Initiation: dual growth drivers

Transcription

1 3 January 212 Beijing Jingneng Clean Energy Target price: HK$2.25 Up/downside: +34.7% Share price (27 Jan): HK$1.67 Initiation: dual growth drivers BJCE is the largest gas-fired power provider in Beijing and China's eighth-largest wind-power operator We like BJCE for its exposure to the Beijing government's support for gas-fired power; wind-power business is competitive Coverage initiated with Buy (1) and six-month target price of HK$2.25 How do we justify our view? Jackie Jiang (852) Dave Dai, CFA (852) Gary Zhou (852) Investment case Beijing Jingneng Clean Energy (BJCE), directly controlled by the Beijing Municipal Government, is the largest gas-fired power provider in Beijing and China s eighth-largest wind-power operator as at 31 December 21. We believe BJCE is well positioned to benefit from China s and Beijing s efforts to achieve a cleaner energy mix. Beijing targets a four-fold increase in the city s gas-fired power capacity, from 2GW in 21 to 8GW by 215. With 6% of the planned projects in hand, we forecast BJCE s gas-fired power capacity to grow from the current 1.2GW to 3.3GW by 213, driving the segment s operating profit at a CAGR of 24% over E. For the wind-power business, BJCE outperformed its peers in terms of utilisation hours and adjusted EBITDA margin in 21. We forecast its wind-power capacity to grow from 1.5GW in 211 to 2.6GW by 213, driving the segment operating profit at a CAGR of 3% over E. We assume an annual growth of 5MW in wind-power capacity from 213 onwards. Catalysts We expect BJCE to expand its capacity for both gas-fired and wind-power projects, which will support sustainable earnings growth. Valuation We use an SOTP valuation to arrive at our six-month target price of HK$2.25 and DCF to value each segment. The stock is trading at 212E PER and PBR of 7.2x and.8x respectively, lower than China s major wind-power operators and traditional IPPs. We believe the stock s current valuation is not demanding given the company s ROE improvement from 8% in 21 to 14% by 213E and EPS CAGR of 24% over E. Risks The Beijing government supports gasfired power by granting cash subsidies to power plants, which are in the municipal s budget under the 12 th Five-Year Plan (12 th FYP) and likely to be in place over the next five years. However, any cut in subsidies would likely bring earnings downside. BJCE s wind-power business depends largely on wind conditions to generate electricity. Wind resources can be volatile and were poor in 2H11, which could be a shortterm downside earnings risk. Share price performance (HK$) (%) Dec Dec-11 1-Jan-12 2-Jan-12 Beijing Jingneng Clean Energy (LHS) Relative to HSI (RHS) 12-month range Market cap (US$bn) 1.32 Average daily turnover (US$ ) Shares outstanding (m) 6,15 Major shareholder Beijing Energy Investment Holding (68.%) Financial summary (Rmb) Year to 31 Dec 11E 12E 13E Revenue (m) 3,722 5,163 7,785 Operating profit (m) 1,37 1,983 2,668 Net profit (m) 84 1,166 1,57 Core EPS EPS change (%) Daiwa vs Cons. EPS (%) n.a. n.a. n.a. PER (x) Dividend yield (%) DPS PBR (x) EV/EBITDA (x) ROE (%) Source: Bloomberg, Daiwa forecasts Important disclosures, including any required research certifications, are provided on the last two pages of this report.

2 3 January 212 Table of contents Initiation: dual growth drivers... 6 Company background... 6 Valuation... 7 Gas-fired co-generation business... 9 Wind-power business Income statement Balance sheet Risk factors Appendix I: Shareholding structure and history Appendix II: Management profiles Appendix III: project details

3 3 January 212 How do we justify our view? Growth outlook Valuation Earnings revisions Growth outlook We forecast BJCE s total consolidated installed capacity for gas-fired and wind power to grow from 1.2GW and 1.5GW to 3.3GW and 2.6GW by 213E, respectively, implying a E CAGR of 53.1%. BJCE: total consolidated installed power-generation capacity (28-13E) (MW) 7, 6, 5, 4, 3, 2, 1, ,59 1, ,19 1,19 1,19 1,19 CAGR: 53% 39 2,147 2, ,647 3, E 212E 213E Gas-fired co-generation Wind power Small-medium hydro and others Valuation BJCE operates a mixed portfolio of clean energy: windpower and gas-fired power. In the absence of a directly comparable listed company, we use the major China wind-power developers and China coal-fired IPPs as a proxy for its peers. BJCE is now trading below both of these categories despite having a similar growth outlook and superior ROE than the coal-fired IPPs, which suggests potential upside from current share-price levels. Peer valuation comparison Company name PER(x) PBR (x) ROE (%) EPS CAGR (%) 212E 212E 212E 11-13E BJCE China wind-farm developers China Longyuan Power Huaneng Renewables Datang Renewables Simple average China thermal IPPs China Resources Power Huaneng Power Int'l Datang Int'l Power Huadian Power Int'l n.a. China Power Int'l Simple average Source: Bloomberg, Daiwa forecasts; note: based on 27 January 212 closing prices Earnings revisions BJCE: net profit attributable to shareholders We forecast BJCE s net profit attributable to shareholders to record a CAGR of 37% over , driven mainly by capacity expansion. (Rmb m) 1,6 1,4 1,2 1, E CAGR: 37% 1,57 1, E 212E 213E - 3 -

