1. business and industrial
2. energy
3. electricity

30 October 2014
Asia Pacific/Singapore
Equity Research
Utilities (Utilities SG (Asia))
Singapore Utilities Sector
Research Analysts
Gerald Wong, CFA
65 6212 3037
[email protected]
Dave Dai, CFA
852 2101 7358
[email protected]
Shih Haur Hwang
65 6212 3024
[email protected]
SECTOR REVIEW
Outlook remains challenging
Figure 1: Vesting contract levels will decline to 30% in 1H15, 25% in 2H15, and
20% in 2016, which is likely to lead to a fall in blended spreads
600
70%
500
60%
400
50%
300
40%
200
30%
100
20%
0
Jan-07
10%
Jan-08
Jan-09
Vesting Price ($/MWh) (LHS)
Jan-10
Jan-11
Jan-12
Uniform Singapore Electricity Price ($/MWh) (LHS)
Jan-13
Jan-14
Vesting Contract Level (RHS)
Source: Energy Market Authority, Energy Market Company
■ Capacity growth slowing from 2015E. Following our April 2013 report
"Significant capacity growth ahead", total power generation capacity in
Singapore has increased 2.6GW or 26%. With only 5% further growth in
capacity expected, we forecast a decline in the reserve margin from a peak
of 46% in 2014 to 44% in 2015. Consequently, the Uniform Singapore
Electricity Price (USEP) has stabilised at an average of S$142/MWh in 9M14
after declining 36% from S$222/MWh in 2012.
■ However, fall in vesting contract level could lead to further decline in
blended spreads. With market power concerns subsiding, the Energy
Market Authority (EMA) has revised down the vesting contract level from
40% to 30% in 1H15, 25% in 2H15, and 20% in 2016. With the vesting price
31% above the USEP in 3Q14, we believe the change in mix could lead to
another 6% decrease in blended electricity tariffs from 3Q14 levels.
■ Remain cautious. With potential further earnings decline, we maintain our
cautious view on stocks with exposure to Singapore power. We expect the
weak outlook for Singapore Utilities to be a drag to Sembcorp Industries'
(NEUTRAL) earnings despite increasing contribution from its overseas
assets. Challenging operating conditions could also further worsen Huaneng
Power’s (UNDERPERFORM) earnings outlook.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS
BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
30 October 2014
Focus charts and table
Figure 2: Contribution of Singapore power generation
Figure 3: We expect capacity growth to slow following a
assets to net profit in FY13
26% increase, which will lead to decline in reserve margin
25%
23%
16000
(MW)
70%
14000
20%
60%
12000
15%
50%
10000
12%
40%
8000
10%
30%
6000
6%
5%
20%
4000
1%
10%
2000
0%
YTL Power
Sembcorp Industries
Keppel
0
Huaneng
0%
2007
Singapore Power Generation as % of Group Net Profit (2013)
2008
2009
2010
2011
2012
2013
Total Generation Capacity - LHS
2014
2015
2016
2017
Peak demand - LHS
2018
2019
2020
Reserve Margin - RHS
Source: Company data, Credit Suisse estimates
Source: Energy Market Authority, Credit Suisse estimates
Figure 4: Market pool prices (USEP) declined by 22% to
Figure 5: Vesting price (VCHP) of S$190/MWh in 3Q14
S$173/MWh in 2013 and further to S$142/MWh in 9M14
31% above USEP
300
300
250
250
200
200
150
150
100
100
50
50
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
0
0
1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
USEP Average ($/MWh)
Uniform Singapore Electricity Price (USEP) - S$/MWh
