Meyer sebastian

Happy New Year!

Chinese wind turbine market:

Characteristics, experience, export potential

Winterwind
Ostersund, Sweden 12 February 2013
Live Presentation

Sebastian Meyer
Director of Research & Advisory
Azure International Beijing

Data and information in this presentation is proprietary to Azure International
Do not distribute or copy without permission, seek permission to reprint excerpts or figures

Confidential & Proprietary: Do not distribute or copy
© 2012 Azure International Sebastian Meyer, Azure International 1

Azure International
- company summary profile
 A clean energy technology research & advisory, commercialization &
investment boutique founded in 2003
 Based in Beijing and dedicated to leveraging the Chinese clean
energy market and value chain into businesses with global potential
 Team’s professional experience combines deep local and
international cleantech business management; strong network of
technical, financial and institutional partners
 Unique, in-house research/knowledgebase combined with hands-on
execution capabilities in sourcing, operations and marketing
 Proven decade-long track record in commercializing clean energy
technologies in China

Engineering Market Research Consulting & advisory Investment


Presentation overview
- outline

(1) Introduction to Azure International
(2) Capacity & potential in China
(3) Operating history & track record
(4) Export potential
(5) Conclusions


Plans, pipelines, capital
- China plans to add 1.2TW generating capacity

Planned Power Generation Capacity
(12th 5-year plan, GW) Total funding need:
2500
• RMB 2.6 Trn to 2015
• RMB 6.2 Trn to 2020
2000

Wind funding needed:
1500 Solar • RMB 180 Bn to 2015
• RMB 340 Bn to 2020
Wind

1000

Solar funding needed:
Nuclear

500
Hydro • RMB 190 Bn to 2015
Coal
• RMB 350 Bn to 2020
0
Now 2015 2020

Source: 12th 5-year Plan, SERC, Azure International estimates


- China plans to add 1.2TW generating capacity

PM2.5 emission sources Beijing
vehicle
exhaust: trucks
vehicle
5%
exhaust: pass
other cars
7% 2%
coal
combustion
14%
secondary
sources road dust
Adding 1.2TW 34% 7%
generating capacity biomass
burning
(mostly coal) poses 8%
an unprecedented cigarette
smoke
soil dust
metal 12%
environmental 1% industry processing
5% 5%
challenge already Source: positive matrix factorization, various sources
obviously
problematic: Water,
Air quality, Global Resource limitations mean wind power likely to
warming... outpace plans


- renewable energy targets & pipelines

• China has seen an unprecedented scale-up and is now the operating
the world’s largest wind fleet
Installed capacity (GW, Cumulative)
Installed capacity (GW, annual)
90
20

18 80

16 70
100% y-o-y growth !
14 60

12
50

10
40
8
30
6

20
4

2 10

- -
< 2005 2006 2007 2008 2009 2010 2011 2012 < 2005 2006 2007 2008 2009 2010 2011 2012


- renewable energy installed

• Pipeline activity reflects economic transactions leading to capacity
• Wind power Installed base already world’s largest

Solar PV 5+GW

Wind 70GW

Source: Azure International data Source: Azure International, Google Earth


- renewable energy under development

• Ongoing early development activity across the country indicates
considerable further potential

Solar PV 85GW

Wind 450GW

Source: Azure International data Source: Azure International, Google Earth


- renewable energy targets & pipelines

• Central targets and bottom-up pipelines intersect reasonably well and
confirm economic interest in out performing capacity targets in the
long run if feasible

Solar PV
Mid Term Target (~2015) Long Term Target (~2020)
Target 21GW 50GW
3GW
Pipeline 18GW 85GW

Source: Azure International for pipeline data, targets from NDRC and other Chinese government planning authorities

Wind
Mid Term Target (~2015) Long Term Target (~2020)
Target 100GW (connected) 150GW
65GW
Pipeline 105GW 450GW


- China’s big 5 generators

• Lots of assets (SOE groups total RMB 2.6Tr or US$ 400Bn)
• Profits low (2010 net margins average 1.6%, Datang posts loss)
• All net profit practically invested in capacity additions (2010 RMB 14bn
or US$ 2.2Bn)
• Overall balance sheets weak (2010 d/(d+e)=>80%)

