Explosive growth of nuclear power —— Optimism on power equipment manufacturers Chen Guoxi, Jiao Jian May 2009

Explosive growth of nuclear power —— Optimism on power equipment manufacturers

Chen Guoxi, Jiao Jian

May 2009

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申万研究 2

1. Current capacity plan is too conservative

2. Nuclear power will be in the spotlight

3. A Rmb 725 billion market

4. Recommend: Dongfang (1072 HK) and Shanghai Electric (2727 HK)

Contents

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申万研究 3

Source: NBS, CEIC, SWS Research

1.1 Current capacity plan: 1.5 million MW in 2020

1.5 million MW capacity in 2020 1/3 of renewable energy

Installed capacity in 2020: 1.5 million MW from 0.8 million MW in 2008

CAGR of installed capacity: 5.5%

Hydro: 0.3 mn MW; Wind: 0.1 mn MW; Nuclear: 0.07 mn MW

900, 000

1, 500, 000

0200, 000400, 000600, 000800, 000

1, 000, 0001, 200, 0001, 400, 0001, 600, 000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2010

E

2020

E

Capaci ty of power generati on (MW)

68%

20%7%5%

Thermal Hydro Wi nd Nucl ear

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申万研究 4

2.1x electricity elasticity during industrialization, while 0.9x post industrialization in US

1.3x electricity elasticity during industrialization, while 1.0x post industrialization in Japan

High electricity demand during industrialization with high proportion of heavy industries

Source: EIA, SWS Research

1.2 High electricity demand during industrialization

2.1x during industrialization in US 1.3x during industrialization in Japan

0. 000. 501. 001. 50

2. 002. 503. 003. 50

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

El ect r i ci t y coffi ci ent Average

0. 00

0. 50

1. 00

1. 50

2. 00

2. 50

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

El ect r i ci t y coffi ci ent Average

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申万研究 5

Average electricity elasticity between 2001 and 2007: 1.3x

Only 0.6x elasticity in 2008, will it remain at low level?

Electricity demand was obviously higher in costal areas, in tandem with industrialization

Source: Thomson Reuters, CEIC, SWS Research

1.3 1.3x elasticity between 2001 and 2007

1.3x in China between 2001 and 2007 Higher electricity demand in costal areas

0. 00

0. 50

1. 00

1. 50

2. 00

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

El ect r i ci t y el ast i ci t y

0. 0

0. 5

1. 0

1. 5

2. 0

2. 5

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Guangdong Zhej i ang J i angsu Chi na

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申万研究 6

We expect higher GDP growth in central regions

Central regions are in their industrialization process

Electricity demand will maintain strong in China


1.4 Industrialization in central regions

Higher GDP growth Industrialization in central regions

0. 0%2. 0%4. 0%6. 0%8. 0%

10. 0%12. 0%14. 0%16. 0%

2006 2007 2008

Chi na Henan Hubei Hunan Shanxi Anhui J i angxi

0. 0%

10. 0%

20. 0%

30. 0%

40. 0%

50. 0%

60. 0%

70. 0%

Shanxi Anhui J i angxi Henan

2006 2007 2008

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申万研究 7


1.5 Strong electricity demand despite energy saving

Stable electricity demand per GDP Lower gross coal consumption

China aims to reduce energy consumption per GDP by 20% in 5 years

But electricity consumption per GDP rose in 2006 and 2007

Primary means is lower coal consumption rate

0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008125, 000. 00

130, 000. 00

135, 000. 00

140, 000. 00

145, 000. 00

150, 000. 00

155, 000. 00

160, 000. 00

Energy consumpt i on per GDP (TCE per RMB mn)

El ect r i ci t y consumpt i on per GDP (KWH per RMB mn)

300

310

320

330

340

350

360

370

2000 2001 2002 2003 2004 2005 2006 2007 2008

Gross coal consumpt i on (g/ KWH)

