%

China Power

Investment (CPI)

2%

China Resources

Power

2%

China Energy

Conservation

Investment

(CECIC)

3%

Huaneng

12%Jingneng

6% Huadian

9%

China

Guangdong

Nuclear Power

(CGNP)

6%

Others

24%

Guodian*

19%

Datang**

14%

Guodian*

19%Others

26%

Guohua

6%Huadian

6%

China

Guangdong

Nuclear Power

(CGNP)

5%

Huaneng

11%

China Power

Investment (CPI)

3%

JOINTO

2%China Energy

Conservation

Investment

(CECIC)

3%

Jingneng

5%

* Guodian: Parent of Longyuan

** Datang: Parent of Datang Renewable

Source: CWEA, CCBIS

* Guodian: Parent of Longyuan

** Datang: Parent of Datang Renewable

Source: CWEA, CCBIS


41

Government-owned enterprises remain leading wind farm operators

We expect large government-owned power supply or energy investment companies to

continue their dominance in the China wind farm operation segment due to:

� Easier access to bank financing

Compared with private or foreign-funded companies, government-owned enterprises

have much better access to bank financing in China as banks in China normally

assume fairly low default risk for government-owned enterprises which have better

relationships with senior management of banks (who are also government officials).

� Better relationship with grid operators

As mentioned in the section “Grid-related problems remain a serious challenge”, we

expect it to remain difficult for wind farm operators to attain grid connection in China

over the next few years, due mainly to the lack of economic incentive for grid

operators to provide connections to wind farms in China as well as the mismatch (in

terms of geography and timing) of wind farm and grid operator construction.

Nonetheless, we believe the position of government-owned power supply or energy

investment companies is better than that of private or foreign-funded wind farm

operators, as they have been dealing with grid operators (also government-owned)

within other power/energy sub-segments, like coal-fired power, nuclear power, hydro

power, etc, for decades, thus have closer relationships with the grid operators.

� Government-owned power companies have compulsory renewable capacity

requirements

In our view, one of the major reasons private or foreign-funded companies are not

very keen in pursuing opportunities within the wind farm operation industry is the low

return on wind projects in China, which is driven by grid-related problems as well as

an unattractive wind power tariff scheme.

Government-owned power companies face compulsory renewable capacity targets

set by the NDRC, requiring them to source 3% and 8% of total capacity from

non-hydro renewable sources by 2010 and 2020F, respectively. Consequently,

despite the unattractive economics of wind projects in China, government-owned

power companies will have to continue aggressive expansion within the wind farm

operation segment.

Based on our estimates, China sourced approximately 3% of its power generating

capacity from wind power in 2010, implying that Chinese power companies are

currently on track to achieve their renewable capacity targets.


42

China power capacity by source

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010F 2015F 2020F

Wind Energy Biomass Energy Solar PV Small Hydro (≤50MW)

Large Hydro (>50MW) Nuclear Power Thermal Coal Power:

Source: CEC, CCBIS

� Better position to win wind resources

We believe government-owned companies have a closer relationship with the central

and provincial governments than private or foreign-funded companies do. This, in our

view, strengthens government-owned company position to gain wind resources. In

China, to attain wind resources, wind farm operators need to first get provincial

government approval to use land for wind farm development.

It has become more competitive to gain wind resource presently, as most of the

wind-rich areas have already been taken by wind farm operators. We believe that

good relationship with provincial governments and the consequent access to good

quality wind resources (i.e. sites with high utilization hours, good grid connection and

healthy local power demand) will be important for wind farm operators to increase

future growth potential.

Wind resources reserves of listed wind operators (June 2010)

0

3

6

9

12

15

18

21

Longyuan Datang China WindPower

GW

Note: China WindPower is a non-government owned company



43

� Easier to get wind farm approvals

Based on our channel check with wind farm operators in China, a wind project need to

prepare more than 50 types of documents and gain approvals from more than ten

government agencies before construction can be commenced. We believe that

government-owned companies are in a better position than private companies to

attaining government approvals given their better relationship.

In theory there is little difference between the government-owned operators

Our view is that state-owned wind operators will maintain leadership in the wind farm

development segment in China. In theory there should not be a material difference in

quality between the top-five wind farm operators in China due to the following

reasons:

� Wind tariff scheme in China is designed to allow a certain project ROE range

Based on our calculations, the Chinese government generally allows power

generators to have an average project ROE of 8-10%. In our view, this should be

applicable to most types of power generation projects, including coal-fired power,

nuclear power, hydro power and wind power.

As a result, assuming no grid-related problems such as connection bottlenecks or

power curtailments, we would expect wind farm operators to have similar project

returns regardless of the quality of wind resources of a wind farm, i.e. the Chinese

government has higher wind power tariffs in regions with poorer wind resource and

vice versa.

� State-owned wind operators have similar bargaining strength with banks, grid

operators and government officials

From our observations, state-owned wind operators do not face much difficulty getting

project financing from Chinese banks, most of which are also state-owned enterprises.

Although we expect central government-owned wind operators to have stronger

bargaining power with Chinese banks than provincial government-owned wind

operators do, the difference between their competitive positions is not material. A

similar rationale can be applied to the relationship with grid operators (to get grid

connection) and with local governments (to get wind resources and project

approvals).

� Wind operators adopt similar brands of WTGs in China

Based on data from CWEA, the top-five wind turbine manufacturers have accounted

for over 70% of China market over the past three years, a trend we expect to continue

in the future. We thus believe that in general wind farm operators in China are

adopting similar brands of WTGs for their projects, which should lead to more

consistent project returns and earnings quality.


44

Longyuan is better managed than Datang Renewable

In our view, Longyuan is a better managed wind farm operator than Datang

Renewable given Longyuan’s better operating efficiency as reflected in its higher

operating margins (excluding coal-related business), lower gearing ratios and similar

overall net margins despite Longyuan’s top-line contribution (approximately 50%)

from low-margin coal-related business.

Although our estimates show Datang Renewable generally enjoys higher growth rates

in parameters like capacity, electricity generation and earnings, we believe this is

mostly a result of Datang’s much smaller base while Datang and Longyuan are adding

the same amount of wind capacity (c.1.5-2GW) per annum in the next two years.

More importantly, while we expect Longyuan’s overall operating margins to be lower

than Datang Renewable’s, this is due mainly to Longyuan’s business contribution from

coal related business. If we compare non-coal operating margins of Longyuan to

Datang Renewable’s, Longyuan’s margins are 110-130bp better than those of Datang

Renewable based on to our forecasts.

Another key difference is Longyuan’s better gearing ratio and lower financing costs.

We forecast that Longyuan’s net gearing ratio will be in the range of 121-161% in

2010-2012F, while Datang Renewable’s will be in the range of 195-286%.

Comparison between Longyuan and Datang Renewable

Longyuan Datang Renewable

2010 2011F 2012F 2010 2011F 2012F

Installed wind capacity (MW) 6,556 8,600 11,000 4,028 5,600 7,100

Wind utilization hours 2,217 2,242 2,309 2,134 2,240 2,274

Wind power generation (net) (GWh) 9,442 14,371 19,244 4,829 8,437 12,083

Average wind power tariff – ex VAT (RMB/kWh) 0.489 0.499 0.501 0.493 0.500 0.499

Wind power revenue (RMB m) 6,071 7,778 10,235 2,378 4,219 6,034

CER/VER income (RMB m) 392 672 953 229 450 607

Operating profit (RMB m) 4,081 5,950 7,773 1,503 2,740 3,815

EBITDA (RMB m) 6,320 9,301 11,862 2,389 4,412 6,118

Net profit (RMB m) 2,007 2,705 3,468 456 1,011 1,311

Growth (YoY, %)

Installed wind capacity 46 31 28 54 39 27

Wind power generation (net) 66 52 34 68 75 43

Wind power revenue 67 28 32 68 75 43

CER/VER income 86 71 42 67 96 35

Operating profit 43 46 31 75 82 39

EBITDA 42 47 28 69 85 39

Net profit 124 35 28 84 122 30

Other P&L ratios (%)

Wind power revenue as % of total revenue 43 47 54 100 100 100

CER/VER income as % of PBT 12 17 18 31 34 35

Operating margin 29 36 41 63 65 63

Operating margin - non coal power 66 76 76 63 65 63

EBITDA margin 44 56 62 100 105 101

Net margin 14 16 18 19 24 22

Balance sheet ratios (%)

Gearing ratio 136 179 194 243 308 333

Net gearing ratio 121 157 161 195 268 287

ROE 7.3 8.8 9.8 4.3 8.6 10.0

Source: Company data, CCBIS estimates


45

Competition landscape – WTG manufacturers in China

China’s WTG market has been dominated by Chinese WTG manufacturers, the

majority of which are government-owned enterprises. According to CWEA, Chinese

WTG manufacturers have steadily increased their market share in China over the past

few years, from 45% in 2006 to 90% in 2010, a trend we expect to continue in the

future.

In September 2009, the Chinese central government pointed out that WTG

manufacturing was facing over-investment and over-capacity. In light of intense price

competition among Chinese WTG manufacturers, we see a trend towards industry

consolidation encouraged by the Chinese government and vertical integration within

the WTG sector over the next few years.

Among the three listed pure play WTG manufacturers, Goldwind, Mingyang, and

Sinovel, we believe Goldwind and Mingyang have better profitability while Sinovel’s

production costs are least competitive. Between Goldwind and Mingyang, we expect

Mingyang to enjoy better growth thanks to its much smaller base. However, we

believe risks with Mingyang are much higher as the company is switching to a new

technology platform for its 2.5/3.0MW WTG products.

China’s WTG market dominated by Chinese manufacturers

According to CWEA, Chinese WTG manufacturers have been steadily increasing their

market share in China over the past few years, from 45% in 2006 to 90% in 2010. We

believe the Chinese WTG manufacturers will maintain market dominance with China

market share of 90% in 2011F.

In our view, dominance of the Chinese WTG producers in the China market is mainly

due to:

1. Competitive cost structure - we estimate their cost will be 40-50% cheaper than

that of foreign WTG producers.

2. Closer relationship with major wind farm operators, majority of which are

government-owned enterprises.

3. Better after-sales services thanks to geographical proximity.

4. China’s localization requirement of 70%. Although it was terminated in

December 2009, we believe it greatly helped Chinese WTG manufacturers

increase scale, lower costs and build a customer base and track record in China

between 2007-2009.


46

China’s WTG market breakdown by manufacturer

0

6,000

12,000

18,000

2006 2007 2008 2009 2010

MW

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

Domestic (LHS) Foreign (LHS) Domestic % (RHS)

Source: CWEA, CCBIS estimates

Market structure: concentrated yet fragmented

Less than ten producers dominate China’s WTG market. Based on statistics from the

CWEA and our estimates, in 2010, the top-three and top-five WTG manufacturers

accounted for more than 60% and 75% of the China market, respectively, and the

top-ten WTG manufacturers accounted for 92% of the market, up from 87% in 2009.

Only two foreign WTG manufacturers made it to the top ten in 2010, down from four in

2009, and their aggregate market share was merely 8%. All of the top-five WTG

manufacturers are Chinese companies.

Meanwhile, China’s WTG market supply remains quite fragmented as we estimate

that in 2010, there were more than 40 WTG manufacturing companies sharing 8% of

the China market, among which more than 20 share 2-3% of the market.

China’s WTG market breakdown by manufacturer (2010)

Gamesa

3%

Huachuang

3%

Others

10%

XEMC Wind Power

3%

Shanghai Electric

3%

Vestas

5%Mingyang

6%

United Power

9%

Goldwind

21%

Dongfang Electric

14%

Sinovel

23%

Source: CWEA, CCBIS estimates


47

Industry trend I: Consolidation – top-five players to benefit

Based on several policy announcements over the past two years, we expect the

Chinese government to encourage market consolidation within the WTG industry.

In September 2009, the State Council approved a proposal made by the NDRC to

curb capacity expansion and investments within several industries, including steel,

cement, polysilicon and wind power equipment.

In December 2009, shortly after the State Council publicly highlighted wind equipment

as an over-capacity industry, the China Energy Bureau terminated the 70%

localization requirement on wind farm investment in China. Moreover, Ministry of

Industry and Information Technology in April 2010 unveiled draft proposal listing

requirements for wind equipment manufacturers to be legally qualified to enter into the

wind equipment manufacturing industry. The requirements include the capability of

producing 2.5MW WTGs, production capacity of over 1GW, and cumulative shipment

of over 500MW.

We believe that the top five WTG manufacturers, including Sinovel, Goldwind,

Dongfang Electric, United Power and Mingyang, to be the main beneficiaries of

industry consolidation in China.

Industry trend II: Vertical integration for cost and quality control

Over the past few years, we have seen a trend of vertical integration among global

WTG manufacturers, particularly those in China. During 2006-2008, there was a tight

supply of WTGs and components around the globe. Thus, global WTG manufacturers

began to vertically integrate to secure supply and mitigate the risk of rising component

costs. However, we saw most international WTG manufacturers slow down their

integration pace after 2009 on muted demand growth and a difficulty in securing

financing for expansion.

Nonetheless, the trend of vertical integration continued in China during the same

period, unlike the case in the overseas markets as WTG demand growth within China

remained strong and Chinese WTG manufacturers combated severe price

competition in the China market.

A good example of Chinese WTG manufacturer vertical integration is Goldwind. In

2007, Goldwind adopted an “asset light” model, meaning that the company

outsourced all of its component manufacturing to third-party vendors and purely

focused on the design and assembly of WTGs. However, Goldwind gradually created

in-house capacity for components of its direct-drive WTGs, including generators,

control systems and blades. The company also holds minority stakes in several key

upstream companies, including those supplying Goldwind with NdFeB magnets (for

direct-drive generator) and epoxide-resin glue (for blade production).


48

Vertical integration by major WTG manufacturers

WTG producer Blade Generator Gearbox Control system

Sinovel x x x* x*

Goldwind � � –** �

Dongfang Electric � � x �

United Power � x �*** x

Mingyang � x x x

XEMC x � –** �

Vestas � � x �

Gamesa � � � �

GE Wind x � � �

Enercon � � –** �

Suzlon � � � �

Repower � x x x

Nordex � x x �

Siemens � x � �

* Partially supplied by an affiliated company

** Product does not require gearbox

*** Pilot production phase

Source: CCBIS

In our view, vertical integration can enhance cost and quality control and become

increasingly important going forward when Chinese WTG manufacturers expand to

overseas markets where quality tends to be more important.

Industry trend III: 10-15% decline in ASP YoY starting from 2010

Based on data from CWEA, ASP of WTGs started to increase in 2004, peaked in

mid-2008 before declining afterwards. We forecast average WTG ASP in China will

fall 10-15% YoY in 2010-2012F.

We believe the WTG ASP increase in 2004-2008 was mainly due to tight WTG supply

and rising raw material costs. According to CWEA, the average ASP increased from

RMB4,800 per kW in April 2004 to RMB6,200 per kW at the beginning of 2008.

However, prices began to fall in 2H08 and declined rapidly in 2009. By the end of

2009, the ASP of Chinese WTGs decreased to below RMB5,000 per kW (down over

20%).

China’s ASP trends for WTGs

Source: CWEA


49

In our view, the WTG ASP decline in China since 2H08 was driven by a WTG supply

surplus, declining raw material (mainly steel) costs, rising localized component supply

as well as WTG manufacturers’ ability to reduce costs owing to economies of scale

and vertical integration.

Direct-drive or gearbox?

The global WTG market has so far been dominated by gearbox WTGs. According to

BTM Consult, gearbox WTGs accounted for more than 85% of the global market as of

2009, while Enercon and Goldwind were the only two companies among the global

top ten WTG manufacturers that had a meaningful share of direct-drive products.

Global direct-drive WTG penetration

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2005 2007 2009 2010F

MW

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Global WTG shipment (LHS) Direct-drive % (RHS)


Over the past year, the presence of direct-drive technology has increased, as

demonstrated by Goldwind’s rapid market share expansion in China, from 15% in

2009 to 21% in 2010 based on our estimates, on the back of the increasing

penetration of its direct-drive WTGs. We believe that Goldwind has also contributed

greatly to the rise of direct-drive WTG global market share from the historical average

of low teens to slightly above 20% in 2010.

Goldwind’s WTG shipment volume and market share in China

0

1,000

2,000

3,000

4,000

5,000

6,000

2007 2008 2009 2010 2011F

MW

0%

20%

40%

60%

80%

100%

Shipment (LHS) China market share (RHS)



50

Several global leading WTG manufacturers, including GE Wind, Siemens and

Dongfang Electric, which were involved in only gearbox WTG manufacturing

historically, started to tap direct-drive WTG R&D and production.

According to Goldwind and Mingyang, direct-drive WTGs have several advantages

over doubly-fed (gearbox) WTGs, such as higher energy yield, grid friendly, light

weight and most importantly savings from repair and maintenance (R&M) costs. (see

Appendix 9, page 159-161 for more details).

However, we would like to highlight that we have no preference between

gearbox and direct-drive WTGs for the following three reasons:

1. No material cost/performance difference for onshore wind applications, which

remain over 90% of wind installation in China and globally:

Based on our channel check with wind farm operators, there is no material

cost/performance difference between gearbox and direct-drive WTGs for onshore

applications, which will remain over 90% of annual installation globally and in China

for the next five years in our view. We believe Goldwind’s market share expansion is

mainly due to its aggressive pricing strategy, supported by its cost reduction efforts on

the back of economies of scale and vertical integration instead of end-customer

preference of direct-drive technology.

2. Too early to draw conclusions on advantages of direct-drive WTGs for offshore

wind applications:

Theoretically, direct-drive WTGs could very well have stronger cost competitiveness

over gearbox WTGs for offshore wind farms, especially given their lighter weight and

lower R&M expense. However, given the limited operating track record for offshore

wind farms globally, it remains too early to draw conclusions. In fact, according to

EWEA, among the top global offshore WTG suppliers, only Siemens adopts

direct-drive technology.

Global leading offshore WTG suppliers

Manufacturer Type of WTG Technology

Siemens 3.6MW Direct-drive

Vestas 3MW Gearbox

Nordex 2.5MW Gearbox

Repower 5MW / 6MW Gearbox

BARD Engineering 5MW Gearbox

Multibrid 5MW Gearbox

Source: EWEA, CCBIS

3. Less reputational risk for global leading WTG makers to explore direct-drive

technology for offshore product development:

Historically, global leading WTG manufacturers have been hesitant to switch

technology platforms due to the high risk of ruining their track record and brand

reputation. However, as all WTG manufacturers have minimal experience with

offshore wind power so far, we believe that leading WTG manufacturers face less risk

exploring direct-drive technology. Consequently, we see companies like GE Wind and

Siemens changing technology platform to direct-drive for their offshore products lately.


51

Siemens acquired its direct-drive technology through the acquisition of Bonus Energy

in 2004. It installed three 3.6MW direct-drive offshore WTGs in Denmark and is

planning to launch full-scale production in 2011. Meanwhile, another global producer

GE acquired ScanWind and its direct-drive technology in 2009 and is planning to

commercialize its 3.5MW direct-drive WTGs in 2012.

Nonetheless, we maintain our view that it remains too early to conclude whether

direct-drive is the better technology of choice for offshore wind farms.

Comparison between listed WTG manufacturers

There are three listed pure WTG manufacturing players, namely, Goldwind, Mingyang

and Sinovel. Both Goldwind and Sinovel are government-owned enterprises, while

Mingyang is the only non-government-owned company among the top five WTG

manufacturers in China. In general, we believe that government-owned WTG

manufacturers enjoy competitive advantage over non-government-owned ones given

the majority of wind farm operators in China are government-owned enterprises and

wind power remains a government-subsidized industry in China.

Based on CWEA statistics and our estimates, Goldwind and Sinovel are the two top

WTG manufacturers in China in 2010, with 21% and 23% market share, respectively,

while Mingyang is the fifth-largest WTG manufacturer. We believe that Goldwind and

Sinovel will keep their position as top-two WTG producers in China with very close

market share over the next two years. Given Goldwind, Sinovel and Mingyang’s

leading positions in China’s WTG market, we expect the three to benefit from the

industry consolidation trend going forward.

Snapshot of listed pure China WTG plays

Goldwind Mingyang Sinovel

Year for first shipment 2001 2008 2006

Company status Government-owned Private Government-owned

Shipment (2010, MW) 4,007 1,220 4,386

Cumulative shipment (2010, MW) 9,358 1,455 10,038

China market share (2010) (%) 21 6 23

Cumulative share in China (2010) (%) 21 3 22

Main products 1.5MW (direct-drive)

2.5MW (direct-drive)

1.5MW (gearbox)

3.0MW (hybrid-direct-drive)

1.5MW (gearbox)

3.0MW (gearbox)


In general, we believe that Goldwind and Mingyang have similar profitability

performance in terms of margins. Both companies have a better production cost

structure than Sinovel. On the other hand, all of the three WTG manufacturers have a

very strong balance sheet with net cash position or minimal net debt position through

2012F, based on our estimates.

Compared with Goldwind, we expect Mingyang to enjoy higher growth due to its much

smaller base. However, we would like to highlight that Mingyang’s earnings growth

comes with much higher risk as Mingyang is switching its WTG technology platform

from doubly-fed (gearbox) WTGs to SCD (super-compact-direct-drive) WTGs for its

2.5/3.0MW products, shipments of which are to be launched after 2H11F. As for

2.5MW WTGs, Goldwind uses direct-drive technology currently used in its 1.5MW

WTGs. We forecast 30% of Mingyang’s gross profit will come from its 2.5/3.0MW

WTG products by 2012F.


52

Fundamental comparison between listed pure WTG plays

Goldwind Mingyang* Sinovel**

Order book

Order backlog (GW) (Jan 2011) 7.0 3.2 15.0

Book to bill (2011F) 1.2 1.3 2.8

Shipment and market share

Shipment (MW)

2010 4,007 1,203 4,386

2011F 5,800 2,400 5,350

2012F 6,685 3,315 6,238

Shipment CAGR (2010-2012F) (%) 29 66 19

China market share (2011F) (%) 27 12 26

Profitability

Gross margin (%)

2010 23.0 23.0* 21.1

2011F 20.7 21.9* 21.1

2012F 21.9 22.0* 21.3

Net margin (%)

2010 13.0 12.6 14.8

2011F 11.4 11.5 15.2

2012F 11.4 11.4 14.8

EPS (RMB/share)

2010 0.98 5.57 2.79

2011F 1.06 8.25 3.60

2012F 1.10 9.73 4.52

EPS CAGR (2010-2012F) (%) 6 32 27

ROE

2010 17 20 19

2011F 17 23 20

2012F 15 21 21

Gearing

Net gearing ratio (%)

2010 Net cash Net cash Net cash

2011F Net cash Net cash Net cash

2012F Net cash Net cash Net cash

* Mingyang’s gross margins are adjusted for warranty provisions (3.3% of revenue)

** Sinovel’s future forecasts are based on consensus estimates



53

China High Speed Transmission Equipment (658 HK)

Excessive concern provides buying opportunity

Company Rating:

Sector Rating:

Outperform (initiation)


China High Speed Transmission Equipment (CHST) is the

second-largest wind gearbox producer globally. CHST’s shares

have underperformed the HSCEI by 33% over the past 12

months amid concerns over muted demand growth, margin

pressure, and the development of direct-drive WTGs. We believe

that CHST’s shares have been oversold and current valuation of

10x 2011F PE is very attractive. We initiate coverage with an

Outperform rating and target price of HK$15.60.

� Solid industry position. CHST’s market share of 43% in

China and 24% worldwide in 2010 are a testament to its

solid industry leadership. We believe that the gearbox

segment remains the most favorable among the wind

equipment value chain given its high barriers to entry.

� Excessive concern over direct-drive development. We

see no material operational benefit for wind operators to

adopt direct-drive over doubly-fed WTGs, particularly for

onshore applications, which will account for over 90% of

global annual installation by 2015.

� Flattish year-on-year earnings growth in 2011F priced

in. Our 2011F estimates assume the lower-end of

management guidance in terms of pricing (down 9% YoY)

and gross margins (28%). Based on our conservative

estimates, CHST trades at 10x 2011F PE, and over

41% discount to the global peer average and at CHST’s

historical valuation trough. We believe concerns

surrounding the stock have been priced in.

� Initiate with Outperform; attractive valuation. Our target

price of HK$15.60 is based on DCF valuation, implying 13x

2011F PE, in line with the average valuation of Chinese

wind equipment manufacturers.

Forecast and valuation

Year to 31 Dec 2008 2009 2010 2011F 2012F

Revenue (RMB m) 3,439 5,647 7,393 9,267 9,959

Reported net profit (RMB m) 693 965 1,403 1,435 1,542

Normalized EPS (RMB) 0.56 0.78 1.10 1.04 1.12

Normalized EPS growth (%) 94 39 41 (5) 7

PER (x) 19.0 13.6 9.6 10.1 9.4

EV/EBITDA (x) 20.5 9.3 7.7 6.9 6.3

PBV (x) 3.5 3.0 1.8 1.7 1.5

Dividend yield (%) 2.1 2.5 3.5 3.4 3.6

ROE (%) 18.6 21.7 18.7 16.9 16.2

Net gearing ratio (%) 18.2 47.1 15.0 23.1 16.6


Price: HK$12.54

Target: HK$15.60

(initiation)

Trading data

52-week range HK$10.52-19.30

Market capitalization (m) HK$17,243/US$2,216

Shares outstanding (m) 1,375

Free float (%) 85

3M average daily T/O (m share) 8.3

Expected return (%) – 1 year 24

Closing price on 1 April 2011

Stock price and HSCEI

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

21.0

22.0

23.0


HK$

8,500

9,000

9,500

10,000

10,500

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

15,000

CHST (LHS) HSCEI (RHS)

Source: Bloomberg



54

Financial analysis

Revenue mix and growth

CHST’s principle product is wind gearboxes used in wind turbines, which accounted

for 74% of its revenue in 2010. We expect wind gearboxes to remain CHST’s largest

sales contributor, accounting for c.70% of total revenue in 2011F-2012F.

Revenue contribution

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011F 2012F

Wind Gear Marine Gear Rail Gear Others


We forecast that CHST’s overall revenue will grow 25% YoY in 2011F and 7% YoY in

2012F. We believe that growth will be mainly driven by wind gearboxes and marine

gearboxes. Our wind gearbox revenue growth estimate of 3% YoY for 2012F is

conservative, and assumes no capacity expansion, no introduction of new wind

products and no ASP increase from product mix improvement. Our 2012F estimate

does, however, include an increase in sales in yaw motors and drive products.

On the back of our conservative assumptions for 2012F wind revenue growth, we

forecast CHST’s revenue growth will slow from 72% CAGR in 2007-2009, to 16%

CAGR in 2010-2012F.


55

Key operation data

2008 2009 2010 2011F 2012F

Revenue (RMB m)

Wind 1,801 3,805 5,458 6,840 7,080

Marine 398 210 234 363 428

Rail 0 14 36 72 130

Other traditional 1,241 1,618 1,665 1,992 2,322

Total 3,439 5,647 7,393 9,267 9,959

Revenue growth YoY (%)

Wind 151 111 43 25 3

Marine 193 (47) 12 55 18

Rail N/M N/M 154 98 80

Other traditional 18 30 3 20 17

Overall 81 64 31 25 7

Revenue contribution (%)

Wind 52 67 74 74 71

Marine 12 4 3 4 4

Rail 0 0 0 1 1



Gross profit and margin

While CHST has been able to improve its gross margin regardless of raw material

cost trends from 29% in 2007 to 31% in 2010, we believe CHST’s gross margin will

face downward pressure in 2011F and 2012F, due mainly to margin pressure from its

wind gearbox product line.

We forecast CHST’s overall gross margin will decline from 31% in 2010 to 28% in

2011F, then rebound to 29% in 2012F, mainly due to improvements in the product mix.

While we expect gross margin of wind gearboxes to slow from 31% in 2010 to 28% in

2011F-2012F, we expect gross margins of other non-wind products to generally

remain stable in 2011F-2012F.

Gross profit trend

0

500

1,000

1,500

2,000

2,500

3,000

2008 2009 2010 2011F 2012F

RMB m

0%

5%

10%

15%

20%

25%

30%

35%

Wind Gear Marine Gear Rail Gear Others Gross margin



56

Gross margin by product

(%) 2008 2009 2010 2011F 2012F

Wind gears 28 32 31 28 28

Marine gears 23 30 24 24 24

Rail gears N/A 39 29 28 28


Overall 29 33 31 28 29


Operating expenses

The company’s operating expenses comprise distribution costs, administrative

expenses and R&D cost. Due to stable cost management of CHST, we expect

operating expenses over sales to remain stable in 2011F-2012F at 10%, a slight drop

from 11% in 2010 due to savings from distribution costs for wind products.

Operating expenses

2008 2009 2010 2011F 2012F

Distribution costs 107 139 287 278 274

Administrative expenses 284 318 460 570 646

Research development costs 55 70 50 111 120

Total 447 528 798 959 1,040

YoY (%) 16 18 51 20 8

Operating expense as % of revenue

Distribution costs 3 2 4 3 3

Administrative expenses 8 6 6 6 6

Research development costs 2 1 1 1 1

Overall 13 9 11 10 10


Operating profit and margin

Assuming stable operating expenses of 10% over sales in 2011F-2012F, we expect

CHST’s operating margin to fall from 20% in 2010 to 18% in 2011F and remain flat for

2012F.

Operating profit trend

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2008 2009 2010 2011F 2012F

RMB m

0%

5%

10%

15%

20%

25%

Operating profit Operating margin



57

Net profit and margin

In 2008-2010, a major component of non-operating expenses was revaluation

gains/losses from CHST’s outstanding convertible bonds and equity swap. We do not

expect a net gain from revaluation to re-appear in 2011 as the convertible bond and

equity swap will be terminated in May 2011. However, due to revenue growth, we

expect 2% YoY growth in net profit for 2011F, followed by 7% YoY growth in 2012F.