Source: Energy Market Company
Source: Energy Market Company
Figure 6: Sector valuation table
Current Target Up/ down Mkt Cap Div yld
Rating
price
side (%) US$ mn
P/E (x)
P/B (x)
ROE (%)
FX
price
Sembcorp Industries
N SGD
4.83
5.40
11.8
6,752
3.5 10.9
9.8
8.8
1.5
1.4
1.2 13.8 13.9 14.1
Keppel Corporation
O SGD
9.40
12.50
33.0
13,359
5.3 10.9
9.5
9.2
1.5
1.3
1.2 13.3 14.0 13.5
Hyflux Ltd
N SGD
1.02
1.20
18.2
686
2.3 n.m. 27.1 15.4
1.7
1.6
1.4
Huaneng Power
U HKD
9.35
7.50
-19.8
15,536
5.2
YTL Power
U MYR
1.55
1.35
-12.9
Manila Electric
N PHP
262.00 276.00
5.3
Average
(%) 14E 15E 16E 14E 15E 16E 14E 15E 16E
8.4
0.3
5.8
9.2
9.6
9.0
1.5
1.4
1.3 18.1 14.9 14.7
3,387
1.2 12.8 14.0
NA
1.1
1.1
NA
6,580
3.9 17.3 17.1 16.3
3.6 12.1 14.5 11.7
3.7
3.4
3.2 21.2 20.1 19.5
1.8
1.7
1.7 12.6 12.7 14.2
8.8
7.5
NA
Source: Company data, Credit Suisse estimates, Thomson Reuters
Singapore Utilities Sector
2
30 October 2014
Outlook remains challenging
Capacity growth slowing from 2015E
In our report “Singapore Utilities Sector – Significant capacity growth ahead” on 11 April
2013, we noted that power generation capacity in Singapore was expected to increase by
3.0GW or 30% in 2013-14E following the completion of Singapore’s LNG terminal in 2Q13
which will increase gas supply into the country. Since then, we have seen the start of
commercial operations for more than 2.6GW of capacity, with the latest addition being
Sembcorp Banyan Cogen which was completed in July 2014.
Figure 7: Planned installed capacity growth in 2013–14
Generation Company
Keppel Merlimau Cogen
Installed
Expected
Update
Capacity (MW) commission
date
800
Mid 2013
Commenced operations June 2013
ExxonMobil
220
Mid 2013
Commenced operations
PacificLight Power
800
End 2013
Commenced operations in 1Q14
Tuas Power Generation
400
End 2013
Commenced operations in 2Q14
Sembcorp Cogen
400
End 2013
Commenced operations in August 2014 following delay due to lack of grid connection
Source: Energy Market Authority, Company data, Credit Suisse
Based on data from Energy Market Authority (EMA), capacity addition is expected to slow
down in 2015-16, with only 603MW of capacity growth expected. With the exception of
Hyflux’s Tuaspring plant which is likely to only commence operations in 2016 due to lack
of grid connection, the remaining additions are mainly embedded generation by industrial
users.
Figure 8: Project commercial operating date (COD) of new capacity
Company
Plant Type
Capacity Change (MW)
Period
Soxal
Steam
5
4Q14
SLNG
CCGT
15.6
4Q14
CGNPC
CCGT
9.9
4Q14
Other
9.9
4Q14
Shell
Embedded generation
67.8
Apr-15
SRC
Embedded generation
42
1Q15
SRC
Embedded generation
42
2Q15
CCGT
411
2Q16
Biofuel Industries
Tuaspring
Total
603
Source: Energy Market Authority, The Lantau Group
Reserve margin likely to peak in 2014
We base the Credit Suisse power generation model on the following:
■
Historical generation capacity is based on data from Energy Market Authority, while
additions are based on announced completion dates of planned expansions. We
assume no further capacity changes from 2017 onwards.
■
Forecast peak demand is driven by Singapore GDP growth, which Credit Suisse
expects to be 3.3% in 2014 and 5.0% in 2015. Thereafter, GDP is expected to grow by
3.5% per annum, in line with the Singapore government’s planning parameter of 3–4%.