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申万研究 8

Source: Thomson Reuters, SWS Research

1.6 Current plan is too conservative

Electricity elasticity under current plan: 0.7x only

Our view: 1.1x elasticity

Our assumption: 1. GDP growth: 7.8% CAGR

2. elasticity: 1.1x in next decade

3. Utilization: 4730 hours

Current plan too conservative 40% more capacity addition

0. 9

1. 51. 8

0. 0

0. 5

1. 0

1. 5

2. 0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2010

E

2020

E(C

urre

nt)

2020

E

I nstal l ed capaci ty (mn MW)

0. 7

1. 0

0. 0

0. 2

0. 4

0. 6

0. 8

1. 0

1. 2

Current pl an Our f orecast

Cpapci ty addi t i on (mn MW)

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申万研究 9

Source: SWS Research

1.6 Current plan is too conservative

Current plan too conservative

We don’t believe electricity demand will be sluggish for a decade

Capacity plan to be revised up, 40% more capacity addition

We’re bullish on demand for power generation equipments

0. 70 0. 80 0. 90 1. 00 1. 10 1. 20 1. 304% 1. 0 1. 1 1. 1 1. 2 1. 3 1. 3 1. 45% 1. 1 1. 2 1. 3 1. 3 1. 4 1. 5 1. 66% 1. 2 1. 3 1. 4 1. 5 1. 6 1. 7 1. 87% 1. 3 1. 4 1. 6 1. 7 1. 8 2. 0 2. 18% 1. 4 1. 6 1. 7 1. 9 2. 1 2. 2 2. 49% 1. 6 1. 7 1. 9 2. 1 2. 3 2. 6 2. 810% 1. 7 1. 9 2. 1 2. 3 2. 6 2. 9 3. 2

El asti ci ty

GDP growth

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申万研究 10





Contents

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申万研究 11

-500, 000, 000

1, 000, 000, 0001, 500, 000, 0002, 000, 000, 0002, 500, 000, 0003, 000, 000, 0003, 500, 000, 000

Chi na US I ndi a Russi a Germany J apan UK

carbon_2000 carbon_2007

Source: Point Carbon, SWS Research

2.1 Burden to reduce CO2 emission

Rapid CO2 emission growth in China Power generation accounted 22%

China emitted most CO2 in 2007

Power generation has greatest potential to reduce emission

Copenhagen Climate Congress at Mid December, 2009

22%22%

14%

11%25%

6%

Power generat i on Manuf acture Const ruct i onTransportat i on Forest ry Others

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申万研究 12


2.2 Advantages over wind and solar

Competitive cost No constrained by resources

Nuclear power is a low cost source

Wind and solar is not unlimited

Nuclear power will be a main substitute for thermal power

0

0. 5

1

1. 5

2

2. 5

Hydro Wi nd Sol ar

Current capaci t y (mn MW) Resources t o be devel oped (mn MW)

0

0. 2

0. 4

0. 6

0. 8

1

1. 2

1. 4

1. 6

Daya Bay Qi nshanPhase I

Qi nshanPhase I I

Qi nshanPhase I I I

Li n' aoPhase I

Ti anwan

Nucl ear Thermal Wi nd Sol ar

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申万研究 13

Source: EIA, Thomson Reuters, SWS Research

2.3 Only 6 stations in operation

8,850 MW capacity at present Accounted for 2% of total electricity

6 stations and Nuclear only accounted 2% of electricity production in 2008

Time to adjust energy structure

Significant potential to develop nuclear power in China

0100020003000400050006000700080009000

10000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Nucl ear power capaci t y (MW)

0. 0%

10. 0%

20. 0%

30. 0%

40. 0%

50. 0%

60. 0%

70. 0%

80. 0%

90. 0%

Chi na I ndi a UK US German J apan France

% of nucl ear power

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申万研究 14


2.4 Above 70,000MW in 2020

70,000MW capacity in 2020 Stations to be completed before 2014

We expect capacity of nuclear power above 70,000MW, 3.8% of total capacity in 2020

100,000MW is possible with cost decrease

21,100MW will be added in 5 years

Compl eti on Operator Locati on Capaci ty (MW)

