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What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th , 2009

What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

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Page 1: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

What’s next after demand bottoming out?—— 2H investment strategy for coal and power sector

Wilson Chen

May. 25th, 2009

Page 2: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 2

Logics

Industrial structure optimizing

Industry Relocation

More Favorable energy industry

structure

More balanced regional energy consumption

Coal

1.Resources in West become more valuable

2.Downstream integration guarantee demand

Power

1.More Exposure in Middle China

2.Less Exposure in East China

Demand bottoming up

Not large rebound

Cost pass-through mechanism

Supply side discipline

Favor Coal for stable spot price

1. Prefer spot exposure

2.Catch the mid-cap valuation gap

Neutral in Power

1. Diversified unit portfolio

2.Catch the mid-cap valuation gap

Long term Short term

Focus on industry structure Supply and demand

Page 3: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 3

1. The implication to energy sector of industry relocation——

A more harmonious relationship between Coal and Power sector

2. Demand bottoming up——

Supply side discipline and cost pass-through mechanism:Long Coal

3. Stock pick——

Gold panning in mid cap and low valuation stock

Contents

Page 4: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 4

1.1 Coal and power——a tug of war

200300400500600700800900

10001100

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Datong Bl ended Shanxi Bl ended

Gross margi n of coal - fi red power sector

- 5. 00%

0. 00%

5. 00%

10. 00%

15. 00%

20. 00%

25. 00%

Gross margi n

Gross margi n of coal sector

0. 00%10. 00%

20. 00%30. 00%

40. 00%

1-Fe

b1-

Apr

1-Ju

n1-

Aug

1-Oc

t1-

Dec

1-Fe

b1-

Apr

1-Ju

n1-

Aug

1-Oc

t1-

Dec

1-Fe

b1-

Apr

1-Ju

n1-

Aug

1-Oc

t1-

Dec

1-Fe

b

Gross margi nSource : Sxcoal, NBS,SWS Research

Page 5: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 5

What happened in the coal contract negotiation?

Power:Loss compensation

Coal:policy cost pass through

Results:10% hike for key contract

Time:Pending the resources tax determine

Source : Sxcoal, Company Reports,SWS Research

2005 2006 2007 2008 2009EAverage QHD Spot Price (5500 kcal) 426 430 486 761 560Shenhua's Seaborne Contract Price (inc. VAT) 359 378 407 468 511Price Gap 19% 14% 19% 63% 10%

Page 6: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 6

1.2 Industry Relocation: A better tomorrow?

Demand growth region closer to mines

Upstream and downstream integration

A more harmonious relationship

Page 7: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 7

Unbalanced regional energy consumption growth

South

0. 00

1000. 00

2000. 00

3000. 00

4000. 00

5000. 00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

South

East

0. 00

1000. 00

2000. 00

3000. 00

4000. 00

5000. 00

6000. 00

7000. 00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

East

Mi ddl e

0. 00

1000. 00

2000. 00

3000. 00

4000. 00

5000. 00

6000. 00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Mi ddl e

CAGR=10%

CAGR=13%CAGR=14%

Source : CEIC, SWS Research

Page 8: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 8

Unbalanced regional coal production create bottleneckCoal transportati on became very i mportant