Figure 9 shows the annual installed capacity in Singapore from 2007–20. We believe that
reserve margin (peak demand minus installed capacity as a percentage of installed
capacity) reached a low of about 34.0% in 2011, leading to higher electricity prices during
this period. However, with installed capacity growing by 19% in 2013 and 7% in 2014E,
the reserve margin is expected to increase to 46%, above the 2007 level. With demand
Singapore Utilities Sector
3
30 October 2014
growth expected to exceed supply growth from 2015E, we expect the reserve margin to
decline to 44% in 2015E. Based on our forecasts, the reserve margin would revert to the
2010-12 levels only after 2020E.
Figure 9: Credit Suisse power generation model suggests reserve margin would decline in 2015E
Year-end capacity (MW)
2007
2008
2009
2010
2011
2012
2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Senoko
3300
3300
2635
2550
2550
3300
3300
3300
3300
3300
3300
3300
3300
3300
Tuas
2670
2670
2670
2670
2670
2070
2171
2609
2609
2609
2609
2609
2609
2609
Seraya
3100
2700
2700
3100
3100
3100
3100
3100
3100
3100
3100
3100
3100
3100
Sembcorp
785
785
785
785
785
785
785
1185
1185
1185
1185
1185
1185
1185
Keppel
500
500
500
500
500
500
1340
1340
1340
1340
1340
1340
1340
1340
PacificLight Power
0
0
0
0
0
0
800
800
800
800
800
800
800
800
Hyflux
0
0
0
0
0
0
0
0
0
411
411
411
411
411
Others
251.2
251.2
287
287
346
365
587
627
779
779
779
779
779
779
Total
10606 10206
9577
YOY change (%)
5%
-4%
-6%
9892 9951.4 10120 12083 12961 13113 13524 13524 13524 13524 13524
3%
1%
2%
19%
7%
1%
3%
0%
0%
0%
0%
Peak demand
5946
6073
6041
6494
6570
6639
6814
7039
7391
7649
7917
8194
8481
8778
YoY Growth
8.0%
2.1%
-0.5%
7.5%
1.2%
1.1%
3.9%
3.3%
5.0%
3.5%
3.5%
3.5%
3.5%
3.5%
GDP growth
9.1%
1.8%
-0.6% 15.2%
6.1%
2.5%
3.9%
3.3%
5.0%
3.5%
3.5%
3.5%
3.5%
3.5%
% of total installed capacity
56%
60%
63%
66%
66%
66%
56%
54%
56%
57%
59%
61%
63%
65%
Reserve Margin
44%
40%
37%
34%
34%
34%
44%
46%
44%
43%
41%
39%
37%
35%
Source: Energy Market Authority, Company data, Credit Suisse estimates
USEP has stabilised at around S$150/MWh
The expected increase in capacity has led to a decrease in the Uniform Singapore
Electricity Price (USEP) since 2013. USEP is the weighted average price in the wholesale
electricity market, and is determined through the interaction of offers made by generation
companies and consumer demand. The average USEP in 2013 declined 22% to
S$173/MWh in 2013, and further to S$142/MWh in 9M14. Since January 2014, the
monthly average USEP has been stable in the range of S$133-156/MWh, which we
believe reflects the breakeven level of tariffs for certain generation companies.
Figure 10: Uniform Singapore Electricity Price (USEP)—S$/MWh
300
250
200
150
100
50
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
0
USEP Average ($/MWh)
Source: Energy Market Company
Singapore Utilities Sector
4
30 October 2014
Reduction in vesting contract level from 1H15
Vesting contracts were implemented by the Energy Market Authority in January 2004 to
control the exercise of market power by the generation companies and promote efficiency
and competition in the electricity market. The vesting contracts commit the generation
companies to sell a specified amount of electricity (vesting contract levels) at a specified
price (the vesting contract price). As a result, it takes away incentives for the generation
companies to exercise their market power by withholding their generation capacity to push
up spot prices in the wholesale electricity market. Vesting contracts were allocated only to
generation companies that had made their planting decisions before the decision in 2001
to introduce vesting contracts. Its allocation is made in proportion to the licensed capacity
eligible for vesting contracts, as shown in Figure 11.