4 3 January 212 Financial summary Key assumptions Year to 31 Dec E 212E 213E Consolidated installed gas-fired power capacity at year end (MW) 1,19 1,19 1,19 1,19 2,228 3,268 Consolidated installed wind-power capacity at year end (MW) ,59 1,452 2,147 2,647 Consolidated installed hydropower and other clean energy capacity (MW) Weighted average gas-fired power ongrid tariff (incl. VAT) (Rmb/KWh) Weighted average gas-fired power utilization hours 3,575 3,239 4,237 4,43 4,224 4,215 Weighted average natural gas price (incl. VAT) (Rmb/m3) Weighted average wind-power on-grid tariff (incl. VAT) (Rmb/KWh) Weighted average wind-power utilization hours 2,156 2,243 2,369 2,223 2,23 2,21 Profit and loss (Rmb m) Year to 31 Dec E 212E 213E Gas-fired Power and Heat Energy Generation 1,164 1,893 2,554 2,432 3,139 5,17 Wind Power ,32 1,285 1,972 2,391 Others 978 2, Total revenue 2,257 4,785 3,643 3,722 5,163 7,785 Other income ,61 COGS (1,927) (3,834) (1,97) (1,96) (2,395) (3,949) SG&A (148) (218) (289) (316) (374) (476) Other op. expenses (45) (832) (1,11) (1,52) (1,41) (1,753) Operating profit ,37 1,983 2,668 Net-interest inc./(exp.) (192) (281) (488) (55) (748) (1,4) Assoc/forex/extraord./others Pre-tax profit ,396 1,825 Tax (2) (18) (56) (95) (154) (219) Min. int./pref. div./others (4) (19) (32) (52) (76) (98) Net profit (reported) ,166 1,57 Net profit (adjusted) ,166 1,57 EPS (reported) (Rmb) EPS (adjusted) (Rmb) EPS (adjusted fully-diluted) (Rmb) DPS (Rmb) EBIT ,37 1,983 2,668 EBITDA ,739 2,154 3,179 4,216 Cash flow (Rmb m) Year to 31 Dec E 212E 213E Profit before tax ,396 1,825 Depreciation and amortisation ,196 1,548 Tax paid (24) (36) (7) (95) (154) (219) Change in working capital (86) (679) (121) 17 (39) 258 Other operational CF items Cash flow from operations ,536 1,92 2,13 3,412 Capex (3,73) (5,894) (1,645) (5,142) (11,657) (5,98) Net (acquisitions)/disposals (87) 1 Other investing CF items 6 (24) (2) Cash flow from investing (3,643) (6,134) (1,932) (4,967) (11,357) (5,98) Change in debt 2,749 5,644 (292) 1,632 9,5 3, Net share issues/(repurchases) 1, ,244 1, (151) Dividends paid (187) (117) (151) Other financing CF items (338) (54) (563) Cash flow from financing 3,456 6, ,45 9,545 2,849 Forex effect/others Change in cash (195) (2) Free cash flow (3,317) (5,624) (11) (3,222) (9,528) (2,568) - 4 -

5 3 January 212 Financial summary continued Balance sheet (Rmb m) As at 31 Dec E 212E 213E Cash & short-term investment ,155 Inventory Accounts receivable ,263 1,29 1,79 2,699 Other current assets Total current assets 1,122 2,18 2,443 2,22 3,191 4,511 Fixed assets 8,163 11,14 11,813 16,37 26,969 31,6 Goodwill & intangibles 1,77 3,996 3,86 3,67 3,47 3,27 Other non-current assets 1,346 2,256 2,77 2,487 2,186 2,186 Total assets 12,41 19,375 2,769 24,63 35,752 41,55 Short-term debt 2,718 3,599 2,731 1,863 1,863 1,863 Accounts payable 1,317 1,564 1,644 1,635 1,998 3,296 Other current liabilities Total current liabilities 4,34 5,297 4,843 3,97 4,27 5,567 Long-term debt 3,795 8,461 8,883 11,383 2,883 23,883 Other non-current liabilities Total liabilities 8,246 13,89 13,776 15,34 25,23 29,5 Share capital 5 1,6 5, 6,32 6,15 6,15 Reserves/R.E./others 3,215 4,27 1,684 2,869 3,962 5,319 Shareholders' equity 3,715 5,277 6,684 8,91 1,112 11,469 Minority interests Total equity & liabilities 12,41 19,375 2,769 24,63 35,752 41,55 EV 9,532 15,197 16,837 2,87 29,346 32,163 Net debt/(cash) 5,943 11,36 11,56 12,69 21,873 24,592 BVPS (Rmb) Key ratios (%) Year to 31 Dec E 212E 213E Sales (YoY) n.a (23.9) EBITDA (YoY) n.a Operating profit (YoY) n.a Net profit (YoY) n.a EPS (YoY) n.a Gross-profit margin EBITDA margin Operating-profit margin ROAE ROAA ROCE ROIC Net debt to equity Effective tax rate Accounts receivable (days) Payables (days) Net interest cover (x) Net dividend payout Company profile Beijing Jingneng Clean Energy Co, Ltd (BJCE) provides clean energy in China. The company operates gas-fired power, heat energy, wind power, small- to medium-sized hydropower, and other clean energy projects

6 3 January 212 Initiation: dual growth drivers The largest gas-fired power provider in China s capital Company background BJCE is the largest gas-fired power provider in Beijing and China s eighth-largest wind-power operator as at 31 December 21. The largest shareholder of BJCE is Beijing Energy Investment Holding (BEIH), which is directly controlled by the Beijing State Assets Management and Administration Centre. BJCE was the largest gas-fired power provider in Beijing, in terms of consolidated installed capacity, as at 31 December 21, accounting for about 61% of Beijing s total gas-fired power installed capacity, according to the Beijing Electric Power Industry Association. BJCE had two gas-fired co-generation plants and a gas-fired heat-energy-generation plant in operation, with a consolidated installed capacity of 1,19MW and a consolidated installed heat energy generation capacity of 1,45MW as at 3 June 211. BJCE also has a gas-fired co-generation plant under construction in Beijing, with a capacity of 838MW, and a heat-energy-generation capacity of 592MW. BJCE was the eighth-largest wind-power operator in China as at the end of 21 in terms of consolidated connected capacity of 1,59MW, according to the China Wind Energy Association. As at 31 December 21, BJCE s consolidated installed capacity accounted for about 2.4% of China s total wind-power installed capacity, according to the World Wind Energy Association (WWEA). As at 3 June 211, BJCE had 17 wind farms in operation with a consolidated installed capacity of 1,95MW, and 11 wind farms under construction with a consolidated capacity under construction of 55.5MW. The wind farms in operation and under construction are strategically located in Inner Mongolia, Beijing, Ningxia and Liaoning Province. BJCE also produces electricity through small to medium-sized hydropower projects and other clean energy generation businesses, with a consolidated installed capacity of 6.4MW as at 3 June 211. BCE: total consolidated installed capacity as at 3 June 211 Capacity in operation (MW) Capacity under construction (MW) Gas-fired power capacity 1, Wind-power capacity 1,95 56 Small-hydro and clean energy power capacity Total power generation capacity 2,291 1,568 Gas-fired heat generation capacity 1, Source: Company The gas-fired co-generation business has been the largest adjusted revenue contributor, accounting for 72% of total adjusted revenue for 1H11, while the windpower business has been the largest contributor to the adjusted operating profit, accounting for 56% of total adjusted operating profit for 1H11. BJCE: adjusted revenue contribution from different business segments (28-1H11) (% ) H11 Gas-fired power and heat energy generation Wind power Small-medium hydro and other clean energy Source: Daiwa calculation based on company data Note: Adjusted revenue equals revenue less concession service revenue plus government grants and subsidies for clean energy BJCE: adjusted operating profit contribution from different business segments (28-1H11) (% ) (3.6) (8.) (2.7) H11 Gas-fired power and heat energy generation Wind power Small-medium hydro and other clean energy Source: Daiwa calculation based on company data Note: Adjusted operating profit equals adjusted revenue minus adjusted operating expense, which excludes concession service costs - 6 -