2010 CGN Li ng' ao 3 1080

2011 CNNC Qi nshan 6 650

2011 CGN Li ng' ao 4 1080

2012 CNNC Qi nshan 7 650

2012 CGN Hongyanhe 1 1080

2012 CGN Ni ngde 1 1080

2013 CNNC Sanmen 1 1100

2013 CGN Ni ngde 2 1080


2013 CGN Yanj i ang 1 1080

2013 CGN Tai shan 1 1700

2013 Huaneng Shi daowan 2000

2013 CNNC Fanj i ashan 1 1000

2014 CNNC Sanmen 2 1100

2014 Chi na Power Hai yan 1 1100

2014 CGN Ni ngde 3 1080

2014 CGN Yanj i ang 2 1080


2014 CNNC Fanj i ashan 2 1000

(MW) Start Compl eti on Under constructi on Capaci ty

2000 2268

2005 3460 4680 5580 6948

2010 12440 5580 12440 12528

2015 20000 12440 20000 24968

2020P 18000 20000 18000 44968

2020E 30000 70000

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申万研究 15





Contents

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申万研究 16

Source: NBS, CEIC, Thomson Reuters, SWS Research

3.1 Need Rmb725 billion investment

Average investment: Rmb11,859 per KW Cost breakdown of nuclear power station

Average investment of Rmb11,859 per KW

Total investment of Rmb725 billion based on 70,000 MW in 2020

Rmb 167 billion for nuclear island and Rmb 109 billion for conventional island

0

2000

4000

6000

8000

10000

12000

14000

16000

Daya Bay Qi nshanPhase I

Qi nshanPhase I I

Qi nshanPhase I I I

Li n' aoPhase I

Ti anwan

I nvestment per KW (Rmb) Average

23%15%

12%

50%

Nucl ear i sl and Convent i onal i sl and Auxi l i ary equi pments Others

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申万研究 17


3.2 Breakdown of equipment investment

Nuclear island Conventional island

Main equipments: pressure vessel, evaporator, pressurizer, pumps and internals

Steam turbine and generator accounts for 42% investment

Nucl ear i sl and

Pressure vessel 23%

Pi pe 20%

Evaporator 17%

Val ves 12%

Pumps 8%

Reactor i nternal s 6%

Control col umn 4%

Boron i nj ect i on tank/ Safety i nj ect i on tank 2%

Pressuri zer 2%

Others 5%

24%18%

58%

Steam turbi ne Generator Others

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申万研究 18


3.3 High localization capability

Market share of main equipments

High localization of major equipments

Dongfang: steam turbine and generator

Shanghai Electric: Evaporator and reactor internals

Harbin: behind Dongfang and Shanghai

Pressure vessel Evaporator Pressuri zerBoron i nj ecti on tank/Safety

i nj ecti on tankPumps Reactor i nternal s Steam turbi ne Generator

Dongfang 17. 6% 29. 4% 25. 0% 35. 0% 15. 8% 0. 0% 51. 6% 55. 2%

Shanghai El e 17. 6% 45. 6% 21. 4% 5. 0% 0. 0% 76. 7% 16. 1% 24. 1%

Harbi n 0. 0% 8. 8% 21. 4% 0. 0% 5. 3% 0. 0% 19. 4% 13. 8%

Areva 11. 8% 8. 8% 10. 7% 15. 0% 36. 8% 16. 7% 0. 0% 0. 0%

Mi tsubi shi 5. 9% 0. 0% 0. 0% 0. 0% 21. 1% 0. 0% 6. 5% 0. 0%

Al stom 0. 0% 0. 0% 0. 0% 0. 0% 0. 0% 0. 0% 6. 5% 6. 9%

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申万研究 19

Total demand: Rmb92.5 billion

Total new contacts in 2008: Rmb33.0 billion

Rmb 60 billion new contracts in future

Source: Company, SWS Research

3.4 Full order in hand

Demand based on market share New contracts in 2008

0. 05. 0

10. 015. 020. 025. 030. 035. 040. 045. 050. 0

Dongf ang Shanghai Harbi n

Demand (Rmb' b)