0%20%

40%60%

80%

Jan-

06

Mar-

06

May-

06

Jul-

06

Sep-

06

Nov-

06

Jan-

07

Mar-

07

May-

07

Jul-

07

Sep-

07

Nov-

07

Jan-

08

Mar-

08

May-

08

Jul-

08

Sep-

08

Nov-

08

Jan-

09

Rai l way transportati on port i on Seaborne port i on

Coal transportation

Regi onal coal producti on and consumpti on porti on

4% 7%0%

16%

47%

6%

22%

4%

25% 22%

0. 00%10. 00%20. 00%30. 00%40. 00%50. 00%

BTT East South Mi ddl e The ThreeWest

Produti on Consumpti on

Source : CEIC, SWS Research

Page 9: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 9

A vision on energy consumption structure

a) By increasing the energy portion in

Central China

b)By increasing the alternative power generation units

Unit decomposition in 2008 Unit decomposition in 2020

Regi onal coal producti on and consumpti on porti on

4% 7%0%

20%

45%

4%

18%

2%

30%25%

0. 00%10. 00%20. 00%30. 00%40. 00%50. 00%

BTT East South Mi ddl e The ThreeWest

Produti on Consumpti on

Source : CEIC, CEC, SWS Research

82%

14%

2%

2%

Coal Hydro Nucl ear Wi nd

68%

20%

5%

7%

Coal Hydro Nucl ear Wi nd

Page 10: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 10

More balanced regional energy consumption

Source : CEIC,SWS Research

Regional coal consumption deficit

Major Deficit

Minor Deficit

Minor Surplus

Major Surplus

Major Deficit

Minor Deficit

Minor Surplus

Major Surplus

Page 11: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 11

Transportation bottleneck relief

Source : CEIC,SWS Research

Coal railway capacity increase in a larger scale than coal output.

0%

5%

10%

15%

20%

25%

30%

35%

40%

2004 2005 2006 2007 2008 2009E 2010E 2011E

Maj or rai l way upgrade, % hi ke of capaci t y Coal output hi ke%

Page 12: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 12

Upstream and downstream integration became realistic

Coal:

Downstream integration:

To ensure the downstream demand

Power:

Upstream integration:

a)To ensure cost stability

b)Newly established mines more valuable

Source : Company Reports, SWS Research

Current

Self sufficient

Outside purchase

2015E

Self sufficient

Outside purchase

Shenhua

Page 13: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 13

1.3 P&L of coal and power industries

New markets from Central pick-up;

New mines in West become valuable;

The premium from transportation;

Bargaining power

Bargaining power;

Consumption growth in Central China;

Higher spark spread

Utilization cut in coastal area;Coal

Power

Benefit

Loss

Loss

Benefit

Page 14: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 14

Recommended stock in the trend of industry relocation

Coal:We like the companies that

1)More potential in coal mine consolidation in the West

2)Less exposure in coastal area

3)Downstream integration

Recommended stock:

China Shenhua

1)Parent group has coal mines in Ningxia and Xinjiang

2)Least costal area exposure

3)20% revenue from power sector.

Shenhua China Coal YCMCosolidation in west 20 m tons N.A N.ASeaborne exposure 53.00% 78.00% 90.00%Down stream integration 20% revenue N.A N.A

Page 15: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 15

Recommended stock in the trend of industry relocation

Power: We like the companies that

More regional exposure in central China

Recommended stock:

China Power Interntional

Largest central exposure.

Cent ral uni t por t i on

0. 0%

20. 0%

40. 0%

60. 0%

80. 0%

100. 0%

CPI CRP Huaneng Datang Huadi an

Cent ral

Page 16: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 16

1. The implication to energy sector of industry shift——

A more harmonious relationship between Coal and Power sector

2. Thriver: Benefited from demand bottoming up——

Supply side discipline and cost pass-through mechanism:Long Coal

3. Stock pick——

Gold panning in mid cap and low valuation stock

Contents

Page 17: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 17

2.1 Demand bottoming up: worst is gone

Source : Sxcoal,SWS Research

PMI index rebound above 50 Daily input and output of QHD port indicated demand rebound

10

20

30

40

50

60

70

80

2005年7月

2005年9月

2005年11月

2006年1月

2006年3月

2006年5月

2006年7月

2006年9月

2006年11月

2007年1月

2007年3月

2007年5月

2007年7月

2007年9月

2007年11月

2008年1月

2008年3月

2008年5月

2008年7月

2008年9月

2008年11月

PMI index PMI Steel Index

300350400

450500550600650700

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Average daily input (k tons)

Average daily output (k tons)

Page 18: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 18

L-shaped or V-shaped? A deja-vu of 2000

Coal and Power downstream demand still weak in 2009E

Source : CEIC,SWS Research

Coal Demand (2.4% )

Non-ferrous Metals(8% )Ferrous Metals(1.2% )

Coal-fired Generation (1.8% )49%

Chemicals(3% ) Cements(9% )

18% 5% 7%12% 9% 8%6%

Generation (3.6% )