We forecast net margin will fall from 19% in 2010 to 15% in 2011F and remain flat in

2012F, mainly due to the derivative discontinuation in 2011.

Net profit trend

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2008 2009 2010 2011F 2012F

RMB m

0%

3%

6%

9%

12%

15%

18%

21%

Net profit Net margin


Capex and PPE turnover

After construction completion of the second wind gearbox production base in 2010,

we believe CHST’s annual capex spending will fall from peak expenditure of

RMB1.72b in 2010 to RMB1.13b in 2012F. According to management, CHST will add

a new product line for coal and agricultural machinery and expand production facilities

for other gears. Given continued high capex spending in 2011F and 2012F, we believe

PPE turnover (revenue over average PPE) will drop from 0.75x in 2010 to 0.67x in

2011F and 0.64x in 2012F.

PPE turnover trend

0.60

0.65

0.70

0.75

0.80

0.85

0.90

2008 2009 2010 2011F 2012F

(x)



58

Debt and gearing

CHST’s net gearing ratio (net debt over total equity) reached a trough in 2010,

following its private equity placement in September 2010. We believe the company

will obtain additional loans to finance the expansion of its current production facilities

for new product lines such as the coal and agriculture machinery as well as the

expansion of in-house production for other gear products. We forecast net gearing

ratio to rise from 15% in 2010 to 23% in 2011F, followed by a drop to 17% in 2012F.

Gearing trend

10%

15%

20%

25%

30%

35%

40%

45%

50%

2008 2009 2010 2011F 2012F


Working capital

In general, we expect CHST to continue improving its working capital position in

2011F-2012F and estimate CHST’s cash conversion cycle will shorten from 101 days

in 2010 to 55 days and 40 days in 2011F and 2012F, respectively.

We saw a surge in accounts receivable days in 2010 due to incidences with

customers including GE and Sinovel. However, we believe that the problems have

been resolved and we now forecast an improvement in accounts receivable days

going forward.

Turnover days

(days) 2008 2009 2010 2011F 2012F

Inventory turnover 148 128 92 115 110

Accounts receivable turnover 103 126 159 125 120

Accounts payable turnover 239 174 150 185 190

Cash conversion 11 80 101 55 40



59

Cash flow analysis

Overall, we consider the company to have a healthy financial position. CHST does not

require large-scale loan refinancing to maintain its position, especially after a new

share placement in 2H10.

We believe net cash inflow will be reduced greatly, from RMB1.65b in 2010 to

RMB554m in 2011F, associated with the repayment of the equity swap. In 2012F, we

expect net cash inflow to rebound to RMB718m after fulfillment of capex requirements

and loan repayments.

We believe increasing net profit in 2011F-2012F and prudent working capital

management will allow the company to improve its operating cash flow from cash

outflow of RMB1.82b in 2010 to cash inflow of RMB2.49b in 2011F.

We estimate the company will have a significant cash outflow from investing activities

in 2011F of RMB2.65b, due to an expected increase in capex towards facility

upgrades and settlement of the equity swap in May 2011. After the settlement of the

equity swap, the company’s cash outflow from investing activities will return to a lower

level of RMB1.26b in 2012F.

We expect cash flow from financing activities to fall from RMB894m in 2010 to

RMB714m in 2011F as additional funds are received from the issuance of new shares

in 2010. Cash flow from financing activities will turn negative in 2012F due to

repayment of bank loans.

Cash flow projections

(4,000)

(3,000)

(2,000)

(1,000)

0

1,000

2,000

3,000

2008 2009 2010 2011F 2012F

RMB m

Cash flow from operations Cash flow from investing activities Cash flow from financing activities Net cash flow



60

Valuation and risks

CHST is an upstream market leader with an attractive valuation

CHST is the largest wind gearbox supplier in China, accounting for 43% market share

in China in 2010, and the second-largest supplier worldwide, accounting for 24% of

the global market share in 2010. We believe that market concerns over the slowdown

in growth in the wind market in the near term, margin pressure, and development of

direct-drive WTGs, has been for the most part priced in CHST’s current valuation of

10x FY11 PER.


Price

(local Market cap PER (x)

EPS

growth PEG (x) PBV (x) ROE (%)

Company Stock code Rating currency) (US$m) 2010A 2011F 2012F (%) 2011F 2010A 2011F 2012F 2010A 2011F 2012F

WTG component manufacturers

China High Speed

Transmission

658 HK O 12.54 2,217 9.6 10.1 9.4 (5) (2.1) 1.8 1.7 1.5 18.7 16.9 16.2

Hansen Transmission HSN LN NR 49.50 534 N/A N/A N/A N/M N/M 0.6 0.6 0.6 (1.7) (1.5) 0.9

Taewoong 044490 KS NR 52,300 796 42.7 22.3 16.0 79 0.3 2.1 2.0 1.8 2.9 5.5 9.3


WTG manufacturers

Xinjiang Goldwind - H share 2208 HK O 14.56 7,858 14.6 13.2 12.9 10 1.3 2.4 2.3 2.0 16.7 17.1 15.4

Xinjiang Goldwind - A share 002202 CH NR 20.65 7,857 N/A 16.9 13.4 24 0.7 N/A 3.6 2.8 39.1 24.6 21.9

Sinovel Wind 601558 CH NR 74.14 11,381 23.4 20.6 17.0 14 1.5 13.9 4.1 3.3 77.5 19.9 20.5

China Ming Yang Wind Power MY US N 10.52 1,315 12.3 8.4 7.1 48 0.2 2.4 1.9 1.5 19.8 22.6 21.0

Vestas VWS DC NR 223.30 8,685 38.9 20.2 15.8 93 0.2 2.2 2.0 1.8 5.9 11.1 12.7

Gamesa GAM SM NR 7.37 2,576 18.6 18.6 18.6 31 0.6 1.1 1.1 1.0 3.1 4.2 5.6

Repower RPW GR NR 145.00 1,900 22.9 25.7 21.5 (11) (2.3) 2.8 2.7 2.5 11.6 10.6 11.5

Nordex NDX1 GR NR 8.26 786 26.6 27.9 21.0 (5) (6.2) 1.5 1.5 1.4 5.9 4.6 6.0




All prices are as of 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS.



61

Our DCF derived target price of HK$15.60

Our target price of HK$15.60 is derived from a DCF valuation based on a WACC of

9.1% and terminal growth of 1% after FY2020F. At HK$15.60, CHST’s shares will

trade at 13x FY11 PER, in line with the average valuation of Chinese wind equipment

manufacturers.

CHST DCF valuation model

Free cash flow (RMB m) FY11F FY12F FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F

Sales 9,267 9,959 10,691 11,599 12,642 13,811 15,077 16,418 17,818 19,378

EBITDA 2,114 2,314 2,553 2,708 2,932 3,142 3,295 3,395 3,490 3,746

margin (%) 23 23 24 23 23 23 22 21 20 19

Less: tax (264) (284) (325) (347) (381) (413) (438) (465) (482) (526)

Working capital 514 142 (177) (192) 18 (225) (228) (230) (240) (85)

CAPEX (1,285) (1,131) (1,126) (1,079) (1,064) (1,139) (1,033) (1,024) (1,180) (1,046)

FCF 1,079 1,041 925 1,090 1,505 1,365 1,596 1,677 1,587 2,089

WACC Sum of PV PV of TV EV

Net debt

(FY10)

Equity

value Shares

Value per

share WACC calculation

(%) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (m shares) (HK$) Equity Beta 0.94

8.2 9,530 13,312 22,842 1,128 21,714 1,458 17.7 Risk-free rate (%) 3.92

8.3 9,490 13,034 22,524 1,128 21,396 1,458 17.4 Equity risk premium (%) 6

8.4 9,451 12,763 22,214 1,128 21,086 1,458 17.2 Country risk premium (%) 1

8.5 9,413 12,500 21,912 1,128 20,785 1,458 16.9 Cost of equity (%) 11

8.6 9,374 12,244 21,618 1,128 20,490 1,458 16.7 Cost of debt (%) 7

8.7 9,336 11,996 21,332 1,128 20,204 1,458 16.5 Debt/capital (%) 30

8.8 9,298 11,754 21,052 1,128 19,924 1,458 16.2 Tax (%) 15

8.9 9,260 11,519 20,779 1,128 19,651 1,458 16.0 WACC (%) 9.1

9.0 9,222 11,291 20,513 1,128 19,385 1,458 15.8 Terminal growth rate (%) 1

9.1 9,185 11,068 20,253 1,128 19,125 1,458 15.6

9.2 9,148 10,852 20,000 1,128 18,872 1,458 15.4

9.3 9,111 10,641 19,752 1,128 18,624 1,458 15.2

9.4 9,074 10,436 19,510 1,128 18,382 1,458 15.0

9.5 9,038 10,236 19,274 1,128 18,146 1,458 14.8

9.6 9,002 10,041 19,043 1,128 17,915 1,458 14.6

9.7 8,966 9,851 18,817 1,128 17,689 1,458 14.4

9.8 8,931 9,666 18,596 1,128 17,469 1,458 14.2

9.9 8,895 9,485 18,381 1,128 17,253 1,458 14.1

10.0 8,860 9,309 18,170 1,128 17,042 1,458 13.9

10.1 8,825 9,138 17,963 1,128 16,835 1,458 13.7

10.2 8,791 8,970 17,761 1,128 16,633 1,458 13.6

Source: CCBIS


62

Risks

Wind policy changes: As an upstream key component supplier to the wind industry,

CHST sales orders are highly sensitive to WTG demand, which, in turn, is very

dependent on the prevailing Chinese government wind policies. China’s WTG

installation grew at a 120% CAGR in 2006-2009 thanks to China’s target of generating

15% of total energy from renewable energy by 2020. We believe policy changes could

have both positive and negative impacts to the WTG manufacturing industry and our

earnings estimates.

Development of direct-drive WTG: The direct-drive WTG does not employ a

gearbox component and its market share is a sliver next to the market share of the

mainstream gearbox-using doubly fed WTGs. Among the top manufacturers in the

Chinese WTG market, only Goldwind and Xemc produce direct drive WTGs. In our

opinion, CHST’s future wind gearbox sales growth is dependent on technology trend

development. However, there is currently no apparent operational benefit for one

technology over the other. Overall, technology developments could have both positive

and negative implications for our earnings estimates depending on the choices made

by wind farm operators over time.

Key component shortage: One of the key components of gearboxes is the main

bearing. Due to the limited number of suppliers of this part in the Chinese market,

CHST relies on global suppliers such as FAG, SKF and Timken for its main bearing

supply. Supply of main bearings can be precarious at times. In fact, market supply of

main bearings experienced shortages in 2007-2008 due to rapid growth in WTGs. At

the moment, no large Chinese main bearing supplier has the technology and capacity

to replace overseas suppliers, so we expect CHST to continue to rely on these major

global suppliers for its main bearing supply, resulting in a potential slowdown in sales

growth in times of rapid WTG growth due to limited component supply.

Raw material cost fluctuations: CHST’s raw materials include cast iron, forged steel

and other spare parts such as bearings and steel plates. According to management,

raw materials accounted for approximately 77% of total cost of sales in 2010. Price

fluctuations in forged steel and other major raw materials could lead to both upside

and downside surprises in our cost and earnings estimates.

Product diversification: Although wind gear sales currently account for

approximately 70-75% of CHST’s total revenue, the company is keen on developing

new production lines like wind control systems, high speed rail products, numerical

control systems and coal and agricultural machinery. New products require

investment and time for market acceptance to gain market share. We think the launch

of new production lines is positive to CHST’s development because these new lines

can reduce the company’s dependence on wind gear sales and wind sector growth,

though they entail the risk of product failure in the product launching period.


63

Company profile

Company history

CHST is one of the leading mechanical transmission equipment producers in China,

according to China Gear Industry Yearbook 2010.

CHST’s major operational subsidiary, Nanjing High Speed & Accurate Gear (Group)

Co., Ltd (NGC), was founded in 1969 with the name Nanjing Machine Tool Repairing

Plant. In 1976, the company was transformed into a professional gear manufacturer

and renamed Nanjing Gear Box Factory. In 2001, the company evolved once again,

this time in to an incorporated (private) company and renamed NGC.

The listed holding company CHST was incorporated in 2005 and acquired a stake in

NGC in 2006. CHST successfully listed on the Main Board of the Stock Exchange of

Hong Kong in July 2007.

Major milestones

Date Development

1969 � Established in Nanjing through the merger of Second Machinery Maintenance Station of Nanjing

and Nanjing Mechanic School; began mechanical transmission equipment production business

1976 � Transformed into a professional gear manufacturer and renamed Nanjing Gear Box Factory

1997 � Obtained ISO9001 certificate for product quality management system

2001 � Established NGC after restructuring of Nanjing Gear Box Factory, and injected the mechanical

transmission equipment production business into NGC

2006 � Began marine gear transmission production and mass production of wind gear transmission

equipment

2007 � Successfully listed on the Main Board of the Stock Exchange of Hong Kong

2009 � Began production of transmission equipment for high-speed locomotives, metros and urban light

rail systems

2010 � Commenced commercial production of 3.0MW wind gearboxes

2011 � Received 150 unit order for 3.0MW main wind gearboxes for offshore wind installation in January

2011


Business description

CHST is principally engaged in the research, design, development, manufacture and

distribution of a broad range of mechanical transmission equipment (gearboxes) used

in a variety of industrial applications.

CHST acquires raw materials, such as forged steel, cast iron, foundry steel bearings,

and steel plates, which it subsequently employs in the manufacture of gears, gear

drafts and gear housings. It then assembles the components into gearboxes. The

production includes nine fundamental procedures described in the chart below.


64

Production procedures


Production facilities

CHST’s production facilities are currently all located in Nanjing, including two wind

power gearbox production facilities with total capacity of approximately 12,000MW

and three production bases for marine gearboxes, rail gearboxes and other traditional

gearboxes.


Production base Main product Plant size (sq. m)

Wind gear transmission equipment I Wind power gearbox with production capacity of about 4,000MW 172,000

Wind gear transmission equipment II Wind power gearbox with production capacity of about 6,000MW 266,000

Traditional gear transmission equipment Gear transmission equipment for construction; gearbox transmission equipment for bar-rolling,

wire-rolling and plate-rolling mills of metallurgy industry; gear transmission equipment for

plate-rolling

110,000

Traditional gear transmission equipment General purpose gearbox; standard gearbox 69,000

Marine gear transmission equipment Marine transmission system: pitch propeller, marine gearbox, tunnel thruster, hydraulic coupling, full

circle swinging

67,000



65

Value chain position

CHST is part of the upstream of the wind power industry. Gearboxes are made from

cast iron and other spare parts such as bearing and steel plates. The company

acquires these raw materials from suppliers and produces gearboxes, a major

component in WTGs. As one of the leading wind gearbox manufacturers, the

company supplies gearboxes to WTG manufacturers in China and overseas. CHST

also supplies WTGs to wind farm operators for wind power generation.

Value chain of the wind power industry


Product offerings

CHST’s products are used in various industries, including wind power generation,

marine vessels, rail transport, aerospace, metallurgy, petrochemicals, construction

and mining.

Wind gearboxes have been the company’s largest source of revenue over the past

few years, with an increasing share of company revenue. Wind gear transmission

equipment has contributed approximately 74% of 2010 revenue. Other major product

groups include marine gearbox, rail gearbox, and other traditional products,

accounting for 3%, 1% and 22% of CHST’s 2010 revenue, respectively.

Revenue contribution by product

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010

Wind Gear Marine Gear Rail Gear Other Traditional Gear



66

The 1.0MW-1.5MW gearbox series is currently the main wind gear transmission

equipment produced by the company, accounting for 80% of CHST’s wind product

revenue in 2010.

Revenue contribution by wind gear transmission equipment

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 20102MW gearbox 1.0,1.3,1.5MW gearbox 750,850kW gearbox Yaw motor & drive Pitch


Product development

Historically, CHST concentrated its efforts on building up its product portfolio and

enhanced product quality through joint development and cooperation with customers,

which are global leaders in their respective fields.

CHST jointly developed its 1.5MW wind gearboxes with GE Wind, the largest WTG

manufacturer in the US market and one of CHST’s largest customers. CHST is

currently developing 2.5MW wind gearboxes for GE in expectation of receiving

product certification. CHST also jointly developed 3MW gearboxes for

hybrid-direct-drive WTGs with Goldwind in 2009-2010.

The company jointly developed 570km/h high-speed train gears with Alstom, a

French-based company specializing in manufacturing high speed rail components,

such as rolling stock, infrastructure and information systems. CHST has also set up a

jointly controlled company with ZF Friedrichshafen AG, a German-based marine

gearbox manufacturer, to produce marine gear transmission equipment.

CHST launched a new numerical control series product line in 1H10. According to

management, CHST is developing other new products, such as wind control systems,

transmission equipment for coal-mining and high-end agricultural transmission

equipment. Although we do not expect near-term financial contribution from these

new product lines, we believe new product development will be positive for the

company’s long-term growth profile, particularly post 2011.


67

Customer profile

CHST sells gearboxes to domestic Chinese customers as well as overseas customers.

Since 2004, the company has developed long-term business relationships with

leading WTG manufactures in China, including Goldwind, Shanghai Electric,

Dongfang Electric, China Guodian United Power, Sinovel and Mingyang. It also sells

wind gearboxes to global leading WTG manufacturers, including GE, Vestas, Nordex,

REpower and Fuji Heavy. In 2009, the company co-developed high-speed train gears

with Alstom and has provided them with rail gearboxes since.

Customer profile


Major suppliers

CHST’s raw material is high-end forge steel and main bearings. To better control the

cost and quality of its forge steel supply, CHST acquired a 50% stake in Jiangsu

Hongsheng in 2008. We estimate that Jiangsu Hongsheng currently accounts for 70%

of CHST’s forge steel demand. Moreover, after experiencing prolonged shortages of

main bearings in 2006-2008, CHST signed a long-term supply contract with SKF to

secure main bearings at predetermined fixed prices in 2009-2011. Besides, CHST

also procures main bearings from FAG, SFK and Timken.

Major competitors

CHST’s major competitors include wind gearbox manufacturers, such as Winergy,

Hansen Transmission, Sew-Eurodrive, Flender Holding GmbH, Chongqing Gearbox,

and Hangzhou Advance Gearbox. Accordingly, CHST is the second-largest wind

gearbox manufacturer globally in 2010, while Winergy and Hansen were the largest

and third-largest wind gearbox manufacturers globally.


68

Shareholding structure

CHST’s largest shareholder is Fortune Apex Limited, owning 15.4% of its total shares

as of March 2011. Fortune Apex Limited is mainly owned by company executive

directors.

Directors and senior management background

Board of directors and senior management

Name Age Position Key experience

Hu Yueming 60 Executive Director,

Chairman of the board

and CEO

� Senior engineer;

� Appointed Director since March 2007;

� Over 30 years of experience managing in machinery and industrial enterprises;

� Previously served various management positions in state-owned power conglomerates.

Chen Yongdao 47 Executive Director and

Vice President



� Over 20 years of experience in R&D and quality inspection of mechanical transmission equipment

production.

Lu Xun 55 Executive Director � Senior engineer;


� Over 20 years of experience in marketing management and client resources in mechanical transmission

equipment.

Li Shengqiang 56 Executive Director � Appointed Director since March 2007;

� Over 25 years of enterprise management experience and mechanical transmission equipment production.

Liu Jiangguo 40 Executive Director � Senior engineer;


� Over 10 years experience in R&D of mechanical transmission equipment.

Liao Enrong 49 Executive Director � Senior engineer;


� Over 20 years experience in heat treatment of metallic materials and technical and investment

management.

Zhang Wei 45 Non-executive Director � Senior engineer;

� Appointed Director since July 2006.

Jiang Xihe 51 Independent

Non-executive Director

� Obtained a doctorate in Accountancy;

� Appointed Director since June 2007;

� Professor and head of Accounting and Financial Development Research Center of Nanjing Normal

University.

Zhu Junsheng 70 Independent


� Vice President of Chinese Renewable Energy Society and Director of the Renewable Energy Professional

Committee of China Association of Resource Comprehensive Utilisation;

� Appointed Director since June 2007.

Chen Shimin 51 Independent


� Obtained a doctorate in Accounting;

� Professor in Nanjing University and Shanghai University of Finance and Economics;

� Appointed Director since June 2007.

Lui Wing Hong,

Edward

47 Chief Financial Officer

and Company Secretary

� Associate member of Australian Society of Certified Public Accountants and a member of Hong Kong

Institute of Certified Public Accountants;

� Joined group in June 2006.



69

Financial summary

Income statement forecasts Balance sheet forecasts

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Revenue 5,647 7,393 9,267 9,959

Cost of goods sold (3,786) (5,094) (6,646) (7,116)

Gross profit 1,861 2,299 2,621 2,843

Other income

Selling and distribution expenses (139) (287) (278) (274)

Administrative expenses (318) (460) (570) (646)

R&D expenses (70) (50) (111) (120)

Operating profit 1,334 1,501 1,662 1,803

EBIT 1,334 1,501 1,662 1,803

Depreciation and amortisation 221 376 452 510

EBITDA 1,554 1,878 2,114 2,314

Net interest expense (74) (116) (137) (164)

Share of results of an associate 16 41 46 50

Extraordinary items (110) 223 128 137

Profit before tax 1,166 1,650 1,699 1,826

Taxation (200) (257) (264) (284)

Net profit after tax 966 1,393 1,435 1,542

Minorities (1) 10 0 0

Reported net profit after tax 965 1,403 1,435 1,542

Dividends (327) (471) (488) (524)

Transfer to reserves 638 933 947 1,017

Normalized net profit after tax 965 1,403 1,435 1,542

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Fixed assets 4,116 5,269 6,061 6,713

Other intangible assets 120 214 269 289

Long-term investments 722 830 922 1,022

Other long-term assets 240 476 582 621

Total non-current assets 5,198 6,789 7,834 8,644

Other current assets 640 932 984 1,057

Inventories 1,313 1,258 2,094 2,145

Marketable securities 0 18 18 18

Accounts receivable 2,613 3,811 3,174 3,274

Cash & equivalents 471 2,124 2,678 3,396

Total current assets 5,037 8,142 8,948 9,890

Total assets 10,235 14,932 16,782 18,535

Accounts payable 1,566 2,613 3,369 3,704

Short-term debt 1,556 1,209 1,853 1,992

Other current liabilities 166 1,405 131 140

Total current liabilities 3,288 5,226 5,354 5,837

Long-term debt 1,012 2,043 2,780 2,988

Convertible debt 1,369 0 0 0

Other long-term liabilities 115 148 170 178

Total non-current liabilities 2,496 2,191 2,950 3,166

Total liabilities 5,785 7,417 8,304 9,002

Total shareholders' equity 4,450 7,514 8,478 9,532

Total equity and liabilities 10,235 14,932 16,782 18,535

Financial ratios Cash flow projections

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Profitability (%)

EBIT margin 23.6 20.3 17.9 18.1

EBITDA margin 27.5 25.4 22.8 23.2

Net margin 17.1 19.0 15.5 15.5

ROE 21.7 18.7 16.9 16.2

Growth (%)

Revenue 64.2 30.9 25.4 7.5

EBIT 119.3 20.8 12.6 9.4

EBITDA 144.5 12.6 10.7 8.5

Net profit growth 39.4 44.3 3.0 7.5

Valuation and ratio analysis (x)

Normalized PER 13.6 9.6 10.1 9.4

Reported PER 13.6 9.6 10.1 9.4

Dividend yield 2.5 3.5 3.4 3.6

Price/cash flow N/A 8.2 26.2 20.2

PBV 3.0 1.8 1.7 1.5

EV/EBIT 10.9 9.7 8.7 8.1

EV/EBITDA 9.3 7.7 6.9 6.3

Liquidity and leverage (%)

Current ratio 1.5 1.6 1.7 1.7

Interest cover (x) 18.1 13.0 12.1 11.0

Gearing ratio 58 43 55 52

Net gearing ratio 47 15 23 17

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

EBITDA 1,554 1,878 2,114 2,314

Change in working capital (1,784) (121) 514 142

Other operating cash flow (47) 61 (137) (92)

Cash flow from operations (277) 1,818 2,491 2,364

Capital expenditure (1,602) (1,717) (1,285) (1,131)

Addition in investments (2) (81) 0 0

Net acquisitions 1 (41) (46) (50)

Reduction/(addition) in other

long-term assets 810 891 (1,268) (72)

Addition in other long-term liabilities 1 0 0 0

Other cash flow from investing

activities 26 (112) (52) (11)

Cash flow from investing activities (766) (1,059) (2,651) (1,264)

Cash dividends (274) (327) (471) (488)

Equity issue 0 2,054 0 0

Net debt issue 1,206 683 1,382 346

Net convertible debt repayment 0 (1,369) 0 0

Other cash flow from financing

activities (99) (147) (197) (240)

Cash flow from financial activities 832 894 714 (382)

Net cash flow (210) 1,653 554 718

Beginning cash 682 471 2,124 2,678

Forex 0 0 0 0

Ending cash 471 2,124 2,678 3,396 Source: Company data, CCBIS estimates


70

Xinjiang Goldwind Science & Technology (2208 HK)

Industry leader, compelling valuation

Company Rating:

Sector Rating:

Outperform (initiation)


Goldwind is the second-largest WTG producer in China, with

21% market share in 2010. Near-term industry concerns over

muted demand growth and margin pressure, we believe, have

been priced in, and we consider Goldwind one of the main

beneficiaries of government-encouraged industry consolidation in

the medium term. Current valuation of 13x FY11F PER provides a

good entry opportunity. We initiate coverage on the stock with an

Outperform rating and target price of HK$16.60.

� Continuous market share gains in China. We believe

Goldwind will expand its market share in China thanks to its

leadership in cost and brand equity. We expect shipment

growth of 45% YoY in 2011F, implying a market share gain to

30%, from 21% in 2010. Goldwind claimed a 32% share in

nationwide WTG public tendering in 2010.

� Well-positioned for overseas and offshore. Goldwind was

among the first to produce 2.5/3.0MW WTGs in China. They

now represent 25% of the company’s order backlog.

Goldwind is rare insofar as it has a track record in offshore

wind in China. We also see it ramping up overseas sales

contribution to 10% in 2011F and c.12% in 2012F.

� Industry and company negatives priced in. Our 2011F

estimates factor into shipment of 5.8GW (guidance:

5.5-6.0GW), ASP decline of 14% YoY and gross margin

decline of 230bp YoY to 20.7%. Based on our conservative

estimates, Goldwind trades at 13x 2011F PE, a 23%

discount to the global peer average, a compelling valuation.

� Initiate with Outperform. Our target price of HK$16.60 is

based on DCF valuation, implying 15x 2011F PE, at a 13%

discount to the global peer average valuation.


Year to 31 Dec 2008 2009 2010 2011F 2012F

Revenue (RMB m) 6,417 10,667 17,475 21,489 22,282

Reported net profit (RMB m) 909 1,766 2,272 2,494 2,568


Normalized EPS growth (%) 45.1 92.6 7.7 10.2 3.0

PER (x) 30.3 15.7 14.6 13.2 12.9

EV/EBITDA (x) 41.3 24.4 16.9 15.2 14.0

PBV (x) 6.6 5.0 2.4 2.3 2.0

Dividend yield (%) 2.7 2.0 7.7 2.6 1.6

ROE (%) 22.0 32.0 16.7 17.1 15.4

Net gearing ratio (%) Net Cash Net Cash Net Cash Net Cash Net Cash


Price: HK$14.56

Target: HK$16.60

(initiation)

Trading data

52-week range HK$12.2 – 21.3



Free float (%) 92





12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

21.0

22.0


HK$

10,000

10,500

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

Goldwind (LHS) HSCEI (RHS) Source: Bloomberg

Clarisse Pan (852) 2533 2400 [email protected]

Alan Lau (852) 2533 2479 [email protected]


71

Financial analysis

Revenue

We forecast Goldwind’s top-line growth to continue in 2011F and 2012F at 23% YoY

and 4% YoY, respectively. We believe Goldwind’s revenue growth in 2010-2012F will

be volume driven and expect its blended ASP of WTGs to decline 14% YoY and 11%

YoY in 2011F and 2012F, respectively. Assuming its market share in China will

increase and overseas sales will expand, we expect Goldwind’s shipment growth to

reach 45% YoY in 2011F and 15% YoY in 2012F.

Goldwind’s principal product, the 1.5MW WTG, contributed 94% of company revenue

in 2010. We expect the 1.5MW WTG to continue to be its principal revenue contributor

through 2012F. Despite production and shipments of 2.5MW WTG in 2011F and

2012F, we believe the 2.5MW WTG still requires one-to-two more years to gain

market acceptance.

Besides WTG sales, the company also generates revenue from wind power services

and wind farm development. These two business lines aggregately accounted for

approximately 3% of total revenue in 2010, and we expect revenue contribution (as

share of overall revenue) to remain stable in 2011F and 2012F.

Revenue trend

0

5,000

10,000

15,000

20,000

25,000

2008 2009 2010 2011F 2012F

RMB m

750 kw revenue 1.5MW revenue 2.5MW revenue

Others Sales from wind power service Sales from wind farm development


1.5MW WTG

1.5MW WTG is currently the dominant product in the Chinese WTG market and

Goldwind’s core product since 2009. The product accounted for 94% of total revenue

in 2010. We estimate this will gradually fall to 75% in 2011F and 63% in 2012F to be

replaced by the sale of the new 2.5MW WTG. We expect product shipments to reach

4,525MW in 2011F, representing 18% YoY growth from 3,851MW in 2010, followed by

a slight fall to 4,435MW or a 2% YoY decline in 2012F.