0

2

4

6

8

10

12

14

16

18

Dongf ang Shanghai Harbi n0. 0%

5. 0%

10. 0%

15. 0%

20. 0%

25. 0%

Nucl ear (Rmb' b) As % of t otal new cont ract s

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申万研究 20





Contents

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申万研究 21


4.1 Dongfang: leader in nuclear power

New contracts in 2008 37% contribution in 2012

Nuclear and wind accounted for 40% new contacts

We forecast 37% revenue from nuclear power in 2012

Revenue CAGR: 25.6%; NP CAGR: 30.5%

45%

8%

15%24%

8%

Thermal Hydro Wi nd Nucl ear Others

-

10, 000. 0

20, 000. 0

30, 000. 0

40, 000. 0

50, 000. 0

60, 000. 0

70, 000. 0

2008 2009E 2010E 2011E 2012E0. 0%

5. 0%

10. 0%

15. 0%

20. 0%

25. 0%

30. 0%

35. 0%

40. 0%

Revenue (Rmb' m) % f rom nucl ear power

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申万研究 22


4.2 Shanghai Electric: transferee of AP1000

Revenue from nuclear island 16.1% revenue CAGR

Transferee of AP1000 – 3rd generation of nuclear power

6 sets capacity in Lingang in 2012

Revenue CAGR: 16.1%; Net profit CAGR: 22.9%

0

200

400

600

800

1000

1200

2006 2007 2008

Nucl ear i sl and (Rmb' m)

0

20, 000

40, 000

60, 000

80, 000

100, 000

120, 000

2006 2007 2008 2009E 2010E 2011E 2012E0. 0

5. 0

10. 0

15. 0

20. 0

25. 0

30. 0

35. 0

Revenue (Rmb' m) YoY growth (%)

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申万研究 23

56%

14%

18%4%8%

Thermal Hydro Engi neeri ng servi ces Nucl ear Others


4.3 Harbin power: sensitive to thermal power

New contracts in 2008 8.7% revenue CAGR

Nuclear accounted 4% of new contracts, much lower than peers

Low market share in nuclear island

Revenue CAGR: 8.7%; Net profit CAGR: 8.6%

-

5, 000. 0

10, 000. 0

15, 000. 0

20, 000. 0

25, 000. 0

30, 000. 0

35, 000. 0

40, 000. 0

45, 000. 0

2006 2007 2008 2009E 2010E 2011E 2012E- 6. 00%- 4. 00%- 2. 00%0. 00%2. 00%4. 00%6. 00%8. 00%10. 00%12. 00%14. 00%

Revenue (Rmb' m) YoY growth (%)

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申万研究 24


4.4 Undemanding valuation

Peer valuation

Buy Dongfang: TP: HK$33.28 at 18.0x FY09 PER, 34% upside

Buy Shanghai: TP: HK$4.16 at 16.0x FY09 PER, 28% upside

Neutral Harbin Power: TP: HK$7.60 at 8.0x FY09 PER, 10% upside

FY08 FY09 FY10 FY08 FY09 FY10 FY08 FY09 FY101072 HK Dongfang El e 25. 45 5, 177 29. 3 13. 7 11. 0 0. 6 1. 7 2. 1 -78. 6 183. 9 24. 9 7. 2 20. 82727 HK Shanghai El e 3. 16 15, 306 13. 0 12. 1 10. 0 0. 2 0. 2 0. 3 -10. 4 9. 5 20. 9 1. 6 12. 31133 HK Harbi n Power 7. 17 1, 274 7. 5 7. 5 7. 1 0. 8 0. 8 0. 9 -32. 6 12. 0 6. 6 1. 0 13. 6

