Wind Power Sector Be Selective

Transcription

1 Industrial Overview South China Financial Wind Power Sector Be Selective 3 March 2017 China s electricity sector is facing two problems. First, electricity consumption is unlikely to grow as fast as in the past 5 years as more supply side structural reform would be in place, depressing industrial production capacity. We estimate a growth rate of 3.5%, 3.7% and 3.8% in 2017, 2018 and 2019, respectively, down from CAGR of 4.8% in Second, China is overshadowed by a glut of electricity supply as reflected by the falling average utilization hours for all power generating devices. Even so, with favorable government policies towards clean power supply as stipulated by the 13 th Five Year Plan for Power Development and the 13th Five Year Plan for Wind Power Development, we believe the wind power sector would continue to offer investment opportunities. Based on the 13th Five Year Plan for Wind Power Development ", we see the following trends: 1. The growth of new wind turbine installation capacity is estimated to slow to an annual average of 17.84GW in from the annual average of 24GW in ; 2. Based on the installation target by province, the new wind turbine installation would shift from the "three Northern provinces (including Inner Mongolia, Xinjiang, Gansu and other northern provinces) to Central, Eastern, and Southern China. Currently, the "three North" region accounts for 78% of total wind power production capacity; 3. Offshore wind turbine installation target will contract from 30GW to 5GW; 4. Future wind power tariffs would ease, closing the gap with the thermal power; 5. A number of UHV transmission wires in the "three Northern regions" will be in operations, thereby reducing curtailment in the region, possibly lifting wind power companies profitability. Within the wind power sector, we prefer wind power companies. We reckon that wind power companies would slow down their pace of wind turbine installation. However, the possible earnings driver would be the enhancement of wind utilization hours from the expected reduction in curtailment in three North regions. Besides, since most of new installation would be located in Zone IV, this would help lifting the average feed-in tariff. Overall, we recommend Buy on Huaneng Renewable (958) and Longyuan (916). We are cautious on wind turbine manufacturers as we believe the peak of China s wind turbine installation has already passed. Besides, the pattern of installation would shift from the Northern region to the South region. This would force manufacturers to shift their product mix towards lower margin 2MW model products, suppressing their margin. Thirdly, the reduction of feed-in tariff outside the Zone IV would also weigh on turbine sale price, as most wind resource is located in Zone I II III regions. As such, we recommend Sell on Goldwind (2208). PRICE PERFORMANCE 1mth 3mth 6mth 12mth % % % % Huaneng Renewables (958 HK) China Longyuan (916 HK) Goldwind (2208 HK) Huadian Fuxin (816 HK) C Transmission (658 HK) HSI HSCEI RELATIVE TO HSI 1mth 3mth 6mth 12mth % % % % Huaneng Renewables (958 HK) China Longyuan (916 HK) Goldwind (2208 HK) Huadian Fuxin (816 HK) C Transmission (658 HK) Analyst: GU Yi Fan (CE: BIL926) : (852) : yifan.gu@sctrade.com PEER GROUP COMPARISON 2017 Estimate Bloomberg Mkt Cap. Closing Target price Upside +/- PER PB Yield ROE Recom- Company code HK$bn HK$ HK$ % X X % % mendation Huaneng Renewables 958 HK Buy China Longyuan 916 HK Buy Goldwind 2208 HK Sell Huadian Fuxin * 816 HK N/A N/A Not Rated C Transmission * 658 HK N/A N/A Not Rated, South China Research *Bloomberg estimates Note: All prices in this report are based on the 2 March 2017 close

2 Be Selective Industry overview: Electricity demand resumed growth in 2016 China s total electricity consumption reached 5,919.8bn KWH in 2016, or 5% YoY, after a stagnant year in The biggest user is the secondary industry, which used 4,210.8bn KWH electricity in 2016, up 2.9% YoY, accounting for more than 71% of China s total power consumption. This compared to a decline in consumption of 1.4% in The recovery we believe was due to 1) natural growth from industrial sector, and, 2) sectors undergoing a capacity reduction in 2016 were not heavy electricity consumers. Sectors involved in capacity cutting were coal, iron, and steel, which were not primarily powered by electricity. In 2016, tertiary industry as well as urban and rural residents both recorded over 10% growth in consumption. However, they together accounted for only 27% of the total electricity consumption. Steady