7 3 January 212 Valuation We forecast BJCE to record a 4.3% CAGR ( capacity CAGR: 53.1%) for consolidated installed capacity and 33.8% CAGR for EPS growth during the same period ( EPS CAGR: 23.8%). We employ an SOTP methodology to derive our valuation. A DCF-valuation approach is used to value each segment given the high visibility of future cash flow for the wind-power and gas-fired power businesses. Our key assumptions include a risk-free rate of 3.5%, market-risk premium of 6.%, company beta of 1., pre-tax borrowing cost of 6.5%, long-term equity-to-debt ratio of 1., and terminal-growth rate of 3.%. BJCE: key assumptions in DCF valuation Risk-free interest 3.5% Risk premium 6.% Beta 1. Cost of equity 9.5% Cost of debt 6.5% Equity ratio 5% Debt ratio 5% WACC 7.5% Terminal-growth rate 3% Tax rate 15% Source: Daiwa forecasts Given China s poor wind conditions since 3Q11, as reflected in the unexciting utilisation hours of the major wind-power operators including China Longyuan Power (LYP) (916 HK, HK$6.4, Buy [1]), Datang Power Renewable (DPR) (Not rated) and Huaneng Power Renewable (HPR) (Not rated), we have included what we view as conservative assumptions in our DCF valuation for the company s long-term windpower utilisation hours, of 2,125 hours. Wind-power, gas-fired power, and others account for respective 59%, 36%, and 6% of our total NAV forecast, which arrives at HK$13,827m (or US$1,773m). Our six-month target price is HK$2.25. BJCE: SOTP valuation (Rmb m) % Gas-fired co-generation 12, of which gas subsidies 15,445 - of which carbon income 1,355 Wind power 2, of which carbon income 8,967 Hydro and other clean energy Dividends from associates 1,5 3 Total enterprise value 35,372 1 Less: net debt 21,873 Less: minority interest 2,166 Total equity value (Rmbm) 11,334 Total equity value (HK$m) 13,827 Total equity value (US$m) 1,773 Oustanding shares (m) 6,15 Target price (HK$ per share) 2.25 Source: Daiwa forecasts BJCE: valuation breakdown Gas-fired power 35.6% Source: Daiwa forecasts Hydro power and other clean energy 2.8% Others 2.8% Wind power 58.7% Peer valuation comparison BJCE operates a mixed portfolio of clean energy: wind-power and gas-fired power. In the absence of a directly comparable listed company, we use the major China wind-power developers (including LYP, DPR, and HPR) and China coal-fired IPPs (including China Resources Power, Huaneng Power International, Datang International Power, Huadian Power International, and China Power International) listed on the Hong Kong Stock Exchange as a proxy for its peers. BJCE is currently trading at 212E PER and PBR of 7.2x and.8x, which are below those of both China s wind-power developers and coal-fired IPPs, despite the company s strong EPS-growth outlook (211-13E EPS CAGR: 23.8%) and superior ROE (211-13E average ROE: 12.2%) compared with the thermal IPPs. On a PBR basis we believe the stock deserves to trade in line with the wind-power operators and at a premium to the coal-fired IPPs, given the latter s vulnerability to coal prices and single-digit ROE (except China Resources Power [836 HK, HK$14.9, Buy(1)]). Our six-month target price of HK$2.25 implies 212E PER and PBR of 9.7x and 1.1x, respectively, which we do not see as demanding

8 3 January 212 Valuation comparison Bloomberg Daiwa Share price Market cap PER (x) PBR (x) ROE (%) EPS CAGR (%) Company code rating (local curr.) US$m 211E 212E 213E 211E 212E 213E 211E 212E 213E 11-13E BJCE - current valuation Outperform , BJCE - implied valuation at target price China wind farm developers China Longyuan Power 916 HK Buy 6.4 5, Huaneng Power Renewable 958 HK Not rated , Datang Power Renewable 1798 HK Not rated , Simple average 3, Weighted average China thermal IPPs China Resources Power 836 HK Buy , Huaneng Power Int'l 92 HK Outperform , Datang Int'l Power 991 HK Hold , Huadian Power Int'l 171 HK Hold ,528 n.a n.a n.a. China Power Int'l 238 HK Hold , Simple average 4, Weighted average Source: Bloomberg, Daiwa forecasts (for rated stocks) Note: Priced as at 27 January