Congl emateSI E GR Si emens 50. 04 61, 735 34. 7 10. 9 10. 8 6. 4 4. 6 4. 6 -53. 8 -28. 1 0. 3 2. 3 20. 5ALO FP Al stom 44. 93 17, 506 10. 1 10. 4 11. 9 3. 9 4. 3 3. 8 28. 4 11. 5 -12. 8 3. 9 43. 8GE US GE 12. 86 136, 182 8. 4 12. 9 13. 6 1. 7 1. 0 0. 9 -19. 0 -42. 1 -5. 4 1. 6 15. 7ABB US ABB 14. 87 34, 540 n. a. 13. 6 14. 0 n. a. 1. 1 1. 1 n. a. n. a. -2. 6 n. a. n. a.7011 J P Mi tsubi shi Heavy 338 11, 977 41. 3 130. 6 41. 6 7. 2 2. 6 8. 1 -60. 5 -64. 1 213. 7 0. 8 1. 86502 J P Toshi ba 380 12, 922 16. 9 n. a. 22. 5 -106. 2 -24. 8 16. 9 n. a. -76. 6 n. a. 1. 8 -46. 8

Nucl ear PowerCEI FP Areva 406. 15 19, 426 21. 1 17. 7 16. 4 16. 6 22. 9 24. 7 -20. 7 37. 8 7. 9 1. 9 8. 7

Wi nd PowerVWS DC Vestas 400 14, 770 14. 7 21. 1 17. 6 2. 8 2. 5 3. 1 75. 8 -8. 2 20. 2 3. 8 29. 4GAM SM Gamesa 15. 24 5, 004 19. 6 24. 6 20. 3 1. 3 0. 6 0. 8 29. 1 -53. 3 21. 4 2. 0 23. 2SUEL I N Suzl on 76. 65 2, 325 37. 3 9. 5 11. 5 7. 1 8. 1 6. 6 18. 0 14. 6 -18. 0 4. 9 17. 8RPW GR Repower 86. 50 1, 071 53. 5 18. 1 17. 0 2. 4 4. 8 5. 1 161. 0 96. 2 6. 5 3. 6 8. 3658 HK Chi na Hi gh Speed 13. 28 2, 133 14. 8 17. 5 13. 3 0. 6 0. 7 0. 9 93. 1 19. 6 31. 7 2. 8 20. 3HSN LN Hansen 131 1, 333 16. 0 19. 6 12. 5 0. 1 0. 1 0. 1 16. 7 11. 9 57. 4 1. 2 8. 0

FY08 ROE(%)

PER (x) EPS (Local currency) EPS growth (%) FY08 PBR(x)

Ti cker NameShare pri ce (Local

currency)Market Cap

(US$' m)

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申万研究 25


4.5 Our view on major subsectors

Auto & machinery: Gary Chen

Subsector Rati ng Recommendati on Our vi ew

Power equi pment Overwei ghtDongfang (1072 HK)Shanghai (2727 HK)

1. El ectri ci ty demand wi l l remai n strong ami d i ndustri al i zat i on i n central regi ons;2. Nucl ear power wi l l be a maj or subst i tute f or tradi t i onal thermal power;3. Dongfang and Shanghai El ectri c wi l l see remarkabl e growth of revenue f rom nucl ear power.

Construct i on equi pment Overwei ght CNHTC (3808 HK)1. Demand wi l l recover f urther wi th growth of i nvestment i n real estate;2. Export and i mport ri sks on the upsi de;3. Possi bl e government pol i ci es to support CVs.

Auto Overwei ght Denway (203 HK)1. Strong auto sal es underpi nned by purchasi ng power and i s sustai nabl e;2. Demand for premi um model s to i ncrease wi th economy recovery and weal th eff ect;3. 20% val uati on di scount of Denway unj ust i fi ed.

Rai l way equi pment NeutralCSR Ti mes El ectri c(3898 HK)

1. Hi gh vi si bi l i ty of 20-30% earni ng growth i n fi ve years;2. Hi gh val uat i on wi th l i t t l e upsi de potenti al ;3. CSR Ti mes El ectri c has potenti al to add new appl i cat i on of i ts technol ogi es.

