[公用](REG) China Power Generation - Tariff adjustments mildly negative for IPPs

    New tariff rates reduce IPPs’ net profits by between 4%and 7%, but the share price correction in the last monthimplies that this has been priced.

　　Current valuations do not reflect stronger fundamentalsled by strong demand recovery.

　　Maintain Buy for Datang, which will be less affected bytariff adjustments. We also like CR Power and Huanengfor their higher leverage towards recovering demand.

　　Tariff hike in Shanxi, but cuts in Zhejiang area. The NationalDevelopment and Reform Commission (NDRC) announcedyesterday that China would raise electricity tariffs for nonresidentialusers by an average of RMB0.028 per KWHeffective 20 November 2009. Residential tariffs will beunchanged. The tariff adjustment aims to balance tariffrates between the provinces, with on-grid tariff rate hike ofbetween RMB0.002-0.015/KWH in Shaanxi and nine otherprovinces, and tariff cuts of RMB0.003-0.009/KWH inZhejiang and six other provinces. We believe theadjustment is meant to compensate loss-making gridcompanies (State Grid Corp. of China, and China SouthernPower Grid Co – not listed) because there had not beentariff adjustments since Jul 08.

　　IPP shares oversold ahead of announcement. IPPs’ shareprices have fallen 13% on average in the last month due toconcerns about tariff adjustments. We estimate the tariffcut will reduce CR Power, Huaneng and Datang’s FY10Fnet profits by -7.3%, 6.9%, and 3.9%, respectively. Theshare price correction implies that the anticipated lowerprofits have been priced in, but do not reflect strongerfundamentals arising from improving demand (+ 9% inSep, and +16% in Oct 09) and stronger 1H09 results.

　　We factored in 10% hike in average coal cost for CY2010.

　　China’s coal price is seasonally high in 4Q due to strongerdemand during winter and lower supply. Our averageassumed coal price of RMB580/mt for FY09 is on track, butwe factored in an average of 10% hike in the coal price toRMB580-640/mt for CY2010, led by improving powerdemand.DBS唯高达香港证券有限公司