Due to intensifying competition, we forecast that the ASP of 1.5MW WTG will fall from

RMB4,253 per kW in 2010 to RMB3,555 per kW in 2011F and RMB3,164 per kW in

2012F. Based on our assumptions for ASP and shipment volume, we project revenue

from 1.5MW WTG to decline by 2% YoY to RMB16.09b in 2011F and by 13% YoY to

RMB14.03b in 2012F.


72

2.5MW WTG

The company began delivering the 2.5MW WTG in 2H10. We expect the product to

earn a pricing premium over the 1.5MW WTG as it is an advanced model.

We forecast shipment volume of the 2.5MW WTG to grow significantly, from 2.5MW in

2010 to 1,125MW in 2011F and 2,250MW in 2012F. Despite our assumption for rapid

volume growth YoY over the next two years, we believe that 1.5MW WTG will remain

Goldwind’s dominant product through 2012F as more time is needed for the new

2.5MW WTG product to gain market acceptance. We expect revenue contribution

from 2.5MW WTG to grow from 0.07% in 2010 to 21.00% in 2011F and 34.00% in

2012F.

We believe an ASP drop for WTGs is inevitable given the market trend, even for

advanced 2.5MW WTG models. We forecast product ASP to fall from RMB4,800 per

kW in 2010 to RMB3,984 per kW in 2011F and RMB3,370 per kW in 2012F. According

to our estimate, due to rapid shipment volume growth in 2011F and 2012F, we

forecast revenue contribution from the 2.5MW WTG to ramp up from RMB12m in

2010 to RMB4.48b in 2011F, and grow 69% YoY to RMB7.58b in 2012F.

750kW WTG and other WTG sales

The 750kW WTG and other smaller capacity WTG are less economical to wind farm

operators compared with megawatt size WTGs. Shipment of 750kW and below

products have been on a declining trend since 2008 and revenue from 750kW and

below products only accounted for only 3% of 2010 WTG revenue. We expect the

company to entirely phase out this product line in 2012F.

WTG ASP trend

3,000

3,500

4,000

4,500

5,000

5,500

2008 2009 2010 2011F 2012F

RMB / kW

750kW WTG 1.5MW WTG 2.5MW WTG Blended ASP



73

Key operation data

2008 2009 2010 2011F 2012F

Sales from wind turbines

750kW turbines

Shipments (unit) 1,138 592 205 200 0

Shipments (MW) 854 444 154 150 0

ASP (RMB per kW) - 750MW 3,868 3,941 3,522 3,274 3,126

Revenue from 750kW WTG (RMB m) 3,301 1,750 542 491 0

YoY (%) 31 (47) (69) (9) (100)

1.5MW turbines

Shipments (unit) 346 1,061 2,567 3,017 2,956

Shipments (MW) 519 1,592 3,851 4,525 4,435

ASP (RMB per kW) 5,327 5,333 4,253 3,555 3,164

Revenue from 1.5MW WTG (RMB m) 2,765 8,487 16,374 16,086 14,030

YoY (%) 468 207 93 (2) (13)

2.5MW turbines

Shipments (unit) 0 0 1 450 900

Shipments (MW) 0 0 3 1,125 2,250

ASP (RMB per kW) 0 0 4,800 3,984 3,370

Revenue from 2.5MW WTG (RMB m) 0 0 12 4,482 7,584

YoY (%) N/M N/M N/M 37,250 69

Other WTG sales (RMB m) 233 110 77 0 0

Total shipment volume (MW) 1,373 2,036 4,007 5,800 6,685

Total WTG sales revenue (RMB m) 6,299 10,347 17,005 21,059 21,614

YoY (%) 110 64 64 24 3

Sales from wind power services (RMB m) 30 215 293 215 334

Sales from wind farm development (RMB m) 88 104 178 215 334

Total revenue (RMB m) 6,417 10,667 17,475 21,489 22,282

YoY (%) 113 66 64 23 4

CAGR 2010-12F (%) 13



We forecast company gross margin to be 21% and 22% in 2011F and 2012F,

respectively. We expect Goldwind’s blended WTG ASP to decline 15% and 10% in

2011F and 2012F, respectively, and believe the company can reduce product costs by

similar magnitude through vertical integration, including in-house production of WTG

components and investments in major suppliers.

In 2010, Goldwind acquired rotor blade manufacturing companies and it now supplies

its own rotor blades needs. Rotor blades account for approximately 20% of its WTG

production costs. We forecast company in-house production to increase from 35-40%

of total WTG costs in 2010 to over 50% in 2011F.


74

Status of in-house production of components

Component

Share of total

WTG cost (%)

Produced in-house

as of 2010 (%) Management estimate

Blades 20 Nil Acquired 2 blade factories in 2010, target to

produce 800-1,000 blades in 2011, around

10% of supply

Generators 27 100 100% in 2011F-2012F

Electrical control system 26 50 60-70% by 2011F

Others 27 Nil Obtained license from Infeneon Technologies

(IFFNY US, Not Rated), to produce 100% of

insulated-gate bipolar transistor (IGBT) from

2011.


Besides acquisitions, the company owns a 35% equity interest in each of its

component suppliers, Jianxi Jinli Mag Rare-Earth and Jiangsu Chengfeng New

Material Technology, which supply neodymium for its permanent magnet generators

and epoxy-glue for its rotor blades, respectively. We expect Goldwind to reduce costs

and receive supply priority from these major component suppliers.

WTG cost of sales trend

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2008 2009 2010 2011F 2012F

RMB / kW

750kW WTG 1.5MW WTG 2.5MW WTG Blended cost of sales



75

Gross profit trend

0

1,000

2,000

3,000

4,000

5,000

6,000

2008 2009 2010 2011F 2012F

RMB m

0%

3%

6%

9%

12%

15%

18%

21%

24%

27%

750kW WTG 1.5MW WTG 2.5MW WTG Others WTG Gross margin


Operating expenses

Operating expenses mainly include product warranty provisions, delivery charges,

R&D, depreciation and amortization and labor cost. It accounted for approximately

10% of revenue in 2008-2010. We expect company warranty provision policy and

operating expenses to maintain in the near future and assume operating expenses will

continue to account for 10% of the revenue in 2011F-2012F.


Assuming stable gross margin and operating expenses, we expect Goldwind’s

operating margin to maintain at 14% and 15% in 2011F and 2012F, respectively.

Driven by the ramp up of 2.5MW WTG sales, we forecast 6% and 10% YoY growth in

operating profit in 2011F and 2012F, respectively.


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2008 2009 2010 2011F 2012F

RMB m

0%

4%

8%

12%

16%

20%




76


We believe Goldwind will maintain net margin at approximately 12% in 2011F-2012F,

year-on-year growth of 9% in 2011F and 4% in 2012F, in line with operating profit

growth. Since Goldwind had a net cash position in 2008-2010, management sees no

need for large equity and debt placements in the near future, especially after obtaining

additional liquidity through its IPO in 2H10. Therefore, we expect the company to incur

similar finance cost levels in 2011F-2012F as in 2010.

Net profit trend

0

500

1,000

1,500

2,000

2,500

3,000

2008 2009 2010 2011F 2012F

RMB m

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%




Following the IPO in 2H10, we believe Goldwind is keen to expand its production

facilities in China and overseas as well as invest in the R&D of WTG and components.

In order to expand overseas, Goldwind will also have to establish sales offices and

production facilities overseas for sales support. Hence, we expect annual capex to

grow, from RMB2.67b in 2010 to RMB2.92b in 2012F, representing a 5% CAGR in

2010-2012F. We forecast PPE turnover (revenue over average PPE) will fall slightly

from 6x in 2010 to 4x in 2011F and 3x in 2012F, given expected facility expansion in

2011F-2012F.

PPE turnover trend

2

3

4

5

6

7

8

2008 2009 2010 2011F 2012F

(x)



77

Working capital

Goldwind has a relative stable cash conversion cycle at approximately 58 and 57days

in 2009 and 2010, respectfully, and we forecast it to maintain at approximately

39 days in 2011F and 2012F each.

Turnover days

(days) 2008 2009 2010 2011F 2012F

Inventory turnover 158 132 119 110 110

Accounts receivable turnover 149 100 158 150 150

Accounts payable turnover 190 174 221 221 221

Cash conversion 117 58 57 39 39


Debt and gearing

Goldwind borrows minimally from banks and other sources and has a relatively

healthy liquidity. It has sufficient cash for working capital and business expansions and

was in a net cash position in 2008-2010. We believe the company will not need to

borrow large sums in the near future, especially after it obtained funds from its IPO in

2H10. We forecast Goldwind to continue its net cash position in 2011F-2012F.

Cash flow analysis

Driven by the company’s stable income growth and better working capital position, we

believe its operating cash flow will improve from RMB186m in 2010 to RMB4.62b in

2011F. We also forecast the company to have increasing cash outflow from investing

activities over 2011F-2012F due to an increase in capex for facility expansion and

R&D spending.

We anticipate the company will have a large cash outflow from financing activities of

RMB1.89b in 2011F due to its expected repayment of bank loans. Overall, we expect

the net cash inflow from operating activities to be balanced by capex spending and

repayment of bank loans in 2011F. Net cash outflow may further increase in 2012F

due to the increase in capex according to our estimates.


(3,000)

(2,000)

(1,000)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2008 2009 2010 2011F 2012F

RMB m




78

Valuation and risks

Well-positioned industry leader with attractive valuation

Market concerns over excess wind power capacity in China due to slow grid

development and continuously decreasing WTG ASP as a result of fierce competition

in the Chinese WTG industry, has pushed down share prices of the whole value chain

for wind energy. Share prices have fallen to a trough level in 4Q10 and 1Q11.

As the second-largest WTG producer in China with 21% market share in 2010,

Goldwind is expected to be one of the biggest beneficiaries of

government-encouraged industry consolidation in the medium term. Currently trading

at HK$14.56 or 13x FY11F PER, we believe Goldwind’s solid financial position and

continuously expanding market share will bring valuation recovery in the

medium-to-long term.


Price


EPS




China High Speed

Transmission

658 HK O 12.54 2,217 9.6 10.1 9.4 (5) (2.1) 1.8 1.7 1.5 18.7 16.9 16.2

Hansen Transmission HSN LN NR 49.50 534 N/A N/A N/A N/M N/M 0.6 0.6 0.6 (1.7) (1.5) 0.9

Taewoong 044490 KS NR 52,300 796 42.7 22.3 16.0 79 0.3 2.1 2.0 1.8 2.9 5.5 9.3


WTG manufacturers

Xinjiang Goldwind - H share 2208 HK O 14.56 7,858 14.6 13.2 12.9 10 1.3 2.4 2.3 2.0 16.7 17.1 15.4

Xinjiang Goldwind - A share 002202 CH NR 20.65 7,857 N/A 16.9 13.4 24 0.7 N/A 3.6 2.8 39.1 24.6 21.9

Sinovel Wind 601558 CH NR 74.14 11,381 23.4 20.6 17.0 14 1.5 13.9 4.1 3.3 77.5 19.9 20.5

China Ming Yang Wind Power MY US N 10.52 1,315 12.3 8.4 7.1 48 0.2 2.4 1.9 1.5 19.8 22.6 21.0

Vestas VWS DC NR 223.30 8,685 38.9 20.2 15.8 93 0.2 2.2 2.0 1.8 5.9 11.1 12.7

Gamesa GAM SM NR 7.37 2,576 18.6 18.6 18.6 31 0.6 1.1 1.1 1.0 3.1 4.2 5.6

Repower RPW GR NR 145.00 1,900 22.9 25.7 21.5 (11) (2.3) 2.8 2.7 2.5 11.6 10.6 11.5

Nordex NDX1 GR NR 8.26 786 26.6 27.9 21.0 (5) (6.2) 1.5 1.5 1.4 5.9 4.6 6.0







79

Our DCF derived target price of HK$16.60

Our target price of HK$16.60 is based on DCF valuation assuming a WACC of 6.8%

and terminal growth of 1.0% after FY2020F. At HK$16.60, Goldwind trades at 15x

FY11F PER, a 13% discount to its global peer average of 17x.

Goldwind DCF valuation model


Sales 21,489 22,282 22,270 20,784 19,762 20,580 22,266 23,691 24,757 25,871

EBITDA 3,385 3,687 3,563 3,339 3,177 3,102 3,308 3,264 3,391 3,534

margin (%) 16% 17% 16% 16% 16% 15% 15% 14% 14% 14%

Less: tax (463) (676) (651) (612) (578) (562) (599) (589) (614) (642)

Minority interest 131 135 130 122 116 112 120 118 123 128

Working capital 1,702 (178) 652 (3) 22 1,169 84 199 398 1,197

CAPEX (2,816) (2,924) (2,441) (1,922) (2,547) (2,215) (2,201) (2,278) (2,244) (1,715)

FCF 1,939 44 1,252 925 190 1,607 712 714 1,053 2,502


Net debt

(FY10)

Equity

value Shares

Value per

share WACC Calculation

(%) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (m shares) (HK$) Equity beta 0.52

5.9 8,381 29,732 38,113 (6,357) 44,470 2,695 19.6 Risk-free rate (%) 3.92

6.0 8,347 28,893 37,240 (6,357) 43,597 2,695 19.2 Equity risk premium (%) 6

6.1 8,313 28,089 36,402 (6,357) 42,759 2,695 18.8 Country risk premium (%) 1

6.2 8,279 27,319 35,598 (6,357) 41,955 2,695 18.5 Cost of equity (%) 7

6.3 8,246 26,580 34,825 (6,357) 41,182 2,695 18.2 Cost of debt (%) 7

6.4 8,212 25,870 34,082 (6,357) 40,439 2,695 17.8 Debt/capital (%) 30

6.5 8,179 25,188 33,367 (6,357) 39,724 2,695 17.5 Tax (%) 15

6.6 8,146 24,532 32,679 (6,357) 39,035 2,695 17.2 WACC (%) 6.8

6.7 8,114 23,901 32,015 (6,357) 38,372 2,695 16.9 Terminal growth rate (%) 1

6.8 8,082 23,294 31,376 (6,357) 37,732 2,695 16.6

6.9 8,049 22,709 30,759 (6,357) 37,116 2,695 16.4

7.0 8,018 22,146 30,163 (6,357) 36,520 2,695 16.1

7.1 7,986 21,602 29,588 (6,357) 35,945 2,695 15.8

7.2 7,955 21,078 29,033 (6,357) 35,390 2,695 15.6

7.3 7,923 20,572 28,496 (6,357) 34,852 2,695 15.4

7.4 7,892 20,084 27,976 (6,357) 34,333 2,695 15.1

7.5 7,862 19,612 27,473 (6,357) 33,830 2,695 14.9

7.6 7,831 19,155 26,987 (6,357) 33,343 2,695 14.7

7.7 7,801 18,714 26,515 (6,357) 32,872 2,695 14.5

7.8 7,771 18,287 26,058 (6,357) 32,415 2,695 14.3

7.9 7,741 17,874 25,615 (6,357) 31,972 2,695 14.1

Source: CCBIS


80

Risks

Launch of new product model: Goldwind has announced plans to develop 3.0MW

and larger capacity WTGs using hybrid drive technology. Because hybrid drive WTGs

have yet to enter the market, we are unsure of the market’s response to the new

technology. However, if the market response is better than expected, it may bring

potential upside to our earnings estimate.

Overseas market expansion: Goldwind’s management expressed its plan to deliver

WTGs overseas to North America, Europe and Africa. To expand overseas, the

company will have to incur significant investment to build its brand, establish delivery

and originate after-sales service teams. Operating in foreign countries may incur

additional costs entailed by complying with local legal requirements and meeting

certain financial requirements for wind project investments. That said, expanding

overseas market may also allow the company to diversify its customer portfolio and

obtain a higher return. The move could be beneficial to the company in the long run, if

successfully implemented.

Wind policy changes: Demand for WTG highly susceptible to the Chinese

government wind policy. For the past few years, China’s WTG installation grew at a

120% CAGR in 2006-2009 thanks to China’s target to generate 15% of total energy

from renewable energy by 2020. We think policy changes could have both positive

and negative impact to the WTG manufacturing industry and our earnings estimate.

Competition in China: Competition in the Chinese WTG market has increased since

the listing of top domestic WTG manufacturers, including Sinovel (A-shares),

Goldwind (A+H shares) and Mingyang (US listed). By listing, these companies

improve corporate governance and provide cash for technology, production and

distribution upgrades. In order to gain market share, WTG manufacturers compete by

launching new products and lowering ASP, resulting in downward pressure on

Goldwind earnings if it is unsuccessfully in implementing cost-cut measures and

maintaining gross and operating margins. At the same time, it may become an

opportunity for market share expansion in the long term if less-competitive WTG

suppliers leave the market.


81

Company profile

Company history

Goldwind is China’s second-largest and the world’s fifth-largest WTG manufacturer in

2010, accounting for 21% of China’s installed capacity according to CWEA. It is also

engaged in the provision of wind power services and the development of wind farms

for sale to wind farm operators.

Founded in February 1998, Goldwind has one of the richest operating histories

among Chinese wind turbine manufacturers. It successfully made its initial public

offering on the Shenzhen Stock Exchange in December 2007 and a secondary listing

on the Main Board of the Stock Exchange of Hong Kong in October 2010.

Goldwind has sales network in four main regions of China, namely (1) Inner Mongolia,

(2) northeast China, (3) northern China, and (4) northwest and south China. Further

afield, it began distributing wind turbines in the US and Germany and also established

branches in Australia.

Major milestones

Year Development

1998 � Xinjiang New Wind, Goldwind’s predecessor company, was established in Urumqi, Xinjiang, by

Xinjiang Wind Power;

� Developed its 600kW wind turbine.

2000 � Developed 650kW wind turbines;

� Obtained the ISO9001 certification.

2001 � Changed its name to Xinjiang Goldwind Science & Technology Co., Ltd;

� Developed 750kW wind turbines.

2002 � Established production base in Urumqi, Xinjiang

2003 � Obtained the ISO9001:2000 certification

2004 � Establishment of the National Wind Power Engineering Technology Research Centre

2005 � Developed 1.2 MW wind turbines

2006 � Received the "2006 World Wind Energy Award" from the World Wind Energy Association;

� Ranked 10th-largest wind turbine manufacturer globally.

2007 � Listed on the SZSE with stock code 0002202;

� Established production base in Beijing;

� Began selling 1.5MW direct-drive permanent magnet wind turbines.

2008 � Established production base in Baotou, Inner-Mongolia;

� Acquired Vensys AG, a research company based in Germany;

� Launched its 1.5MW wind turbine to the European market.

2009 � Developed 2.5MW direct-drive permanent magnet wind turbine;

� Developed 3.0MW hybrid-drive wind turbine.

2010 � Installed three 1.5MW wind turbines on Uilk wind farm in Minnesota, US;

� Established production base in Neunkirchen, Germany;

� Launched 2.5MW direct-drive permanent magnet wind turbines;

� Commenced development of 6.0MW wind turbine;

� Listed on the Main Board of the Stock Exchange of Hong Kong with stock code 2208 HK;

� Won bid in Illinois, US under Shady Oaks, a wind farm wholly owned by Goldwind. The plant will

install 70 turbines of 1.5MW, all from Goldwind, and is expected to generate electricity in 2012.

2011 � Signed a supply contract with HydroChina International for wind farm projects in Adama, Ethiopia,

Africa. The contract includes 34 units of its1.5MW direct-drive permanent magnet wind turbine,

which will be delivered in three batches between March and June 2011.



82

Research and development

Since 2002, the company has co-developed its 1.2MW and 1.5MW wind turbines with

Vensys AG, a German-based engineering company acquired by Goldwind in 2008 as

its R&D arm. Including R&D bases in Beijing and Urumqi, Xinjiang, Goldwind has

three major R&D centers with more than 500 R&D staff globally.

Main business – WTG sales

Goldwind is one of China’s leading WTG manufacturers producing gearless

direct-drive permanent magnet (DDPM) full-power rectification WTGs, which generate

alternative current through AC-DC-AC conversion. In addition, its permanent magnet

technology is able to enhance the productivity of electricity generation. WTG sales

accounted for 97% of Goldwind’s revenue for 2010 of which 94% came from 1.5MW

WTG sales and 3% from 750kW, with the remaining from other WTG models. At

end-2010, Goldwind’s signed orders totaled 2,765MW, comprising 1,811 1.5MW WTG

units, 18 2.5MW WTG units and one 3.0MW WTG unit.

WTG product series

Model Features

750kW WTG The product was developed by the company in 2001 and has been for sale since then;

however, it is currently no longer one of Goldwind’s main products.

1.5MW DDPM WTG The company’s main product, which can be used both on-shore and off-shore.

2.5MW DDPM WTG Launched in the second half of 2010 and currently an advance product to the mainstream

1.5MW WTGs in the China market. The product can be used both on-shore and off-shore.

3.0MW hybrid-drive WTG Adopts the hybrid of direct-drive and conventional gearbox technology. The prototype has

been successfully developed but has not yet begun mass production.

6.0MW WTG Currently under development.


WTG revenue contribution by product (2010)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010

750 kW WTG 1.5MW WTG Other WTG



83

Revenue recognition and warranty obligations

Goldwind recognizes sales revenue upon successful delivery of wind turbines (i.e.

after the wind turbines are installed and once preliminary inspection is complete). By

that time, the company collects up to 90% of the contract price. The remaining amount

is collected upon complete fulfillment of the 24-month warranty period.

Component production status of WTGs

The company produces a wide range of major WTG components in-house, including

rotor blades, generators, and parts for its electrical control systems. It is a vertically

integrated producer as these components cover c.60% of a typical 1.5MW direct-drive

WTG production. Before 2010, key components, which accounted for 20% of total

production costs, were produced in-house, according to management.

Production cost breakdown of a typical direct-drive 1.5MW WTG

Impeller

12%

Blade

20%

Structural components

16%

Electric control

16%

Generator

27%

Nacelle

9%


Component production status

Component Suppliers

Blades � In-house production recently began after two blade factories were acquired in 2010,

target to produce 800-1,000 blades in 2011, around 10% of supply

Gearboxes � Nanjing High Speed (CHST), Chongqing Gearbox

Generators � 100% in-house production

Electrical control system � 50% in-house production

Others � Jiangxi Jinli Mag Rare-Earth provides neodymium for its permanent magnet

generators (Goldwind is a 35% stakeholder)

� Jiangsu Chenfeng New Material Technology provides epoxy-glue for its blades

(Goldwind is a 35% stakeholder)



Goldwind’s production bases are located in China’s northern and coastal regions

where Chinese wind farms are concentrated. Up to December 2010, the company had

total production capacity of 4,300 units of 1.5MW/2.5MW WTG, 2,500 units of turbine

rotor and nacelle, 1,000 units of generators and 3,000 units of electric control system.


84

Production facilities (December 2010)

Production base Main product Annual capacity as at Dec 2010

Xinjiang Urumqi Base Phase I

1.5MW/2.5MW WTG,

turbine rotor and nacelle

500 units

300 units of turbine rotors and

nacelle

Xinjiang Urumqi Base Phase II 1.5MW/2.5MW WTG 600 units

Beijing Yizhuang Base 1.5MW/2.5MW WTG

Electric control system

900 units

3,000 units

Inner Mongolia Baotou Base 1.5MW/2.5MW WTG 900 units

Gansu Jiuquan Base Turbine rotors and nacelle 800 units

Hebei Chengde Base

1.5MW/2.5MW WTG,

turbine rotors and nacelle

500 units


nacelle

Ningxia Yinchuan Base

1.5MW/2.5MW WTG,

turbine rotors and nacelle

500 units


nacelle

Germang Neunkirchen Base 1.5MW/2.5MW WTG 100 units

Shaanxi Xian Base 1.5MW/2.5MW WTG

generator

200 units

1,000 units of generators

Jiangsu Nanjing Base 1.5MW/2.5MW WTG 100 units

Jiangsu Dafeng Base Turbine rotors and nacelle 300 units

Total 1.5MW/2.5MW WTG

turbine rotors and nacelle,

generators, and

electric control system

4,300 units

2,500 units

1,000 units

3,000 units


Other businesses

Other businesses of Goldwind include the provision of wind power services and the

development of wind farms for sale to wind farm operators, which together accounted

for 3% of total revenue in 2010.

Provision of wind services

The company provides a wide range of wind power services, from the development of

wind farms and primary investment consultancy, to pre-construction project services

such as feasibility studies and wind measurement and WTG maintenance services to

wind farm operators.

Wind farm investment, development and sales

Besides selling WTGs, Goldwind invests, develops and sells wind farms to large wind

farm operators. As per management of the company, the major investment cost

components of a typical wind farm are derived from WTGs (70%), grid connection

(15%), construction (12%) and other miscellaneous items (3%). Eighty percent of

investment cost is financed by bank borrowings and 20% by equity investments.

Goldwind does not intend to hold its wind farms as long-term investments.


85

Breakdown of wind farm investment costs

Wind turbines

related costs

70%

Others

3%Construction

12%

Grid connection

15%


Customer profile

Goldwind's major customers are large wind farm operators in China. Its five-largest

customers are China Guangdong Nuclear Wind Power, Gansu China Power Jiuquan

Fourth Wind Power, Wind Power Guazhou of China Hydropower Consulting Group,

Longuuan, and Gansu Jiuquan Huineng. Together, their sales account for over 30% of

Goldwind’s total sales revenue in 2010.

The company is keen to expand its customer base to overseas markets. It began

installing WTGs in a wind farm in Minnesota and won a bid to provide wind turbines to

a wind farm in Illinois. Currently, Goldwind has representative offices in the US,

Germany and Australia.

Shareholder structure

Goldwind has 2,695m shares outstanding as of end-March 2011, of which 81% are

A-shares and 19% H-shares.

Shareholder structure (March 2011)

China Three Gorges

Group, 26.74%

CB Fund, 5.99%

Social Society Fund,

1.50%

Other H share holders,

17.06%

Other A share holders,

48.72%



86

Use of IPO proceeds

Use of IPO proceeds

Production base

construction, 40.20%

Expansion to int'l market,

24.10%

Bank loans repayment,

11.10%

Working capital, 10.00%

WTG design

development, 14.60%



87

Board of directors and senior management background



Wu Gang 52 Chairman of Board, CEO

and Executive Director

� Senior engineer, with above 20 years of experience in wind power industry;

� Awarded World Wind Energy Award by World Wind Energy Association in 2006.

Guo Jian 47 President and Executive

Director

� Senior engineer, with above 20 years of experience in wind power industry;

� Received rewards in science and management of business, including the “Xinjiang Elite Entrepreneur in

2009”.

Wei Hongliang 38 Vice President and

Executive Director

� Responsible for capital management and investment;

� General manager of Capital Operation and Equity Management department of China Three Gorges New

Energy, a substantial shareholder and a large investment corporation in China.

Li Ying 75 Vice Chairman and

non-executive Director


� Previously served various management positions in state-owned renewable energy enterprises.

Gao Zhong 51 Non-executive Director � Senior political officer;

� Previously served various management positions in state-owned enterprises.

Lv Houjun 47 Non-executive Director � Doctor in economics and a qualified senior economist;

� Previously served various management positions in large financial institutions.

Wang Yousan 75 Independent


� A qualified senior economist;

� Previously served various positions in the Xinjiang local government and state-owned enterprises.

Shi Pengfei 69 Independent



� Member of the expert committee of China Hydropower Consulting Group and vice chairman of Chinese

Wind Energy Association.

Li Man Bun,

Brian David

35 Independent


� Deputy chief executive of The Bank of Asia;

� Independent non-executive director of Towngas China and an alternate director of AFFIN Bank Berhad.

Sun Liang 40 Chief Financial Officer � Chartered Financial and Treasury Professional;

� Previously financial director of Alstom and other subsidiaries of leading global conglomerates.

Jürgen Rinck 47 Vice President and Chief

Technology Officer

� Responsible for financial, R&D, sales, and licensing aspects of Vensys AG’s business;

� Previously general manager of Vensys Energiesysteme GmbH; joined the group since Vensys AG was

acquired by Goldwind.

Wang Haibo 36 Vice President � Previously director of Marketing Center and Investment Development Department of the group;

� Has substantial experience in the development of operation of wind farm projects.

Wang Xiangming 40 Vice President � Senior engineer, above 15 years of experience in wind power industry;

� Considerable experience in product development, client management and technology services

Cui Xinwei 49 Chief Engineer � Professor grade engineer; above 10 years of experience in R&D of wind power generation, advanced

technology application, industrialization of products and on-site technological services.

Ma Jinru 44 Vice President, Secretary

of Board and Company

Secretary

� Senior economist;

� Previously served as a secretary of the board and company secretary for Hong Kong-listed Dalian Port.