9 3 January 212 Gas-fired co-generation business BJCE was the largest gas-fired power provider in Beijing, in terms of consolidated installed capacity as at 31 December 21, which accounted for about 61% of the total gas-fired power installed capacity in Beijing, according to the Beijing Electric Power Industry Association. BJCE had two gas-fired co-generation plants and a gasfired heat energy generation plant in operation with a consolidated installed capacity of 1,19MW and a consolidated installed heat energy-generation capacity of 1,45MW as at 3 June 211. It also had a gas-fired co-generation plant under construction in Beijing with a capacity of 838MW and a heat energy-generation capacity of 592MW. Beijing: major gas-fired power providers as at 3 June 211 Beijing Electronic Zone Gas-fired Cogen 12 MW 6% China Resources 15 MW 8% Huadian (Beijing) Co-generation 5 MW 26% Jingneng Clean Energy 1,19 MW 6% Source: Beijing Association for Electric Power Industry, Beijing DRC (Development and Reform Commission) Gas-fired co-generation is supported by government plans The Beijing Government has set a target of having noncoal-fired heating for the whole city by 215 and has increased the percentage of annual natural-gas consumption relative to total energy consumption from 13.1% in 21 to over 2% by 215. Beijing plans to develop and construct four major gas-fired power and heat centres, ie, co-generation plants, in the northeast, northwest, southeast and southwest of the Beijing metropolitan area. Beijing plans to increase total installed capacity of gas-fired co-generation plants in the city from 2GW in 21 to 8GW by 215, according to the municipal government s 12 th FYP on energy construction and development. Beijing: total power consumption and local power generation (28-15E) (1 GWh) 1,2 1, % 35% 34% 34% 33% ,15 38% E Local power generation Power consumption Local generation as a % of consumption Source: Beijing Electric Power Company, 12 th FYP on energy construction and development Beijing s 12 th FYP on gas-fired power capacity (MW) 9, 8, 7, 6, 5, 4, 3, 2, 1, 2, 5-year CAGR: 32% 8, E Source: 12 th FYP on energy construction and development Out of the five major gas-fired heat and power cogeneration plants planned in Beijing over E as listed below, BJCE has obtained 59% of the planned pipeline, which would drive its gas-fired power capacity from the current 1.2GW to 3.3GW by 213E. Beijing: major gas-fired power plants in operation and planned Plant Capacity (MW) Operational date Operator Jingfeng co-gen 41 May-6 BJCE Taiyanggong co-gen 78 May-8 BJCE Dianzicheng co-gen 12 Apr-11 Beijing Zhengdong Electronic Power Group Zhengchangzhuang co-gen 58 May-11 Huadian Group CRP Xiexin co-gen 15 Jun-11 CR Power Huaneng Thermal Expansion Project 923 Dec-11 Huaneng Power Jingqiao Caoqiao co-gen 838 Expected in 212 BJCE Northeast centre Jingneng co-gen 8 Expected by 213 BJCE Shenhua Beijing Guohua cogen 8 Expected in 213 Shenhua Guohua Gaojing co-gen 1,2 Expected by 214 Datang Power Shijingshan co-gen 1,2 Expected by 214/15 BJCE Total 7,729 BJCE's share of planned projects 59% Source: Company, Beijing DRC, 12 th FYP on energy construction and development 4% 38% 36% 34% 32% 3% - 9 -

10 3 January 212 Gas-fired power regulations The gas-fired power business does not make much economic sense compared with coal-fired power in China, in our view, given the current natural gas costs and on-grid tariffs. However, local governments usually support gas-fired power as a relatively clean energy source through subsidies. The Beijing Government subsidises gas-fired power plants in two ways: 1) a tariff subsidy, and 2) passing on the cost of natural gas. On-grid tariffs The on-grid tariffs for gas-fired power plants are determined by the relevant governmental pricing bureaus. These tariffs should reflect production costs plus a reasonable investment return. Factors for consideration used by the pricing bureaus include fuel type, cost structure, the economic life of the facilities, and applicable tax rates. Gas-fired power plants are generally entitled to charge a higher on-grid tariff than coal-fired power plants because of their different cost structures and the government policies to stimulate the use of fuels that are more ecologically friendly. Relevant governmental pricing bureaus retain the discretion to adjust the tariff if there are material changes, such as a dramatic fluctuation in the price of natural gas. BJCE has seen an increase in its on-grid tariffs for gasfired power over the past few years, along with rising natural gas costs and benchmark coal-fired power ongrid tariffs. In December 211, the Beijing Government raised the gas-fired on-grid power tariff by 6.5%, to Rmb.573/KWh from Rmb.538/KWh, along with a tariff hike for coal-fired power. BJCE: weighted average on-grid tariff for gas-fired power, (including VAT) (Rmb/MWh) Source: Company H11 Beijing: benchmark on-grid tariff for gas-fired and coal-fired power, VAT inclusive (28-11) (Rmb/KWh) Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Gas-fired on-grid tariff Source: Company, Beijing DRC Gas-fired total settlement tariff Coal-fired on-grid tariff Subsidy paid by gov. Tariff paid by grid Dispatch priority Gas-fired co-generation plants receive dispatch priority after renewable energy and nuclear-power generation units, and ahead of coal-fired and oil-fired power generation units. Pursuant to the State Council s Measures for the Dispatch of Energy Saving Power, the priority for power dispatch is: 1) non-adjustable powergeneration units utilising renewable fuels, 2) adjustable power-generation units utilising renewable fuels, 3) nuclear-power generation units, 4) cogeneration units and resources using comprehensive utilisation power-generation units, 5) gas-fired power-generation units, 6) other coal-powergeneration units, including co-generation units without heating loads, and 7) oil-fired powergeneration units. Policy for natural-gas use The National Development and Reform Commission (NDRC) announced the priorities for the different natural-gas demand groups in its Policy on Natural Gas Usage document in August 27. Gas-fired heat and power co-generation units were on the priority list, as were residential and public facilities, and natural-gas vehicles. It encouraged central heating, air-conditioning and fertiliser production, as well as recommending substitute projects for oil and liquefied petroleum gas (LPG), low-economy hydrogen projects and peak-sharing power generation. In the event of excessive gas supply, we would expect the Beijing government to move more demand drivers from the allowed list onto the priority list. Gas-fired power and centralised or decentralised heating are among the possible candidates

11 3 January 212 China: policy on natural-gas use (27) Residential sector Industrial fuel Chemical feedstock Power sector Priority City residential Combined heat and power system Public facilities natural-gas vehicles Allowed Centralised heating Decentralised heating Central airconditioning Substitution projects using oil and LPG Substitution projects using coal with environmental and economic benefits Interruptible consumers Low economic hydrogen projects Low economic nitrogenous fertiliser projects Peak-sharing power generation in the area with sufficient supply Confined Expansion of ammonia projects Non-essential lead power-generation Some chemical projects using methane Prohibited Methanol projects Base-load generation in largescale coal-based areas Source: NDRC Local-government subsidies Gas-fired power plants in Beijing are subsidised by the Beijing Municipal Finance Bureau (BMFB), which enables them to recover fuel costs and earn reasonable returns. The BMFB subsidises gas-fired power plants in two ways: 1) by offering an electricity-price subsidy to eliminate the gap between on-grid power tariffs and total settlement tariffs, and 2) by passing on the cost of natural gas. Electricity-price subsidy The Beijing Municipal Government provides a subsidy to the gas-fired power enterprises based on the gap between each enterprise s on-grid tariffs (excluding tax) and the settlement tariffs approved by the NDRC. The price administrative authority determines the subsidy amount based on the annual approved quantity of ongrid electricity generation entitled to subsidies. No subsidy is provided for the actual electricity generated in excess of the aforementioned approved amount. At the beginning of every year, each enterprise must prepare a subsidy-funding budget based on its electricity sales plan. The enterprise is granted 8% of the budget after entering into an electricity-sales contract with the power-grid company. At the end of each year, the power enterprise adjusts the electricity sales according to its budget, and settles the amount on the basis of the enterprise s annual audit report before the end of January of the following year. the grid company and the rest is subsidised by the Beijing government. As the on-grid power tariff increases, the gap (electricity price subsidy) will narrow and eventually be eliminated. Beijing: benchmark on-grid tariff for gas-fired and coal-fired power, VAT inclusive (28-11) (Rmb/KWh) Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Gas-fired on-grid tariff Source: Company, Beijing DRC Gas-fired total settlement tariff Coal-fired on-grid tariff Subsidy paid by gov. Tariff paid by grid BJCE: calculation of electricity price subsidy for gas-fired power Tariff gap Settlement tariff incl. VAT less On grid tariff incl. VAT = Tariff gap incl. VAT x (1 VAT) = Subsidy per output Source: Daiwa estimates x Allowed power output Lower of: 1) Approved power output; 2) Actual power output = Total electricity price subsidy Natural gas-price subsidy The increase in natural-gas costs, if not passed on to the on-grid power tariff, is fully subsidised by the BMFB, based on the allowed electricity-generation amount of BJCE s gas-fired co-generation plants. BJCE: calculation of natural gas price subsidy for gas-fired power Increase in Total gas consumption natural gas price Change in gas cost. Incl. VAT x (1-VAT) = Change in gas cost excl. VAT Source: Daiwa estimates x Unit gas consumption x Approved electricity output = Total natural gas price subsidy Currently, BJCE s major gas-fired power plant, the Taiyanggong plant, receives Rmb.617/KWh for its electricity sales, of which Rmb.573/KWh is paid by