electricity demand likely in In , we don t expect a strong growth in total electricity consumption as more supply-side structural reforms and capacity cutting would continue. Besides, it is reported that apart from more capacity cutting in coal and steel industries, China might extend capacity cutting into aluminum and automobile sectors, the heavy users of electricity. This would adversely affect electricity demand. Hence, we believe the secondary industry would see only 1% growth per annum in electricity consumption in Together with the expected 10% growth of the tertiary sector as well as urban and rural areas per annum, we estimate China s electricity consumption in 2017, 2018 and 2019 would only grow by 3.5%, 3.7% and 3.8%, respectively, lower than the CAGR of 4.8% in CHINA'S ELECTRICITY CONSUMPTION F 2018F 2019F 100mKWH Electricity consumption 50,274 54,045 56,099 56,379 59,198 61,274 63,518 65,944 By Industry Primary ,021 1,075 1,129 1,185 1,244 Secondary 37,403 40,022 41,502 40,921 42,108 42,529 42,954 43,384 Industrial 36,794 39,332 40,788 40,217 41,383 Light industry 5,989 6,367 6,634 6,720 7,016 Heavy industry 30,802 32,958 34,145 33,496 34,367 Tertiary 5,675 6,259 6,660 7,159 7,961 8,757 9,633 10,596 Urban and rural residents 6,203 6,774 6,923 7,269 8,054 8,859 9,745 10,720 %YoY Electricity consumption By Industry Primary Secondary Industrial Light industry Heavy industry Tertiary Urban and rural residents %Share Electricity consumption By Industry Primary Secondary Industrial Light industry Heavy industry Tertiary Urban and rural residents Source: National Energy Administration (NEA), forecasts by South China Research Important: please refer to our disclosures and disclaimers at the end of this report. -2-

3 CHINA'S ELECTRICITY CONSUMPTION Source: NEA China is overshadowed by a glut of electricity supply According to China electricity council, average utilization hours for all power generating devices (above 6,000KW) dropped 203 hours to 3,785 hours in 2016, the lowest level since Utilization hours of fire power plants dropped 199 hours to 4,165 hours, showing excessive power supply. This situation is likely to continue throughout government s 13th Five Year Plan as China is going through electricity supply reform through the installation of more clean energy power generators. This would shift the source of electricity supply to green/renewable energy from fossil fuel power plants. Structural shift in favor of renewable energy particularly for wind power sector Despite excessive power supply, renewable energy, especially the wind power sector, is the focus of the 13th Five Year Plan, while hydro-electricity power development is slowing down after years of high growth. Government policies are favorable to the wind power sector, including tariff subsidiary, value-add tax deduction, the setting of minimal utilization hour (launched in 2016) and the building of related power grids. With excessive power supply and favorable government policies to clean power supply, conventional electricity sources, like coal fire plants, are likely to come under pressure in terms of production capacity and utilization hours. Together with recovery in coal prices, the profitability of conventional electricity sources would fall. We believe the role of coal fire plants will shift to peak power plants from base load power plants. Government s 13 th Five Year Plan provides a golden period for wind power companies According to the 13 th Five Year Plan for Wind Power Development published by China National Energy Administration in November 2016, China will expand wind power generator capacity to 210GW, including 205GW onshore wind farm and 5GW offshore wind farm. By the end of 2015, China had installed 129GW wind farms, overshooting the 12 th Five Year Plan s target by 24%. However, the 13th Five Year Plan has not revised up the 2020 installation target. We believe government s intention is to shift the focus towards the enhancement of the quality of wind power development (e.g. ultilization hours) instead of simply focus on quantity wind power development (e.g. production capacity) as in the 12 th Five Year Plan. CHINA'S ELECTRICITY CONSUMPTION Target Capacity Power generation Targets in Target 12 th Five Year Plan On-shore (GW) Targets of completion 12 th Five Year Plan Targets of 13 th Five Year Plan Off-shore (GW) Total (GW) Wind power generation (GW) 1,900 1,863 3,900 4,200 Percentage to total generation (%) Source: 13 th Five year plan for wind power development, 12 th five year plan for wind power development Important: please refer to our disclosures and disclaimers at the end of this report. -3-