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申万研究 26

The views expressed in this report accurately reflect the personal views of the analyst. The analyst declares that neither he/she nor his/her associate serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the analyst. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analyst, the Company or the group company(ies). A group company(ies) of the Company confirm that they, whether individually or as a group (i) are not involved in any market making activities for any of the listed corporation reviewed; or (ii) do not have any individual employed by or associated with any group company(ies) of the Company serving as an officer of any of the listed corporation reviewed; or (iii) do not have any financial interest in relation to the listed corporation reviewed or (iv) do not, presently or within the last 12 months, have any investment banking relationship with the listed corporation reviewed.

Undertakings of the AnalystChen GuoxiI am conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China or have equivalent professional competence. I issue this report independently and objectively with due diligence. This report distinctly and accurately reflects my research opinions. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein. Information Disclosure with respect to the CompanyThe Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact [email protected] for the relevant disclosure materials.

Introduction of Share Investment RatingSecurity Investment Rating ：When measuring the difference between the markup of the security and that of the market’s benchmark within six months after the release of this report, we define the terms as follows: Buy ： with a markup more than 20% better than that of the market ；Outperform ： With a markup 5% to 20% better than that of the market ；Neutral ： with a markup less than 5% better or worse than that of the market ；Underperform ： with a markup more than 5% worse than that of the market.Industry Investment Rating:When measuring the difference between the markup of the industry index and that of the market’s benchmark within six months after the release of the report, we define the terms as follows: Overweight ： Industry performs better than that of the whole market ；Neutral ： Industry performs about the same as that of the whole market ；Underweight ： Industry performs worse than that of the whole market.

We would like to remind you that different security research institutions adopt different rating terminologies and rating standards. We adopt the relative rating method to recommend the relative weightings of investment. The clients’ decisions to buy or sell securities shall be based on their actual situation, such as their portfolio structures and other necessary factors. The clients shall read through the whole report so as to obtain the complete opinions and information and shall not rely solely on the investment ratings to reach a conclusion. The Company employs its own industry classification system. The industry classification are available at our sales personnel if you are interested.CSI300 is the benchmark employed in this report for A-share listed firms and FXI/SYWG Triple-C Index is the benchmark employed in this report for HK-listed firms.

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申万研究 27

This report is to be used solely by the clients of Shenyin & Wanguo Securities Research Institute Co, Ltd. (hereinafter referred to as the “Company”). The Company will not deem any other person as its client notwithstanding his receipt of this report.This report is based on published information which the Company believes to be reliable, however, the authenticity, accuracy or completeness of such information is not warranted by the Company. The materials, tools, opinions and speculations contained herein are for the clients’ reference only, and are not to be regarded or deemed as an invitation for the sale or purchase of any security or other investment instruments. The clients understand that the text message reminder and telephone recommendation are no more than a brief communication of the research opinions, which are subject to the complete report released on the Company’s website (http://www.sw108.com). The clients may ask for follow-up explanations if they so wish.The materials, opinions and estimates contained herein only reflect the judgment of the Company on the day this report is released. The prices, values and investment returns of the securities or investment instruments referred to herein may fluctuate. At different periods, the Company may release reports which are inconsistent with the materials, opinions and estimates contained herein. The clients shall consider the Company’s possible conflict of interests which may affect the objectivity of this report, and shall not base their investment decisions solely on this report. The investment and services referred to herein may not be suitable for certain clients and shall not constitute personal advice for individual clients. The Company does not ensure that this report fully takes into consideration of the particular investment objectives, financial situations or needs of individual clients. The Company strongly suggests the clients to consider themselves whether the opinions or suggestions herein are suitable for the clients’ particular situations; and to consult an independent investment consultant if necessary.Under no circumstances shall the information contained herein or the opinions expressed herein forms an investment recommendation to anyone. Under no circumstances shall the Company be held responsible for any loss caused by the use of any contents herein by anyone.Independent investment consultant should be consulted before any investment decision is rendered based on this report or at any request of explanation for this report where the receiver of this report is not a client of the Company.

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申万研究 28

Shanghai SWS Research & Consulting Co., Ltd.

Gary Chen

[email protected]

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Explosive growth of nuclear power —— Optimism on power equipment manufacturers Chen Guoxi, Jiao Jian May 2009