12 3 January 212 Gas supply in Mainland China and Beijing China has constructed a number of major longdistance natural-gas pipelines and LNG terminals to support the country s increasing energy demand. These pipelines and LNG terminals transmit natural gas from both domestic and overseas gas-well sources to regions with high energy demand, which has helped to boost natural-gas consumption. The major gas pipelines include the Shaanxi-Beijing Gas Pipeline Phase I-III, the West-East Gas Pipeline Phase I and Phase II, the Sichuan Gas Pipeline, and the Zhongxian-Wuhan Natural Gas Pipeline. China: natural gas pipelines details Western Siberia Eastern Siberia Heilongjiang Central Asia China Pipeline (from Kazakhstan) Jilin Liaoning CNOOC Yingkou LNG Xinjiang Gansu Inner Mongolia Ningxia Shanxi Beijing Tianjin Shandong Hebei CNOOC Hebei LNG PetroChina Dalian LNG PetroChina Tangshan LNG Sinopec Tianjing LNG CNOOC Hebei Qinhuangdao LNG Sinopec Qingdao LNG LNG terminals in China (existing and potential) Existing pipeline Tibet Qinghai Sichuan Shaanxi Chongqing Henan Hubei Jiangxi Anhui Jiangsu Shanghai Zhejiang CNOOC Binhai LNG PetroChina Rudong LNG CNOOC Shanghai Yangshan LNG CNOOC Ningbo Zhejiang LNG Construction pipeline Shaanxi-Beijing Pipeline I (PetroChina) Shaanxi-Beijing Pipeline II (PetroChina) Shaanxi-Beijing Pipeline III (PetroChina) West-East Pipeline I (PetroChina) Burma-China Pipeline (PetroChina) Yulin-Jinan Pipeline (Sinopec) Sichuan-East Pipeline (Sinopec) Yunan Guizhou Guangxi Hunan Guangdong Macau Fujian Hong Kong CNOOC Putian LNG Taiwan CNOOC Shantou LNG CNOOC Dapang LNG CNOOC Zhuhai LNG Sinopec Beihai LNG CNOOC Hainan LNG West-East Pipeline II (PetroChina) Zhong-Wu Pipeline (PetroChina) Hainan Source: Daiwa

13 3 January 212 China: details of major natural-gas pipelines Completion Capacity Length Project name Owner Well source time (bn cm) (km) West-East Pipeline I PetroChina Tarim Basin Changqing, Changbei , West-East Pipeline II PetroChina Turkmenistan ,12 PetroChina (6%), Shaanxi-Beijing Pipeline I Beijing Enterprises (4%) Changqing, Sulige ,15 Shaanxi-Beijing Pipeline II Shaanxi-Beijing Pipeline III PetroChina (6%), Beijing Enterprises (4%) Changqing, Sulige PetroChina (6%), Beijing Enterprises (4%) Changqing, Turkmenistan, Kazakhstan Chunyu, Sichuan Basin ,375 Zhong-Wu Pipeline PetroChina Sichuan-to-East Pipeline Sinopec Puguang, Sichuan ,23 Yulin-Jinan Pipeline Sinopec Daniudi, Ordos ,45 Burma-China Pipeline PetroChina Source: CNPC, Daiwa Burma's west coast ,86 Natural gas is transported to Beijing through the Shaanxi-Beijing Gas Pipeline. The Shaanxi-Beijing Gas Pipeline is the only gas-pipeline project that directly reaches and supplies gas to Beijing. Phases I and II of this project were completed in 1997 and 25, respectively, with a total design capacity of 2bn m 3 /year. Phase III of the project started to supply gas to Beijing in 211, with a designed capacity of 15bn m 3 /year. Phase IV is currently being planned. The main source of gas for this project is the Changqing gas field in Shaanxi Province, one of the largest oil and gas fields in China. The Shaanxi-Beijing Gas Pipeline was connected to the West-East Gas Pipeline in 29, improving the stability of gas supply to Beijing by introducing other gas sources. All of the gas supplied in Beijing, including that to BJCE, is distributed by Beijing Gas Group (Not listed), the sole operator of the city s natural-gas pipeline in Beijing. BJCE: supplier and customers Beijing Gas gas BJCE power heat North China Grid Beijing District Heating Co. Natural-gas pricing mechanism The retail price of natural gas is composed of a wellhead price, pipeline transmission tariff, and retail spread, and is largely controlled by the NDRC. The onshore wellhead price is set by the NDRC, with a 1% floating range determined by suppliers and buyers, while the offshore wellhead gas price is free of NDRC control and is determined by supply and demand. The pipeline transmission tariff is set by the NDRC and is principally determined by the pipeline distance. The retail spread is the gap between the city s gate price (wellhead price plus pipeline transmission tariff) and retail price, which is set by local governments on a costplus basis. Downstream city gas distributors can usually pass on the city-gate price hike to end users, although cost pass-through can be difficult at the retail level for residential users. China: natural-gas pricing mechanism Natural gas fields Well-head price Upstream Gas exploration PetroChina Sinopec Source: NDRC, Daiwa Middle-stream Gas transmission PetroChina Sinopec Natural gas pipeline Transmission charge City-gate price = well-head price + transmission charge Down-stream Gas transmission Beijing Gas ENN Energy China Gas Citygate China Resources Gas Kunlun Gas HK&ChinaGas Retail price = city-gate price + retail spread Gas consumers BJCE Households Industrial users Commercial users Vehicles (CNG) The NDRC has raised the natural gas city-gate price three times over the past five years, to reflect an increasing proportion of total gas supply from imported gas sources and rising exploitation costs at gas wells. The city-gate price hikes were passed on to most types of end users, including gas-fired cogeneration plants, with a time lag. The weightedaverage natural-gas price (including VAT) for BJCE s gas-fired power plants increased from Rmb1.82/m 3 in 28 to Rmb2.21/m 3 in 1H11. This increase in the gasconsumption cost is partially passed on to grid companies in the form of on-grid tariff rises, and partially subsidised by the BMFB, as mentioned previously in the section on Gas-fired power regulations. Source: Company, Daiwa