88

Financial summary


FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Revenue 10,667 17,475 21,489 22,282


Gross profit 2,758 4,021 4,442 4,882

Other income 312 637 705 655

Selling and distribution expenses (690) (1,096) (1,289) (1,337)



expenses (77) (272) (301) (312)


EBIT 2,026 2,872 3,084 3,375

Depreciation and amortisation (82) (167) (301) (312)

EBITDA 2,108 3,039 3,385 3,687


Share of results of an associate 4 16 37 37

Extraordinary items 21 10 0 0


Taxation (200) (416) (463) (676)

Net profit after tax 1,812 2,394 2,625 2,703

Minorities (45) (122) (131) (135)

Reported net profit after tax 1,766 2,272 2,494 2,568

Dividends (540) (2,540) (857) (514)

Transfer to reserves 1,226 (268) 1,637 2,054

Normalized net profit after tax 1,746 2,262 2,494 2,568

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Fixed assets 2,682 4,131 6,647 9,259

Goodwill 250 257 257 257


Long-term investments 126 323 360 396



Other current assets 1,134 1,539 2,484 2,563

Inventories 2,854 4,391 5,137 5,244


Cash & equivalents 4,379 9,324 9,299 8,540


Total assets 14,883 28,398 33,864 36,266


Short-term debt 602 1,502 1,502 1,502

Other current liabilities 2,520 2,824 5,304 5,396


Long-term debt 2,022 1,465 1,365 1,265







FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Profitability (%)

EBIT margin 19.0 16.4 14.4 15.1

EBITDA margin 19.8 17.4 15.8 16.5

Net margin 16.6 13.0 11.6 11.5

ROE 32.0 16.7 17.1 15.4

Growth (%)

Revenue 66.2 63.8 23.0 3.7

EBIT 73.3 41.8 7.4 9.4

EBITDA 69.3 44.2 11.4 8.9



Normalized PER 15.7 14.6 13.2 12.9

Reported PER 15.5 14.5 13.2 12.9


Price/cash flow 25.2 6.6 N/A N/A

PBV 5.0 2.4 2.3 2.0

EV/EBIT 25.4 17.9 16.7 15.2

EV/EBITDA 24.4 16.9 15.2 14.0



Interest cover (x) 52.1 32.6 94.8 101.6


Net gearing ratio Net cash Net cash Net cash Net cash

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

EBITDA 2,108 3,039 3,363 3,687

Change in working capital (313) (2,186) 1,702 (178)

Other operating cash flow (493) (667) (463) (676)

Cash flow from operations 1,302 186 4,624 2,833



Net acquisitions 295 276 0 0

Addition in other long-term assets (299) (117) 0 0


activities 137 23 58 55

Cash flow from investing activities (1,616) (2,495) (2,758) (2,869)

Cash dividends (280) (924) (1,700) (535)


Net debt issue/(repayment) 1,825 1,636 (100) (100)


activities (140) (203) (90) (89)

Cash flow from financial activities 1,405 7,279 (1,891) (723)

Net cash flow 1,091 4,970 (25) (759)

Beginning cash 3,286 4,379 9,324 9,299

Effect of foreign exchange rate

changes 2 (25) 0 0

Ending cash 4,379 9,324 9,299 8,540



89

China Ming Yang Wind Power (MY US)

Cheap but risky

Company Rating:

Sector Rating:



China Ming Yang Wind (Mingyang) is the fifth-largest WTG

producer in China, with 6% market share in 2010. Despite being

the only non-government-owned company among the top-five

WTG makers in China, Mingyang, nevertheless, remains a

beneficiary of industry consolidation. While Mingyang is trading at

8x 2011F PER and a 51% discount to the global peer average, we

view its valuation justifiable owing to high risk from the launch of

2.5/3.0MW super-compact-drive technology (SCD) WTGs based

on disruptively different technology. We initiate coverage with a

Neutral rating and target price of US$11.00.

� Solid order book. According to Mingyang, its orders on hand

are more than 3GW as of December 2010, sufficient to cover

100% of its 2011F shipments and c.20% of 2012F shipments,

based on our estimates. We expect Mingyang’s book-to-bill ratio

to be 1.3x, similar to Goldwind’s 1.2x.

� Stronger growth allowed by lower base. We estimate

Mingyang’s earnings growth at 31% CAGR in 2010-2012F, at

the higher end of peers’ 10-30%. We believe earnings growth is

driven by Mingyang’s much smaller scale, c.30% of the scale of

leading peers like Goldwind and Sinovel.

� High risk from technology platform switch. We see high risk

from the launch of SCD WTG as it is based on a different

technology platform (hybrid direct drive) from existing

manufactured 1.5MW WTG (doubly-fed). Our forecasts include

13% and 19% sales contribution from SCD in 2011F and 2012F,

respectively.

� Initiate with Neutral. Our target price of US$11.00 is based on

DCF valuation, implying 9x 2011F PE, at a 49% discount to the

global peer average, justifiable given the high execution risk of

new SCD product launch.


Year to 31 Dec 2008 2009 2010 2011F 2012F

Revenue (RMB m) 125 1,173 5,518 8,999 10,641

Reported net profit (RMB m) (494) (221) 698 1,032 1,217

Normalized EPS (RMB) (4.94) (2.21) 5.58 8.25 9.73

Normalized EPS growth (%) N/M N/M N/M 47.8 17.9

PER (x) N/A N/A 12.3 8.4 7.1

EV/EBITDA (x) N/A N/A 10.7 6.6 5.7

PBV (x) 23.2 12.0 2.4 1.9 1.5

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

ROE (%) (166.5) (38.4) 19.8 22.6 21.0

Net gearing ratio (%) 7.8 Net Cash Net Cash Net Cash Net Cash


Price: US$10.52

Target: US$11.00

(initiation)

Trading data

52-week range US$9.19 – 14.48

Market capitalization (m) US$1,315

Shares outstanding (m) 125

Free float (%) 100




Stock price and S&P 500

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0


US$

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

Mingyang (LHS) S&P 500 (RHS) Source: Bloomberg




90

Financial analysis

Revenue

Mingyang commissioned its first WTG in 2008. Until 2010, all of its revenue was

generated from Mingyang’s 1.5MW WTG. The company launched its SCD 2.5/3.0

WTG in 2010 and successfully delivered two units in the same year. Assuming time is

needed for the market to accept the new SCD technology, we estimate that the

1.5MW WTG will continue to be Mingyang’s main revenue contributor in 2011F-2012F.

We expect Mingyang to have rapid top-line growth of 63% YoY in 2011F and 18% YoY

in 2012F on the back of capacity expansion of wind farm operators in China. We

forecast total shipment volume to grow from 1,203MW in 2010 to 2,400MW in 2011F

and 3,315MW in 2012F, representing year-on-year growth of 99% and 38% in 2011F

and 2012F, respectively. Due to the falling WTG ASP industry trend, we forecast

blended WTG ASP of the company to decrease in order to maintain competitiveness,

from RMB4,587 per kW in 2010 to RMB3,750 per kW in 2011F and RMB3,210 per kW

in 2012F. Despite the expected fall in ASP, we expect Mingyang’s revenue to ramp up

given growth in shipment volume over 2011F-2012F.

Revenue trend

0

2,000

4,000

6,000

8,000

10,000

12,000

2008 2009 2010 2011F 2012F

RMB m

1.5MW WTG 2.5/3.0MW WTG 6.0MW WTG


WTG ASP trend

3,000

4,000

5,000

6,000

7,000

2008 2009 2010 2011F 2012F

RMB / kW

1.5MW turbines 2.5/3.0MW turbines



91

1.5MW WTG

The 1.5MW WTG is Mingyang’s main product and accounted for its entire revenue

through 2008-2010. We believe the product will continue to be Mingyang’s main

source of revenue for 2011F-2012F, with an expected shipment volume growth of 75%

YoY to 2,100MW in 2011F, from 1,203MW in 2010.

We expect ASP for 1.5MW WTGs to face continuous downward pressure, triggered

by intense competition among WTG producers in China. We see Mingyang ASP

falling 19% YoY in 2011F and 16% in 2012F. Nonetheless, we expect overall product

revenue to grow 42% YoY in 2011F due to a rapid increase in its shipment volume.

SCD 2.5/3.0MW WTG

The company launched its SCD 2.5/3.0MW WTG in 2H10. We believe “super compact

drive technology” is a new technology in the WTG market which needs time to build a

good track record and earn broader market acceptance. It is unrealistic to expect the

new product to receive a huge market response immediately after launch, so we

anticipate product shipment volume to increase gradually in 2011F-2012F.

We believe SCD 2.5/3.0MW WTG will receive an advanced model price premium over

the 1.5MW WTG and estimate its ASP to be RMB 3,930 per kW in 2011F and

RMB3,388 per kW in 2012F. We forecast the product to contribute c.13% of total

revenue in 2011F and 26% of total revenue in 2012F.

SCD 6.0MW WTG

Mingyang has not officially launched the SCD 6.0MW WTG. It announced its plan to

build a prototype for future SCD 6.0MW WTG in 2011. We expect the company to

launch the product in 2H11 and to commission product sales in 2012F, accounting for

3% of the total revenue that year.


92

Key operation data

2008 2009 2010 2011F 2012F

Sales from wind turbines

1.5MW turbines

Shipment (unit) 16 152 802 1,400 1,600

Shipment (MW) 24 228 1,203 2,100 2,400

ASP (RMB per kW) - 1.5MW 6,232 5,143 4,587 3,724 3,134

Revenue from 1.5MW WTG (RMB m) 150 1,173 5,518 7,820 7,522

YoY (%) N/M 684 371 42 (4)

2.5/3.0MW turbines

Shipment (unit) 0 0 0 100 275

Shipment (MW) 0 0 0 300 825

ASP (RMB per kW) - 2.5/3.0MW 0 0 0 3,930 3,388

Revenue from 2.5/3.0MW WTG (RMB m) 0 0 0 1,179 2,796

YoY (%) N/M N/M N/M N/M 137

6.0MW turbines

Shipment (unit) 0 0 0 0 15

Shipment (MW) 0 0 0 0 90

ASP (RMB per kW) - 6.0MW 0 0 0 0 3,589

Revenue from 6.0MW WTG (RMB m) 0 0 0 0 323

YoY (%) N/M N/M N/M N/M N/M

Total shipment volume (MW) 24 228 1,203 2,400 3,315

Total revenue (RMB m) 150 1,173 5,518 8,999 10,641

YoY (%) N/A 684% 371% 63% 18%

CAGR 2010-2012F (%) 39%



Despite the drop in ASP, we believe Mingyang can maintain its gross profit margin at

c.19% in 2011F-2012F based on its measures to cut production costs. We believe

Mingyang will be able to lower cost of production by increasing procurement scale of

its component parts and begin in-house production of some major components.

Overall gross profit is expected to grow 54% YoY in 2011F and 19% YoY in 2012F.

Gross profit contribution of 1.5MW WTGs will fall from 100% in 2010 to 89% in 2011F

and reach 67% in 2012F due to the launch of SCD WTGs according to our estimates.

In other words, we forecast the combined gross profit contribution from SCD

2.5/3.0MW and 6.0MW WTG to grow to 11% in 2011F and to 33% in 2012F.


93

WTG cost of sales trend

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2008 2009 2010 2011F 2012F

RMB / kW

1.5MW turbines 2.5/3.0MW turbines


Gross profit trend

(500)

0

500

1,000

1,500

2,000

2,500

2008 2009 2010 2011F 2012F

RMB m

(30)%

(20)%

(10)%

0%

10%

20%

30%

1.5MW turbines 2.5/3.0MW turbines 6.0MW turbines Gross margin


Operating expenses

Operating expenses mainly include WTG and component delivery charges, R&D,

depreciation and amortization, and labor costs. We expect the company to maintain

operating expenses at 6% over revenue in 2011F-2012F, similar to the percentage in

2010.


Operating losses in 2008 and 2009 turned into profit in 2010 due to solid growth in the

company’s shipment volume. We expect Mingyang’s operating profit to grow 66% YoY

in 2011F and 16% YoY in 2012F due to continuing growth in Mingyang’s shipment

volume in 2011F-2012F and good control over its operating costs. Overall,

2011F-2012F operating margin will maintain at 14%, similar to the level in 2010.


94


(1,000)

(500)

0

500

1,000

1,500

2,000

2008 2009 2010 2011F 2012F

RMB m

(350)%

(300)%

(250)%

(200)%

(150)%

(100)%

(50)%

0%

50%




We forecast Mingyang’s net profit to grow along with its operating profits at 47% YoY

in 2011F and 18% YoY in 2012F, with the expectation of stable net margins of 12% in

2011F-2012F, a slight decline from 2010’s net margin of 13%.

Net profit trend

(600)

(400)

(200)

0

200

400

600

800

1,000

1,200

1,400

2008 2009 2010 2011F 2012F

RMB m

(450)%

(400)%

(350)%

(300)%

(250)%

(200)%

(150)%

(100)%

(50)%

0%

50%




Although Mingyang completed production facility expansion in Tianjin and Zhongshan

in 2010, management announced plans for facility expansions including expansion of

its Rudong base and construct facilities for future major components production.

Management targets to increase its production capacity from 1,598 1.5MW WTG units

and 500 SCD 2.5/3.0MW WTG units to 2,100 1.5MW WTG units and 700 SCD

2.5/3.0MW WTG units by the end of 2011.

We forecast company capex to grow from RMB356m in 2010 to RMB651m in 2011F

and drop to RMB503m in 2012F, representing 83% YoY growth in 2011F and a 23%

year-on-year fall in 2012F. We forecast PPE turnover (revenue over average PPE) to


95

decrease from 22x in 2010 to 14x in 2011F and 9x in 2012F, mainly based on our

assumption that sales ramp up of SCD WTGs will lag capex growth in the short term.

In other words, we believe sales growth of SCD WTG will not be very strong in the

early phases of the launching period, so capex growth will exceed sales growth.

PPE turnover trend

0

5

10

15

20

25

2008 2009 2010 2011F 2012F

(x)


Debt and gearing

Mingyang has healthy financial position. We believe the company has little need to

raise debt in the near future and we expect net cash in 2011F-2012F.

Working capital

Mingyang’s inventory, accounts receivable and accounts payable turnover in 2008

and 2009 was significantly higher than industry peers because the company began to

deliver products in 2007 and the commissioning of those products usually takes about

a year. Assuming that Mingyang boosts commissioning of wind turbines previously

delivered, sales and cost of sales will normalize and stabilize turnover days. Hence,

we expect cash conversion days to remain stable at 20 days in 2011F-2012F.

Turnover days

(days) 2008 2009 2010 2011F 2012F

Inventory turnover 1,543 657 156 140 140

Accounts receivable turnover 1,156 506 192 160 160

Accounts payable turnover 1,601 733 299 280 280

Cash conversion 1,098 430 48 20 20



96

Cash flow analysis

We expect Mingyang to experience net cash outflow in 2011F, mainly due to the

significant capex spending for facility expansion and the repayment of bank loans.

The negative cash flow will turn positive after capex spending falls in 2012F.

Thanks to a net profit increase in 2011F-2012F, we expect cash flow to turn positive in

2011F-2012F, assuming stable working capital management over the period.

We forecast Mingyang’s cash outflow from investing activities will peak at RMB603m

in 2011F, from RMB267m in 2010, due to capex peaking in 2011F as a result of

management’s production facility expansion targets. The company’s cash outflow

from investing activities will drop to RMB464m in 2012F according to our estimate,

after Mingyang completed its facility expansions.

Cash flow from financing activities spiked in 2010 thanks to funds received from

Mingyang’s IPO in 2H10. We estimate cash outflow of RMB266m and RMB158m in

2011F and 2012F, respectively, related to repayment of bank loans.


(1,000)

(500)

0

500

1,000

1,500

2,000

2,500

2008 2009 2010 2011F 2012F

RMB m




97

Valuation and risks

Mingyang’s discounted valuation to peers is justifiable

Mingyang is currently trading at 8x FY11F PER, representing a 51% discount to global

peers trading at 17x FY11F PER. In view of Mingyang’s SCD WTG launch and the

high risk associated with the platform switch from doubly-fed WTGs, we consider the

discount justifiable.

Moreover, although we forecast that the company will achieve 31% CAGR for

2010-2012F, at the high end of its peers at 10-30%, we believe this may be driven by

its much smaller size in comparison with leading peers like Goldwind and Sinovel.

Our current estimates reflect the higher-end of management guidance for

2011F-2012F and thus there exists downside risk to our forecasts should Mingyang’s

“blue sky scenario” fail to materialize.


Price


EPS




China High Speed

Transmission

658HK O 12.54 2,217 9.6 10.1 9.4 (5) (2.1) 1.8 1.7 1.5 18.7 16.9 16.2

Hansen Transmission HSNLN NR 49.50 534 N/A N/A N/A N/M N/M 0.6 0.6 0.6 (1.7) (1.5) 0.9

Taewoong 044490KS NR 52,300 796 42.7 22.3 16.0 79 0.3 2.1 2.0 1.8 2.9 5.5 9.3

Hyunjin Materials 053660KS NR 17,100 232 N/A 10.9 7.6 N/M N/M 1.3 1.2 1.0 (12.8) (1.0) 10.8

WTG manufacturers

Xinjiang Goldwind - H share 2208HK O 14.56 7,858 14.6 13.2 12.9 10 1.3 2.4 2.3 2.0 16.7 17.1 15.4

Xinjiang Goldwind - A share 002202CH NR 20.65 7,857 N/A 16.9 13.4 24 0.7 N/A 3.6 2.8 39.1 24.6 21.9

Sinovel Wind 601558CH NR 74.14 11,381 23.4 20.6 17.0 14 1.5 13.9 4.1 3.3 77.5 19.9 20.5

China Ming Yang Wind Power MYUS N 10.52 1,315 12.3 8.4 7.1 48 0.2 2.4 1.9 1.5 19.8 22.6 21.0

Vestas VWSDC NR 223.30 8,685 38.9 20.2 15.8 93 0.2 2.2 2.0 1.8 5.9 11.1 12.7

Gamesa GAMSM NR 7.37 2,576 18.6 18.6 18.6 31 0.6 1.1 1.1 1.0 3.1 4.2 5.6

Repower RPWGR NR 145.00 1,900 22.9 25.7 21.5 (11) (2.3) 2.8 2.7 2.5 11.6 10.6 11.5

Nordex NDX1GR NR 8.26 786 26.6 27.9 21.0 (5) (6.2) 1.5 1.5 1.4 5.9 4.6 6.0

Suzlon SUELIN NR 44.60 1,778 N/A N/A 24.3 N/A N/M 1.1 1.1 1.1 (12.9) (12.2) 3.8

Dongfang Electric 1072HK NR 26.70 8,237 17.3 14.0 11.8 24 0.6 2.4 3.0 2.4 33.0 24.5 23.0

Shanghai Electric 2727HK NR 3.96 13,355 15.2 13.3 12.0 15 0.9 1.6 1.4 1.3 11.3 11.0 11.0


Source: Bloomberg, CCBIS estimates


98

Our target price at US$11.00 derived from DCF valuation method

We derive our target price of US$11.00 from a DCF valuation based on 11.0% WACC

and terminal growth of 1% after FY2020F. At US$11.00, Mingyang’s shares would

trade at 9x PE, representing a 49% discount to the average of its global peers. While

we believe the company earnings will grow at a 31% CAGR in 2010-2012F, there are

several risks to our current earnings estimates, including: (1) launch of a new model

(3.0MW hybrid-direct-drive WTG); (2) overseas market expansion; (3) short track

record; (4) implementation of vertical integration strategy; (5) wind policy changes;

and (6) competition within the China market.

Mingyang DCF valuation model


Sales 8,999 10,641 14,166 15,970 16,858 17,794 18,864 20,214 19,604 18,874

EBITDA 1,308 1,514 2,105 2,156 1,964 2,094 2,034 2,193 1,915 1,659

margin (%) 15% 14% 15% 13% 12% 12% 11% 11% 10% 9%

less:tax (184) (216) (308) (320) (296) (317) (310) (336) (297) (261)

minority interest 11 9 13 13 12 13 13 14 13 11

working capital (623) (65) (185) (85) 389 (464) (76) (165) 236 (313)

CAPEX (651) (503) (405) (469) (474) (524) (472) (655) (848) (754)

FCF (139) 740 1,220 1,295 1,596 802 1,189 1,051 1,018 342


Net debt

(FY10)

Equity

value Shares

Value per


(%) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (m shares) (US$) Equity beta 1.2

10.1 5,911 1,508 7,419 (2,006) 9,425 125 11.5 Risk-free rate (%) 3.92

10.2 5,888 1,480 7,368 (2,006) 9,374 125 11.4 Equity risk premium (%) 6

10.3 5,865 1,453 7,319 (2,006) 9,325 125 11.4 Country risk premium (%) 1

10.4 5,843 1,427 7,270 (2,006) 9,276 125 11.3 Cost of equity (%) 13

10.5 5,820 1,401 7,222 (2,006) 9,228 125 11.3 Cost of debt (%) 7

10.6 5,798 1,376 7,174 (2,006) 9,180 125 11.2 Debt/capital (%) 30

10.7 5,776 1,352 7,127 (2,006) 9,133 125 11.1 Tax (%) 15

10.8 5,754 1,328 7,081 (2,006) 9,087 125 11.1 WACC (%) 11.0

10.9 5,732 1,304 7,036 (2,006) 9,042 125 11.0 Terminal growth rate (%) 1

11.0 5,710 1,281 6,991 (2,006) 8,997 125 11.0

11.1 5,688 1,259 6,947 (2,006) 8,953 125 10.9

11.2 5,667 1,237 6,904 (2,006) 8,910 125 10.9

11.3 5,645 1,216 6,861 (2,006) 8,867 125 10.8

11.4 5,624 1,195 6,819 (2,006) 8,825 125 10.8

11.5 5,603 1,175 6,777 (2,006) 8,783 125 10.7

11.6 5,581 1,155 6,736 (2,006) 8,742 125 10.7

11.7 5,560 1,135 6,696 (2,006) 8,702 125 10.6

11.8 5,540 1,116 6,656 (2,006) 8,662 125 10.6

11.9 5,519 1,097 6,616 (2,006) 8,622 125 10.5

12.0 5,498 1,079 6,577 (2,006) 8,583 125 10.5

12.1 5,478 1,061 6,539 (2,006) 8,545 125 10.4

Source: CCBIS


99

Risks

Launch of a new product model: Mingyang uses doubly-fed induction technology

for its 1.5MW WTG model. We believe that execution risks are high for Mingyang’s

launch of SCD 2.5/3.0MW and 6.0MW WTGs, not only because these are new

models and require time for track records to be established, but also because SCD

WTGs adopt a disruptively new “hybrid-direct-drive” and “two-blade” technology.

However, if market response is better-than-expected, it might bring upside surprise to

our earnings estimates.

Overseas market expansion: Mingyang management has expressed its intention to

penetrate overseas markets, including the US. In our view, while overseas markets

could provide upside to Mingyang’s WTG ASP, the risk inherent in building sales

channels in new markets include establishing significantly more expensive

after-sale-service workforce overseas and rising exposure to foreign policy changes

and foreign currency fluctuations. The impact could be positive or negative depending

whether Mingyang’s product can meet market expectations, answer foreign customer

requirements and adapt to foreign government regulations.

Short track record: Mingyang has less than five years of operating history and its

WTG has a relatively short track record in comparison with WTGs of other top WTG

suppliers, such as Goldwind, Siemens, Vestas and Dongfang Electric. Although

Mingyang’s WTG has not encountered serious defaults or accidents, its limited track

record length may need time to earn larger market acceptance.

Vertical integration strategy: Although Mingyang management has experience in

the production of WTG components, such as blades and electric control systems, they

might encounter problems implementing vertical integration producing other major

WTG components such as gearboxes. Depending on the success of Mingyang’s

component production lines, the vertical integration strategy could bring positive or

negative impact to WTG qualities and production costs.

Wind policy changes: The demand for WTG can be greatly affected by government

wind policy as wind power currently remains dependent on subsidies to be

economically viable. For the past few years, China’s WTG installation has grown at

120% CAGR in 2006-2009 thanks to China’s target to generate 15% renewable

energy of total energy by 2020. We think policy changes could have both positive and

negative effects on the WTG manufacturing industry and our earnings estimates.

Competition in China: Competition in the Chinese WTG market has been getting

more intense due to the listing of top domestic WTG manufacturers, such as Sinovel

(A-shares), Goldwind (A+H shares) and Mingyang (US listed). The listing of these

companies will improve their corporate governance and provide cash for technology,

production and distribution upgrades. In order to gain market share, WTG

manufacturers compete by launching new products and lowering ASP. Mingyang will

need to successfully implement cost cut measures in order to maintain its gross and

operating margins, as earnings will suffer downward pressure if the company fails to

do so. However, greater competition may become an opportunity for market share

expansion in the long term once less competitive WTG suppliers exit the market.


100

Company profile

Company history

On 1 October 2010, Mingyang became the first Chinese WTG manufacturer listed on

the New York Stock Exchange. According to CWEA, Mingyang is the fifth-largest WTG

manufacturer and largest non-state owned manufacturer in China, with market share

of 5.5% in 2010.

The company was established in Zhongshan, Guangzhou in 2006. In 2007, it acquired

the intellectual property (IP) rights to produce 1.5MW WTGs from Mingyang Electric,

its former major shareholder. In addition to IP rights, Mingyang obtained substantial

WTG manufacturing technology and experience from Mingyang Electric, which has

been manufacturing WTG components since 1995.

Major milestones

Date Development

2006 � Guangdong Mingyang, Mingyang’s predecessor company, was established in Zhongshan,

Guangdong province.

2007 � Received a statement of compliance from Germanischer Lloyd (GL) certification, an international

certification body in the wind power sector, for its MY1.5s model;

� Began selling MY1.5s WTGs.

2008 � Constructed production bases in Xian and Tianjin

� Jilin production base began production and delivery of MY1.5se turbines.

� Signed a technology licensing contract with Aerodyn Energiesysteme to build the 2.5/3.0MW super

compact drive (SCD) WTG

2009 � Established a R&D center in Roskilde, Denmark, with Risoe Wind Energy Laboratory;

� Received product design certificate from China General Certification Center for its MY1.5se model.

The certificate is one of the requirements for WTG manufacturers to receive state funding;

� Received a statement of compliance from GL certification for its MY1.5se model;

� Signed a technology licensing contract with Aerodyn Energiesysteme to build the 6.0MW SCD

WTG

2010 � Completed the prototype SCD 2.5/3.0MW WTG and installed it in Rudong, Shanghai;

� Listed on the NYSE under the stock symbol MY;

� Won a 200MW bid (about 67 3.0MW SCD WTG) for Xinjiang Hami wind farm project.

2011 � Received a total sales order of 1.1GW in January 2011, of which 200MW for SCD 2.5/3.0MW

WTGs. 75% of the orders came from the five-largest wind power generators.


Major products

Currently, the 1.5MW WTG is Mingyang’s dominant product. The company

customized this product into two separate models, a typhoon resistant model and a

cold-weather resistant model. Both 1.5MW models are designed to use three rotor

blades, doubly-fed induction generators and a three-stage gearbox.

In 2H10, Mingyang developed its SCD WTG, which uses a two-rotor blade design and

is equipped with a compact integrated two-stage gearbox and a medium slow-running

synchronous generator. Management expects the product to be commercialized in

2011.


101

Major products

WTG series Features

MY 1.5s

(typhoon resistant)

Designed to be installed in costal areas, can survive extreme wind speed as high as 70

meters/sec (156.6 miles/hour). It has a rotor diameter of 73m.

MY 1.5se

(cold weather resistant)

Equipped with heaters and designed to generate electricity at temperatures as low as

-30’C (-22’F). Installed in the northern parts of China, such as Jilin and Inner Mongolia.

Rotor diameter of 82m.

SCD 2.5/3.0MW WTG Designed to be installed in coastal and tidal flat areas. Using a compact gearbox and

generator, with an emphasis on reduction of size and weight. The design lowers the

bearings’ operational speed and thus reduces wear of components. Typical weight of a

3.0MW WTG is around 120 tonnes.

SCD 6.0MW WTG The product is currently under development. Its prototype is expected to be constructed in

1H11.


Revenue recognition and warranty obligations

Mingyang recognizes sales revenue upon successfully delivery of WTGs (i.e. when

WTGs are installed and preliminary inspection is complete). By that time, the

company would have collected up to 90% of the contract price. The remaining amount

is collected upon complete fulfillment of the 24 month warranty period.

During the warranty period, Mingyang guarantees its customer the availability and

performance of its wind turbines. It provides technical and maintenance support

services and covers parts and labor costs for non-maintenance repairs and

replacement. At the point of delivery, the company accrues a provision equivalent to

3.3% on sales price for future warranty obligations, and recognises it as a cost of

sales. The accounting treatment is different to other WTG producers in China, who

may recognize the provision as a selling expense.

Product development and technology licensing

Mingyang’s major technology partner in developing WTG is Aerodyn Energiesysteme.

It acquired its 1.5MW WTG production technology through Mingyang Electric, which

obtained exclusive product rights from Aerodyn Energiesysteme in 2006. Mingyang

obtained exclusive license rights to produce and sell Aerodyn Energiesysteme’s SCD

2.5/3.0MW WTGs and SCD 6.0MW WTGs in 2008 and 2009, respectively. The

agreements will expire in 2016 and 2019. Once this occurs, these licenses will

become non-exclusive.

Exclusive license terms summary

WTG series Expiry date Units limit Geographical market

SCD 2.5/3.0MW WTG 1 January 2016

SCD 6.0MW WTG 1 January 2019

2010: 30 units

2011: 200 units

2012: 500 units

None from 2013

China and US distribution only,

not allowed for other overseas

markets


SCD WTG royalties

Royalties Minimum annual royalty payment

First 100 units 2.0% on sales price No less than Euro 16,000 per MW

Next 400 units 1.5% on sales price No less than Euro 12,000 per MW

Next 500 units 1.0% on sales price No less than Euro 8,000 per MW

After 1,000 units 0.5% on sales price No less than Euro 4,000 per MW



102

Mingyang has also established research centers in China’s Guangdong province and

Denmark.

WTG component production status

Besides self-produced rotor blades, Mingyang acquires most of its critical WTG

components from independent suppliers. The company acquires its electric control

system, frequency converters and pitch control system from REnergy, an affiliated

company controlled by the Chairman of the Board. The remainder of the components

are acquired from independent suppliers.

Component production status

Component Suppliers

Blades Self-produced.

