Thursday, September 27, 2007

Citi: Food 4 Thoughts: China Wind Power Industry - Sexy Growth but Not Risk Free

Citigroup Asian Utility Research
China Wind Power Industry - Sexy Growth but Not Risk Free

New news:

* A Food-for-Thought Investor Luncheon Event — We hosted the event on 25 Sep 2007 with more than 70 investors discussing China Wind Energy with speakers: 1) Alex Tancock, general manager of a wind power consultant firm Wind Prospect (HK) with experience in the UK, Australia and China; and 2) Yuchuan Tian, managing director of Hong Kong Energy (Holdings) Ltd, the renewable energy arm of Hong Kong Construction (190 HK, NR).

* High growth potential — China is the fifth-largest global wind market with 1,700MW by end-2006. Wind Prospect forecasts this capacity will rise to 30,000MW by 2020, implying a CAGR of 23% pa. Most of the increment would be in Northeast China with high wind speed and large load.

* Tariffs setting to be a key Based on Wind Prospect, plants larger than 50MW are of limited profitability as they are granted on competitive biddings; but, projects smaller than 50MW each are determined at the local level, offering 5-12% project return, though PPAs are unlikely in place until after commissioning. Big projects are often broken up into 49.5MW each to avoid bidding.

* Risks — Key risks are (i) wind mast and data collection are rarely to global standards, (ii) data in feasibility report could be questionable, (iii) local entity may choose non-IEC compliant local turbines, (iv) delayed completion, (v) problems in grid connection and (vi) uncertain tariffs before completion.

* Rewards — Key rewards are (i) projects could be built quickly, (ii) less uncertainty after getting local government support, (iii) huge market in China, (iv) possible equipment cost cut once domestic manufacturers are familiar with them, and (iv) extra profit from CDM and carbon credits.

* Hong Kong Energy (Holdings) Ltd — It is an early bird in PRC wind power with one operational wind farm in Heilongjiang, with two more (in Hebei and Inner Mongolia) planned. They also invest in waste-to-energy and biofuel projects.

* Stock implications — PRC IPPs should invest more in wind power plants as the government requires those with over 5,000MW to have 8% of capacity from renewable energy. Among the five HK listed PRC IPPs, Huadian and CR Power have operational wind power plants and Datang has a farm under construction.