Figure 11: Maximum capacity eligible for vesting contracts
Genco
Maximum Capacity (MW)
Seraya
3100
Senoko
3300
Tuas
2670
Sembcorp
785
Keppel
470
PacificLight Power
800
Source: Energy Market Authority
Following a biennal review, EMA has announced that the vesting contract level will be
progressively reduced from 40% to 30% for 1H15, 25% for 2H15, and 20% for 2016. This
was driven by the view that it can be lowered to the LNG vesting level (about 16%) for
2015-16 without market power concerns. The gradual reduction is intended to allow the
respective retail arms to adjust their hedging portfolios and contract cover as the vesting
contract level is reduced from 40% to 20%. In particular, it was noted that there is no intent
for vesting contracts “to provide revenue certainty to the gencos nor is the sustainability of
gencos' revenue a factor that should be taken into account when setting the VCL.”
Figure 12: Vesting contract level to fall to 30% in 1H15, 25% in 2H15, and 20% in 2016
Period
Vesting contract level
1 Jan 2011 - 31 Dec 2011
60%
1 Jan 2012 - 30 Jun 2013
55%
1 Jul 2013 - 31 Dec 2013
50%
1 Jan 2014 - 31 Dec 2014
40%
1 Jan 2015 - 30 Jun 2015
30%
1 Jul 2015 - 31 Dec 2015
25%
1 Jan 2016 - 31 Dec 2016
20%
Source: Energy Market Authority
Singapore Utilities Sector
5
30 October 2014
Figure 13: Vesting contract hedge price significantly above USEP
300
250
200
150
100
50
0
1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
VCHP ($/MWh)
Source: Energy Market Company
Blended spreads likely to decline further
With the decline in vesting contract levels, generation companies will have to sell a greater
proportion of their electricity generated to the spot market or to retail customers. As shown
in Figure 14, the vesting contract price of S$190/MWh is at a 31% premium to the USEP
of S$145/MWh in 3Q14. While the average USEP rose above the vesting price for certain
periods in 2Q09-1Q12, the average USEP has been consistently below the vesting price
since 3Q12 as new generation capacity has been added to the market.
Assuming electricity tariffs stay at 3Q14 levels with the USEP below the vesting price, and
retail contracts have a similar tariff to the USEP, the change in mix as a result of the
decrease in vesting contracts could lead to a further 6% decrease in blended electricity
tariffs.
Figure 14: Vesting contract levels will decline to 30% in 1H15, 25% in 2H15, and 20% in
2016, which is likely to lead to a fall in blended spreads
600
70%
500
60%
400
50%
300
40%
200
30%
100
20%
0
Jan-07
10%
Jan-08
Jan-09
Vesting Price ($/MWh) (LHS)
Jan-10
Jan-11
Jan-12
Uniform Singapore Electricity Price ($/MWh) (LHS)
Jan-13
Jan-14
Vesting Contract Level (RHS)
Source: Energy Market Authority, Energy Market Company
Singapore Utilities Sector
6
30 October 2014
Asia Pacific / Singapore
Conglomerates
Sembcorp Industries Limited
(SCIL.SI / SCI SP)
Rating
NEUTRAL*
Price (29 Oct 14, S$)
4.83
Target price (S$)
5.40¹
Upside/downside (%)
11.8
Mkt cap (S$ mn)
8,634 (US$ 6,785)
Enterprise value (S$ mn)
7,933
Number of shares (mn)
1,787.55
Free float (%)
23.8
52-week price range
5.53 - 4.78
ADTO - 6M (US$ mn)
7.5
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
Gerald Wong, CFA
65 6212 3037
[email protected]
Weak Singapore power outlook a drag
■ Maintain NEUTRAL. On our estimates, Sembcorp Cogen contributed 24%
to Sembcorp Industries' underlying Utilities net profit and 12% to group net
profit in 2013. We expect a further decline in blended power spreads in
Singapore to be a drag to earnings in 2015-16E.