14 3 January 212 Beijing: natural-gas city-gate price and natural-gas price for gas-fired co-generation plants (incl. VAT) (25-11) (Rmb/m3) Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 City gate price * Heat-electricity co-generation end-user price 2.28 Source: Beijing DRC Note:* A natural-gas cost of Rmb1.95/m3 was applied to gas-fired co-generation plants newly operational in 28 BJCE: weighted-average natural-gas price purchased (incl. VAT) (28-1H11) (Rmb/m3) Source: Company H11 Implications of potential gas-price reform On 26 December 211, the National Development and Reform Commission (NDRC) announced it was beginning gas-price reform trials in Guangdong and Guangxi provinces. The pilot programmes see PRC city-gate ceiling prices set with reference to the market prices of its substitutes (namely fuel oil and LPG), replacing the current cost-plus basis, to reflect supplydemand equilibrium. The main points include: 1) using Shanghai as a reference point for pricing, 2) calculating Shanghai s ceiling city-gate price based on a formula (6/4 weighting for fuel oil/lpg), 3) arriving at the city-gate prices in Guangdong (Rmb2.74/m3) and Guangxi (Rmb2.57/m3) based on the 21 year-end prices of alternative fuels, 4) city-gate prices applying to both domestic and imported piped gas with uniform city-gate prices regardless of their source, and 5) retail pricing being at the discretion of the local government, ie, cost-linkage where applicable. The mechanism would initially be adjusted annually, and then moved gradually to semi-annual or quarterly adjustments. Although the trials in Guangdong and Guangxi are expected to have little implications on Beijing s citygate gas price in the near term, we do not rule out the possibility of a gas price hike in the long-term. However, with the natural-gas price subsidy in place where BJCE is subsidized by any increase in its gas cost, we expect the impact on BJCE s earnings to be minimal. Operational assumptions and financial forecasts Capacity expansion and revenue growth We forecast BJCE to expand its gas-fired power consolidated installed capacity from 1,19MW as at 3 June 211 to 2,228MW by the end of 212 and 3,268MW by 213, based on the company s existing project pipeline. Meanwhile, we forecast heatgeneration capacity to expand from 1,45MW as at 3 June 211 to 1,778MW by the end of 212 and 2,398MW by 213. We expect stable utilisation hours for gas-fired power, with the exception of a dip in 211 due to the repair and maintenance of the Taiyanggong plant. We forecast total net electricity output to increase at a CAGR of 42%, from 4,682GWh in 211 to 9,479GWh in 213, due to a capacity ramp-up. BJCE: total consolidated installed capacity of gas-fired power (21-13E) (MW) 3,5 3, 2,5 2, 1,5 1, 5 1,19 1, E CAGR: 65.7% 2,228 3, E 212E 213E

15 3 January 212 BJCE: total net gas-fired power output and weighted-average utilisation hours (28-13E) (GWh) 1, 8, 6, 4, 2, 3,575 CAGR: 27% 3,239 4,237 4,43 4,224 4, E 212E 213E Net electricity generation (LHS) Source: Company, Daiwa calculation and forecasts CAGR: 42% (hour) 5, 4,5 4, 3,5 3, Weighted average utilization hours (RHS) We have not factored in any increase in natural-gas costs or gas-fired on-grid power tariffs in the future. However, we do see the risk of a rise in natural-gas costs if inflation falls in 212. We would expect any cost hike to be passed on partially through an increase in the on-grid gas-fired power tariff, with the remainder subsidised by the BMFB. We forecast BJCE s total revenue derived from the gas-fired co-generation business to rise at a CAGR of 46% over , driven by capacity expansion. BJCE: total revenue from gas-fired co-generation business (28-13E) (Rmbm) 6, 5, 4, 3, 2, 1, 7 1,93 CAGR: 48% 346 1, ,185 2,91 CAGR: 46% 372 2, , E 212E 213E sales of electricity sales of heat Others Source: Company, Daiwa calculation and forecasts Government subsidies We expect the Beijing Government to continue to support gas-fired power as a relatively clean energy source, compared with coal-fired power, through tariff subsidies and natural-gas price subsidies over the 12 th FYP period. We have factored in a 1% cut in gas subsidies from 216 onwards in our assumptions. We forecast total government subsidies to increase at a CAGR of 2%, from Rmb579m in 211 to Rmb838m in 213, on the back of increases in electricity output and gas consumption. We forecast the electricity price subsidy to decline in 212 due to an increase in the gasfired on-grid power tariff, which is expected to reduce the gap between the total settlement tariff and on-grid tariff subsidized by the municipal government. BJCE: gas subsidies from government (28-13E) (Rmb m) E 212E 213E Electricity price subsidy CAGR: 2% Natural gas price subsidy Income of CERs and VERs BJCE has two gas-fired co-generation plants registered with the Carbon Development Mechanism (CDM) Executive Board: the Taiyanggong plant and the Jingfeng plant. We assume no new projects will be registered, such that sales of certified emission reductions (CER) and voluntary emission reductions (VER) will only be derived from the above two plants. We assume a continued contribution from carbon income beyond 212, but have factored in a lower spot price for carbon credits of 5/CO 2 t, compared with 1/CO 2 t for BJCE: income from CERs and VERs for gas-fired co-generation business (28-13E) (Rmb m) E 212E 213E Adjusted EBITDA and adjusted operating profit We have adjusted BJCE s financials to better reflect the operational results given the recurring nature of government subsidies. The adjusted revenue is derived from revenue plus government subsidies to clean energy. The adjusted operating profit is equivalent to reported operating profit minus income from CERs and VERs and other one-off income