Page 19: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 19

2.2 Supply side discipline:Coal

Source : Sxcoal,SWS Research

0

200

400

600

800

1000

2007

-01

2007

-04

2007

-07

2007

-10

2008

-02

2008

-05

2008

-08

2008

-11

2009

-02

-100%

-50%

0%

50%

100%

150%

Monthly output MoM grow th

050

100150200250300

2007

-01

2007

-04

2007

-07

2007

-10

2008

-02

2008

-05

2008

-08

2008

-11

2009

-02

-200%-100%0%100%200%300%400%500%

Small rural mines MoM grow th

2006 2007 2008E 2009E 2010E 2011EState-owned Key 1119 1240 1407 1505 1611 1724YOY growth 10.81% 13.47% 7.00% 7.00% 7.00%Utilization rate 96.00% 102.60% 102.48% 101.92% 100.89% 107.95%State-owned Local 320 324 396 416 428 441

YOY growth 1.25% 22.22% 5.00% 3.00% 3.00%Utilization rate 109.74% 99.36% 109.39% 106.13% 100.55% 103.57%

Township 892 959 888 799 879 967YOY growth 7.51% -7.40% -10.00% 10.00% 10.00%Utilization rate 106.76% 107.51% 92.60% 80.49% 87.05% 95.75%

Total 2331 2523 2691 2720 2918 3132YOY growth 8.24% 6.66% 1.60% 7.27% 7.32%Utilization rate 99.61% 103.14% 99.19% 95.06% 96.23% 103.27%

We turned down the utilization rate of Township Mines

What has changed from 1999 to 2009?

1.Government’s attitude to coal industry.

2.Industry concentration ratio largely increase

3.Stronger balance sheet and cash flow.

Monthly clean coal output in Shanxi Monthly clean coal output in township mines

Page 20: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 20

2.2 Supply side discipline:IPPs

Source : CEC,Company reports, SWS Research

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

19

851

986

19

871

988

19

891

990

19

911

992

19

931

994

19

951

996

19

971

998

19

992

000

20

012

002

20

032

004

20

052

006

20

072

008

E2

009

E2

010

E

4000

4200

4400

4600

4800

5000

5200

5400

5600

Utilization hours Generation growthCapacity growth

42%

27%

31%

Big five Local large companies Rest

Why IPPs continue the aggressive capex?

1.To gain larger market share

2.Political incentive

3.Easy financing access

Capex plan still aggressive for major IPPs

While demand is bottoming out in 2009,utilization rate is not Market share of electric power industry

0

10

20

30

40

50

60

Huaneng Datang Huadi an CRP

2008 2009E 2010E

Page 21: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 21

Coal sector: policy cost and material cost past through;

Pricing mechanism is more flexible.

2.3 Cost pass through mechanism:limited space for spot coal price decline

Power sector: inefficient in the marketization of on-grid tariff

Sell side tariff hike will be a good entry point.

Direct sell

Transparent transmission and distribution tariff

systemMarket-based tariff setting mechanism

Selling tariff hike

Coal cost linkage mechanism

2005 2006 2007 2008 2009E 1Q09Average QHD Spot Price (5500 kcal) 426 430 486 761 560 550