■ Market expectation for Utilities optimistic. From a peak of S$70 mn in
3Q12, Utilities' quarterly net profit from Singapore has gradually declined to
S$47 mn in 2Q14. This was driven largely by Energy, which saw a 40% YoY
and 21% QoQ decline in underlying net profit in 2Q14 mainly driven by lower
power spreads. With the 400MW Banyan Cogen in Singapore (completed
July 2014) also likely to be impacted by lower power spreads, and 1320MW
TPCIL power plant in India to be completed in 1H15 unlikely to contribute
significantly to profit in 2015, we believe consensus FY15 Utilities net profit
forecast of about S$425 mn could be too optimistic.
■ Execution risks remain high for Marine. We expect a weak oil price
environment to lead to slower new orders for Marine. In addition, margins
are likely to remain under pressure due to profit recognition for new products
in its orderbook, which we estimate make up about 70% of its current
orderbook.
■ Utilities stub at premium to historical average. SCI's utility stub is trading
at 9.5x FPE, above its historical average of 9.2x.
Share price performance
Price (LHS)
8
7
6
5
4
Nov-12 Mar-13
Jul-13
Rebased Rel (RHS)
Nov-13 Mar-14
120
110
100
90
80
Jul-14
The price relative chart measures performance against the
FTSE STRAITS TIMES IDX which closed at 3224.03 on
29/10/14
On 29/10/14 the spot exchange rate was S$1.27/US$1
Performance over
Absolute (%)
Relative (%)
1M 3M 12M
-7.1 -11.9 -8.9
-5.1 -7.4 -9.4
—
—
Financial and valuation metrics
Year
Revenue (S$ mn)
EBITDA (S$ mn)
EBIT (S$ mn)
Net profit (S$ mn)
EPS (CS adj.) (S$)
Change from previous EPS (%)
Consensus EPS (S$)
EPS growth (%)
P/E (x)
Dividend yield (%)
EV/EBITDA (x)
P/B (x)
ROE (%)
Net debt/equity (%)
12/13A
10,797.6
1,463.4
1,160.1
820.4
0.46
n.a.
n.a.
8.9
10.5
3.5
5.6
1.6
16.9
net cash
12/14E
11,704.9
1,442.5
1,137.2
788.5
0.44
0
0.44
-3.9
10.9
3.5
5.5
1.5
14.4
net cash
12/15E
13,380.2
1,571.1
1,265.8
872.2
0.49
0
0.48
10.5
9.9
3.5
4.7
1.4
14.5
net cash
12/16E
14,490.4
1,729.1
1,423.8
980.7
0.55
0
0.52
12.3
8.8
3.5
3.9
1.2
14.8
net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Singapore Utilities Sector
7
30 October 2014
Weak Singapore power outlook a
drag
Singapore Utilities profit declined 16% YoY in 2013
Driven by lower power spreads, net profit of Sembcorp cogen declined to S$93 mn in 2013
from S$111 mn in 2012. On our estimates, Sembcorp Cogen contributed 24% to
Sembcorp Industries' underlying Utilities net profit and 12% to group net profit in 2013.
Figure 15: Net profit of Sembcorp Cogen declined 16% in 2013 to S$93 mn
(In S$'000)
1,400,000
140,000
1,200,000
120,000
1,000,000
100,000
800,000
80,000
600,000
60,000
400,000
40,000
200,000
20,000
-
2007
2008
2009
2010
2011
Profit for the year - RHS
2012
2013
Revenue - LHS
Source: Company data
From a peak of S$70 mn in 3Q12, Utilities' quarterly net profit from Singapore has
gradually declined to S$47 mn in 2Q14. This has been a drag to the Utilities net profit,
which saw increasing contribution from China and the Middle East otherwise.
Figure 16: Singapore Utilities net profit declining since 4Q12
120
112
99
100
88
76
80
60
59
58
59
23
24
21
40
62
54
16
79
34
36
35
38
39
31
89
30
38
29
104
100
81
17
92
93
39
46
43
51
76
37
25
33
21
65
20
95
40
47
46
64
50
70
64
69
52
53
52
53
47
0
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Singapore
Others
Source: Company data, Credit Suisse estimates
Singapore Utilities Sector
8
30 October 2014
This decline in profit was driven mainly by Energy, which continued to see a 40% YoY and
21% QoQ decline in underlying net profit in 2Q14 mainly driven by lower power spreads.