16 3 January 212 The adjusted EBITDA is equivalent to adjusted operating profit plus depreciation and amortisation. We forecast the company s adjusted EBITDA and adjusted operating profit to rise at respective CAGRs of 27% and 27% over 21-13, and the adjusted operating-profit margin and adjusted-ebitda margin to remain stable at about 11% and in a range of 22-24%, respectively, over BJCE: adjusted EBITDA and adjusted operating profit from gas-fired co-generation business (28-13E) (Rmbm) 1,4 1,2 1, , E 212E 213E Adjusted EBITDA Adjusted operating profit Adjusted EBITDA margin (%) Adjusted operating profit margin (%) (%) BJCE: key operating assumptions and financials for gas-fired co-generation business E 212E 213E Financial forecasts (Rmbm) Sales of electricity 1,93 1,546 2,185 2,91 2,767 4,58 Sales of heat Others 1 Revenue 1,164 1,893 2,554 2,432 3,139 5,17 Adjusted revenue 1,635 2,32 2,962 3,11 3,66 6,8 Other income Government subsidies CERs and VERs income Others 11 Gas consumption cost 1,9 1,459 1,971 1,96 2,395 3,949 EBITDA ,38 1,397 Adjusted EBITDA ,323 Adjusted EBITDA margin (%) Depreciation & amortization Operating profit Adjusted operating profit Adjusted operating profit margin (%) Gas subsidies as % of operating profit Carbon income from gas-fired projects as % of operating profit Operation assumptions Consolidated power capacity at year end (MW) 1,19 1,19 1,19 1,19 2,228 3,268 Consolidated power capacity, weighted average (MW) 1,19 1,19 1,19 1,19 1,416 2,315 Consolidated heat energy capacity at year end (MW) 1,45 1,45 1, ,778 2,398 Consolidated heat energy capacity, weighted average (MW) 1,45 1,45 1, ,83 Weighted average utilization hours 3,575 3,239 4,237 4,43 4,224 4,215 Gross electricity generation (GWh) 3,92 3,855 5,42 4,811 5,983 9,757 Net electricity generation (GWh) 3,44 3,748 4,96 4,682 5,818 9,479 Heat energy generation (kgj) 1,123 5,115 5,625 4,814 5,184 8,823 Weighted average gas-fired power on-grid tariff (incl. VAT) (Rmb/KWh) Weighted average heat tariff (incl. VAT) (Rmb/GJ) Weighted average natural gas price (incl. VAT) (Rmb/m3) Note: Adjusted revenue is revenue plus government subsidies on clean energy; adjusted operating profit is derived from adjusted revenue minus operating expenses (excl. concession cost); adjusted EBITDA is adjusted operating profit plus depreciation and amortisation

17 3 January 212 Wind-power business BJCE was the eighth-largest wind-power operator in the PRC as at the end of 21 in terms of consolidated connected capacity, at 1,59MW, according to the HydroChina Report. As at 31 December 21, the company s consolidated installed capacity accounted for 2.4% of China s total wind-power installed capacity, according to the WWEA. As at 3 June 211, it had 17 wind farms in operation with a consolidated installed capacity of 1,95MW, and 11 wind farms under construction with a consolidated capacity of 55.5MW. The wind farms in operation and under construction are strategically located in Inner Mongolia, Beijing, Ningxia, and Liaoning Province. China: top-15 wind-power developers consolidated capacity and market shares (21) Consolidated installed Company/group capacity (MW) Market share (%) Guodian/Longyuan 8, Huaneng Group 6, Datang Group 5, Huadian Group 2, China Guangdong Nuclear 2, Guohua/Shenhua 2, CPI Group 1, BJCE 1, China Resources Power Suntien CECIC China Windpower Ningxia Power Three Gorges Corp Tianrun Others 8, Total 44, Source: China Wind Energy Association BJCE: total consolidated installed wind-power capacity as at 3 June 211 Beijing 15MW 13.7% Source: Company Liaoning 49.5MW 4.5% Inner Mongolia MW 81.8% Wind-power development supported by government plans China s strong policy support for the industry has resulted in impressive results. The country surpassed the US to become the world s largest wind-power developer with total installed capacity of 44.7GW in 21, according to the WWEA. China s newly installed wind-power capacity reached 18.9MW in 21, which was a record high. Market-share breakdown of total installed wind capacity (21) Denmark 1.9% Canada 2.% UK 2.6% France 2.9% Italy 2.9% Rest of the world 13.6% India 6.6% Spain 1.5% Source: Global Wind Energy Council Germany 13.8% China 22.7% US 2.4% We believe the government will continue to support wind power in order to sustain its capacity growth, which should be underpinned by the upcoming finalised capacity targets for new energy for 215 and 22, including for wind power. The China Electricity Council (the country s top policy lobbyist for the electricity industry) forecasts a total of 18GW of connected wind-power capacity by 22. China: connected power-capacity targets GW E 22E Thermal ,16 Hydro Wind Nuclear Solar Source: CEIC, China Electricity Council From , we forecast 14GW of newly-connected capacity and 16.5GW of newly-installed capacity a year. However, we recognise the benefits of China s upgrade to a UHV transmission network after 214, which should help provide annual upside to both installedand connected-capacity numbers in the long term. By 22, we forecast China to have total installed capacity of 28GW and total connected capacity of 18GW. Our forecasts are broadly in line with the Global Wind Energy Council s (GWEC) total installedcapacity forecast (2GW) and the China Electricity Council s total connected-capacity forecast