Big 5 net assets (RMB Bn) Big 5 profitability (RMB Bn)
800 Total liabilities Total assets Group profit
250
600
200
400
200 150

0 100
-200
50
-400
-600 0
Datang Huanneng Guodian Huadian CPI
-800 -50
Datang Huanneng Guodian Huadian CPI
Source: public declarations y SOE group level companies, not audited or confirmed


- Hong Kong listed renewables subsidiaries

• Better capitalized with funds raised in HK IPOs
• Room for more leverage on balance sheets, but eventually capital is
required for continued asset expansion
• Given current capital market conditions, companies will be trying to
conserve capital
1H 2012 Net Debt / D+E (%)

Datang 1/2GW (1Yrs)

80%
Huaneng 4GW (2Yrs) MAX

Longyuan 6GW (3Yrs)

0% 10% 20% 30% 40% 50% 60% 70% 80%
Source: Company financial statements


- surcharge & redistribution fails to deliver cash

• Interconnection delays likely caused by delayed cash reimbursement
to deficit grids; ie lack of funding causes delays!
Cumulative wind capacity installed & connected
(GW)
capacity installed & connected capacity installed not connected
70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00
1H06

1H07

1H08

1H09

1H10

1H11

1H12
2005

2006

2007

2008

2009

2010

2011
Source: Azure International


Plans, pipeline, capital
- surcharge & redistribution fails to deliver cash

• Curtailment is also Curtailment by province (2009-2011)
correlated with
degree of deficit
under Surcharge & 黑龙江

Redistribution
吉林
mechanism 新疆
辽宁

• Lack of funds also 甘肃内蒙古
北京

means economic 宁夏
河北

uncertainty once 青海山西山东

grid connection is 西藏
陕西河南

completed 四川湖北
安徽

重庆浙江
江西
Above 20% 湖南
贵州福建
10-20% 云南
广西广东
0-10%

Source: CEC, Azure International


- receivables in the value chain

Sinovel - receivables vs. payables (RMB Bn) Goldwind - receivables vs. payables (RMB Bn) Mingyang - receivables vs. payables (RMB Bn)

Payables (+) Receivables (-) Payables (+) Receivables (-)
Payables (+) Receivables (-)
20 15 10

15 10 5

10
5 -
5
-
- (5)
(5)
(5) (10)
(10)
10)
(15)
15) (15)

20) (20) (20)
YE09 1H10 YE10 1H11 YE11 1H12 YE09 1H10 YE10 1H11 YE11 1H12 YE09 1H10 YE10 1H11 YE11 1H12

Source: Company financial statements Source: Company financial statements Source: Company financial statements

• Sinovel, Goldwind, Mingyang together represent 43% of all installed wind
generation capacity as at end Oct 2012
• Knock-on effect clearly affecting working capital of equipment suppliers
• Payables less receivables already at RMB 9bn (neg) for Sinovel, Goldwind
and Mingyang
• Market saw relatively stable installations in the timeframe
• 1H 2011 working capital funding increase basically locked-up all capital
raised in previous IPOs of the equipment manufacturers

Plans, pipeline, capital
- borderline bankability caused by administration

Average plant age close to 1.5 years operating only, with most
operating projects actively repaying long-term loans

70GW+ installed, financing 80% debt (2-year repayment holiday) puts
sector exposure on banks at some RMB 280bn
•7-year repayment and 6.5% interest means wind sector must
repay RMB 50bn in fixed principal and interest payments p.a.
2012 sector revenue at 2k effective hours by WA FIT is RMB 78bn, with:
• RMB 46bn from the OGT, and
• RMB 32bn from top-up to FIT, of which

This leaves some RMB 50bn of timely received cash revenue for
servicing debt payments

Further capacity expansion can’t effectively be funded through
retained earnings/cash; utilities must access (existing) equity