4 But, new wind turbine installation to slow down With new wind turbine installation (connected to the grid) reaching 19.3GW in 2016 and total China s production capacity hitting 220GW (overshooting the 13th Five Year Plan target by 10GW), the average installation per year from is estimated to be 17.84GW. This would be lower than the average growth of 24GW per annum in Although the installation momentum may pick up somewhat in 2017 as a result of some delays caused by weather and other difficulties faced in the Southern part of China in 2016, we believe this is a short term improvement and there will be a slowdown in wind turbine installation thereafter. For off-shore wind turbine installation, it will be difficult in the 13th Five Year Plan as the installation target has been cut to 5GW from 30GW in the 12th Five Year Plan. NEW INSTALLATION FROM Capacity added (GW) Total capacity (GW) Annual Average Estimate for Source: NEA, South China Research Estimate Installation migrating from the Northern China to the Southern China Based on wind turbine installation target by province, we observe there will be a regional shift from the Northern China (Northeast, north and northwest regions) to the Southern China. The implied future installation, using installation target minus current capacity, shows that only 33% or 61GW will be installed in the Northern China, as compared to the current 77%. Having considered the severe curtailment in the Northern China, wind turbine installation would mostly be located in southern China in the next 2 or 3 years. Installation by Regions INSTALLATION BY REGIONS Implied future installation by regions Source: NEA Curtailment due mainly to overcrowded installation We believe curtailment is due to a combination of factors including overcrowded installation, insufficient local demand and lack of transmission lines. Among these factors, overcrowded installation should be the prime factor. Statistics suggest there is very low or even no curtailment in lightly wind turbine installed area (0GW - 5GW). There is an average of 10% curtailment in moderately installed areas (5.01GW 10GW). There is almost 27% curtailment in heavily installed area. CONCENTRATION BRINGS CURTAILMENT Capacity Installed Average Curtailment Range 0-5GW 0.5% 0%-7% GW 10% 0%-30% >10GW 27% 9%-38% Source: NEA However, there are 2 exceptions, namely Shandong Province and Suzhou of Jiangsu Province. These two areas have large production capacity but no curtailment is recorded. Shandong is known for its large electricity demand because of heavy industry. Even so, we believe any excess electricity supply or demand could be solved by the connections of Ultra-high voltage (UHV) transmission lines with other provinces. Besides, there are plans to increase the transmission capacity further ahead. For Suzhou, the demand for electricity is high and the city s transmission network is well connected to the nearby provinces. Important: please refer to our disclosures and disclaimers at the end of this report. -4-

5 UHV transmission lines to solve overcrowded installation issue Hence, we believe to solve the curtailment issue due to overcrowded installation, it will require more connections of UHV transmission lines to match the excess electricity supply areas with the excess demand areas. Before 2016, UHV transmission lines were primarily serving Central and Eastern parts of China. Only 1 out of 7 lines is connected to the Northern part of China. The following wind capacity distribution map shows three Northern provinces (including Inner Mongolia, Xinjiang and Gansu) accounted for 78% of production capacity in China. In 2016, two UHV transmission lines were connected to Inner Mongolia, which has the largest provincial production capacity. According to State Grid Corporation of China, 3 more UHV transmission lines would be in operation in 2017, connecting Inner Mongolia to Shandong and Suzhou. Besides, another UHV transmission lines would connect Gansu and Hunan. Xinjiang will not add more UHV transmission lines until TOTAL CAPACITY BY REGIONS AND UHV LINES Notes: Base on the total capacity connected to the grid as of Source: NEA Expecting improvement in curtailment for the worst hitting Northern regions Curtailment in Inner Mongolia, Xinjiang and Gansu is likely to improve with the slowdown of wind turbine installation and connections of UHV transmission lines. For instance, Inner Mongolia newly installed 1.63GW, 1.67GW, and 4.07GW of wind turbine in 2013, 2014 and 