Figure 17: Singapore Utilities profit decline driven by Energy
In S$mn
1Q13
2Q13
1H13
1Q14
2Q14
1H14
Energy
39.2
56.6
95.8
37.1
29.3
66.4
Water
6.7
5.9
12.6
7.2
7.2
14.4
On-site logistics & Solid waste management
6.4
6.7
13.1
8.5
10.2
18.7
Total
52.3
69.2
121.5
52.8
46.7
99.5
Source: Company data
Valuation
SCI's utility stub is trading at 9.5x FPE, above its historical average of 9.2x.
Figure 18: Sembcorp Industries—Utilities Stub valuation
25
20
15
10
5
0
Dec-02
Dec-03
Dec-04
Dec-05
P/E
Dec-06
Dec-07
Average
Dec-08
Dec-09
+1 std dev
Dec-10
Dec-11
Dec-12
Dec-13
-1 std dev
Source: Bloomberg, Company data, Credit Suisse estimates,
Singapore Utilities Sector
9
30 October 2014
Companies Mentioned (Price as of 29-Oct-2014)
Huaneng Power International Inc (0902.HK, HK$9.11, UNDERPERFORM, TP HK$7.5)
Hyflux Ltd (HYFL.SI, S$1.02, NEUTRAL, TP S$1.2)
Keppel Corporation (KPLM.SI, S$9.4, OUTPERFORM, TP S$12.5)
Manila Electric (Meralco) (MER.PS, P261.6, NEUTRAL, TP P276.0)
Sembcorp Industries Limited (SCIL.SI, S$4.83, NEUTRAL, TP S$5.4)
YTL Power (YTLP.KL, RM1.55, UNDERPERFORM, TP RM1.35)
Disclosure Appendix
Important Global Disclosures
I, Gerald Wong, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and
securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in
this report.
3-Year Price and Rating History for Huaneng Power International Inc (0902.HK)
0902.HK
Date
17-Jan-12
13-Feb-12
22-Mar-12
02-Aug-12
03-Oct-12
10-Apr-13
24-Apr-13
27-Nov-13
30-Jul-14
14-Oct-14
Closing Price
(HK$)
4.44
4.95
4.51
5.62
5.88
8.37
8.80
7.43
8.73
8.90
Target Price
(HK$)
4.50
5.96
5.70
5.85
7.10
9.00
9.40
6.40
7.40
7.50
Rating
O
U*
*
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
U N D ERPERFO RM
3-Year Price and Rating History for Hyflux Ltd (HYFL.SI)
HYFL.SI
Date
04-Nov-11
02-Apr-12
03-Aug-12
01-Nov-12
10-May-13
07-Nov-13
20-Feb-14
Closing Price
(S$)
1.41
1.51
1.43
1.34
1.44
1.17
1.24
Target Price
(S$)
1.40
1.90
1.70
1.60
1.50
1.30
1.20
Rating
N
O
N
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
O U T PERFO RM
Singapore Utilities Sector
10
30 October 2014
3-Year Price and Rating History for Keppel Corporation (KPLM.SI)
KPLM.SI
Date
26-Jan-12
13-Apr-12
18-Oct-12
18-Feb-13
18-Jul-13
07-Nov-13
23-Jan-14
25-Jul-14
21-Oct-14
Closing Price
(S$)
10.39
11.07
11.00
11.29
10.80
10.93
10.88
11.03
9.70
Target Price
(S$)
12.40
12.70
12.80
13.70
12.50
12.90
12.70
13.10
12.50
Rating
O
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
3-Year Price and Rating History for Manila Electric (Meralco) (MER.PS)
MER.PS
Date
10-Feb-12
29-Feb-12
28-Jun-12
13-Dec-12
20-Dec-12
20-Dec-12
06-Jun-13
30-Sep-13
03-Jan-14
27-May-14
Closing Price
(P)
273.00
263.60
251.00
260.00
262.00
262.00
380.00
286.00
254.20
262.00
Target Price
(P)
198.00
247.00
262.00
339.00
339.00
276.00
Rating
U
N
*
*
N
*
N
R
N
U N D ERPERFO RM
N EU T RA L
REST RICT ED
* Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for Sembcorp Industries Limited (SCIL.SI)
SCIL.SI
Date
04-Nov-11
27-Feb-12
06-Aug-12
26-Feb-13
10-Apr-13
06-Aug-13
11-Nov-13
26-Feb-14
Closing Price
(S$)
4.17
5.12
5.32
5.17
5.01
5.06
5.30
5.42
Target Price
(S$)
4.88
5.48
6.08
5.88
5.08
5.18
5.28
5.40
Rating
O
N
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
N EU T RA L
Singapore Utilities Sector
11
30 October 2014
3-Year Price and Rating History for YTL Power (YTLP.KL)