- outline

(5) Conclusions


Operating history in China
- overview
• Over 5 years • Growing verifiable evidence of reasonably
operating history robust turbine operations in China
documented
• Results reflect curtailment and seasonality
• Azure International
data shows turbines Operating track record: net capacity factor (%)
are operating Average net performance from 01-Mar-06 to 01-Jul-12 (26 GW reference capacity)

reasonably well
0.45

0.4

• 5 GW shown; data 0.35

set covers 20% 0.3

theoretically
available generation
0.25

for market (’06-’11) 0.2

shows net 0.15

performance of 22% 0.1

0.05 Congestion likely explains declining average technical performance
• Can be compared to
net results for
0
Nov/06
Jan/07

Nov/07
Jan/08

Nov/08
Jan/09

Nov/09
Jan/10

Nov/10
Jan/11

Nov/11
Jan/12
May/06

Sep/06

May/07

Sep/07

May/08

Sep/08

May/09

Sep/09

May/10

Sep/10

May/11

Sep/11

May/12
Jul/06

Jul/07

Jul/08

Jul/09

Jul/10

Jul/11

Jul/12
Mar/06

Mar/07

Mar/08

Mar/09

Mar/10

Mar/11

Mar/12
Germany Source: Azure International data

© 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 17

- average vs. project level

Utilization of wind plant in China Revenue of Per kW
(full load Average revenue per kW (capacity Average revenue per kW
hours) Individual project revenue per kW factor) (RMB/kW) Individual project revenue per kW

3,000 35% 2,000
1,800
30%
2,500 1,600
25% 1,400
2,000
20% 1,200
1,500 1,000
15%
800
1,000
10% 600

500 400
5%
200
- 0%
-
55 projects
55 projects
Source: Azure International,UNFCCC
Source: Azure International,UNFCCC


- cold weather dominates

Chinese fleet exposure
• Most of the fleet in
high wind speed
areas in north China Cold weather rated Normal

• In these regions,
equipment is rated
to operate regularly
in temperatures to
minus 35 degrees
• Generally dry
conditions in north
China mean ice is
generally not an
overall issue
• Abrasion through
fine dust is a
common problem Source: Azure International


- cold weather dominates

2012E Installed wind capacity in cold weather rated provinces
(>500 MW)
25

Cold!
20

15

GW

10

5

0
IMAR Hebei Gansu Liaoning Heilongjiang Jilin Xinjiang Shanxi Ningxia Shaanxi



- volume accelerates fleet operating experience
Fleet operating experience (turbine years)

Cold weather Normal

Goldwind

Sinovel

Vestas

Dongfang

Guodian United

Mingyang

Shanghai Eelectric

- 5,000 10,000 15,000 20,000 25,000 30,000



- direct drive leadership?

Fleet operating experience direct drive (turbine years)

Cold weather Normal

Goldwind

XEMC

Energine

DNEE

- 2,000 4,000 6,000 8,000 10,000 12,000


- outline

(5) Conclusions


Export potential
- value proposition & risk

International expectation of value:

“Deeply discounted capacity with manageable risk
or reliability tradeoff”

Azure:

Because of differences in market maturity, capital
markets, value chain integration, differing levels of
quality control and sourcing relationships,
international sourcing needs to be carefully
managed to ensure highest valued is obtained
(& Azure can support international buyers)

Export potential
- available capacity & competitive pricing

Supply side (Production plans vs installations) Wind turbine bid price in China (incl. VAT) - 1.5MW
total actual installations tempered production plans (50%) (RMB/kW)
45 9,000

40
8,000
35

7,000
30

25
6,000

20
5,000
15

10 4,000

5
3,000
0

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12
Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Sep-12
Jun-07

Jun-08

Jun-09

Jun-10

Jun-11
Jul-06

Jul-12
Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11
Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11
Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Nov-12
May-06

May-12
2006

2007

2008

2009

2010

2011

2012

Source: Azure International Data Source: Azure International Data

“Apparent” excess capacity
strong price competition has halved capacity costs as industry reached
scale


Export potential
– exports already started

Turbine exports form China (MW)
400

350
USA
Pakistan
300 Ecuador
Brazil
USA Australia
250
Vietnam Chile
Cyprus
(MW) 200

150 USA

USA
100
USA India
Thailand Pakistan
England
50 Cuba
Thailand
Chile

-
2008 2009 2010 2011 2012



Export potential
- expectation gaps and context

• At present negotiations for Chinese turbine for
developer participation in a growing number of
projects around the world are frustrated by huge
gaps and different expectations that exist because of
differences in China and international markets
• Context: 100% y-o-y growth, average turbine
operating experience is just over 1.5 years
• Shift from most turbines under warrantee in early
2013, to most turbines beyond 2-year warrantee
period
• Warrantee periods quietly extending…it’s a buyer’s
market