2015, respectively. However, in 2016, the installation slowed down to a three-year low 1.32GW. Furthermore, in addition to the completion of 2 UHV transmission lines, 3 more UHV transmission lines connecting Inner Mongolia are expected to be in operation in 2017, according to State Grid Corporation of China. Gansu and Xinjiang are also facing similar development. Based on UHV transmission lines development schedule, Inner Mongolia is likely to see the fastest improvement, followed by Gansu and Xinjiang. In 2H2016, Inner Mongolia already showed improvement in curtailment. It had only 13% curtailment, much lower than 33% in Xinjiang and 39% in Gansu. TOTAL CAPACITY BY REGIONS AND UHV LINES Source: NEA Important: please refer to our disclosures and disclaimers at the end of this report. -5-

6 NUMBERS OF UHV EXPECTED TO START OPERATION IN before Inner Mongolia Gansu Xinjiang Source: State Grid Corporation of China Further Feed-in tariff cut National Development and Reform Commission (NDRC) further cut feed-in tariff for new project after 2018 in Zone I, II, III, IV by RMB0.04, RMB0.02, RMB0.02, and RMB0.01, per KWH respectively, from Dec 2015 s decision. However, technically, companies can still enjoy the 2016 feed-in tariff as long as the project is approved and included into subsidies list before 2018 and started construction before Increasing tariff spread between Zone IV and Zone I will encourage companies to get more approval in Zone IV. RMB/KWH (old) Zone I Zone II Zone III Zone IV Source: NDRC Removing subsidy in Shandong and price-cutting in Yunnan In addition to the reduction by NDRC, Shandong cut its provincial subsidy to wind power companies to RMB0.02/kwh in 2016, from RMB0.06/kwh of Yunnan proposed to use hydro power tariff as the base price to calculate wind feed-in price, which would cut down the wind tariff by around RMB0.13/kwh from its current Zone IV tariff. Tariff cut in Yunnan and subsidy cut in Shandong will affect all existing wind power companies in Value added tax issue Regarding the current value added tax (VAT) refund policy, companies could get back half of VAT on wind power revenue. If the government removes this policy, wind power companies revenue from wind power would be cut down by 8.5%. Stock Selections We prefer wind power producers We reckon that wind power companies would slow down their pace of installation. However, the possible earnings driver would be enhancement of wind utilization hours from the expected reduction in curtailment in the Northern regions. Besides, since most of entire new installation would be located in Zone IV, this will help lifting the average feed-in tariff. Overall, we recommend Buy on Huaneng Renewable (958) and Longyuan (916). Wind turbine producers are out of our favor Firstly, we estimate that demand for wind turbine would slow to an annual average installation of 17.84GW in in China under the 13th Five Year Plan, against an annual average installation of 24GW in Secondly, we have observed a higher proportion of wind turbines will installed in the Southern region of China. This would drive the manufacturers to shift their product mix towards products of the slow wind 2MW model, which has lower margin but more applicable to the Southern and Central China, from 3MW or larger models which enjoys higher margin. Thirdly, the cheap feed-in tariff in Zone I,II,III will also weigh on turbine sale price, as most wind resource is located in Zone I,II,III regions. Overall, with the growth of wind turbine installation likely to have peaked in 2015, we are cautious on wind turbine manufacturers. We are Sell on Goldwind (2208). Important: please refer to our disclosures and disclaimers at the end of this report. -6-

7 STOCK PICK BUY Date: 2 March 2017 HSI: 23, Share Price: HK$ Mth Target Price: HK$3.13 Upside Potential: +14.2% Renewable Energy Share Information Stock code 958 HK Market cap. RMB30.009bn Issued shares 4,193m BVPS RMB1.98 P/B 1.23 Avg daily T/O HK$65.38m Estimated free float 93.3% ROE 14.0% ROA 3.1% 12-mth high/low HK$3.21 / 1.85 Major shareholder JPMorgan Chase 6.84% NCSSF 6.68% Citigroup Inc. 5.96% BlackRock, Inc. 5.15% Exchange rate RMB1 = HK$1.13 US$1 = HK$7.75 Note: Financial data and ratios as of Dec 31, 2015 Share Price Chart HK$ HUANENG RENEWABLES CORP-H HSI (rebased) m share Mar May Jul Sep Nov Jan Mar 1mth 3mths 6mths 12mths Share price chg +8.7% +9.2% -1.1% +42.7% Relative to HSI +6.2% +3.8% -3.0% +20.3% Analyst : GU Yi Fan (CE: BIL926) : (852) : yifan.gu@sctrade.com Important: please refer to our disclosures and disclaimers at the end of this