YTLP.KL
Date
07-Mar-12
10-Apr-13
10-Jul-14
11-Jul-14
Closing Price
(RM)
1.74
1.46
1.50
1.49
Target Price
(RM)
1.73
1.33
1.35
Rating
U
*
*
U
* Asterisk signifies initiation or assumption of coverage.
U N D ERPERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which
consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total
return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the
most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings
are based on a stock’s total return relative to the average total return of the relevant countr y or regional benchmark; prior to 2nd October 2012 U.S. and Canadian
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a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +1015% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return
relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or
valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
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Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating
Versus universe (%)
Of which banking clients (%)
Outperform/Buy*
46%
(54% banking clients)
Neutral/Hold*
38%
(51% banking clients)
Underperform/Sell*
13%
(43% banking clients)
Restricted
3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely
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definitions above.) An investor's decision to buy or sell a security should be based on investment objecti ves, current holdings, and other individual factors.
Singapore Utilities Sector
12
30 October 2014
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Price Target: (12 months) for Sembcorp Industries Limited (SCIL.SI)
Method: Our S$5.40 target price for Sembcorp Industries is based on 1) sum-of-the-parts analysis with SembCorp Marine (SCMN.SI) valued at its
Credit Suisse target price, 2) Gallant Venture marked to market and 3) the balance of SCI is valued at 10x FY14E earnings.
Risk:
The key risks to our target price of S$5.40 for SembCorp Industries (SCI) include: 1) a potential slowdown in rig demand for SMM which
constitutes a significant portion of our value of SCI, 2) asset impairment in the financial assets held by SCI, 3) the risk that there is poor
take-up in the additional space in Jurong Island by petrochemical companies and not meeting our growth forecasts and 4) limited sucess
in its overseas joint venture.
Price Target: (12 months) for Huaneng Power International Inc (0902.HK)
Method: We use P/B (price-to-book) valuation to get to our target price of HK$7.50 for Huaneng Power International Inc (H). We assume a longterm ROE (return on equity) of 14%, and then get an implied FY14 PB of 1.2x, which makes us come up with the target price.
Risk:
Investment risks for our HK$7.50 target price for Huaneng Power International Inc (H) include: 1) faster-than-expected capacity growth. 2)
lower-than-expected coal prices. 3) better-than expected utilization hours.
Price Target: (12 months) for Hyflux Ltd (HYFL.SI)
Method: Our 12-month target price of S$1.20 for Hyflux is based on sum-of-the-parts (SOTP) analysis encompassing: 1) a discounted cash flow
(DCF) value of existing businesses at 9.2% WACC, zero terminal value, 2) value contribution from associates; 3) EPC business value at
7x normalised earnings and 4) new businesses discounted at 13.4% cost of equity.