Hubs Ningbo Yongxiang Forging, Jiangsu Jixin Wind Power Technology.

Main shafts Pinghu Zhongzhou Heavy Machinery, Jiangyin Zhenhong Heavy Forging, Zhongshi

Luoyang Heavy Machinery.

Gearboxes Nanjing High Speed (CHST), Winergy Tianjin.

Generators Nanjing Turbine & Electric Machinery, Shanghai Nanyang Electrical Machinery.

Electrical control system REnergy (an affiliated company controlled by Chairman of the Board).

Frequency converters REnergy, IDS, ABB Beijing.

Transformers Tianjin Special Variable Electrical Transformer, Zhuhai South Hualitong.

Pitch control system REnergy, SSB Wind Energy Technology.

Yaw and pitch bearing Xuzhou Rothe Erde Slewing Bearing, Wafangdian Bearing.



Mingyang’s production facilities are located in Guangdong, Jilin, Tianjin and Jiangsu.

By the end of 2010, Mingyang had annual production capacity of 1,598 units of

1.5MW WTG, 500 units of SCD 2.5/3.0MW WTG, and 2,010 sets of rotor blades.

Production facilities (December 2010)

Production base Main product Annual capacity as at Dec 2010

1.5MW WTG 288 units

SCD 2.5/3.0MW WTG 200 units

Guangdong Zhongshan headquarters

Rotor blades 288 units

1.5MW WTG 524 units Jilin base


1.5MW WTG 524 units


Tianjin base


1.5MW WTG 262 units


Rudong, Jiangsu base


1.5MW WTG 1,598 units


Total

Rotor blades 2,010 units



103

WTG comparison: Mingyang’s SCD versus Goldwind’s hybrid-drive

Both Mingyang’s SCD 3.0MW WTG and Goldwind’s hybrid-drive 3.0MW WTG employ

a hybrid design of a gearbox and gearless direct drive technology. Since both designs

have not yet been introduced commercially, they both have limited track records.

The main features of the SCD 2.5/3.0MW WTG include a reduction in size and weight

and an improvement in operational reliability. This is achieved by using a compact

generator and two-rotor blade design. Weight reduction is possible by decreasing the

amount of material inside the nacelle and tower as they are the center of weight in a

WTG. Weight is also reduced as a result of removing a rotor blade (two instead of

three). WTG weight reduction can help save installation costs. A second feature is the

lower bearings operational speed of the two-stage gearbox, which reduces the wear

of the gearbox component, thereby increasing operational reliability.

Weight comparison between Mingyang, Goldwind and Sinovel’s 3.0MW WTG

0

50

100

150

200

250

300

350

400

450

500

Ming Yang SCD 3.0MW Goldwind hybrid-drive 3.0MW Sinovel 3.0MW

tonnes

Tower Nacelle Hubs Rotor blades


The Goldwind hybrid-drive 3.0MW WTG employs a three rotor blade design. The

number of blades balances aerodynamic efficiency, costs and system reliability.

Traditionally, WTGs require less rotational speed to yield the same energy output as a

three rotor blade design. As a result, the two rotor blade design saves cost but is

expected to have a lower aerodynamic efficiency.

Summary of comparisons

Goldwind hybrid-drive 3.0MW

Mingyang

SCD 3.0MW

Length of track record ✘ ✘

Number of blades Three blades Two blades

Gearbox component ✓ ✓

Low manufacturing cost ✓✓ ✓✓✓ Reliability ✓✓ ✓✓

Power generation productivity ✓✓ ✓✓

Low-voltage ride through (LVRT) capability ✓✓ ✓✓

Smaller size and weight ✓✓ ✓✓✓

Low maintenance cost ✓✓ ✓✓



104

Other wind services

Mingyang is expanding its wind power services, including wind testing, feasibility

studies, wind farm designs, wind farm construction services, and lease financing. In

2010, the company signed an agreement with Huaran for construction services for

Mingyang’s WTGs. Mingyang also arranges lease financing provided by one of its

major shareholders, Industrial and Commercial Bank of China, for wind farm

operators for WTG purchases.

Customer profile

Mingyang’s customers include the five-largest Chinese national grid companies (i.e.

Huadian, Huaneng, Datang, Longyuan [Guodian] and CPIC) and private sector

companies, such as Guangdong Yudean, Beijing Jingneng, Guangdong Shuidian

Bureau, Fujian Investment and Development Group, and Inner Mongolia Aode Sente

New Energy. In 2009, the five-largest Chinese national grid companies contributed

60% to Mingyang’s total annual sales and the private sector companies 26%.



Clarity Investors,

13.17%

China Opportunity S.A.

SICAR (SOPAF),

10.64%

ICBC Int'l Inv Mgt Ltd,

8.79%

Pre-IPO investors (note

1), 24.42%

Public, 20.00%Chairman Zhang and

family, 22.98%

Note 1: Pre-IPO Investors include Merrill Lynch, SCGC Capital, DT Capital, Mitsui & Co., CCBI and other investors



105

Use of IPO proceeds

Production base

construction, 32.68%

Potential acquisition of

component suppliers,

29.96%

WTG design

development, 17.70%

Construction of research

centre, 4.08%

Working capital, 15.58%





Chuanwei Zhang 48 Chairman of Board, CEO and Executive Director

� Founder of the company; also founder of Mingyang Electric, prior majority shareholder of the company

and founder of REnergy, a component supplier;

� Over 20 years of experience in wind power and renewable energy sector. Xian Wang 39 Senior Vice President and

Executive Director � In charge of operations and strategy;

� Previously served as senior executive VP at Guangzhou Huayutai Investment and in charge of the

investment department of Guangzhou Sanxin Group; rich in capital management experience. Song Wang 46 Senior Vice President and

Executive Director � In charge of technology development, marketing and sales services;

� Previously served as a manager of a subsidiary of Huaneng and a R&D engineer at National Academy of

Metallurgical and Automation. Niccolo Magnoni 35 Executive Director � Founder and chairman of China Opportunity Fund SA Sicar, a fund that invests in renewable energy,

insurance and retail industries, and a company investor. Jinfa Wang 46 Senior Vice President � In charge of general administration and human resources;

� Over 20 years of experience in the wind power industry. Renjing Cao 41 Chief Technology Officer � Professor of engineering, in charge of research and development;

� Received several awards for his research including the Beijing, Guangzhou, and Zhongshan City Science

and Technology Awards. Xianzhong Zhang 48 Vice President � Responsible for quality control;

Previously served as a general manager in charge of R&D and product control of Hubei Jiangshan

Industry Company.

� Over 20 years of factory management experience. Jiawan Cheng 47 Vice President � Responsible for engineering and services;

� Previously served as a general manager of Nantong Kailian Wind Power; with over 10 years of

experience within the wind power sector Yunshan Jin 44 Vice President � In charge of sales and marketing;

� Previously in charge of marketing at Mingyang Electrical;

� Over 20 years of sales experience in wind power and renewable energy Manfred Loong 55 Chief Financial Officer � Former CFO and COO of UTStarcom China and the Greater China CFO of Lucent China;

� Over 10 years of senior management experience in multinational conglomerates Yiguo Hao 41 Chief Operating Officer � PhD in environmental engineering;

� Previously serviced various management positions in Dongfeng Motor and Dengfeng Motor Gearboxes;

� Over 15 years of management experience in Chinese manufacturing companies



106

Financial summary


FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Revenue 1,173 5,518 8,999 10,641


Gross profit 76 1,087 1,671 1,993

Other income 0 18 45 53

Selling and distribution expenses (91) (149) (292) (372)



expenses (53) (43) (45) (53)

Operating profit (135) 763 1,263 1,461

EBIT (135) 765 1,263 1,461

Depreciation and amortisation (28) (43) (45) (53)

EBITDA (107) 808 1,308 1,514


Share of results of an associate (0) 3 0 0


Profit before tax (185) 731 1,226 1,442

Taxation (38) (21) (184) (216)

Net profit after tax (223) 711 1,042 1,226

Minorities 2 (13) (11) (9)

Reported net profit after tax (221) 698 1,032 1,217

Dividends 0 0 0 0

Transfer to reserves (221) 698 1,032 1,217

Normalized net profit after tax (221) 698 1,032 1,217

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Fixed assets 169 418 1,024 1,473




Total non-current assets 331 870 1,869 2,434

Other current assets 269 345 1,243 1,441

Inventories 1,973 1,895 2,811 3,317





Total assets 4,965 8,492 11,986 14,587


Short-term debt 182 480 300 200

Other current liabilities 1,959 585 1,002 1,274



Total non-current liabilities 45 267 493 684


Total shareholders' equity 577 3,527 4,570 5,795



FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Profitability (%)

EBIT margin (11.5) 13.9 14.0 13.7

EBITDA margin (9.2) 14.6 14.5 14.2

Net margin (18.9) 12.7 11.5 11.4

ROE (38.4) 19.8 22.6 21.0

Growth (%)

Revenue 840.6 370.5 63.1 18.2

EBIT N/M N/M 65.1 15.7

EBITDA N/M N/M 61.9 15.7

Net profit growth N/M N/M 47.8 17.9


Normalized PER N/A 12.3 8.4 7.1

Reported PER N/A 12.3 8.4 7.1


Price/cash flow 10.1 4.9 N/A 14.1

PBV 12.0 2.4 1.9 1.5

EV/EBIT N/A 11.3 6.8 5.9

EV/EBITDA N/A 10.7 6.6 5.7



Interest cover (x) N/A 22.7 34.0 76.3

Gearing ratio 0.3 0.1 0.1 0.0

Net gearing ratio Net Cash Net Cash Net Cash Net Cash

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

EBITDA (107) 808 1,308 1,514

Change in working capital 533 (1,137) (623) (65)

Other operating cash flow 3 (103) (184) (216)

Cash flow from operations 428 (432) 502 1,233

Capital expenditure (73) (356) (651) (503)

(Addition)/reduction in investments (71) 32 0 0

Net acquisitions (45) 0 0 0

Reduction/(addition) in other

long-term assets (79) 14 0 0

Reduction in other long-term liabilities (44) 0 0 0



Cash flow from investing activities (309) (267) (603) (464)


Net debt issue/(repayment) 117 298 (180) (100)


activities 445 (77) (86) (58)

Cash flow from financial activities 562 2,462 (266) (158)

Net cash flow 681 1,764 (367) 611

Beginning cash 42 722 2,486 2,119

Effect of foreign exchange rate

changes (1) 0 0 0

Ending cash 722 2,486 2,119 2,731 Source: Company data, CCBIS estimates


107

China Longyuan Power (916 HK)

Quality company with fair valuation

Company Rating:

Sector Rating:



Longyuan is the largest wind farm operator in China. By 2010 it

owned 15% of domestic installed wind capacity. While we like

Longyuan’s leading industry position and earnings CAGR of 31%

for 2010-2012F, we expect the company’s ROE to remain low at

8-10%. Longyuan has underperformed the HSCEI by 13% over

the past 12 months and we believe the price now reflects industry

concerns and has bottomed. Nonetheless, we would have to see

near-term catalysts before turning positive on the stock. We

initiate coverage with a Neutral rating on the shares and target

price of HK$9.10.

� Leader in wind farm operations in China. Longyuan, in

our view, outperforms Chinese peers in terms of scale,

wind project efficiency and balance sheet management.

We expect Longyuan to maintain this leadership and claim

c.15% market share in China in 2010-2012F.

� Earnings CAGR of 31% for 2010-12F but low ROE.

Backed by robust capacity expansion, we estimate

Longyuan’s earnings will grow at a 31% CAGR in

2010-2012F. However, we consider ROE of 8-10% in

2010-2012F quite low and attended by high refinancing

risk, particularly in 2012F.

� Limited near-term catalysts. Chinese wind operators face

challenges including grid connection bottlenecks, power

curtailments, CDM uncertainty and the possibility of

interest rate hikes. We believe these concerns are priced

in, yet we fail to see any near-term positive catalysts for the

stock.

� Initiate with Neutral. Our target price of HK$9.10 is based

on DCF valuation, implying 21x 11F PE, in line with the

average for global peers, which we consider fair.


Year to 31 Dec 2008 2009 2010 2011F 2012F

Revenue (RMB m) 8,555 9,744 14,213 16,473 19,103

Reported net profit (RMB m) 337 894 2,007 2,705 3,468


Normalized EPS growth (%) 165 124 83 35 28

PER (x) 112.8 48.5 26.5 19.7 15.3

EV/EBITDA (x) 21.4 12.0 8.4 5.7 4.5

PBV (x) 5.0 1.7 1.9 1.7 1.5

Dividend yield (%) 0.0 0.0 0.8 1.0 1.3

ROE (%) 4.8 3.5 7.3 8.9 10.1

Net gearing ratio (%) 297 65 121 157 161


Price: HK$8.47

Target: HK$9.10

(initiation)

Trading data

52-week range HK$6.63 – 9.28



Free float (%) 72





4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0


HK$

9,000

10,000

11,000

12,000

13,000

14,000

15,000

Longyuan (LHS) HSCEI (RHS) Source: Bloomberg



108

Financial analysis

Revenue

Longyuan engages mainly in wind power and coal-fired power generation in China. In

2010, wind power and coal-fired power sales accounted for 43% and 54% of the

company’s total revenue, respectively. The company is also engaged in power

generation from other renewable energy sources, which accounted for 3% of total

revenue.

Overall, we expect Longyuan’s total revenue to grow 16% YoY in both 2011F and

2012F. We forecast Longyuan’s revenue growth to mainly come from its wind power

business, with CAGR of c.30% for 2010-2012F. In contrast, we expect its coal-related

and other businesses to remain largely stable year-on-year for the next two years.

As a result of wind power sales growth, we forecast revenue contribution from wind

power sales will grow from 43% in 2010 to 47% in 2011F. On the other hand, we

expect revenue contribution from coal-related business to fall from 54% in 2010, to

48% in 2011F, and revenue from other business lines to slightly grow, from 3% in 2010

to 5% in 2011F, mainly due to the company’s plan to expand solar and geothermal

power generation.

Revenue trend

0

5,000

10,000

15,000

20,000

2008 2009 2010 2011F 2012F

RMB m

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Wind power Coal power Other business Total revenue YoY growth


Wind power

We forecast wind power sales to grow 28% YoY in 2011F and 32% YoY in 2012F on

the back of capacity expansion of 31% YoY in 2011F and 28% YoY in 2012F

respectively (approximately 2GW per annum). Apart from constructing onshore wind

farms, we believe Longyuan will achieve its capacity expansion target with the help of

a wind project injection from Guodian, its parent company, and through the

development of overseas projects in South Africa, North America and Eastern Europe.

We regard our assumptions for utilisation hours and wind power tariffs as quite

generous. In China, the government has put in place a wind tariff scheme with the aim

of keeping wind project returns in the range of 8-10%. Thus wind projects in regions

with higher utilization hours will theoretically receive lower wind power tariffs, in our

view. However, in our assumptions, we factor in increases in both utilization hours and


109

wind power tariffs for Longyuan. We assume Longyuan’s utilisation hours will

gradually increase from 2,217 hours in 2010 to 2,242 hours in 2011F and 2,309 hours

in 2012F and for wind power tariffs to reach RMB 0.5 per kWh in both 2011F and

2012F, up from RMB 0.49 per kWh in 2010.

Key operation data – wind power

2008 2009 2010 2011F 2012F

Consolidated installed capacity (MW) 2,503 4,504 6,556 8,600 11,000

YoY (%) 93 80 46 31 28

Average utilization hours 1,923 2,268 2,217 2,242 2,309

YoY (%) 20 18 (2) 1 3

Net electricity generation (GWh) 3,407 5,684 9,442 14,371 19,244

YoY (%) 140 67 66 52 34

Average tariff exclude VAT (RMB/kWh) 0.48 0.48 0.49 0.50 0.50

Wind electricity sales (RMB m) 1,635 2,752 4,613 7,178 9,635

Others (RMB m) 3 2 7 0 0

Total wind revenue (RMB m) 1,638 2,754 4,620 7,178 9,635

YoY (%) 125 68 68 55 34

CAGR 2010-2012F (%) 44


Coal-related businesses

According to the company’s strategies, Longyuan’s coal-related businesses will not be

a company priority even though the company has no intention of scaling down this

business line. We expect revenue from the company’s coal-related business to grow

3% YoY in 2011F and remain flat in 2012F. According to management, the company is

planning to upgrade its coal power plant capacity by 1GW in 2012F. Coal power

capacity expansion is still subject to the approval from relevant government bodies,

with the requisite approvals likely to be granted in late 2011F or 2012F. With this in

mind, we expect capacity upgrades to be completed by end-2012F and sales

increases to come into effect from 2013F.

Key operation data – coal-related businesses

2008 2009 2010 2011F 2012F

Consolidated installed capacity (MW) 1,875 1,875 1,875 1,875 2,875

YoY (%) (23) 0 0 0 53


YoY (%) 15 (1) 4 1 0


YoY (%) 2 (14) 5 2 0


Coal electricity sales (RMB m) 4,090 3,669 3,859 3,942 3,942

Coal steam sales (RMB m) 121 230 311 302 302

Coal trading sales (RMB m) - - 3,276 3,371 3,371

Others (RMB m) 163 1,974 267 317 317

Total coal revenue (RMB m) 4,373 5,873 7,714 7,933 7,933

YoY (%) 9 34 31 3 0

CAGR 2010-2012F (%) 1



110

Other businesses

Longyuan’s other businesses include power generation from non-wind renewable

energy sources, such as solar power, geothermal power, tidal power and biomass

power. We expect revenue from the company’s other businesses will grow by

78% YoY in 2011F and 23% YoY in 2012F, assuming capacity expansion of the

company’s solar and geothermal power generation projects.

Key operation data – other renewable power

2008 2009 2010 2011F 2012F

Consolidated installed capacity (MW) 28 29 42 80 96

YoY (%) 615 4 45 90 20


YoY (%) (31) 74 16 (18) 1

Net electricity generation (GWh) 23 54 94 148 179

YoY (%) 234 138 74 57 21


Other renewable power sales (RMB m) 28 46 71 108 131

Others business 428 518 624 971 1,175

Total other sales (RMB m) 455 563 695 1,079 1,306

YoY (%) 93 24 23 55 21

CAGR 2010-2012F (%) 37


Other income

Other income mainly includes income from sales of CERs and VERs as well as from

government grants. We estimate that other income will increase at 24% YoY in 2011F

and 33% YoY in 2012F, thanks to rising income from sales of CERs and VERs. In our

current forecasts, we assume that the current CDM system and related income will

continue after 2012F, which is generous in our view.

CER and VER income assumptions

1H10 2H10 1H11F 2H11F 1H12F 2H12F

Capacity registered (MW) 1,902 2,854 3,435 4,128 4,576 5,720

% of capacity registered (%) 42 44 48 48 52 52

CER/VER blended price (€/t) 10.3 9.8 10.8 10.8 11.2 11.2

CERs and VERs income 162 230 305 367 423 529


Operating expenses

Longyuan’s major operating expenses include coal consumption, coal sales costs and

depreciation and amortisation. We forecast the operating expenses of Longyuan will

grow 6% YoY in 2011F and 10% in 2012F. The main drivers for the increase are the

larger depreciation arising from the increase in plant and equipment, and the increase

in the costs for coal trading and power generation.

In terms of operating expenses as a percentage of total revenue, we expect the ratio

to fall from 78% in 2010 to 71% in 2011F and 68% in 2012F. The conclusion was

based on our estimate that the average investment cost for wind farms will decrease

accordingly with the decrease in WTG ASP per kW. The fall in average cost per kW

capacity will decrease depreciation per sales.


111

Operating expenses trend

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2008 2009 2010 2011F 2012F

RMB m

30%

40%

50%

60%

70%

80%

90%

100%

Coal consumption Coal sales costs Depreciation and amortization

Personnel costs Other operating expenses SCC costs

As a % of sales



The improvement in revenue mix has provided upward momentum in Longyuan’s

operating profit. We believe continuing expansion of the company’s wind power

capacity will gradually improve its operating profit and operating margin in

2011F-2012F because wind power consumes no fuel costs and generates higher

operating margin over coal power. We forecast operating profit will grow 46% YoY in

2011F and 31% in 2012F, and operating margin will reach 36% in 2011F and 41% in

2012F.


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2008 2009 2010 2011F 2012F

RMB m

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%




Due to the increase in the base and net finance costs, we believe net profit growth will

slow in 2011F and 2012F to 35% YoY and 28% YoY, respectively. These figures are in

stark contrast to 124% YoY net profit growth in 2010. In addition, we forecast net profit

margin to rise from 14% in 2010 to 16% in 2011F and 18% in 2012F on better

business mix.


112

Net profit trend

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2008 2009 2010 2011F 2012F

RMB m

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%



Return on equity (ROE)

While we expect Longyuan’s ROE to rise from 7% in 2010 to 9% in 2011F and 10% in

2012F, we emphasize that this is a result of the company leveraging its balance sheet

and increasing contribution from the wind power business, which has relatively higher

ROE than the company’s coal-related business. Nevertheless, we believe that

Longyuan’s 2012F ROE is in danger of falling further if the company issues new

shares in 2012F, as management suggested it might do.

ROE trend

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

2008 2009 2010 2011F 2012F



113

Capex and gearing

We estimate Longyuan’s capex will grow 26% YoY in 2011F followed by a 32% YoY

decline in 2012F. The decline in capex for 2012F was mainly related to the decline in

the average investment costs from the fall in WTG ASP.

Due to the expected decrease in capex in 2011F-2012F, we estimate the PPE

turnover (revenue over average PPE) will fall from 0.32x in 2010 to 0.27x in 2011F

and 0.25x in 2012F.

PPE turnover trend

0.25

0.30

0.35

0.40

0.45

2008 2009 2010 2011F 2012F

(x)


Longyuan management commented that the company would mainly utilize debt to

finance capex. We expect the company’s net gearing ratio (net debt over total equity)

to grow from 121% in 2010 to 157% in 2011F and reach 161% in 2012F. Given the

stretched balance sheet and further capex needs, going forward, we would not be

surprised if the company taps the equity market to satisfy its financial needs. This

would likely lower the company’s net gearing ratio even further; however, we have not

factored this possible outcome in our estimates.

Net gearing trend

50%

100%

150%

200%

250%

300%

2008 2009 2010 2011F 2012F



114

Cash flow analysis

Longyuan had negative free cash flow in 2010 given its heavy capex requirement for

wind farm construction. Since we believe Longyuan will continue to expand wind

capacity, Longyuan’s free cash flow is likely to remain negative throughout 2012F.

Due to rising earnings and an improving working capital position, we expect

Longyuan’s cash flow from operations to grow from RMB4,021m in 2010 to

RMB8,744m and RMB9,413m in 2011F and 2012F, respectively.

Longyuan’s cash flow from investing activities primarily derives from capex spending.

Given management guidance on capacity expansion of approximately 2GW p.a. in

both 2011F and 2012F, and our assumption of declining WTG pricing, we forecast

Longyuan’s capex will fall from RMB17,700m in 2010 to RMB13,716m by 2012F.

For cash flow from financing activities, we anticipate the cash outflow to continue to

increase from the increased use of debt to build new wind farms in 2011F-2012F.


(30,000)

(20,000)

(10,000)

0

10,000

20,000

30,000

2008 2009 2010 2011F 2012F

RMB m

Cash flow from operations Cash flow from inv esting activ ities Cash flow from financing activ ities Net cash flow



115

Valuation and risks

Longyuan’s current valuation at 20x FY11F PER seems fair

Longyuan’s shares currently trade at 20x FY11F PER, similar to the average for global

peers of 21x, which seems fair in our view. However, Longyuan’s shares trade at a

36-39% premium to its direct comparable Datang (1798 HK, Underperform) and to the

average for Chinese wind operators, at 14x and 15x respectively, and both justified in

our view, based on Longyuan’s industry leadership, better operating efficiency, higher

wind project ROEs, and relatively healthier balance sheet and cash flows.


Price

(local

Market

cap PER (x)

EPS



China Longyuan Power Group 916 HK N 8.47 8,128 26.5 19.7 15.3 35 0.6 1.9 1.7 1.5 7.3 8.9 10.1

China Datang Corporation

Renewable 1798 HK U 2.38 2,230 31.4 14.2 10.9 122 0.1 1.4 1.2 1.1 4.3 8.6 10.0


China Windpower Group 182 HK NR 0.84 798 14.4 10.9 8.2 32 0.3 1.6 1.5 1.3 13.4 14.8 16.7

Acciona ANA SM NR 77.21 6,986 28.3 27.3 22.3 4 7.8 0.8 0.8 0.8 2.9 3.3 4.0







All prices are as at 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS.



116

Our target price at HK$9.10 derived by DCF valuation method

Our target price estimate of HK$9.10 is based on DCF valuation. We assume WACC

of 8.8%, and terminal growth of 1% after FY2020F. At our price target, Longyuan’s

shares would be trading at 21x FY11F earnings, in line with the average for its global

peers of 21x.. Despite a high earnings CAGR of 31% in 2010-2012F, we believe that

the company’s ROE remains low at 8-10% level and there are several downside risks

to our current earnings estimates, including: (1) grid connection bottlenecks in China;

(2) risks attendant on overseas project returns; (3) the risk that CER and VER income

could fall short of expectations; (4) uncertainty on government subsidies and policies;

and (5) the risk of increasing gearing and interest rates.

Longyuan DCF valuation model


Sales 16,473 19,103 21,211 25,657 29,347 33,830 39,595 46,802 54,729 64,400

EBITDA 9,301 11,862 14,828 18,587 22,133 26,487 32,028 38,955 46,575 55,871

...margin 56% 62% 70% 72% 75% 78% 81% 83% 85% 87%

less:tax (565) (724) (987) (1,403) (1,683) (2,721) (3,348) (4,153) (5,046) (6,243)

minority interest 763 978 1,231 1,749 2,098 2,394 2,947 3,655 4,440 5,493

working capital 1,155 (181) (1,069) (520) (489) (212) (715) (411) (1,028) (639)

CAPEX (22,467) (15,285) (15,701) (23,365) (22,713) (25,372) (30,083) (31,692) (34,835) (37,839)

FCF (11,812) (3,350) (1,698) (4,953) (653) 577 828 6,354 10,107 16,643

WACC

Sum of

PV PV of TV EV

Net debt

(FY10)

Equity

Value Shares

Value per


(%) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (m shares) (HK$) Equity Beta 1.07

7.9 (2,303) 113,018 110,716 33,086 77,630 7,464 12.4 Risk-free rate (%) 3.92

8.0 (2,423) 110,594 108,171 33,086 75,085 7,464 12.0 Equity-risk premium (%) 6

8.1 (2,542) 108,241 105,699 33,086 72,613 7,464 11.6 Country-risk premium (%) 1

8.2 (2,660) 105,958 103,297 33,086 70,212 7,464 11.2 Cost of equity (%) 12

8.3 (2,777) 103,741 100,963 33,086 67,878 7,464 10.8 Cost of debt (%) 7

8.4 (2,893) 101,587 98,694 33,086 65,608 7,464 10.4 Debt/capital (%) 50

8.5 (3,008) 99,495 96,486 33,086 63,401 7,464 10.1 Tax (%) 15

8.6 (3,122) 97,461 94,339 33,086 61,254 7,464 9.7 WACC (%) 8.8

8.7 (3,235) 95,485 92,250 33,086 59,164 7,464 9.4 Terminal growth rate (%) 1

8.8 (3,347) 93,563 90,216 33,086 57,130 7,464 9.1

8.9 (3,458) 91,693 88,236 33,086 55,150 7,464 8.8

9.0 (3,567) 89,874 86,307 33,086 53,222 7,464 8.5

9.1 (3,676) 88,104 84,428 33,086 51,343 7,464 8.2

9.2 (3,784) 86,381 82,598 33,086 49,512 7,464 7.9

9.3 (3,890) 84,704 80,814 33,086 47,728 7,464 7.6

9.4 (3,996) 83,070 79,074 33,086 45,989 7,464 7.3

9.5 (4,101) 81,479 77,378 33,086 44,293 7,464 7.0

9.6 (4,204) 79,928 75,724 33,086 42,638 7,464 6.8

9.7 (4,307) 78,417 74,110 33,086 41,025 7,464 6.5

9.8 (4,409) 76,944 72,535 33,086 39,450 7,464 6.3

9.9 (4,510) 75,508 70,999 33,086 37,913 7,464 6.0



117

Risks

Grid connection bottleneck in China: Grid network construction within China’s

richest wind areas, such as Inner Mongolia, the three northeast provinces, and

Xinjiang, is lagging the expansion of wind farms. We believe the issue could be

gradually resolved in the coming three-to-five years, from higher spending in ultra high

voltage (UHV) transmission lines and the new smart grid system that will be part of the

state grid, all part of the government’s 12th Five-Year Plan. If China could enhance its

power grid network more rapidly, or alternatively, if the progress on the power grid is

slower than we expect, there could be upside or downside surprise, respectively, to

our earnings forecasts.

Overseas project execution risk: Longyuan management has laid out its plan to

develop projects overseas which will entail higher return potential. Targeted regions

include South Africa, North America and Eastern Europe. In our view, investment

returns from overseas projects could be affected by changes in the policies of the

foreign governments in the countries it is dealing with. Obtaining financing for projects

can be more difficult from flow of fund restrictions between country borders and the

absence of business relationships with overseas banks. Finally, foreign currency

fluctuations add additional investment risk to the company’s overseas project returns.

CER and VER income: CER income has risk inherent in project approval by the CDM

EB, the UN body that oversees carbon credit trading. In December 2009, the CDM EB

suspended approvals for some Chinese wind farms. Although the CDM EB has since

approved some other Chinese wind farms, some uncertainty about the approval

process still lingers. Continuation of the Kyoto Protocol and related carbon trading

mechanisms also remain uncertain post 2012. Our current forecasts for Longyuan

have factored in continuous CER/VER income streams post 2012F.