report HUANENG RENEWABLES (958 HK) High earnings growth potential with inexpensive valuation Undervalued we give Huaneng Renewable (HNR) a BUY rating with a target price of HK$3.13 which is estimated using 9x PER (well below 3-year average of 10.6x) and our estimated EPS of RMB0.308 (or HK$0.348) in FY2017, consistent with Bloomberg consensus RMB0.32. Supreme performance in 1M2017 In January 2017, HNR reported that its wind power generation increased 29.1% YoY. Detailed power generation by regions showed curtailment relief in many provinces, such as Xinjiang, Liaoning, Inner Mongolia and Hebei. Although there is no further detail until the final results announcement, we believe the strong growth would be driven by higher wind turbine installation (which is more persistent) and less likely to be better wind resources (which is less persistent). Operating defensive wind farms By the end of 1H2016, more than 63% of its wind farms are located in Zone IV regions with higher feed-in tariffs and low to zero curtailment, as compared to 18% Zone IV installation of Huadian Fuxin (816 HK) and 45% of Longyuan (916 HK). Besides, 24% of its wind capacities are in Inner Mongolia. We believe the curtailment there will improve more than other northern regions in Thus, in FY2017, we believe HNR would achieve a total utilization hour of over 1,920 hours, 1% improvement from our FY2016 estimated hours. Beneficiary from ultra-high voltage power line (UHV) We see the curtailment in Inner Mongolia will ease in 2017, coming from low installation during 2016 and several UHV commenced operations in 2H2016. HNR will benefit the most from it, comparing to Huadian Fuxin and Longyuan. Based on its 1H2016 information, 24% of its total capacities are located in Inner Mongolia, including 2,467.2MW wind farms and 160MW solar farms as compared to its peers. Huadian Fuxin and Longyuan, have a share of 15% and 14%, respectively. HNR is a pure renewable energy company Unlike Longyuan and Huadian Fuxin, HNR has only wind and solar power generators with no coal plant attached. With the general policy leaning towards green power source and continuous new installation in China creating excessive power supply, coal electricity station will continue to suffer in terms of dropping utilization hours. HNR doesn t have to face any downside risks from the fire power side. Exposed to Tariff risk in Shandong and Yunnan Shandong cut its provincial subsidiary to wind power down to RMB0.02/kwh in 2016, from RMB0.06/kwh of There are risks the reduction would continue into Yunnan has also proposed to use hydro power tariff as the base price to calculate wind feed-in price, which would potentially cut the wind tariff by around RMB0.13/kwh. In 1H2016, HNR has almost 10% of total capacity and 12% of total capacity in Shandong and Yunnan, respectively, which might be adversely affected by the tariff cuts. Earnings Data Year to 31 Dec 2015A 2016E 2017E 2018E Attributable Profit RMBmn 1,860 2,792 3,000 3,330 YoY Change % EPS RMB BPS RMB DPS RMB PER X PBR X Dividend Yield % ROAE % Note: Figures for 2016 to 2018 are based on South China Research estimates. Note: All prices in this report are based on the 2 March 2017 close -7-

8 STOCK PICK BUY Date: 2 March 2017 HSI: 23, Share Price: HK$ Mth Target Price: HK$7.73 Upside Potential: +13.2% Renewable Energy Share Information Stock code 916 HK Market cap. RMB62.023bn Issued shares 3,340m BVPS RMB4.58 P/B 1.32 Avg daily T/O HK$85.67m Estimated free float 92.9% ROE 8.3% ROA 2.3% 12-mth high/low HK$7.30 / 4.38 Major shareholder BlackRock, Inc. 9.23% JPMorgan Chase 7.06% NCSSF 5.96% Exchange rate RMB1 = HK$1.13 US$1 = HK$7.75 Note: Financial data and ratios as of Dec 31, 2015 Share Price Chart HK$ m share CHINA LONGYUAN POWER GROUP-H HSI (rebased) 0 Mar May Jul Sep Nov Jan Mar 1mth 3mths 6mths 12mths Share price chg +5.9% +10.9% +5.7% +50.8% Relative to HSI +3.5% +5.4% +3.7% +27.1% Analyst : GU Yi Fan (CE: BIL926) : (852) : yifan.gu@sctrade.com Important: please refer to our disclosures and disclaimers at the end of this report CHINA LONGYUAN (916 HK) Increasing capacity in Zone IV to boost average tariff High growth We give China Longyuan ( Longyuan ) a BUY rating with a target price of HK$7.73 which is estimated using 12.5x PER (slightly below 3-year average of 13x) and our estimated EPS of RMB0.547(or HK$0.618) in FY2017, which is consistent with Bloomberg consensus for Our estimated EPS for FY2017 is 12% higher than our estimated EPS for FY2016(RMB0.487), due to new capacity (estimated to be 1400MW) and improving utilization hours. Increasing