Start

Page 22: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 22

What is changing the expectation and expectation spread

00.51

1.52

2.53

Oct-0

6

Dec-0

6

Feb-0

7

Apr-0

7

Jun-

07

Aug-0

7

Oct-0

7

Dec-0

7

Feb-0

8

Apr-0

8

Jun-

08

Aug-0

8

Oct-0

8

Dec-0

8

Feb-0

9

Apr-0

9

Power composite HSCEI

0. 00%50. 00%

100. 00%150. 00%200. 00%250. 00%300. 00%350. 00%400. 00%

Oct -

06

Dec-

06

Feb-

07

Apr-

07

J un-

07

Aug-

07

Oct -

07

Dec-

07

Feb-

08

Apr-

08

J un-

08

Aug-

08

Oct -

08

Dec-

08

Feb-

09

Apr-

09

Coal composite HSCEI

Demand grow;Policy cost transfer Demand slip

down;downstream weak;price decline

expectation

Demand bottoming up;price rebound

Demand grow;Coal cost linkage mechanism

Coal price surge

Expectation of coal price decline; tariff hike Expectation of coal price

rebound; marketization pricing mechanism

Page 23: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 23

1. The implication to energy sector of industry shift——

A more harmonious relationship between Coal and Power sector

2. Thriver: Benefited from demand bottoming up——

Supply side discipline and cost pass-through mechanism:Long Coal

3. Stock pick——

Gold panning in mid cap and low valuation stock

Contents

Page 24: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 24

PE and PB ratio spread between mid and large cap historical high

3.1 Large discount on mid-cap stock unjustified

00.20.40.60.811.21.4

2005年1月7日

2005年4月7日

2005年7月7日

2005年10月7日

2006年1月7日

2006年4月7日

2006年7月7日

2006年10月7日

2007年1月7日

2007年4月7日

2007年7月7日

2007年10月7日

2008年1月7日

2008年4月7日

2008年7月7日

2008年10月7日

2009年1月7日

PBR of mid cap IPP PBR of large cap IPP

051015202530

2003年1月3日

2003年7月3日

2004年1月3日

2004年7月3日

2005年1月3日

2005年7月3日

2006年1月3日

2006年7月3日

2007年1月3日

2007年7月3日

2008年1月3日

2008年7月3日

2009年1月3日

PER of mid cap Coal PER of large cap coal

50% discount in PB ratio for mid-cap IPP35% discount in PE ratio for mid-cap Coal

Page 25: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 25

Current stock price assume a 30% ASP decline

While although YCM has largest spot exposure in the industry, coal price risk is not that large:

(1) Location advantages: Shandong is one of the biggest coal consumption and import provinces. Short transportation distance.

(2) Stable key client relationship

Potential Catalysts:Continuously share repurchase:RMB9.7 bn cash at hand

3.1.1 YCM: spot exposure factor exaggerated

Source : WIND,SWS Research

50% relative PE discount unjustified

Shandong East South North Export

00. 20. 40. 60. 8

11. 21. 41. 6

2003

13

年月

日20

034

3年

月日

2003

73

年月

日20

0310

3年

月日

2004

13

年月

日20

044

3年

月日

2004

73

年月

日20

0410

3年

月日

2005

13

年月

日20

054

3年

月日

2005

73

年月

日20

0510

3年

月日

2006

13

年月

日20

064

3年

月日

2006

73

年月

日20

0610

3年

月日

2007

13

年月

日20

074

3年

月日

2007

73

年月

日20

0710

3年

月日

2008

13

年月

日20

084

3年

月日

2008

73

年月

日20

0810

3年

月日

2009

13

年月

Rel at i ve PE Average

Page 26: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 26

3.1.2 CPI: Benefits from capacity diversification not fully recognized

Source : WIND,SWS Research

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Huaneng Datang Huadi an CRP CPI

Uni t f uel cost hi ke i n 2008

2009F

Coal - fi red Hydro

Tabl e 1: Pot ent i al Asset I nj ect i on: Wul i ng Power

Commenced operation Capacity Location Wuqiangxi Hydro 1996 240*5 Hunan

Lingjintan 2000 270 Hunan

Hongshui Hydro 2003 25*5 Hunan

Wanmipo Hydro 2004 80*3 Hunan

Sanbanxi Hydro 2004 250*4 Guizhou

Jinweizhou 2002 21*3 Hunan

Majitang 1983 18.5*3 Hunan

Guazhi 2007 50*3 Guizhou

Dongping 2007 72*3 Hunan

Source: Sinohydro, SYWG Research

Assuming the acquisition to generate 8% ROI, financing cost at 5%, the EPS enhancement will be 4 cents, or 20% of FY09E.

Page 27: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 27

3.1.3 IPPs: Be cautious on coal price rebound

Earnings Change in 1% coal price hike

0%

-5%

-10%

-15%-20%

-25%

-30%

Huaneng Datang Huadian CRP CPI

Earnings Change

Page 28: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

www.sw108.com

申万研究 28

3.1.4 Valuation Matrix for Coal Sector Demand bottoming up is mostly digested by investors.

Next main theme should be spot price rebound caused by strict supply side discipline.

Shenhua: long term value eminent.Capital injection and industry consolidation should be the catalyst.

China Coal: Fair value play because the market not fully recognized downside risk of export business.