Uncertainties on government subsidies and policies: We note that government

subsidy income is a material part to the return from wind farms. Future government

policies in China towards feed-in-tariffs, VAT rebates and preferential income tax rates

can greatly affect our earnings estimates.

Risk of increasing gearing and interest rates: Longyuan relies mainly on bank

borrowings, corporate bonds and debentures to finance capex. We expect the

company’s gearing ratio to grow from 136% in 2010 to 194% in 2012F, which would

lead to increasing interest risk exposure in the issuance of new debts and refinancing.

In addition, since we foresee potential interest rate hikes by the PBOC to tackle

inflation problems in China, we expect Longyuan’s financing costs would be on a

rising trend in the near future. Based on our estimates, for every 1% (100bp) increase

in Longyuan’s effective interest rate, Longyuan’s net profit would decline by 10%.

Equity refinancing risks in 2012F: Longyuan’s management has publicly

announced plans to issue new shares in 2012F. Although the decision is subject to the

approval from the board of directors, if the new shares are issued, they may incur

additional administrative costs and may also lead to the dilution to earnings per share

post issuance.


118

Company profile

Longyuan is China’s largest wind farm operator, accounting for approximately 15% of

China’s cumulative wind capacity by end-2010 based on our estimate. The major

shareholder of Longyuan is Guodian, one of the five-largest power generation

companies in China.

Company history

Longyuan was established through reorganization of the former China Longyuan

Electric Power Group Corporation, founded in January 1993 and one of the pioneers

in new energy development in China.

The company commenced construction of its first wind farm in 1991 which became

operational in the following year with 1.2MW capacity. Longyuan has accumulated

nearly 20 years of wind farm operation experience.

In 1999, Longyuan was merged with China Fulin, a wind power generation company,

and Zhongneng Power-Tech, which is specialized in the development and

consultation of electricity technology.

In 2002, under the restructuring of China’s power industry by the State Council, the

former State Power Corporation was reorganized and divided into two power grid

companies and the five-largest independent power generation companies. It became

a wholly owned subsidiary of Guodian, one of the five-largest independent power

generation companies after the restructuring.

In addition, Longyuan inherited 144MW wind power assets from the former State

Power Corporation in 2003 and nine wind farms in 2004 to become Guodian’s wind

power investment arm since then.

In 2009, the company was successfully listed on the main board of Hong Kong’s stock

exchange.

Major milestones

1991 � Began construction of wind power plants in Xinjiang

1993 � Established by the former Ministry of Energy

1996 � Became a wholly owned subsidiary of the former State Power Corporation

1999 � Merged with China Fulin and Zhongneng Power-Tech

2002 � Became a wholly owned subsidiary of Guodian as a result of group restructuring of the former

State Power Corporation

2003 � Inherited 144MW wind power assets from the former State Power Corporation. Total wind installed

capacity reached 231MW, accounting for 40% of China's total wind capacity.

2004 � Won concession projects for Jiangsu Rudong and Juling Tongyu; began large-scale construction

of wind power projects.

2006 � Proposed the development plan of six major wind areas

2009 � Listed on the main board of Hong Kong’s stock exchange

2010 � Won bid for Jiangsu Dafeng Intertidal Zone Concession Project for a capacity of 20MW. Gansu

Guazhou wind farm with installed capacity of 300MW began operations. Added 35 wind power

projects in 2010, installed capacity reached 2,053MW.

2011 � 56 wind projects and one biomass project were registered with CDM in January 2011, with

combined installed capacity of 2,904MW.



119

Business description

Longyuan is primarily engaged in the design, development, construction,

management and operation of wind farms. In addition to its wind power business,

Longyuan also operates other power projects in thermal power, solar power, tidal,

biomass and geothermal energy.

According to Longyuan, by the end of December 2010, the company had installed

capacity of 8,473MW, of which 6,556MW (77.4%) coming from wind power, 1,875MW

(22.1%) from coal-fired power and the remaining 42MW (0.5%) from other renewable

sources.

Revenue by segment (2008-2010) Installed capacity by segment (2008-2010)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2008 2009 2010

RMB m

Wind power Coal power Other revenue

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2008 2009 2010

MW

Wind power Coal power Other renewables

Source: Company data, CCBIS Source: Company data, CCBIS

The company’s wind projects are located in 13 provinces in China, including

Heilongjiang, Jilin, Liaoning, Inner Mongolia, Jiangsu, Zhejiang, Fujian, Hainan,

Gansu, Xinjiang, Hebei, Yunnan, and Anhui. Its capacity is concentrated in the

northern regions of China, including three northeast provinces, Inner Mongolia and

Hebei, which jointly accounted for 62% of Longyuan’s total capacity in 2010.

Installed capacity by region (2008-2010) Gross power generation by region (2008-2010)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2008 2009 2010

MW

The three northeast provinces Inner MongoliaThe southeast coastal provinces GansuXinjiang HebeiOthers

0

2,000

4,000

6,000

8,000

10,000

12,000

2008 2009 2010

GWh

The Three Northeast Provinces Inner MongoliaThe Southeast Coastal Provinces Gansu

Xinjiang HebeiOthers

Source: Company data, CCBIS Source: Company data, CCBIS


120

Business overview – wind power

Wind power-related income includes electricity sales (part of company’s overall

revenue), VAT rebate income (part of “other income”) and CDM income (part of “other

income”). Wind power is generated from wind farms operated by the company before

being sold to local grid companies. Electricity is sold at fixed tariffs according to

geographical locations based on the fixed price set by NDRC in 2009.

VAT rebate income is received in form of a refund of 50% of the VAT levied on

electricity generation on wind power. It is also received on 100% VAT rebate upon

procurement (capital expenditure) of domestic wind equipment.

Meanwhile, CDM income is derived from the sale of carbon credits, known as CERs,

from wind farms registered with the CDM EB. Longyuan also sells VERs, granted from

the electricity output of its CDM projects before those projects are registered as CDM

projects. Up to January 2011, the company announced it has 56 registered CDM

projects, of which 55 are wind projects and 1 is biomass project, with combined

installed capacity of 2,904MW.

Business overview – coal-related business

Coal-related business accounted for 54% of Longyuan’s overall revenue in 2010.

Longyuan’s coal-related business mainly comprises of coal-fired power generation

and coal trading.

Longyuan sells electricity generated by its coal-fired power plants to Jiangsu Electric

Power Company. It operates two coal power plants, which are inherited from the

former State Power Corporation with installed capacity of 1,875MW. The company is

planning to upgrade its coal-fired power capacity by 1GW by 2012F, subject to

government approval. In addition to electricity sales income, the steam generated

from coal electricity generation and sold to industrial and commercial users, such as

hotels and factories, also contributed to the company’s revenue.

We estimate that Longyuan also generates 17-25% of its revenue before service

concession construction (SCC) income from coal trading over 2009-2011F. Based on

management’s disclosure, Longyuan’s coal trading business is primarily sourcing coal

and selling it to its parent company Guodian. Despite huge top-line contribution, we

believe profit impact from this business line is minimal due to its low profit margin at

7-8%.

Business overview – other businesses

Other businesses accounted for merely 3% of Longyuan’s overall revenue in 2010.

Longyuan generates income from its pilot projects in other renewable energy sources,

including tidal, biomass and geothermal energy. In addition, the company also

provides consulting, repairs and maintenance, training and other professional

services to wind farms. Management also commented that solar project investment

would be a new development area for the company going forward.


121

Major customers

Main customers of the company are wholly owned subsidiaries of State Grid

Corporation of China, including Fujian Electric Power Company, Heilongjiang Electric

Power Company, Northeast China Grid Company Limited and Liaoning Electric Power

Company.

Major suppliers

Wind turbine is the primary equipment in the operation of wind farms. Longyuan

mainly acquires wind turbines from Gamesa, Vestas, GE, Goldwind and Sinovel.

Some major wind turbine manufacturers such as Vestas, Gamesa and Goldwind have

established long-term business relationships with the company of up to eight years.

As for the company’s coal power business, it has entered into long-term coal supply

agreements with Shenhua Zhunge’er Energy Company and China National Coal

Group Corporation to secure coal prices. These contracts have minimum terms of no

less than five years.



Guodian Group, 64%

China Investment Corp,

5%

Social Society Fund,

3%

China Life Insurance,

3%

Public, 25%



122




Xie Changjun 53 Executive Director and

President

� Professor-grade senior engineer;

� Joined group in 1993;


Tian Shicun 58 Executive Director and

Vice-President

� Professor-grade engineer;



Wang Liansheng 59 Executive Director � Senior economist;



Zhu Yongpeng 59 Non-executive Director and

Chairman of Board


� Joined group in 1993, appointed as Chairman of Board in July 2009;

� Served as an engineer in several government divisions;

� General manager of Guodian.

Wang Baole 54 Non-executive Director � Senior statistician;

� Appointed as Director in July 2009;

� Previously served various management positions in state-owned power conglomerates;

� Head of Plan & Development Department & head of Nuclear Power Office of Guodian.

Luan Baoxing 43 Non-executive Director � Senior accountant;

� Appointed as Director in July 2009;

� Head of Capital Operation and Ownership Management Department of Guodian.

Li Junfeng 54 Independent Non-executive

Director

� Director of academic members, deputy Director general and researcher of the Energy Research

Institute under the NDRC;

� Appointed as Director in July 2009.

Zhang Songyi 55 Independent Non-executive

Director

� Received JurisDoctor from Yale University;

� Previous department joint head of Morgan Stanley Asia Limited;


Meng Yan 55 Independent Non-executive

Director

� PRC CPA, Doctor in Economics (Accounting)

� Dean and professor in School of Accountancy Society of Central University of Finance and

Economics;

� Executive Director of the Accounting Society of China and the Banking Accounting Society of China;


Chen Bin 51 Supervisor � Appointed as a supervisor in July 2009;

� Deputy chief accountant and head of financial management department of Guodian

Yu Yongping 50 Supervisor � Appointed as a supervisor in July 2009;

� Head of audit department of Guodian

Wang Jianting 46 Employee Representative

Supervisor

� Appointed as a supervisor in July 2009;

� Chief of disciplinary inspection group and chairman of the trade union of Longyuan.

Jia Nansong 48 Secretary of Board & Joint

Company Secretary

� Previously senior engineer in state-owned power conglomerates;

� Joined group in 1994.

Huang Yuan 49 Vice-President � Previously senior engineer in state-owned power conglomerates;

� Joined group in 1993.

Zhang Yuan 54 Vice-President � Professor-grade senior engineer;



Ngai Wai Fung 49 Joint Company Secretary � Appointed as joint company secretary since 2009;

� Director and head of listing services of KCS Hong Kong Limited;

� Vice president of Hong Kong Institute of Chartered Secretaries.



123

Financial summary


FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Revenue 9,744 14,213 16,473 19,103

Other income 569 989 1,220 1,617

Operating expenses (7,459) (11,118) (11,743) (12,947)


EBIT 2,854 4,084 5,950 7,773

Depreciation and amortisation (1,590) (2,236) (3,351) (4,089)

EBITDA 4,444 6,320 9,301 11,862

Net interest expense (1,020) (1,098) (1,897) (2,583)

Share of results of an associate 105 228 (20) (20)

Extraordinary items 4 (3) 0 0


Income tax (296) (441) (565) (724)

Net profit after tax 1,647 2,770 3,468 4,446

Minorities (753) (763) (763) (978)

Reported net profit after tax 894 2,007 2,705 3,468

Dividends 0 (403) (541) (694)

Transfer to reserves 894 1,604 2,164 2,774

Normalized net profit after tax 890 2,010 2,705 3,468

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Fixed assets 38,178 51,619 70,735 81,931

Goodwill 0 12 12 12

Other intangible assets 6,086 7,661 7,661 7,661

Long-term investments 799 1,315 1,315 1,315

Other long-term assets 2,523 3,665 3,665 3,665



Inventories 333 632 536 589



Cash & equivalents 16,503 4,089 6,444 11,200


Total assets 67,954 74,634 96,002 112,993


Short-term debt 17,087 17,200 17,600 17,600



Long-term debt 16,219 19,975 36,825 49,053

Other long-term liabilities 2,363 2,330 2,330 2,330






FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Profitability (%)

EBIT margin 29.3 28.7 36.1 40.7

EBITDA margin 45.6 44.5 56.5 62.1

Net margin 9.2 14.1 16.4 18.2

ROE 3.5 7.3 8.9 10.1

Growth (%)

Revenue 13.9 45.9 15.9 16.0

EBIT 103.9 43.1 45.7 30.6

EBITDA 79.0 42.2 47.2 27.5



Normalized PER 48.5 26.5 19.7 15.3

Reported PER 48.2 26.5 19.7 15.3


Price/cash flow 2.8 N/A 22.6 11.2

PBV 1.7 1.9 1.7 1.5

EV/EBIT 18.7 13.0 8.9 6.8

EV/EBITDA 12.0 8.4 5.7 4.5



Interest cover (x) 2.8 3.7 3.1 3.0



FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

EBITDA 4,444 6,320 9,301 11,862

Change in working capital (83) (1,813) 1,155 (181)

Other operating cash flow (276) (486) (1,712) (2,269)

Cash flow from operations 4,085 4,021 8,744 9,413


Addition in investments (340) (138) (20) (20)

Net acquisitions 8 (65) 0 0


activities 1,360 348 1,174 1,589


Cash dividends 0 (632) (403) (541)

Equity issue 17,514 126 0 0

Net debt issue 10,952 3,677 17,250 12,228


activities (1,891) (1,858) (1,924) (2,627)

Cash flow from financial activities 26,575 1,313 14,923 9,060

Net cash flow 15,505 (12,365) 2,355 4,756

Beginning cash 1,002 16,503 4,089 6,444

Forex (3) (48) 0 0

Ending cash 16,503 4,089 6,444 11,200



124

China Datang Corporation Renewable Power (1798 HK)

Balance sheet a major concern

Company Rating:

Sector Rating:

Underperform (initiation)


Datang is the second-largest wind farm operator in China. By 2010 it

had a 9% share of China’s wind installed capacity. In our view,

Datang’s net gearing ratio of between 270% and 290% for

2011F-2012F is a major concern, as it entails high equity refinancing

risk. Its ROE in the range of 9% to 10% in 2011F-2012F also falls

short of peers, particularly considering Datang is a pure play wind

project operator, with ostensibly higher ROE than coal-fired power

operators. We initiate coverage with an Underperform rating and

target price of HK$2.00.

� Faster earnings growth thanks to scale effect. We expect

Datang to enjoy earnings CAGR of 70% in 2010-2012F, better

than Longyuan’s 31%, owing to Datang’s smaller scale of

c.60% of Longyuan’s in 2010.

� Stretched balance sheet: We forecast Datang’s net gearing

ratio will surge to 268% and 286% by 2011F and 2012F,

respectively. Despite our view that state-owned enterprises in

China carry minimal credit risk, Datang’s tight cash position

remains a concern for us.

� ROE at 9-10% in 2011-12F falls short of peers: We estimate

Datang’s ROE will be 9-10% in 2011F-2012F. While this is in

line with Longyuan’s, we view Datang’s performance as

inferior. Unlike Longyuan, which operates a coal-fired

business, Datang is a pure wind operator, and should

theoretically have higher ROE.

� Initiate with Underperform. Our target price of HK$2.00 is

based on DCF valuation, implying 12x 2011F PE, a 43%

discount to the average of its global peers. We believe

Datang’s valuation discount is justifiable given its stretched

balance sheet and inferior operating efficiency.


Year to 31 Dec 2008 2009 2010 2011F 2012F

Revenue (RMB m) 860 1,428 2,380 4,219 6,034

Reported net profit (RMB m) 140 248 456 1,011 1,311


Normalized EPS growth (%) 149.0 77.6 28.5 121.8 29.7

PER (x) 71.7 40.3 31.4 14.2 10.9

EV/EBITDA (x) 21.7 10.3 6.1 3.3 2.4

PBV (x) 2.3 1.8 1.4 1.2 1.1

Dividend yield (%) 0.0 0.0 0.0 0.7 0.9

ROE (%) 3.2 4.4 4.3 8.6 10.0

Net gearing ratio (%) 190 271 195 268 286


Price: HK$2.38

Target: HK$2.00

(initiation)

Trading data

52-week range HK$1.85 – 2.43



Free float (%) 71


Expected return (%) – 1 year (16)



1.8

1.9

2.0

2.1

2.2

2.3

2.4

2.5

2.6

2.7


HK$

10,000

10,500

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

Datang (LHS) HSCEI (RHS)

Source: Bloomberg




125

Financial analysis

Revenue

Datang is the second-largest wind power generation company in China, just behind

Longyuan. It is only engaged in the generation of wind power. We anticipate rapid

top-line growth for the company from the management’s target of adding c.1.5GW

capacity in 2011F in order to reach 5.6GW. We forecast capacity to reach 7.1GW by

2012F. Hence, we expect the company’s revenue to experience rapid growth at 77%

YoY in 2011F and 43% YoY in 2012F.

We assume Datang’s utilization hours will gradually increase from 2,134 hours in

2010 to 2,240 hours in 2011F and 2,274 hours in 2012F. We further assume its wind

power tariffs will rise, from RMB0.49 in 2010 to RMB0.5 per kWh, in 2011F-2012F. In

China, the government has put in place a wind tariff scheme with the aim of keeping

wind project returns in the range of 8-10%. Thus wind projects in regions with higher

utilization hours will theoretically receive lower wind power tariffs, in our view.

Therefore, we believe we have given a quite generous assumption to Datang’s

utilization hours and wind tariffs in 2011F-2012F.

Key operation data – wind power

2008 2009 2010 2011F 2012F

Installed capacity (MW) 1,768 2,620 4,028 5,600 7,100

YoY (%) 92 48 54 39 27


YoY (%) 5 (4) (1) 5 1



Sale of electricity (RMB m) 613 1,384 2,378 4,219 6,034

YoY (%) 114 126 72 77 43

CAGR 2010-2012F (%) 59


Other income

Other income is income generated from the company’s registered CDM projects and

government grants. We anticipate other income to grow at 104% YoY in 2011F

because we believe the number of registered CDM projects in 2011F will double, and

the total amount of government grants to increase from robust growth in electricity

sales. For 2012, we believe increase in wind capacity and in the number of projects

registered under CDM will be similar to 2011F, but due to the increased base numbers,

we expect to see growth slow to 29% YoY for 2012F.

Operating expenses

Since the company is only engaged in wind power generation, we noted Datang’s

main operating expenses are depreciation and amortization, labour, and

miscellaneous items such as material costs and repair and maintenance costs. We

anticipate operating expenses to grow in 2011F-2012F, driven by the increase in

depreciation and repair and maintenance costs from the increased number of WTG

installed, but remain stable in terms of per unit of electricity generated and sales. We

forecast operating expenses over sales to fall somewhere between 52% and 53% in

2011F-2012F, similar to the level in 2010.


126

Operating expenses trend

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2008 2009 2010 2011F 2012F

RMB m

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Service concession construction costs Depreciation and amortization

Labour costs Other operating expenses

As a % of sales



We expect Datang’s operating profit to grow by 82% YoY in 2011F given our estimate

for revenue to grow at 77% YoY in 2011F and operating expenses over sales to

remain flat YoY in 2011F. We also expect operating margin of the company to fall

between 63-65% in 2010-2012F, due to the stable cost control over the period.


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2008 2009 2010 2011F 2012F

RMB m

0%

10%

20%

30%

40%

50%

60%

70%

80%




Given strong growth in the company’s operating profit in 2011F, we expect net profit in

2011F to experience high growth of 122% YoY. We also forecast net margin will

remain stable in 2011F-2012F, between 22-24%. Net interest expense is the main

component of Datang’s non-operating expenses. Due to the company’s growing use

of debt-to-finance capacity expansion, we expect net interest expenses to rise 85%

YoY in 2011F.


127

Net profit trend

0

200

400

600

800

1,000

1,200

1,400

2008 2009 2010 2011F 2012F

RMB m

0%

5%

10%

15%

20%

25%



Return on equity (ROE)

We expect Datang to realize significant improvements in ROE in 2011F and 2012F

assuming the company expands capacity through the use of debt and a rapid increase

in reported net profit of a 70% CAGR in 2010-2012F. Since we expect Datang’s

growth in equity will only grow at an 11% CAGR in 2010-2012F, far lag behind growth

in reported net profit, we expect ROE will ramp up from 4% in 2010 to 9% in 2011F

and reach 10% by 2012F.

ROE trend

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

2008 2009 2010 2011F 2012F



Growth in capex is mainly driven by management’s objective to expand installed

capacity. Based on management guidance, Datang’s capex for 2011F will grow 41%

YoY to RMB15m from RMB11m in 2010. We expect to see a 27% YoY decline in

capex in 2012F, taking into account future declines in WTG ASP according to our

estimates. Turning now to PPE turnover (revenue over average PPE), we expect the

ratio to rise from 0.09x in 2010 to 0.11x in 2011F and reach 0.12x by 2012F thanks to

the expected reduction of the per capacity investment cost in wind turbines.


128

PPE turnover trend

0.06

0.07

0.08

0.09

0.10

0.11

0.12

0.13

2008 2009 2010 2011F 2012F

(x)


Debt and gearing

Datang’s wind farm projects are heavily financed by bank borrowings and loans from

related parties. We expect the company's debt to grow from RMB26m in 2010 to

RMB36m in 2011F. Assessing its debt composition at June 2010, around 86% of the

company loans are repayable after 2 years. We anticipate the company will continue

to obtain financial support from Datang Group, its parent company. Hence it will be

capable of obtaining new bank loans for future wind farm projects and renewals of its

existing loans through guarantees by Datang Group and future electricity tariffs,

despite its high net gearing ratio.

The net gearing (net debt over total equity) of Datang has decreased from 271% to

195% in 2010, due to the effect of the IPO in December 2010. Through continuing

financing of its projects through bank and other borrowings, we expect the net gearing

ratio to rise to 268% in 2011F and reach 286% by 2012F.

Loan composition (June 2010)

After 1 year but

within 2 years

8%

After 2 years but within 5

years

27%After 5 years

59%

Within 1 year

6%



129

Net gearing trend

150%

200%

250%

300%

2008 2009 2010 2011F 2012F


Cash flow analysis

The operating cash flow of the company is expected to grow in line with company

profit in 2011F-2012F. We noted that Datang’s major cash outflows derive from capex

for the construction of new wind farms. Because they are mainly financed by

long-term loans, we expect cash outflows from investing activities for constructing

new wind farms to be offset by the increase in net cash inflow from financing activities

from bank and other loans in 2011F-2012F. We expect the company’s cash flow

generation to be weak in 2011F-2012F.


(15,000)

(10,000)

(5,000)

0

5,000

10,000

15,000

2008 2009 2010 2011F 2012F

RMB m




130

Valuation and risks

Datang’s current valuation discount to peers is justifiable

Datang’s shares currently trade at 14x FY11F PER, a 28% discount over Longyuan

(20x), the industry leader in wind power generation in China. From our vantage point,

the discount is justified by the better operating efficiency, higher wind project ROE and

healthier balance sheet and cash flows for Longyuan over Datang.

Datang’s shares trade at a 32% discount to its global peers’ average of 21x. We

believe Datang deserves to be traded at a discount to global peers given its weak

balance sheet position. Due to the expected increase of debt to finance for Datang’s

capacity expansion, we have concerns over the company’s increasing net gearing

ratio, from 195% in 2010 to 286% by 2012F, according to our estimates. As it is a

state-owned company and because Datang can avail itself of financial support from

Datang Group when necessary, the company can not be considered at great risk of

default; nevertheless, its high net gearing ratio exposes it to high interest risk and

refinancing risk. Assuming a gearing ratio of 268% for the company in 2011F, then an

increment of 1% (100bp) interest rate can lead to a c.20% fall in company net profit.

Thus, factoring in the risk of an interest rate hike in the near future could lead to a

lower valuation.


Price

(Local

Market

cap PER (x)

EPS



China Longyuan Power

Group

916 HK N 8.47 8,128 26.5 19.7 15.3 35 0.6 1.9 1.7 1.5 7.3 8.9 10.1

China Datang Corporation

Renewable

1798 HK U 2.38 2,230 31.4 14.2 10.9 122 0.1 1.4 1.2 1.1 4.3 8.6 10.0


China Windpower Group 182 HK NR 0.84 798 14.4 10.9 8.2 32 0.3 1.6 1.5 1.3 13.4 14.8 16.7

Acciona ANA SM NR 77.21 6,986 28.3 27.3 22.3 4 7.8 0.8 0.8 0.8 2.9 3.3 4.0







All prices are as at 1 April 2011. Bloomberg consensus data are used for peers not rated by CCBIS.



131

Our target price of HK$2.00 derived by DCF valuation method

Our target price of HK$2.00 was derived from DCF valuation based on a WACC of

9.5%, and terminal growth of 1% after FY2020F. At our target price, Datang’s shares

would be trading at 12x, a 40% discount over Longyuan and a 43% discount over

global peers. Despite a high earnings CAGR of 70% in 2010-2012F, with an expected

net gearing ratio wallowing in the range of 270-290%, high interest rate risk and high

refinancing risk could have material impact over company earnings. Besides, we

stress that Datang’s ROE is inferior to Longyuan’s, although their overall ROE both

remain at 9-10% in 2011F-2012F, because Longyuan also operates coal-fired power,

which theoretically has lower return over wind power. We forecast Datang has lower

average project ROE compared with Longyuan’s.

There are several downside risks to our current earnings estimates, including: (1) Grid

connection bottleneck in China; (2) risk attendant on overseas project returns; (3) risk

arising from CER and VER income; (4) uncertainties on government subsidies and

policies; and (5) risk of increasing gearing and interest rate.

Datang DCF valuation model


Sales 4,219 6,034 7,857 9,955 12,707 16,058 20,135 25,169 31,228 38,284

EBITDA 4,412 6,118 7,765 9,838 12,607 15,932 20,017 25,146 31,199 38,248

...margin 105% 101% 99% 99% 99% 99% 99% 100% 100% 100%

Less:tax (132) (171) (299) (538) (780) (1,091) (1,502) (2,046) (2,706) (3,513)

Minority interest 178 231 329 457 884 1,236 1,702 2,319 3,067 3,982

Working capital 1,235 992 855 1,528 1,358 2,171 2,217 2,738 3,295 5,869

CAPEX (15,011) (10,894) (12,729) (15,569) (19,667) (21,061) (24,403) (28,818) (33,188) (34,173)

FCF (9,318) (3,723) (4,080) (4,284) (5,598) (2,813) (1,969) (661) 1,667 10,412


Net debt

(FY10)

Equity

value Shares

Value per

share WACC calculation

(%) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (m shares) (HK$) Equity beta 1.38

8.6 (21,190) 65,238 44,049 20,545 23,504 7,143 3.9 Risk-free rate (%) 3.92

8.7 (21,186) 63,824 42,639 20,545 22,094 7,143 3.7 Equity risk premium (%) 6

8.8 (21,182) 62,453 41,272 20,545 20,727 7,143 3.4 Country risk premium (%) 1

8.9 (21,177) 61,123 39,946 20,545 19,401 7,143 3.2 Cost of equity (%) 14

9.0 (21,173) 59,833 38,660 20,545 18,115 7,143 3.0 Cost of debt (%) 7

9.1 (21,168) 58,581 37,413 20,545 16,868 7,143 2.8 Debt/capital (%) 50

9.2 (21,163) 57,364 36,201 20,545 15,656 7,143 2.6 Tax (%) 15

9.3 (21,158) 56,183 35,025 20,545 14,480 7,143 2.4 WACC (%) 9.5

9.4 (21,153) 55,036 33,883 20,545 13,338 7,143 2.2 Terminal growth rate (%) 1

9.5 (21,147) 53,920 32,773 20,545 12,228 7,143 2.0

9.6 (21,142) 52,836 31,694 20,545 11,149 7,143 1.9

9.7 (21,136) 51,782 30,646 20,545 10,101 7,143 1.7

9.8 (21,130) 50,756 29,626 20,545 9,081 7,143 1.5

9.9 (21,124) 49,758 28,634 20,545 8,089 7,143 1.3

10.0 (21,118) 48,787 27,669 20,545 7,125 7,143 1.2

10.1 (21,112) 47,842 26,731 20,545 6,186 7,143 1.0

10.2 (21,105) 46,922 25,817 20,545 5,272 7,143 0.9

10.3 (21,098) 46,025 24,927 20,545 4,382 7,143 0.7

10.4 (21,091) 45,152 24,061 20,545 3,516 7,143 0.6

10.5 (21,084) 44,301 23,217 20,545 2,672 7,143 0.4

10.6 (21,077) 43,472 22,395 20,545 1,850 7,143 0.3

Source: CCBIS


132

Risks

Grid connection bottleneck in China: The grid network construction within China’s

richest wind areas, including Inner Mongolia and the three northeast provinces, is

lagging behind the expansion of wind farms. We believe the issue could be resolved in

the coming 3-5 years, from higher spending in UHV transmission lines and “smart grid

systems” by the State Grid as part of the 12th five year plan. If China could enhance its

power grid network faster or slower than our expectation, there could be upside or

downside surprises to our earnings forecasts.

Overseas project execution risk: Datang management laid out its plan to develop

projects overseas with higher return potential. Targeted regions include North and

South America, Australia and Eastern Europe. In our view, investment returns of

overseas projects could be affected by changes in foreign government policies.

Besides, the means to obtain borrowings to finance projects can be more difficult due

to flow of fund restrictions between country borders and the dearth of business

relationships with overseas banks. Foreign currency fluctuations raise additional

investment risk to the company’s overseas project returns.