capacity in Zone IV to push tariff After years of installing wind turbines in Zone IV area, the weight of capacity in Zone IV regions has been increased to 44.7% in 1H2016 from 38.6% in the end of One of the direct benefits is the rising overall feed-in tariff. The average feed-in tariff increased to RMB590/MWH (include VAT) in FY2015 from RMB583/MWH in FY2013. We expect the average feed-in tariff to increase further ahead. With the assumption that most of its new capacity will be located in Zone IV regions, our estimations for future tariff are RMB592/MWH in FY2016, RMB593/MWH in FY2017 and RMB594/MWH in FY2018. Besides, based on 1H2016 figures, Longyuan only has less than 4% of total capacity in Yunnan and 2% of total capacity in Shandong, meaning less exposure to tariff risk in these regions. Utilization hours may improve Longyuan would also benefit more from minimum utilization hours policy. In 2015 and 2016, Longyuan had lower utilization hours in its wind business comparing to HNR, whose utilization hours were above minimum hour policy in many regions. So in the future, Longyuan has more room for improvement. Lower base in 1H2016 may give a stronger recovery in 1H2017 Longyuan delivered a poor performance in 1H2016 with wind generated power grew less than 9%, as compared to 16.5% increase in its wind turbine capacity. HNR had a more consistent performance in 1H2016 of 31.2% increase in power generation against a 29.2% increase in capacity. Given a lower base in 1H2016, we see a potential of a stronger recovery in 1H2017. Its coal power plants may weigh on its performance Even though the coal price increased substantially in the end of 2016, the tariff for coal electricity was not raised. This may lower its coal power plants margin. Besides, its coal fire plants would continue to be pressured by new installed green energy plants in terms of utilization hours. However, these effects are limited since Longyuan only owns 858MW of coal plants, a tiny share comparing to the sheer size of it wind power capacity. Besides, most of the loss from coal power plant would be shared by other shareholders as Longyuan only has a minority interest. Earnings Data Year to 31 Dec 2015A 2016E 2017E 2018E Attributable Profit RMBmn 2, , , ,031.8 YoY Change % EPS RMB BPS RMB DPS RMB PER X PBR X Dividend Yield % ROAE % Note: Figures for 2016 to 2018 are based on South China Research estimates. Note: All prices in this report are based on the 2 March 2017 close -8-

9 STOCK PICK SELL Date: 2 March 2017 HSI: 23, Share Price: HK$ Mth Target Price: HK$12.8 Upside Potential: 0% Renewable Energy Share Information Stock code 2208 HK Market cap. RMB54.585bn Issued shares 500m BVPS RMB6.58 P/B 1.74 Avg daily T/O HK$50.42m Estimated free float 93.6% ROE 18.6% ROA 5.7% 12-mth high/low HK$13.60 / 8.75 Major shareholder Anbang Asset Mgt 8.24% International Finance Corp 6.41% JPMorgan Chase 5.97% Exchange rate RMB1 = HK$1.13 US$1 = HK$7.75 Note: Financial data and ratios as of Dec 31, 2015 Share Price Chart HK$ m share XINJIANG GOLDWIND SCI&TEC-H HSI (rebased) 0 Mar May Jul Sep Nov Jan Mar 1mth 3mths 6mths 12mths Share price chg +0.0% +6.3% +12.8% +42.9% Relative to HSI -2.3% +1.1% +10.6% +20.4% GOLDWIND (2208 HK) Pressured by lower demand in the future More downside risk as we are bearish on its earnings outlook We give Goldwind a SELL rating with a target price of HK$12.8 which is estimated using 12x PER and our estimated EPS of RMB1.03(or HK$1.16) in FY2017, which is around 20% below Bloomberg consensus. We are more skeptical about new wind turbine installation in China. Less than expected earnings in 2016 In the preliminary report, Goldwind announced its net income to be RMB3.0bn, 2% below Bloomberg consensus. This is primarily due to less wind turbine sale in China; According to Caixin energy, Goldwind s wind turbine sale in mainland China dropped almost 20% in Weak demand from China market Market may be too bullish that China can maintain an annual average installation rate between 20GW- 25GW in the 13 th Five Year Plan in line with the average in the past three years. However, we believe it is over-optimistic. Taking into account the difference between targeted capacity and existing capacity, we estimate the annual installation rate would be around 17.8GW in , suggesting the growth momentum would be slower in the years ahead. Since a majority of Goldwind s revenue is derived from China market, this would weigh on its future earnings momentum. Turbine margin is likely to shrink We also expect its wind turbine margin would drop as a result