Source : Datastream SWS Research

Valuation Matrix

Source : Datastream SWS Research

A-H premium

Company names PremiumChina Shenhua 32.43%China Coal Energy 62.54%YCM 98.89%

Company names Country Ticker Closing price 08PE 09PE 10PE 08PB 09PB 10PBPeabody US BTU.US 28.94 8. 97 13. 31 10. 79 2. 41 1. 78 1. 47Arch coal US AIS.US 16.12 6. 68 37. 40 10. 13 1. 29 1. 02 0. 88BHP Australia BHP.AX 33.34 8. 37 18. 72 22. 65 2. 86 2. 52 2. 15Rio tinto Australia RIO.AX 61.88 5. 31 17. 79 15. 87 1. 63 1. 42 1. 24

Company names Ticker Rating Closing price Target price 08PE 09PE 10PE 08PB 09PB 10PBChina Shenhua 1088.HK Outperform 23.20 24.50 15. 32 13. 87 11. 94 2. 74 2. 33 2. 05China Coal Energy 0836.HK Neutral 8.28 8.50 14. 09 13. 08 10. 94 1. 63 1. 44 1. 33YCM 1171.HK Outperform 8.71 10.00 5. 84 8. 76 7. 87 1. 43 1. 22 1. 06

Page 29: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

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申万研究 29

3.1.5 Valuation Matrix for Power Sector

Demand bottoming up but utilization rate not yet.

Should be cautious on the coal price rebound.

Sector recovery is definite but all priced in.

A-H premium

Source : Datastream SWS Research

Company names Ticker Rating Closing price Target price 08PE 09PE 10PE 08PB 09PB 10PBCPI 2380.HK Outperform 1.86 2.20 -9.79 8.86 8.09 0.85 0.76 0.69Huadian 1071.HK Outperform 1.93 2.50 -4.02 7.21 5.35 0.90 0.81 0.73Huaneng 902.HK Outperform 4.95 5.50 -13.27 11.84 9.52 1.43 1.31 1.18CRP 836.HK Neutral 15.92 16.00 38.83 15.61 12.74 2.74 2.41 2.12Datang 991.HK Neutral 3.72 3.50 54.87 13.60 8.13 1.50 1.37 1.06

Company names PremiumHuaneng 76.01%Datang 132.08%Huadian 192.75%

Valuation Matrix

Page 30: What’s next after demand bottoming out? —— 2H investment strategy for coal and power sector Wilson Chen May. 25 th, 2009

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申万研究 30

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 AnalystWilson ChenI 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/SWS Triple-C Index is the benchmark employed in this report for HK-listed firms.

Disclaimer

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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.

The Company possesses all copyrights of this report. The Company reserves all rights related to this report. Unless otherwise indicated in writing, all the copyrights of all the materials herein belong to the Company. In the absence of any prior authorization by the Company in writing, no part of this report shall be copied, photocopied, replicated or redistributed to any other person in any form by any means, or be used in any other ways which will infringe upon the copyrights of the Company. All the trademarks, service marks and marks used herein are trademarks, service marks or marks of the Company, and no one shall have the right to use them at any circumstances without the prior consent of the Company.This report may be translated into different languages. The Company does not warrant that the translations are free from errors or discrepancies.This report is for distribution in Hong Kong only to persons who fall within the definition of professional investors whether under the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong) (the “SFO”) or the Securities and Futures (Professional Investor) Rules (Chapter 571D of the laws of the Hong Kong under the SFO).This report is for distribution in the United Kingdom only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) order 2001 (as amended) (the “Order”) or (ii) are persons falling within Article 49(2)(a) to (d) (“High Net Worth Companies, Unincorporated Associations, etc”) of the Order (All such persons together being referred to as “Relevant Persons”). This document is directed only at Relevant Persons. Other Persons who are not Relevant Persons must not act or rely upon this document or any of its contents.Neither this report nor any copy of it may be taken or transmitted into the United States of America, its territories or possessions or distributed, directly or indirectly, in the United States of America, its territories or possessions or to any U.S. person (Within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended). Any failure to comply with this restriction may constitute a violation of U.S. securities laws. Neither this report nor any copy of it may be taken or transmitted into Canada. The distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe, any such restrictions. By accepting this report the clients agree to be bound by the foregoing limitations.

Disclaimer

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Shanghai SWS Research & Consulting Co., Ltd.

Wilson Chen

[email protected]

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