18 3 January 212 China: wind-power annual net additions of installed and connected capacity (MW) 18, 16, 14, 12, 1, 8, 6, 4, 2, 29A 21A 211E 212E 213E 214E 215E Installed Connected 216E 217E 218E 219E 22E Source: CEIC, Daiwa forecasts Grid remains the bottleneck The development of wind power in China has faced some obstacles, with grid connections and transmission stability the key issues. The country plans to build a large UHV power transmission network aimed at helping to transmit renewable energy (wind and solar power) and hydro electricity from the north and west regions to the demand centres on the coast. We expect the grid-connection problem for wind power to be largely resolved when these UHV lines, especially those connecting the northern regions and central provinces, start operation as planned in UHV power networks planned and completed Humeng Zhundong Completed lines Planned lines (favorable to wind power) Planned lines (others) UHV AC lines UHV DC lines Wind-intensive areas Hami Hydro power areas Solar power areas Ximeng 17 Chifeng Western Inner Zhangbei Jiuquan Mongolia Northern 1 Shaanxi Eastern Qingzhou Jingbian Shanxi Ningxia Weifang Lianyungang Yongdeng Huainan Zhengzhou 7 Anhui Nanjing Shanghai Chongqing 6 Jingmen Northern Chengdu Zhejiang Ya an 2 8 Nanchang Western Zhejiang Jingping Xiangjiaba 11 Changsha Xiluodu 21 Yunan 9 Guangdong Nuozhadu Source: State Grid, Daiwa Note: Red lines are favourable for wind-power transmission

19 3 January 212 Details of the UHV lines Transmission No. UHV lines AC/DC Voltage (kv) capacity (MW) UHV AC lines planned in 12 th Five-Year Plan Three vertical lines 1 Ximeng, Inner Mongolia - Nanjing, Jiangsu AC 1, 9,4 2 Zhangbei, Hebei - Nanchang, Jiangxi AC 1, ~1, 3 Western Inner Mongolia - Changsha, Hunan AC 1, ~1, Three horizontal lines 4 Northern Shaanxi - Weifang, Shandong AC 1, ~1, 5 Jingbian, Shaanxi - Lianyungang, Jiangsu AC 1, ~1, 6 Ya'an, Sichuan - Shanghai AC 1, ~1, One circular line - not particularly critical to wind-power development 7 Huainan, Anhui - Jiangsu - Shanghai - Northern Zhejiang - Southern Anhui - Huainan, Anhui AC 1, n.a. UHV DC lines planned in 12 th Five-Year Plan 8 Jingping, Sichuan - Southern Jiangsu DC 8 7,2 9 Nuozhadu, Yunnan - Guangdong DC 8 5, 1 Hami, Xinjiang - Zhengzhou, Henan DC 8 7,2 11 Xiluodu, Yunnan - Western Zhejiang DC 8 7,5 12 Hami, Xinjiang - Chengdu, Sichuan DC 8 7,2 13 Jiuquan, Gansu - Changsha, Hunan DC 8 7,5 14 Zhundong, Xinjiang - Chongqing DC 11 7,5 15 Eastern Ningxia - Zhejiang DC 8 7,6 16 Hulunbeier, Inner Mongolia - Qingzhou, Shandong DC 8 7,5 17 Hulunbeier, Inner Mongolia - Northern Henan DC 8 7,5 18 Chifeng, Inner Mongolia - Jiangsu DC 8 7,5 Completed by Hami, Xinjiang - Yongdeng, Gansu AC 75 ~8, 2 Xiangjiaba, Sichuan - Shanghai DC 8 6,4 21 Yunnan - Guangdong DC 8 5, 22 Southeastern Shanxi - Jingmen, Hubei AC 1, 6, Source: State Grid, various media reports, compiled by Daiwa Wind-power regulations The provisions on the Administration of Power Generation from Renewable Energy, which came into effect on 5 January 26, state that wind-power projects with installed capacity of 5MW or above are subject to approval by the NDRC. Those with capacity below 5MW are subject to local government approval only. However, the NDRC now seems to have centralised approval rights for wind-power projects regardless of project scale since early 211, when the National Energy Bureau (NEB) (part of the NDRC) announced the first batch of central governmentapproved wind-power projects up to 26.8GW. We believe the centralisation of approvals is aimed at tightening approval standards and improving project quality. On-grid tariffs The wind power on-grid tariff is set by the NDRC. The country is divided into four wind-power regions, according to the status of wind power and the conditions for construction of wind-power projects; and different standards for on-grid tariffs are determined for the four wind-power regions, which are Rmb.51/kWh, Rmb.54/kWh, Rmb.58/kWh or Rmb.61/kWh, for regions 1-4 respectively. China: benchmark wind-power on-grid tariff details On-grid tariff Region (Rmb/KWh) Areas Region I.51 Inner Mongolia (excl. Chifeng, Tongliao, Xiang'an, Hulunbeier); Xinjiang (incl. Urumqi, Yili, Changji, Kelamayi, Shihezi) Region II.54 Hebei (incl. Zhangjiakou & Chengde); Inner Mongolia (incl. Chifeng, Tongliao, Xiang'an, Hulunbeier); Gansu (incl. Zhangye, Jaiyuguan, Jiuquan) Region III.58 Jilin (incl. Baicheng, Songyuan); Heilongjiang (incl. Jixi, Shuangyashan, Qitaihe, Suihua, Yichun, Daxinganling); Gansu (excl. Zhangye, Jaiyuguan, Jiuquan); Xinjiang (excl. Urumqi, Yili, Changji, Kelamayi, Shihezi); Ningxia Region IV.61 All other regions Source: NDRC Dispatch priority As a non-adjustable power-generation unit, windpower projects receive the highest priority for electricity dispatch. Pursuant to the Measures for the Dispatch of Energy Saving Power (for trial), the order of the power dispatch priority enjoyed by power generation units is as follows: 1) non-adjustable powergeneration units utilising renewable fuels, b) adjustable power-generation units utilising renewable fuels, 2) nuclear-power generation units, 3) co-generation units and resources using comprehensive utilisation powergeneration units, 4) gas-fired power-generation units, 5) other coal power-generation units, including cogeneration units without heat load, and 6) oil-fired power-generation units. The carbon-trading mechanism The CDM is a carbon-trading mechanism through which public or private entities can purchase CERs from CDM projects and use these CERs to comply with their domestic emission-reduction targets, or sell them in the open market pursuant to the Kyoto Protocol, which the PRC Government ratified in August 22. Meanwhile, VERs have emerged as a carbon-credit trading market outside the Kyoto Protocol regime. VERs are voluntary and not mandated by any law or regulation, but originate from a purchaser s desire to take an active part in climate-change mitigation efforts. BJCE sells VERs attributable to electricity output from projects before these projects are registered as CDM projects with the CDM Executive Board, and from other projects that are not eligible to be registered as CDM projects. As at 3 June 211, the company had 16 projects registered with the CDM Executive Board, two of which were gas-fired co-generation projects; the remainder were wind-power projects. The income from CERs and VERs significantly improves the economic viability of the projects. The income from CERs and VERs together accounts for 22%, 21%, and 6% of our respective total group operating-profit forecasts for BJCE for 211, 212, and