of 1) product mix shift, and 2) decreasing feed-in tariff for wind power companies. Starting from 2016, most of the wind turbines were installed in the Southern China and the Eastern China, shifting away from the previous the three Northern provinces regions. We expect this development would enable wind power manufacturers to enjoy lower curtailment as well as higher feed-in tariff in these regions. As compared to the three Northern provinces, wind speed are general lower in the Southern regions. Hence, demand for lower wind speed generator will increase. According to Goldwind s, its low wind speed 2MW model has the lowest margin among all the products. Besides, the decline in feed-in tariff from the wind power companies will also have downward pressure on Goldwind s sale price. Expending wind farms In the past few years, Goldwind has been expanding its self-operating wind farms. As of 1H2016, it has 3.5GW wind farms, contributing 22% of its gross profit. As its wind farms continue to grow, it will provide more stable and predictable earnings ahead. Exploiting oversea markets Given the expected slowing demand in China market, oversea market could provide more growth prospect for Goldwind. Goldwind has been successful in many oversea projects. Its cooperation with Apple could boost in its international reputation and may have more business opportunities ahead. Earnings Data Analyst : GU Yi Fan (CE: BIL926) : (852) : yifan.gu@sctrade.com Important: please refer to our disclosures and disclaimers at the end of this report Year to 31 Dec 2015A 2016E 2017E 2018E Attributable Profit RMBmn 2, , , ,823.3 YoY Change % (12) (0) EPS RMB BPS RMB DPS RMB PER X PBR X Dividend Yield % ROAE % Note: Figures for 2016 to 2018 are based on Bloomberg estimates. Note: All prices in this report are based on the 2 March 2017 close -9-

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SCFH may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or investment services in relation to the investment concerned or a related investment or investment banking services to the shares issuer(s) mentioned in this report. SCFH may have received compensation for investment banking services from The Company within the preceding 12 months and/or may currently seeking investment banking mandate from The Company. IMPORTANT: This report and the information and opinions provided or expressed herein have been prepared by SCRL and/or SCFH for the information of its or their respective clients only, and has been compiled with reasonable care using data, information, or sources believed to be true, reliable, and accurate at the time of publication. No representation or warranty whatsoever, whether express or implied, is made to the accuracy or completeness or otherwise of this report or any of the contents thereof. SCRL and/or SCFH and their or their directors, officers, associates, representatives, or employees accordingly do not accept any responsibility or liability whatsoever for any direct or consequential loss or damage of whatsoever nature arising from or as a result of the use, publication, or distribution in whole or in part of this report or any of its contents. The information and opinions contained in this report are or may be subject to change or revision without any notice. SCRL and/or SCFH and their or their respective directors, officers, associates, representatives, or employees may have positions or otherwise be directly or indirectly interested in the securities mentioned in this report or may buy, sell, or deal or offer to buy, sell, or deal in or with such securities from time to time, whether as principal for its or their own account or as agent or in any other capacity for or on behalf of another person. This report is not, and is not intended to be, nor constitutes any offer or solicitation for the purchase or sale or other dealing in the securities mentioned herein. Copyright protection and other rights exist or subsist in this report, which may accordingly not be used for any other purpose, nor sold, distributed, published, or reproduced in any manner without the express consent of SCRL. This publication is approved for distribution in the UK by South China Securities (UK), a firm authorized and regulated by the FSA. Investors, when reading this report, should understand and comprehend the investment objectives and its relevant investment risks, and consult their own independent financial advisers before making any investment decision when necessary. Important: please refer to our disclosures and disclaimers at the end of this report. -10-