Chinese Independent Power Producers

Further challenges in 2010

Outlook not rosy, in spite of significant 2009 underperformance
The Chinese IPPs have underperformed MSCI China by between 20% and 66% during 2009. However, we think that coal prices could continue to have a negative effect on share price performance in early 2010, in spite of valuations looking attractive in some cases. China Resources Power (CR Power), whose share price has been affected by development problems of its Inner Mongolian coal mine, stands out as being relatively attractive, in our view.

Mining Team expects coal prices to climb further in 2010
UBS is lifting its 2010 Qinhuangdao spot coal price forecast to Rmb730/t from Rmb675/t. The National Development and Reform Commission (NDRC) has just fine-tuned on-grid tariffs for power generators, and we do not think tariff increases to compensate for higher coal prices are either imminent or able to be relied upon.

Positives: tariff cut concerns are reduced and demand is strong Concerns about the potential of tariff cuts put pressure on share prices during Q409 but actual tariff adjustments announced were either minor reductions or increases, and we think removal of this overhang is positive. Power demand also looks quite strong, which could lead to upside in consensus utilisation rate assumptions.

Top pick is China Resources Power; least preferred is Datang

We think the higher returns achieved by CR Power compared to its peers greatly reduce its earning sensitivity to coal prices increases and place it best to fund future growth from internal cash flows. It is the only one of

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