CER and VER income: CER income is dependent on project approvals by the CDM

EB, the UN body that oversees carbon credit trading. In December 2009, the CDM EB

suspended the approvals for some Chinese wind farms. Although the CDM EB has

approved other Chinese wind farms, there is still a degree of uncertainty surrounding

the approval process. Moreover, the continuation of the Kyoto Protocol and related

carbon trading mechanisms presently remains uncertain post-2012. Our current

forecasts for Datang have factored in continuous CER/VER income streams post

2012F.

Uncertainty surrounding government subsidies and policies: Government

subsidy income is a material component of the return from wind farms. Government

subsidies are also subject to annual government approval. Future government

policies in China towards feed-in-tariffs, VAT rebates and preferential income tax rates

can greatly affect our earnings estimates.

Risk of interest rate exposure given high gearing: Datang relies on bank and other

borrowings finance its wind farm constructions. We anticipate the company’s net

gearing ratio will reach c.286% in 2012F, which would lead to increasing interest risk

exposure in the issuance of new debt and refinancing. In addition, since we foresee

potential interest rate hikes by the PBOC to tackle inflation problems in China, we

expect Datang’s financing costs to steadily rise in the near future. Based on our

estimates, for every 1% (100bp) increase in Datang’s effective interest rate, net profit

would decline by c.20%


133

Company profile

Datang is the second-largest wind farm operator in China according to BTM Consult.

As of end-2010, Datang had 4,028MW of cumulative wind capacity, accounting for

approximately 9% of China’s wind capacity based on our estimates. Datang’s majority

shareholder is Datang Group, one of the five-largest power generation companies in

China.

Company history

Datang was established in July 2010, during the reorganization of its predecessor,

Datang Chifeng Saihanba Wind Power Generation (Datang Chifeng Saihanba),

established in September 2004.

Through its predecessor, Datang Chifeng Saihanba, Datang has over six years of

experience in wind farm development. The company’s first wind power project

(installed capacity of 30.6MW) commenced construction in October 2004 and began

operations in August 2005.

In April 2006, Datang formed its first wind power joint venture with KEPCO

Neimenggu International in China, This represented Datang’s first step towards

leveraging the experience and advanced technology of overseas power companies.

In 2009, parent Datang transferred to Datang 12 wind farms with total installed

capacity of 549MW, reaffirming Datang’s role as Datang Group’s flagship company for

its wind power business. In 2010, through the reorganization, Datang received all wind

power businesses held by Datang Group and also the wind power businesses of

Datang Group’s subsidiary, Shanxi Renewable Power.

Over the past six years, Datang rapidly built up its wind power business. The

company’s total installed capacity surged from 79.9MW in 2005 to 4,028MW in

end-2010.

In December 2010, Datang was listed on the Main Board of the Stock Exchange of

Hong Kong.

Major milestones – Datang

Year Development

2004 � Predecessor company, Datang Chifeng Saihanba, was established by Datang Group, and began

construction of its first wind power project in Inner Mongolia

2005 � First wind power farm in Chifeng, Inner Mongolia, began operations, with installed capacity of

30.6MW

2006 � First wind power joint venture with KEPCO Neimenggu International in China

2008 � Received approval from the NDRC to develop and construct the 102MW Shanghai Donghai Bridge

Offshore wind power project

� Acquired wind power projects in Bayannur and Linxo in Inner Mongolia, expanding total installed

capacity to 1,768MW

2009 � Datang Chifeng Saihanba was renamed to China Datang Corp. Renewable Power Co., Ltd.

� Inherited 12 wind farms from Datang Group with installed capacity of 549MW. Total installed

capacity reached 2,620MW; ranked second in China, eighth in the world according to BTM

2010 � Acquired two wind power projects under construction from Datang Group with installed capacity of

49.5MW each and 2% equity interest in Datang Hailin Wind Power at a consideration of RMB1.7m.

� Listed on the main board of Hong Kong’s stock exchange in December 2010

2011 � Won a bid in China’s first solar thermal power generation project, located in Inner Mongolia, with

50MW capacity



134

Business description – wind and solar power generation

Datang is the primary entity through which its controlling shareholder Datang Group is

engaged in renewable energy, with a focus on wind power generation. Unlike China

Longyuan Power, Datang is not involved in coal-related businesses.

Datang Renewable develops, manages and operates wind farms in China. Sale of

electricity to local grid companies drives company revenue. Its wind power projects

are currently located in Inner Mongolia and northeastern provinces, central and

western China, and the southeastern coastline of China.

Up to December 2010, the company had installed capacity of 4,028MW and wind

resources reserves of approximately 59GW for future development. Most of its

operating projects are located in Inner Mongolia and the northeastern provinces,

accounting for 74% of total capacity.

According to management, Datang regards development of solar projects in China as

the next growth driver. In January 2011, bid results of public tendering of the first solar

thermal project in China were announced. Datang’s bid was the lowest among the

participants and the company successfully won this 50MW solar thermal project in

Inner Mongolia.

Operating projects (December 2010)

Inner Mongolia, and the northeast provinces Central and western regions Southeastern coastline Total

Geographical coverage Inner Mongolia, Liaoning, Jilin and Heilongjiang Hebei, Henan and Gansu Shandong and Shanghai

Installed capacity (MW) 2,994 597 437 4,028

% of total installed capacity (%) 74 15 11 100

Wind resources reserve (MW) 38,140 15,325 5,370 58,835

% of total wind resources reserve (%) 65 26 9 100


Installed capacity by region (2008-2010) Gross power generation (2008-2010)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2008 2009 2010

MW

Southeastern Coastline

Central and Western

Inner Mongolia and the three northeast provinces

0

1,000

2,000

3,000

4,000

5,000

6,000

2008 2009 2010

MW

Total gross power generation (GWh)




135

Major customers

Datang’s main customers are local grid companies controlled by the Chinese

government. Its top-five customers have historically accounted for over 90% of total

revenue in the sale of electricity.

Major suppliers

Datang has established long-term relationships with Vestas, Goldwind and Sinovel, its

major wind turbine manufacturers. Other suppliers, for spare parts and consumables,

include Eulkind and Nordex. Datang’s top-five major suppliers account for

approximately 80% of its total purchases.



Datang and Datang Jilin,

65.61%

Other public investors,

22.46%

China Longyuan,

1.38%

China Yangtze Int'l,

2.29%

Angang Group HK,

2.29%

Aluminum Corp of China

Overseas, 2.29%

High Action Ltd, 0.92%

State Grid Int'l Dev,

2.29%

China Power Int'l,

0.46%


Use of IPO proceeds

The company plans to use 65% of its IPO proceeds received in December 2010 to

increase installed capacity by developing wind power projects and towards the

purchase of wind turbines, while 25% will be used to repay bank loans. The remaining

10% will be used as future working capital.

Use of IPO proceeds

Develop wind power

projects, 45%

Repayment of bank

loan, 25%

Purchase wind turbines,

20%

Working capital, 10%



136




Chen Jinhang 55 Non-executive

Director and

Chairman of the

Board


� Joined the group and appointed Director in July 2010;

� Previously director and general manager of Datang Group;

� Served various management positions in state-owned power conglomerates, including Datang and State Grid Corp of

China

Wu Jing 53 Non-executive

Director and

Vice Chairman

the of Board



� Previously chief economist of Datang Group;

� Served various management positions in state-owned power conglomerates.

Yin Li 59 Non-executive

Director



� Previously chief of Strategic Planning and Development of Datang Group;


Jian Yingjun 47 Non-executive

Director


� Joined the group and appointed Director in July 2010;;

� Previously president of Datang Jilin;


Hu Yongsheng 47 Executive

Director and

President

� Senior economist;

� Master in management engineering;

� Joined the group and appointed Director in September 2004;


Zhang Xunkui 42 Executive

Director and

Vice President

� Master in Engineering Thermophysics;

� Joined the group and appointed Director in November 2009;


Wang Guogang 55 Independent

non-executive

Director

� Doctor in Economics;

� Director general and researcher of Financial Research Institute of Chinese Academy of Social Sciences;

� Executive Director of China Society for Finance & Banking;

� Appointed Director in July 2010.

Yu Hon To David 62 Independent

non-executive

Director

� Vice chairman of MCL Partners Limited;

� Independent non-executive Director of various Hong Kong listed companies; appointed Director in July 2010.

Liu Chaoan 54 Independent

non-executive

Director

� Chairman of board of China Power Engineering Consulting Corp North China Power Engineering;

� Independent non-executive Director of various Hong Kong listed companies; appointed Director in July 2010.

Wang Guoping 53 Chief

Supervisor

� Appointed supervisor in July 2010;

� Senior accountant;

� Chief of auditing department of Datang Group.

Zhang Xiaochun 38 Supervisor � Appointed supervisor in July 2010;


� Chief of auditing department of Datang Jilin.

Dong Jianhua 50 Employee

Representative

� Appointed supervisor in July 2010;

� Senior political officer;

� Assistant to president and chief of politics department.

Hu Guodong 47 Vice President,

Secretary of

Board & Joint

Company

Secretary


� Joined the group in August 2004, appointed Vice President in 2009;


Wang Wenpang 44 Vice-president � Senior engineer;

� Joined the group in August 2004;


Meng Lingbin 48 Vice-president � Engineer;

� Joined the group in January 2007;


Zhang Xuefeng 42 Chief Financial

Officer


� Joined the group in February 2005.



137

Financial summary


FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Revenue 1,428 2,380 4,219 6,034

Other income 207 369 754 971

Operating expenses (775) (1,246) (2,233) (3,190)

Operating profit 860 1,503 2,740 3,815

EBIT 860 1,503 2,740 3,815

Depreciation and amortisation (553) (886) (1,672) (2,303)

EBITDA 1,413 2,389 4,412 6,118

Net interest expense (475) (766) (1,416) (2,101)

Share of results of an associate (1) (2) (2) 0


Profit before tax 384 735 1,322 1,714

Income tax (17) (57) (132) (171)

Net profit after tax 367 677 1,189 1,543

Minorities (118) (222) (178) (231)

Reported net profit after tax 248 456 1,011 1,311

Dividends 0 0 (100) (152)

Transfer to reserves 248 456 911 1,180

Normalized net profit after tax 248 456 1,011 1,311

FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Fixed assets 21,472 31,243 44,582 53,173






Inventories 6 10 11 18

Accounts receivable 862 1,495 1,850 2,480



Total assets 24,540 40,942 56,253 68,895

Accounts payable 6 85 117 208

Short-term debt 1,528 3,619 3,619 3,619



Long-term debt 14,290 21,957 32,465 40,091







FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

Profitability (%)

EBIT margin 60.2 63.1 64.9 63.2

EBITDA margin 98.9 100.4 104.6 101.4

Net margin 17.4 19.2 24.0 21.7

ROE 4.4 4.3 8.6 10.0

Growth (%)

Revenue 66.0 66.6 77.3 43.0

EBIT 86.2 74.8 82.4 39.2

EBITDA 109.5 69.1 84.7 38.7



Normalized PER 40.3 31.4 14.2 10.9

Reported PER 40.3 31.4 14.2 10.9


Price/cash flow N/A 3.2 N/A 9.7

PBV 1.8 1.4 1.2 1.1

EV/EBIT 17.0 9.7 5.3 3.8

EV/EBITDA 10.3 6.1 3.3 2.4



Interest cover (x) 1.8 2.0 1.9 1.8



FYE 31 Dec (RMB m) 2009 2010 2011F 2012F

EBITDA 1,413 2,389 4,412 6,118

Change in working capital (374) (338) 1,235 992

Other operating cash flow (30) 90 (132) (171)

Cash flow from operations 1,008 2,141 5,515 6,939



Net acquisitions (163) 0 0 0




Cash dividends (57) 0 0 (100)


Net debt issue 7,071 9,759 10,508 7,626


activities 217 (835) (1,464) (2,154)

Cash flow from financial activities 7,231 13,098 9,044 5,371

Net cash flow (14) 4,500 (405) 1,470

Beginning cash 545 531 5,031 4,626

Forex 0 0 0 0

Ending cash 531 5,031 4,626 6,096



138

Appendix 1: Introduction to wind power

Wind power – an effective tool to curb GHG emissions

To achieve sustainable development and combat global warming, the governments

around the globe are working together towards the reduction of greenhouse gasses

(GHG) emissions, such as carbon dioxide (CO2).

According to the International Energy Agency (IEA), electricity and heat generation is

the largest source of CO2 emission and accounted for 41% of total emission in 2008.

Without the use of fossil fuels, wind energy can reduce CO2 emission by replacing

fossil electricity generation, such as coal-fired power.

As per the Global Wind Energy Association (GWEC)’s estimation, the expected

annual CO2 savings from wind energy in 2010 is 243m tonnes, over 500m tonnes per

year between 2015 and 2020, and 842m tonnes per year by 2030.

Global electricity generation by source (2008)

Coal

40.8%

Biomass and waste

1.3%

Nuclear

13.5%

Gas

21.2%Oil

5.5%

Hydro

16.2%

Solar PV

0.1%

Wind

1.1% Other sources

0.3%

Source: IEA

Wind power potential – 45x of global 2008 power demand

Wind power currently represents around 1% of total electricity generation globally.

According to a research jointly conducted by the Harvard University, Cambridge

University and the VTT Technical Research Centre of Finland and published in 2010,

there are around 690PWh onshore and 157PWh offshore wind resources worldwide,

after imposing a 20% capacity factor limit. The findings of the research, compared to

the global electricity consumption at 18,603TWh in 2008 as cited by IEA, suggest that

the world’s overall wind resources are 45 times of global electricity demand.


139

Global annual wind energy potential

0

200

400

600

800

1,000

1,200

1,400

Onshore Offshore 0-20m Offshore 20-50m Offshore 50-200m Total resources

PWh

No capacity factor limitations 20% capacity factor limitations

Source: Global Potential for Wind-Generated Electricity by Xi Lu, Harvard University, Michael B. McElroy, Harvard

University and Cambridge University, Juha Kiviluoma, VTT Technical Research Centre of Finland, CCBIS

The research also found that wind power would be an effective tool to curb CO2

emission, since there are plenty of wind resources, both onshore and offshore, in the

top CO2 emission countries, including China, the US, India, Russia and Japan.

Global top-five CO2 emission countries - CO2 emission (2005-2009)

CO2 emission (m tonnes)

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2005 2006 2007 2008 2009

China United States India Russia Japan

Source: Energy Information Administration


140

Global top-five CO2 emission countries – annual wind energy potential vs.

electricity consumption (2008)

0

25,000

50,000

75,000

100,000

125,000

China United States India Russia Japan

TWh

Electricity consumption Potential wind energy – onshore Potential wind energy – offshore

Source: Global Potential for Wind-Generated Electricity by Xi Lu, Harvard University, Michael B. McElroy, Harvard

University and Cambridge University, Juha Kiviluoma, VTT Technical Research Centre of Finland, CCBIS


141

Appendix 2: Wind power and other energy sources comparison

Wind power is clean, safe, and having relatively low operating costs compared with

other energy sources. Another advantage of wind power generation is that wind power

does not consume fuel and, thus, has very stable generation costs for a wind power

project. Also, rural land is what a wind power project requires and it is not bounded by

water constraints, and therefore wind power has high development potential.

Pros and Cons of wind power

Pros Cons

Environmentally friendly; nil CO2 emission in power generation, this is critical for

governments to meet CO2 emission targets.

The unpredictability of climate changes causes no controllability over power

generation; and with a lack of sufficient power storage system, wind power

generation cannot meet power demand in real time.

Wind farm operators can sell carbon credits and earn income through carbon credit trades

under the CDM and verified emission reductions (VERs) (please refer to Appendix 7:

Carbon Credit trading markets and CDM)

Occupying a large area of land for onshore wind farms; increasing use of

WTGs will raise electricity generation and enjoy economies of scale in

operations. But more WTGs means larger land requirements.

Utilizing rural area land and supplying electricity to towns located in rural areas where

connection of grids is expensive or technically difficult.

Affecting signal reception such as cellular communications and telephone

systems.

Fuel free, no costs for fuel, and generally safe to use when compared with nuclear, coal, oil

and natural gas.

Noisy and producing constant sound and movements of the rotor blades may

annoy neighborhood.

Attracting tourists. Killing birds around the area, especially during migration seasons.

Source: CCBIS

Operation requirement comparisons between different power sources

Thermal Nuclear Wind Solar PV Hydro Biomass Geo-thermal

Controllability/predictability high high low low medium high low

Land area requirement low medium medium medium high high medium

Water resources requirement nil medium nil nil high high low

Impact on the environment high mid to high low nil high nil high

Technological difficulties low high low low medium medium high

Energy level of the whole life cycle medium medium low high medium low medium

Development potential low medium high high low medium medium

Source: CCBIS


142

Appendix 3: How does a WTG work?

WTGs are the most important component in a wind power project. WTGs perform the

best in areas with strong and steady winds, like coastal areas and higher latitude

areas.

The wind vane on the tail of a WTG turns the rotor at the wind, causing it to spin. The

rotor turns the shaft (low-speed draft), and the shaft turns the generator to generate

electricity. In conventional WTGs with gearboxes, the gearbox can enhance the

turning speed and torque conversions using gear ratios. The converter makes the AC

into DC power. The power transformer converts the low-to-medium voltage to a high

voltage level suitable to flow to the local grid at a pre-determined voltage.

WTGs are designed to operate under a spectrum of wind speed. The designated

maximum speed below is the survival speed, above which WTGs cannot operate. On

average, commercial WTGs survive a range of 144km/h to 259km/h. WTGs are

installed with a control system which stalls, pitches and yaws the rotor blades and the

whole turbine according to the wind speed in order to increase efficiency or ceases

operation when wind is above the survival speed.

WTGs connected to households Interior of a WTG

Source: LP Electric Srl

Source: National Renewable Energy Laboratory, U.S. Department of Energy


143

Appendix 4: Global development of wind power

Status of global wind power development

The global wind market has experienced healthy growth at a CAGR of 22% in

2001-2010. For many years until 2009, European countries and the US had been the

main drivers of the growth of global wind installations. In 2001-2003, global new wind

installations slowed down due to the financial crisis. Nonetheless, the industry picked

up again in 2004-2008, following the recovery of the global economy, in our opinion.

In 2006, the Chinese government passed ‘The Renewable Energy Law’ and stated its

target to increase the use of renewable energy to 15% of annual power consumption

by 2020. Since then, China has taken the lead to expand wind power installation

capacity. China’s new wind installations grew at a 96% CAGR in 2006-2010 versus

global growth at a 26% CAGR.

Global cumulative installed wind power capacity

(2001-2010)

Global (ex-China) cumulative installed wind power

capacity (2001-2010)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

40%

Cumulative installed capacity (MW) (LHS) Growth rate (RHS)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

14%

16%

18%

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

40%


Source: GWEC, CWEA, CCBIS Source: GWEC, CWEA, CCBIS

Global newly installed wind power capacity (2001-2010)

Global (ex-China) newly installed wind power capacity

(2001-2010)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(10)%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Newly installed capacity (MW) (LHS) Growth rate (RHS)

0

5,000

10,000

15,000

20,000

25,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(30)%

(20)%

(10)%

0%

10%

20%

30%

40%

50%

60%

70%

80%




144

Government’s RPS a fundamental driver for wind power globally

To combat climate change issues, governments around the world have adopted

various policies, including the most populous Renewable Portfolio Standard (RPS). It

is a target set by a government of a percentage of energy consumption or generation

from renewable energy sources by a certain period of time.

Although most of the RPS announced by governments are not specified with types of

energy sources to be used to achieve the targets, given wind power’s cost

competitiveness and scalability among renewable energy sources, we believe that

RPS would be a fundamental driver for wind power development globally.

Target share of primary and final energy from renewables

Primary energy Final energy

Existing share

in 2008 (%) Future target

Existing share


EU countries

Austria 29.0 28.5 34% by 2020

Belgium 3.0 3.3 13% by 2020

Bulgaria 5.1 9.4 16% by 2020

Cyprus 2.1 9% by 2010 4.1 13% by 2020

Czech Republic 4.9 8.6–10% by 2020 7.2 13% by 2020

Denmark 18.0 20% by 2011, 30% by 2025 18.8 30% by 2025

Estonia 12.0 19.1 25% by 2020

Finland 25.0 30.5 38% by 2020

France 7.5 7% by 2010 11.0 23% by 2020

Germany 8.1 4% by 2010, 18% by 2020, 50% by 2050 8.9 18% by 2020

Greece 5.1 8.0 18% by 2020

Hungary 6.1 6.6 13% by 2020

Ireland 3.8 3.8 16% by 2020

Italy 8.2 6.8 17% by 2020

Latvia 28.0 6% by 2010 29.9 40% by 2020

Lithuania 10.0 12% by 2010, 20% by 2025 15.3 23% by 2020

Luxembourg 3.6 2.1 11% by 2020

Malta 0.5 0.2 10% by 2020

Netherlands 3.4 3.2 14% by 2020

Poland 5.8 14% by 2020 7.9 15% by 2020

Portugal 17.6 23.2 31% by 2020

Romania 14.0 20.4 24% by 2020

Slovakia 5.2 8.4 14% by 2020

Slovenia 12.0 15.1 25% by 2020

Spain 7.6 10.7 20% by 2020

Sweden 32.0 44.4 49% by 2020

United Kingdom 2.6 2.2 15% by 2020

Other developed/OECD/transition countries

Albania 18% by 2020

Israel 10–20% by 2020

South Korea 2.4 4.3% by 2015, 6.1% by 2020, 11% by 2030

Switzerland 16.0 24% by 2020 18.0

(to be continued)


145

Target share of primary and final energy from renewables (continued)

Primary energy Final energy

Existing share


Existing share


Developing countries

China 9.9 10% by 2010 15% by 2020

Egypt 14% by 2020

Fiji 100% by 2013

Indonesia 5.0 17% by 2025

Jordan 7% by 2015, 10% by 2020

Kuwait 5% by 2020

Lebanon 12% by 2020

Madagascar 54% by 2020

Malawi 7% by 2020

Mali 15% by 2020

Morocco 8% by 2012 10% by 2012

Nigeria 20% by 2012

Pakistan 10% by 2012

Palestine 20% by 2012

Senegal 15% by 2025

Syria 4.3% by 2011

Thailand 20% by 2022

Tonga 100% by 2013

Tunisia 10% by 2011 10% by 2011

Uganda 61% by 2017

Vietnam 3% by 2010, 5% by 2020, 11% by 2050

Source: REN21

Leading countries for wind power

According to the GWEC, global cumulative installed wind capacity reached 197GW by

the end of 2010. China was the largest wind market in terms of cumulative capacity,

followed by the US, Germany, Spain and India. China has the largest new wind

installation and accounted for 50% of the global market in 2010.

Top-10 countries in cumulative installed capacity (2010) Global new wind installations (2010)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

China

USA

Germany

Spain

India

Italy

France

UK

Canada

Denmark

Rest of world

MW

Italy

2%

Canada

2%

Turkey

1%

UK

3%France

3%

Germany

4%

Spain

4%India

6%

China

50%

USA

13%

Rest of world

12%



146

Global top WTG manufacturers

The world’s top WTG manufacturers include Vestas (VWS DC, Not Rated), GE Wind,

Enercon, and Gamesa (GAM SM, Not Rated). The market environment has changed

in light of China’s rapid growth in its new installations over the past few years. The

global market share of European and American WTG manufacturers has been diluted

and replaced by Chinese leading WTG manufacturers, such as Sinovel (601558 CH,

Not Rated), Goldwind and Dongfang Electric (1072 HK, Not Rated) which together

accounted for 22.9% of the world’s new WTG installations in 2009.

Global WTG market share – newly installed capacity

(2009)

Global WTG market share – newly installed capacity

(2008)

GE

12.4%

Sinovel

9.2%

Enercon

8.5%

Suzlon

6.4%

Siemens

5.9%

REpower

3.4%

Gamesa

6.7%Goldwind

7.2%

Dongfang

6.5%

Others

21.3%

Vestas

12.5%

GE

16.7%

Sinovel

3.6%

Enercon

9.0%

Siemens

6.2%

Nordex

3.4%

Acciona

4.5%

Vestas

17.8%

Others

15.8%

Suzlon

8.1%

Goldwind

4.1%

Gamesa

10.8%

Source: BTM Source: BTM


147

Appendix 5: Wind power development in China

China’s wind power growth

The Chinese government is keen to develop renewable energy sources due to

China’s strong energy demand and efforts to combat global warming. Wind power is

one of its priorities among the different energy sources available in the country. In

2010, China added 19GW wind power capacity to reach cumulative capacity of

45GW.

China’s cumulative installed wind power capacity (2001-2010)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

15%

35%

55%

75%

95%

115%

135%


Source: CWEA, CCBIS

China’s newly installed wind power capacity (2001-2010)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(30)%

(10)%

10%

30%

50%

70%

90%

110%

130%

150%

170%


Source: CWEA, CCBIS


148

Policy support from the Chinese government

The Chinese government introduced and revised regulations to encourage the use of

wind power in national power generation. Price-driven incentives include fixed

feed-in-tariffs, government grants and value-added tax (VAT) credits. Quantity-driven

incentives include compulsory renewable energy capacity requirements with large

independent power producers (IPPs) and renewable energy consumption targets by

2020.

According to the price policy notice issued by the National Development and Reform

Commission (NDRC) in July 2009, fixed feed-in-tariffs are formed in accordance with

the status of wind energy resources and conditions of construction.

Feed-in tariffs in China

Source: National Energy Administration

Feed-in tariff level per location in China

Tariff level Location

RMB 0.51 per kWh � Northern Xinjiang

� Central & western Inner Mongolia

RMB 0.54 per kWh � Western Gansu

� Eastern Inner Mongolia

� Northern Hebei

RMB 0.58 per kWh � Central and southern Xinjiang

� Ningxia

� Eastern Gansu

� Western Liaoning

� North, central and eastern Heilongjiang

RMB 0.61 per kWh � All other locations

Source: National Energy Administration

RMB0.51/kWh

RMB0.54/kWh

RMB0.58/kWh

RMB0.61/kWh


149

Major renewable energy policies in China

Subject Effective year Authority Key points

CDMs – Measures for Operation and Management of

CDM Projects

2005 NDRC Only CDM projects by companies controlled by Chinese parties will be eligible

for approval. The approval procedures of CDM projects include review by

experts appointed by NDRC, MOST, MFA, MOF and the National CDM Board.

Renewable Energy Law 2006 People’s Congress Defines the responsibility of each relevant ministry in promoting renewable

energy. It also mandates full dispatch, the principle of setting tariffs and a

renewable energy fund.

Grid-connection – Provisions on the Administration of

Power Generation from Renewable Energy

2006 NDRC Grid-connection system for power generation from renewable energy shall be

constructed and administered by power grid enterprises.

Interim Measures on Administration of Designated Fund

for the Development of Renewable Energy

2006 MOF MOF will allocate funds from the PRC central financial budget to support the

development of renewable energy.

Mandatory Purchase – Supervision Measures on

Purchase of the Full Amount of Renewable Energy

Power by Grid Enterprises

2007 SERC Grid enterprises must buy out the grid-connection volume in the area for all

power generated by renewable sources. They will be penalized for failure to

do so.

Medium and long-term development plan for the

development of renewable energy

2007 NDRC Development plan states China's target to reach installed wind power capacity

of 5GW by 2010 and 30GW by 2020; further amended to 10GW by 2010 in

2008.

Taxation – Catalogue of Public Infrastructure Projects

Entitled for Preferential Tax Treatment

2008 MPF Wind farm operators are allowed to receive a three-year income tax exemption

and 50% reduction for the following three years, for all wind projects approved

after January 2008.

VAT – Circular on VAT Policy Regarding Comprehensive

Utilization of Resources and Other Products

2008 MOF Wind power generators receive a 50% tax rebate on VAT on wind power sales.

CO2 emission target in a standing meeting 2009 State Council By 2020, CO2 emission per unit of GDP of China is to be reduced to 40-45%

under 2005 levels.

Feed-in-tariff – Circular Regarding the Furtherance of

On-grid Pricing Policy of Wind Power

2009 NDRC Onshore feed-in-tariffs are fixed at four ranges according to location;

RMB0.51/0.54/0.58/0.61 per kWh (including VAT).

Taxation – Notification on Chinese CDM Fund and CDM

Projects subject to Corporate Income Tax

2009 MPF, SAT 2% of the income from sales of green gas reduction quota can be deducted from

tax income.

VAT – Tax refund policy for Purchase of Domestically

Manufactured Equipment by Foreign invested

Enterprises

2009 MPF, SAT Foreign invested enterprises that purchase domestically manufactured

equipment can receive VAT refunds.

Mandatory Purchase – Renewable Energy Law

Sub-clauses 1 and 2 of Rule 14

2010 People’s Congress China will carry out a renewable energy-related full purchase system. The

energy supervisory, electricity regulatory and finance supervisory departments of

the State Council will ensure full repurchase of renewable energy to be

formulated.

Renewable Energy Law Amendment 2010 People’s Congress Regulatory framework for the development and use of renewable energy

Offshore wind power – Provisional Measures for the

Administration of Offshore Wind Power Construction

2010 NEA Regulates the administration organization management and technical quality

administration for offshore wind power development planning, project granting,

project approval, use of sea area, marine environmental protection, construction

completion and acceptance, operation information management, etc.

Source: People’s Congress, NDRC, Ministry of Finance, State Council


150

Appendix 6: Economy of wind farms

Cost comparisons between renewable energy sources

In our view, wind power’s cost advantage over other renewable energy sources is in

upfront capex requirement and generation costs.