Export potential
– context & risk interpretation (capex and opex)
China ROW
Capex
Lower cost Higher cost
Opex
2 year warranty period 5 year warranty period is common, but
cost of services is charged to client
Warranty periods currently being
expanded Enercon: warranty period > 12 years

Entire Chinese fleet now operational Public data on turbine models which
for an average period of under 2-years have been operating for more than 10
years
No public data on failure rates
Project financial model includes
Assumes fixed yearly O&M cost with no failure rates
major failures
e.g changing 15% of gearboxes every 5
year period
© 2012 Azure International
Sebastian Meyer, Azure International 13-Feb-13 28

Export potential
– annual energy production interpretation
China ROW
Considers losses but not uncertainty Considers losses & uncertainty

Example:
– GROSS equivalent full load hours: 3500h
– Estimated energy losses: 20%
– Net energy production: 2800 full load hours
This is the value given in a typical local FSR, it is a P50, there are as many chances
that this result is exceeded than chances that it is not reached.

– Estimated Uncertainty: 15%
– P75: 2517 full load hours  75% chance of being exceeded
– P90: 2262 full load hours  90% chance of being exceeded

This is is the value used by western developers for project assessment


Export potential
- other commercial DD & finance related issues

• Country risk, currency risk, policy risk, political risk

• International banks & insurance difficulty in getting
comfortable with risks although international listings have
helped add some balance sheet visibility for some leading
companies

• Most Chinese banks are unable to lend in foreign currency,
long-term parent company guarantee treatment remains
unresolved particularly with regards to potential future asset
ownership transfers, PPA uncertainty and unfamiliarity with
non-PPA market based subsidies

• Service and maintenance treatment/coverage


- outline

(5) Conclusions


Conclusion
- Closing remarks

• China is already a world leader in wind markets

• The position and its leading companies as an important global
industry leader will be optimized if the industry can
demonstrate long-term success in its home market

• International markets and approaches particularly around
policy and finance differ considerably from the China
experience

• Execution of growing Chinese brand turbine deals depends on
refining approaches to international markets and Chinese
overseas direct investment, but experience is growing...


Azure International – Syndicated Research
- Other available studies

Other reports available:
A) Wind Development Bottom-Up (updated monthly, predictive)
B) Wind Turbine Manufacture Bottom-Up (updated monthly, predictive)
C) Wind Gearboxes Bottom-Up (updated annually)
D) Large Castings Bottom-Up (updated annually)
E) Blades Bottom-Up (updated annually)
F) China Offshore Industry: Sponsored by WWF Norway, and available at:
http://assets.wwf.no/downloads/china_norway_offshore_wind_final_wwf_march_2010.pdf

Bespoke assignments (suggestions/examples):
- Market segments, new products, competitor analysis, policy & market analysis
- Customer, partner, strategic buyer identification
- Project pipeline identification/acquisition (China, Australia, USA, Europe)
- Turbine and component quality due diligences, procurement support
- Investment related commercial and technical due diligences
- Wind measurement, project design, micro-siting, turbine selection
- Permitting & approvals, company structuring & setup
-Energy strategy: carbon foot-printing and emissions optimization & offset


Conclusion
- final remarks –
2012 3Q China Wind Market 2012 China Grid Scale Energy
Quarterly: Storage:

 Reports available through Azure International’s partner Greentech Media
(GTM) at www.greentechmedia.com

Sebastian Meyer
Director of Research & Advisory
sebastian.meyer@azure-international.com
Tel: +86 10 8447 7053
Fax: +86 10 8447 7058

Oriental Kenzo
Suite H, Office Tower, 6th Floor
48, Dongzhimen Wai Street
100027 Dong Cheng District, Beijing
PR China
www.azure-international.com
Happy New Year!


Meyer sebastian

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