Risk:
Risks to our S$1.20 target price for Hyflux includes delays in project commencement and execution would affect financials and recurring
income recognition schedule, ability to pass through costs in rising materials cost environment, opex costs containment, unexpected costs
relating to operational and maintenance aspects, changes in relevant government's initiatives and regulations, political risks in the
countries where Hyflux operates, rising competition, lack of visibility in individual projects, reliance on key management.
Price Target: (12 months) for Keppel Corporation (KPLM.SI)
Method: Our S$12.50 target price for Keppel Corporation is based on an SOTP (sum of the parts) methodolgy, valuing: (1) 14x P/E multiple for the
O&M business, (2) Credit Suisse's target prices for Keppel Land (S$3.80) and Mobile One S$3.73), (3) the marked-to-market value of
other listed entities and (4) the asset value estimates for Keppel Bay and the infrastructure business.
Risk:
Risks to our target price of S$12.50 for Keppel Corp include the following: (1) slower than expected recovery in the offshore & marine or
property cycles; (2) limited earnings visibility on infrastructure business; and (3) limited disclosure on individual businesses.
Price Target: (12 months) for Manila Electric (Meralco) (MER.PS)
Method: Our P276 target price for Manila Electric (Meralco) is based on an SOTP (sum-of-the-parts) methodology: 81% from the existing
distribution business and 19% from the forthcoming generation business. We used DCF (discounted cash flow) analysis to estimate the
value of both the distribution and generation businesses. Our WACC (weighted average cost of capital) assumption is 9.3%.
Risk:
Upside (downside) risks to our P276 target price for Manila Electric (Meralco) include: for the distribution business, higher (lower)
electricity sales volume and/or regulated wheeling tariff; for its forthcoming generation business, higher (lower) attributable capacity
assumptions.
Price Target: (12 months) for YTL Power (YTLP.KL)
Method: YTL Power's target price of RM1.35 is based on (1) The water assets are valued based on 0% premium to the FY14 RAB (regulated asset
base) due to regulatory tightening in the water sector in the UK. We have assumed a forex exchange of RM5.5 to every Pound Sterling.
(2) The Malaysian power assets will see their IPP expire in Sep 2015 and are valued based on a Discounted cash flow method, with a
discount rate of 10% (weighted average cost of capital) (3) The Indonesian power assets are valued based on the Discounted Cashflow
method with a discount rate of 10%. (4) Power Seraya power plants are valued based on a discounted cashflow method with a discount
rate of 10%.
Singapore Utilities Sector
13
30 October 2014
Risk:
Upside risks to YTL Power's RM1.35 target price include: (1) A lucrative overseas utility project is injected into the company (2) if YTLP
wins a major new domestic project. Downside to YTLPower's target price: (1) UK water regulatory change results in a worse than
expected allowable rate of return. (2) A stronger Ringgit or a weaker Pound Sterling will mean less Ringgit revenue from Wessex (3) More
political uncertainties.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the
target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (0902.HK, HYFL.SI) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of
Credit Suisse.
Credit Suisse provided investment banking services to the subject company (0902.HK, HYFL.SI) within the past 12 months.
Credit Suisse has managed or co-managed a public offering of securities for the subject company (0902.HK, HYFL.SI) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (0902.HK, HYFL.SI) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0902.HK, HYFL.SI) within
the next 3 months.
Credit Suisse may have interest in (YTLP.KL)
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (0902.HK).
Credit Suisse has a material conflict of interest with the subject company (MER.PS) . Credit Suisse is acting as a financial advisor to San Miguel
Corporation regarding the proposed sale of its 27% stake in Manila Electric Company (Meralco) to JG Summit Holdings.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (SCIL.SI, 0902.HK, HYFL.SI,
KPLM.SI, MER.PS, YTLP.KL) within the past 12 months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares;
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NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a
research analyst account.
Credit Suisse (Hong Kong) Limited ................................................................................................................................................... Dave Dai, CFA
Credit Suisse AG, Singapore Branch .......................................................................................................... Gerald Wong, CFA ; Shih Haur Hwang
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683.
Singapore Utilities Sector
14
30 October 2014
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UT0383.doc
Singapore Utilities Sector
15