We estimate wind power currently has the lowest capex requirement (capex per

kilowatt of capacity installed) among various energy sources, while solar PV has the

highest capex requirement in China.

Capex comparisons between different power sources in China

6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000

Hydro

Waste (Biomass)

Solar PV

Wind

Natural gas

Capital expenditure (in RMB) per kW

Source: CPNE, CCBIS

According to Renewable Energy Policy Network for the 21st Century (REN21),

onshore wind power generation cost is among the lowest compared with other energy

sources. However, offshore wind generation cost currently remains high due to the

immaturity of offshore wind technology and consequent difficulties in electricity

connections as well as higher construction and maintenance costs.

Generation cost comparison between power sources

0 5 10 15 20 25 30 35 40 45 50 55

Large hydro

Small hydro

Onshore wind

Offshore wind

Biomass

Geothermal

Rooftop solar PV

Utility-scale solar PV

CSP

Coal-fired

Gas

Nuclear

US cents / kwh

Source: REN21 (July 2010), CCBIS estimates


151

Cost breakdown of wind farms

WTG are the principal component of a wind farm. We estimate that WTGs (excluding

tower tube) normally account for c.50-60% of Chinese wind farm construction costs.

Construction (c.20%) and tower tube (c.10-15%) are other major cost components of

a wind farm. Grid connection and land both account for around 2% of construction

cost of a typical wind farm in China.

Onshore wind farm costs distribution

Wind turbines

51%

Tower tube

12%

Design

1%

Interest

2%Development

1%Grid connection

2%

Other E&M

10%

Construction

19%

Land

2%

Source: China WindPower, CCBIS

IRR analysis of a typical wind farm in China

Based on assumptions listed in the table below, we estimate that the IRR of a typical

49.5MW wind farm in China is around 11.7%, given the CDM scheme ceases

end-2012. However, if the CDM scheme continues after 2012, we expect wind farm

IRRs in China to increase to 16.9%.

We note that our analysis assumes no other issues, such as physical grid connection

bottleneck or power curtailment.

Assumptions

Capacity of wind farm 49.5W

Utilization hours 2,200 hours

CERs EUR10/MT or RMB87/MT; 1MT CERs per 1MWh electricity generation

WTG costs RMB4,400 per kW; being 51% of wind farm investment

Total project investment RMB420m

Bank loan RMB342m; being 80% of project investment

Capital RMB85m; being 20% of project investment

Interest rate 5.5% per annum

Construction period 12 months

VAT credit VAT of CAPEX offset by VAT from power sales, total RMB 50m

Income tax rate 25%, First three years income tax free, the following three years 50% on income tax for

foreign investments



152

Analysis of a typical 49.5MW capacity wind farm in China – CDM ceases end-2012

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13

Total capacity (MW) 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5

Utilization hours (hours) 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200

Gross power generated (MWh) 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900

Power loss (%) 9 9 9 9 9 9 9 9 9 9 9 9

Electricity sold (MWh) 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099

Fixed tariff including VAT (RMB/kWh) 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54

Fixed tariff excluding VAT (RMB/kWh) 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49

Net electricity tariff (RMB m) 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0

Net CDM income (RMB m) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

VAT refund – power generation (RMB m) 0.0 0.0 0.0 0.0 0.0 0.0 0.1 4.2 4.2 4.2 4.2 4.2

Total revenue (RMB m) 49.0 49.0 49.0 49.0 49.0 49.0 49.1 53.1 53.1 53.1 53.1 53.1

CAPEX (RMB m) (427)

Depreciation (RMB m) (d) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4)

Maintenance costs (RMB m/kWh) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5)

Maintenance fund (RMB m) (1.5) (1.5) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4)

Total (RMB m) (27.3) (27.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3)

Gross profit (RMB m) 21.7 21.7 20.7 20.7 20.7 20.7 20.8 24.9 24.9 24.9 24.9 24.9

Operating expense (RMB m) (3.4) (3.4) (3.4) (3.4) (3.4) (3.4) (3.4) (3.7) (3.7) (3.7) (3.7) (3.7)

Operating profit (RMB m) 18.3 18.3 17.3 17.3 17.3 17.3 17.4 21.1 21.1 21.1 21.1 21.1

Loan balance at end of year (RMB m) 342 307.5 273.3 239.2 205.0 170.8 136.7 102.5 68.3 34.2 0.0 0.0 0.0

Interest expense (RMB m) (e) (17.9) (16.0) (14.1) (12.2) (10.3) (8.5) (6.6) (4.7) (2.8) (0.9) 0.0 0.0

Profit before tax (RMB m) (a) 0.4 2.3 3.2 5.1 6.9 8.8 10.8 16.4 18.3 20.2 21.1 21.1

Taxation (RMB m) 0.0 0.0 0.0 (0.6) (0.9) (1.1) (2.7) (4.1) (4.6) (5.1) (5.3) (5.3)

Net profits (RMB m) 0.4 2.3 3.2 4.4 6.1 7.7 8.1 12.3 13.7 15.2 15.9 15.9

Capital (RMB m) 85

VAT offset (RMB m) (b) 8.3 8.3 8.3 8.3 8.3 8.3 4.1 0.0 0.0 0.0 0.0 0.0

Loan repayment (RMB m) (c) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) 0.0 0.0

Cash flow – equity level (RMB m) (a)+(b)+(c)-(d) (85) (4.1) (2.2) (1.3) 0.6 2.5 4.3 2.0 3.6 5.5 7.4 42.5 42.5

Cash flow – project level (RMB m) (a)+(b)-(d)-(e) 47.9 47.9 47.0 47.0 47.0 47.0 42.8 42.5 42.5 42.5 42.5 42.5

20-year equity IRR (%) 11.66

20-year project IRR (%) 8.12

ROE (%) 0.47 2.67 3.73 5.19 7.11 9.04 9.48 14.44 16.09 17.74 18.57 18.57



153

Analysis of a typical 49.5MW capacity wind farm in China – CDM continues after 2012

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13

Total capacity (MW) 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5 49.5

Utilization hours (hours) 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200

Gross power generated (MWh) 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900 108,900

Power loss (%) 9 9 9 9 9 9 9 9 9 9 9 9

Electricity sold (MWh) 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099 99,099

Fixed tariff including VAT (RMB/kWh) 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54

Fixed tariff excluding VAT (RMB/kWh) 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49 0.49

Net electricity tariff (RMB m) 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0

Net CDM income (RMB m) 0.0 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3 9.3

VAT refund – power generation (RMB m) 0.0 0.0 0.0 0.0 0.0 0.0 0.1 4.2 4.2 4.2 4.2 4.2

Total revenue (RMB m) 49.0 58.2 58.2 58.2 58.2 58.2 58.4 62.4 62.4 62.4 62.4 62.4

CAPEX (RMB m) (427)

Depreciation (RMB m) (d) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4) (21.4)

Maintenance costs (RMB m/kWh) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5) (4.5)

Maintenance fund (RMB m) (1.5) (1.5) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4) (2.4)

Total (RMB m) (27.3) (27.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3) (28.3)

Gross profit (RMB m) 21.7 31.0 30.0 30.0 30.0 30.0 30.1 34.2 34.2 34.2 34.2 34.2

Operating expense (RMB m) (3.4) (4.1) (4.1) (4.1) (4.1) (4.1) (4.1) (4.4) (4.4) (4.4) (4.4) (4.4)

Operating profit (RMB m) 18.3 26.9 25.9 25.9 25.9 25.9 26.0 29.8 29.8 29.8 29.8 29.8

Loan balance at end of year (RMB m) 342 307.5 273.3 239.2 205.0 170.8 136.7 102.5 68.3 34.2 0.0 0.0 0.0

Interest expense (RMB m) (e) (17.9) (16.0) (14.1) (12.2) (10.3) (8.5) (6.6) (4.7) (2.8) (0.9) 0.0 0.0

Profit before tax (RMB m) (a) 0.4 10.9 11.8 13.7 15.6 17.5 19.4 25.1 27.0 28.8 29.8 29.8

Taxation (RMB m) 0.0 0.0 0.0 (1.7) (1.9) (2.2) (4.9) (6.3) (6.7) (7.2) (7.4) (7.4)

Net profits (RMB m) 0.4 10.9 11.8 12.0 13.6 15.3 14.6 18.8 20.2 21.6 22.3 22.3

Capital (RMB m) 85

VAT offset (RMB m) (b) 8.3 8.3 8.3 8.3 8.3 8.3 4.1 0.0 0.0 0.0 0.0 0.0

Loan repayment (RMB m) (c) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) (34.2) 0.0 0.0

Cash flow – equity level (RMB m) (a)+(b)+(c)-(d) (85) (4.1) 6.4 7.3 9.2 11.1 13.0 10.7 12.3 14.2 16.0 51.1 51.1

Cash flow – project level (RMB m) (a)+(b)-(d)-(e) 47.9 56.6 55.6 55.6 55.6 55.6 51.4 51.1 51.1 51.1 51.1 51.1

20-year equity IRR (%) 16.85

20-year project IRR (%) 10.50

ROE (%) 0.47 12.78 13.84 14.03 15.96 17.88 17.06 22.03 23.68 25.33 26.15 26.15



154

Appendix 7: Carbon trading markets and CDM

Kyoto Protocol

Kyoto Protocol is an international agreement signed by 155 countries in the ‘United

Nations Framework Convention on Climate Change (UNFCCC)’ held in Kyoto, Japan.

The countries included in the “Annex I” of the agreement are industrialized countries

and the European community which shall ensure that their aggregate greenhouse

gases emissions do not exceed their assigned amounts, calculated at 5% below their

1990 emission levels in the commitment period from 2008 to 2012.

Carbon credit trades under Kyoto mechanisms

In order to meet the target emission level within the assigned amounts, Annex I

countries may simply reduce their country emission or acquire carbon credits in the

market through four types of carbon credit trades under Kyoto Protocol:

(1) Assigned Amount Units (AAUs): Annex I countries purchase excess AAUs from

other Annex I countries. This happens when an Annex I country was successful in

reducing its greenhouse emission level below its committed level and has extra quota

to sell for income.

(2) Removal Units (RMUs): Annex I countries earn RMUs through investing in ‘land

use, land-use change, and forestry’ (LULUCF) activities that absorb CO2, which can

be used to meet carbon emission commitments.

(3) Clean Development Mechanism (CDM): CDM refers to the purchase of ‘Certified

Emissions Reduction units’ (CERs) by Annex I countries from non-Annex I countries

(developing countries). Projects eligible for trade must be pre-approved by the CDM

Executive Board (CDM EB) and registered on the CDM Registry.

(4) Joint Implementation (JI): Emission Reduction Units (ERUs) are earned through

co-investments in emission reduction projects between Annex I countries under the

supervision of the JI Supervisory Committee.

Four types of carbon credit trades under Kyoto Protocol

Source: CCBIS


155

Voluntary Emission Reduction Units (VERs)

The fifth type of carbon credit trades involves the sale of VERs between two

undesignated countries. Participating projects are usually those which fail to meet all

the requirements or obligations under Kyoto Protocol for certification. As projects that

trade as VERs are not approved by a regulatory board like those that trade as CDM

schemes, they are only audited by independent third parties. These projects will

usually trade at discounts to CDM registered projects to compensate for the inherent

risk faced by the VER buyers.

Current development of carbon credit market

Since Kyoto Protocol came into effect in 2005, the carbon credit market has been one

of the fastest growing international commodity markets. According to the World Bank,

trading volume of the market reached US$143.7b in 2009, up 80% YoY, with 205%

CAGR seen in 2005-2009. In aggregate, trade volume in 2004-2009 was US$384.5b.

From the price chart below, we can see how the per unit carbon credit price moves in

line with the global economy. When the global economy was in prosperous times in

2007 and 2008, the per unit carbon credit unit rose to EUR35 per metric ton of carbon

from EUR15 per metric ton, but quickly dropped to EUR10 per metric ton in difficult

times in 2009. Since 2009, the per unit carbon credit price stabilized at around EUR15

per metric ton.

Carbon credit per unit price trend

5

10

15

20

25

30

35

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

EUR/MT

Source: Bloomberg (ECX European Climate Exchange (ECX) from 22 April 2005 to 1 April 2011)

At present, the major carbon credit trading markets are located in Europe. The eight

largest exchanges include the Paris Bluenext Exchange, the Netherlands Climex

Exchange, the Austria EXAA Energy Exchange, the European Climate Exchange

(ECX), the European Energy Exchange (EEX), the Italian Power Exchange (IPEX),

the London Energy Brokers’ Association (LEBA) and the Nord Pool Exchange.

Carbon credit exchanges were also established in Canada, Japan, Russia, the US,

and Australia. We expect that developing countries such as China, South Korea and

India will establish their own carbon credit exchanges within three-to-five years.


156

CDM registration procedures

Project operators, including wind farms and other renewable project operators, may

be eligible to register as a CDM with the CDM executive board through nine

procedures.

CDM registration procedures

(1) Planning a CDM project activity CDM project participants (PPs) plan a CDM project activity according to the conditions set in order to be registered as a

CDM project activity. The projects should meet:

� Additionally: applicants should ensure the project reduces emissions more than the world would have occurred in the

absence of the project.

� Baseline: applicants should ascertain the amount of emissions that would have occurred without the project, otherwise

known as the “baseline” of the project. It may be estimated through reference to emissions from similar activities and

technologies, or to actual emissions prior to project implementations.

(2) Preparing the project design document (PDD) � PPs prepare the project design document (CDM-PDD) for a CDM project activity. The CDM-PDD presents information

on the essential technical and organizational aspects of the project activity, the approved baseline methodology applied

to the project activity and the approved monitoring methodology applied to the project.

(3) Getting approval from each party involved � PPs shall get written approval of voluntary participation from the designated national authority (DNA). A party involved is

a party that provides a written approval.

� The registration of a project activity can take place without an Annex I party being involved at this stage of registration. (*

China is not included in the Annex I party list)

(4) Validation � Validation is the process of independent evaluation of a project activity against the requirements of the CDM on the

basis of the PDD. Validation is carried out by a designated operational entity (DOE).

(5) Registration � Registration is the formal acceptance of a validated project as a CDM project activity. Registration is done by the CDM

executive board.

(6) Monitoring a CDM project activity � PPs collect and archive all relevant data necessary for calculating greenhouse gas (GHG) emission reductions by a

CDM project activity, in accordance with the monitoring plan written in the PDD.

(7) Verification and certification � Verification is the periodic independent review and ex-post determination of the monitored GHG emission reductions.

Verification is carried out by a DOE. Certification is the written assurance by a DOE that a project activity achieved the

reductions in GHG emissions as verified.

(8) Issuance of CERs � The executive board will issue CERs equal to the verified amount of GHG emission reductions. The issuance of CERs,

in accordance with the distribution agreement, shall be affected only when the share of proceeds to cover administrative

expenses (SOP-Admin) of the CDM has been received.

(9) Distribution of CERs � CERs will be distributed among PPs.

� The decision on the distribution of CERs from a CDM project activity shall exclusively be taken by PPs.

Source: China Carbon N.V.

Timeline for CDM registration

Source: Longyuan, CCBIS

1st to 2nd months- Plan CDM project activity- Prepare project design document (PDD) - Get approval from each Party involved

4th to 5th months- Validation

6th month- Registration

7th to 12 months- Monitoring a CDM project activity- Verification & certification- Issuance of CERs- Distribution of CERs

1st to 2nd months- Plan CDM project activity- Prepare project design document (PDD) - Get approval from each Party involved

4th to 5th months- Validation

6th month- Registration

7th to 12 months- Monitoring a CDM project activity- Verification & certification- Issuance of CERs- Distribution of CERs


157

CDM – current status

As of 1 April 2011, there are approximately 2,947 CDM projects registered globally.

China plays a leading role in the CDM market selling carbon credits. It has more than

1,200 projects registered with the CDM EB as of March 2011. Other Asian countries,

Brazil, and Mexico are also major carbon credit sellers.

Breakdown of registered CDM projects by country (March 2011)

China

43.8%

Brazil

6.4%

Others

15.2%

Republic of Korea

1.8%

Indonesia

2.1%

Vietnam

1.9%

Malaysia

3.1%Mexico

4.2%

India

21.5%

Source: UNFCCC


158

Appendix 8: China WTG industry overview

Leading Chinese WTG manufacturers, such as Sinovel, Goldwind, Mingyang, and

Shanghai Electric, have the ability to deliver 2.0MW WTGs and are developing WTGs

with capacity up to 6.0MW, in our view. However, at the current stage, the

1.5MW WTG remains dominant in China, and accounts for 67.1% of new installations

in 2009 based on CWEA data.

China distribution of newly installed WTG (2009)

2.0MW WTG

6%

1.25MW WTG

3%

1.5MW WTG

66%

850kW WTG

9%

750kW WTG

12%

Others capacities

4%

Source: CWEA

According to China Wind Engery Association (CWEA), the top-five WTG

manufacturers accounted for above 70% of newly installed wind power capacity in

2010. We estimate that doubly-fed WTG is now main stream, accounting for 76% of

total installations in China in 2010. Direct-drive WTGs accounted for the remaining

24%.

China WTG market share in newly installed wind power capacity (2010)

Gamesa

3%

Huachuang

3%

Others

10%

XEMC Wind Power

3%

Shanghai Electric

3%

Vestas

5%Mingyang

6%

United Power

9%

Goldwind

21%

Dongfang Electric

14%

Sinovel

23%

Source: CWEA, CCIBS estimates


159

Appendix 9: Comparison of doubly-fed, direct-drive, and hybrid-drive WTGs

Doubly-fed WTGs dominate the global WTG market, including China. It employs a

gearbox component which enhances turning speed and electricity generation. The

technology has a relatively long track record at a relatively low manufacturing cost.

Many top WTG manufacturers, such as Sinovel, Dongfang Electric, Guodian United

Power and Mingyang, manufacture WTGs using doubly-fed induction generator

(DFIG) technology.

Direct-drive full-converter technology is employed by the Goldwind WTGs. This

design eliminates the gearbox component used in most conventional WTGs. To

further reduce the number of rotating components, a large single main bearing links

the rotor assembly and generator rotor. The turbine feeds generated power into the

grid by means of a “back-to-back”- (AC to DC to AC) type full-converter equipment.

The generator operates at varying frequencies, directly proportional to the rotor

speed.

Hybrid-drive WTGs are produced by Goldwind and Mingyang. It is a new technology

employing a hybrid gearbox, which is lighter in weight than traditional WTGs and is

more reliable and cheaper to manufacturers. Up to 2010, there were several

hybrid-drive WTGs being delivered. It will take time before large-scale deliveries are

made as the product gains the confidence and acceptance of the market.

Comparison of mainstream commercial WTGs in China

Remarks

Doubly-fed induction

generator

Direct-drive generator with

direct-current excitation

Direct-drive generator with

permanent-magnet excitation

Hybrid-drive/super

compact drive (SCD)

Main suppliers

Vestas, Sinovel, Gamesa,

Nordex, Repower, GE,

Dongfang Electric,

United Power, Mingyang Enercon, Mtorres, Lagerwey

VENSYS, Goldwind, Scanwind,

Xmec Windpower Goldwind, Mingyang

Length of track record ✓✓✓ ✓✓ ✓ ✘

Gearbox component 1 ✓ ✘ ✘ ✓

Reliability 1 ✓ ✓✓ ✓✓ ✓✓

Low maintenance cost 1 ✓ ✓✓ ✓✓ ✓✓

Smaller size and weight 2 ✓✓ ✓ ✓ ✓✓✓

Low manufacturing cost 2 ✓✓ ✓ ✓ ✓✓✓

Low-voltage ride through (LVRT) capability 3 ✓ ✓✓ ✓✓ ✓✓

Power generation productivity ✓ ✓✓ ✓✓ ✓✓



160

Remarks

1. Gearbox component and reliability

In a conventional WTG, the gearbox component has a relatively higher failure rate.

Elimination of the gearbox simplifies the transmission structure and increases

operational reliability. Maintenance costs associated with oil replacement are also

reduced.

2. Size, weight, and manufacturing cost

Of the three main types of WTGs, doubly-fed, direct-drive, and hybrid WTGs, hybrid

WTGs have the smallest size and consume the least materials to construct. As a

result, hybrid WTGs have a lower manufacturing cost per kilowatt capacity. Since

doubly-fed WTGs employ the gearbox component to enhance turning speed, their

sizes are smaller in comparison with a direct-drive WTGs under the same capacity.

3. Low-voltage ride through (LVRT) capability

LVRT capability enables a more stable grid connection and prevents the WTG from

going off-line in the event of major grid disturbances. This is why LVRT enabled WTGs

are a requirement of the State Grid towards power generators. Studies suggest that

direct-drive WTGs have better LVRT capability than doubly-fed WTGs.


161

Appendix 10: WTG technology development in China

Historical development of WTGs

Source: Energy Research Institute Nationl Development and Reform Commission

In order to increase the power generation of wind farms and further exploit wind

resources, WTG manufacturers have continued developing larger capacity WTGs.

Megawatt-capacity WTGs began commercial used in the 21st century. Currently, the

main stream of WTGs used ranges from 1.5MW to 3.0MW. Leading European WTG

manufacturers are developing 6.0/7.0MW WTG prototypes, such as Vestas, Siemens

and REpower, as well as Chinese WTG manufacturers.

A WTG’s power generation capabilities are proportional to its rotor blade length.

Longer rotor blades allow for larger rotor surface area and the increase in a WTG’s

tip-speed ratio, which effectively increases the power generation capability of the

WTG.

Rotor size and maximum power output

Rotor diameter (meters) Power output (kW)

10 25kW

17 100 kW

27 225 kW

33 300 kW

40 500 kW

44 600 kW

48 750 kW

54 1.0MW

64 1.5MW

72 2.0MW

80 2.5MW

88 3.0MW

Source: Danish Wind Industry Association, American Wind Energy Association

Future WTGs are expected to have longer rotor diameters, larger capacity, and will be

adaptive to offshore operations, where wind resources are rich but have yet to be

harnessed.

Rotor Diameter

(m)


162

Appendix 11: Global offshore wind power development

Europe – the offshore wind power leader

Up to 2009, there were 38 offshore wind farms around the globe, all operated in

Europe. Other countries like China, the US and Canada have begun developing

offshore wind farms, but Europe is still in the lead. The global offshore wind

cumulative installed capacity reached 2.1GW in 2009, of which 2,056MW was

installed in Europe.

Global cumulative offshore wind power installed capacity (2009)

Germany

2%

Denmark

30%

UK

42%

China

2%

Netherlands

12%

Sweden

8%

Others

4%

Source: EWEA, CCBIS

Global cumulative offshore wind power installed capacity (2009)

Ranking Countries Region

Cumulative installed

capacity at end-2009

(MW)

Cumulative installed

WTG at end-2009

Cumulative offshore

wind farms under

operations

1 UK Europe 882.8 287 12

2 Denmark Europe 639.2 305 9

3 Netherlands Europe 246.8 130 4

4 Sweden Europe 163.7 75 5

5 Germany Europe 42.0 9 4

6 China Asian Pacific 46.5 16 0(1)

7 Belgium Europe 30.0 6 1

8 Ireland Europe 25.2 7 1

9 Finland Europe 24.0 8 1

10 Norway Europe 2.3 1 1

11 Japan Asian Pacific 1.0 1 0(1)

Total 2,103.4 845 38

(1) China began construction of its first offshore wind farm in April 2009. It has not yet been completed. Japan has its

first offshore WTG installed but has not yet constructed any wind farms at end-2009.

Source: EWEA, CCBIS estimates

According to the European Wind Energy Association (EWEA), newly installed offshore

wind capacity for 2010 is 883MW. Europe’s cumulative installed offshore wind

capacity has reached 2.9GW, representing 3.5% of total installed capacity in wind

power. There were 45 offshore wind farms under operations in Europe at end-2010.


163

For 2011, EWEA forecasts there will be 1.0GW to 1.5GW new offshore wind capacity

on grid in Europe. There are ten wind farms with 3.0GW currently under construction.

Offshore cumulative installed capacity will reach 6.2GW when these projects have

been completed.

Offshore wind power development in the UK

The UK has the largest installed capacity of offshore wind power as at end-2009. It

commissioned its first offshore wind farm in 2000. Up to end-2010, the UK had 33

offshore wind power farms under construction, consisting of 877 WTGs and expected

capacity of 2,323MW. Major offshore wind farm manufacturers include Vestas,

Siemens and REpower.

Wind farms under construction in the UK (2010)

Wind farms under

construction Location Number of WTGs Expected capacity (MW) Average turbine size (MW) Developer

Whitelee Phase I extension East Renfrewshire 36 108 3.0 Scottish Power

Whitelee Phase II extension East Ayrshire 39 109.02 2.8 Scottish Power

Kilbraur extension Highland 8 20 2.5 Falck Renewables

Fullabrook Down Devon 22 66 3.0 Devon Wind Power

Low Spinney Leicestershire 4 8 2.0 Broadview Energy

Lynemouth Northumberland 13 30 2.3 Scottish Power

Gairnieston Farm Aberdeenshire 1 2.3 2.3 Mr Philip Benzie

High Haswell Durham 2 4 2.0 Hallam Land Management

Lochelbank Perth & Kinross 12 9.6 0.8 RWE Npower Renewables

Griffin Forrest Perth & Kinross 68 156.4 2.3 SSE Renewables

Novar Extension Highland 16 36.8 2.3 RWE Npower Renewables

Curryfree Co Londonderry 6 15 2.5 RES UK & Ireland Ltd

Fairfield Farm Cumbria 5 6.5 1.3 Wind Prospect

Crimp Cornwall 3 2.43 0.8 West Coast Energy Developments

G24I 1 2.3 2.3 Ecotricity

Gordonbush Highland 35 71.75 2.1 Scottish & Southern

Hazlehead South Yorkshire 3 6 2.0 Banks Developments

Mark Hill South Ayrshire 28 56 2.0 Scottish Power Renewables

Ormonde Cumbria 30 150 5.0 Vattenfall

Millennium Ext 2 Highland 6 15 2.5 West Coast Energy Developments

Glenkerie Wind Farm Scottish Borders 11 22 2.0 Novera

Ferndale - Power Factory Rhondda Cynon Taff 8 6.4 0.8 Infinergy

Sheringham Shoal Norfolk 88 316.8 3.6 Scira Offshore Energy Ltd

Butterwick Moor County Durham 10 20.5 2.1 E.ON UK Renewables

Clyde Wind Farm South Lanarkshire 152 349.6 2.3 SSE Renewables

Maesgwyn Neath Port Talbot 13 26 2.0 Pennant Walters

Arecleoch South Ayrshire 60 120 2.0 Scottish Power

Crockagarron Co Tyrone 6 15 2.5 Northern Wind Power

Torrs Hill Dumfries & Galloway 2 4 2.0 Fred Olsen Renewables

Greater Gabbard East Anglia 140 504 3.6 Scottish & Southern

An Suidhe Argyll & Bute 23 19.3 0.8 RWE Npower Renewables

Beinn an Tuirc Extension Argyll & Bute 19 38 2.0 Scottish Power

Tangy Extension Argyll & Bute 7 5.95 0.9 Scottish & Southern

Total 877 2,322.7

Source: RenewableUK


164

Appendix 12: Offshore wind turbines

Current status

Supply of offshore WTGs is dominated by Vestas and Siemens. According to EWEA

data, above 80% of global offshore WTGs were installed by Vestas and Siemens as of

2010. Other major WTG manufacturers, such as GE, REpower, Multibrid and Nordex,

are also entering the offshore wind market.

Market share (newly installed capacity) of offshore WTG manufacturers (2010)

REpower

3%Sinovel

11%

Vestas

56%Simens

28%

Bard

2%

Source: EWEA, CCBIS estimates

Chinese WTG manufacturers, such as Sinovel, Goldwind and Mingyang, are still in

their seminal stages within the offshore wind field. Except for the Donghai Bridge

offshore wind farm, which deploys WTGs supplied by Sinovel, no other large offshore

wind project installation has been completed in China so far. In our view, Chinese

WTG manufacturers have a short track record and relative lack of experience in the

manufacture and maintenance of offshore WTGs.

WTG R&D status of Chinese manufacturers

Company Research, development & trial product

Chinese WTG manufacturers

Sinovel 3.0MW WTGs successfully installed and operational in Shanghai Donghai Daqiao 108MW project; the company predicts the

5.0MW turbine will be launched in 2011.

Goldwind First 1.5MW offshore WTG manufactured in 2007; 2.5MW, 3.0MW prototypes produced and operational; expected launched date

in 2011; 5.0MW designs at research stage.

Dongfang Electric 5.0MW offshore WTG at experimental stage.

Guodian United Power Company expects 3.0MW to be launched in 2011.

Mingyang Company expects 3.0MW to be launched in 2011.

Xemc 5.0MW offshore WTG in experimental stage (XEMC Darwind).

Sewind 3.6MW offshore WTG launched in June 2010.

Haizhuang 5.0MW offshore WTG in experimental stage. International WTG manufacturers

Siemens Long track record in offshore WTG installation beginning in 1991. Launched 3.6MW WTGs and is developing 5.0/6.0 offshore

WTGs.

Vestas Long track record in offshore WTG installation beginning in 1990. 3.0MW WTGs launched; developing 5.0/6.0 offshore WTGs.

Nordex 2.5MW WTGs launched.

REpower Launched 5.0MW and 6.0MW WTGs offshore, with rotor diameter of 126m.

BARD Launched 5.0MW WTGs.

Multibrid Launched 5.0MW WTGs.

Source: CWEA, CCBIS


Rating definitions

Outperform (O) – expected return 10% over the next twelve months

Neutral (N) – expected return between -10% to 10% over the next twelve months

Underperform (U) – expected return < -10% over the next twelve months

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initiation of china wind power 4 april 2011

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