Don’t jump the gun
􀁣 Potential options to help IPPs
We still believe a blanket end-use tariff increment is likely only after the
Olympics, if inflation is eased. Other options could include raising ongrid
tariffs while freezing end-use tariffs, raising end-use tariffs for
industry and commercial users, a regional tariff increment, direct
subsidies, value-added tax rebates or a combination. We think raising
on-grid tariffs while subsidising grid operators seems a better alternative.
􀁤 Policy dilemma could constrain action
We believe that the government is under pressure to help the IPPs
since their plight could threaten power supply. But with domestic coal
price rises more restrained than increases in Asian prices, a tariff
increment or subsidies could fuel further coal price hikes. This may limit
the scale of government help, and the IPPs risk having to bear the brunt
until a tariff increment is feasible. The regulator may rely more on
window guidance or increasing supply to indirectly control coal prices.
􀁥 How much help is needed?
We now look for a 22.2-63.2% y-y drop in FY08F net profit at the IPPs.
To pass on 70% of the coal price increases since 2007, the IPPs will
need a tariff increment of 10.2%. To bring FY09F net profit to the FY07
level, Datang, Huaneng and Huadian will each need tariff increments of
2.6%, 6.3% and 4.6%. Further earnings cuts are possible in the
absence of a tariff increment or subsidies.
􀁦 Recent rally may have jumped the gun
At an FY07 P/E of 13.8x and FY08F P/BV of 1.3x, the market might
have priced in a tariff increment or subsidies that should bring FY09F
net earnings to at least the FY07 level. Given the uncertainties in
government action, we remain cautious on Huaneng and Huadian.
Despite higher valuations on the recent rally, Datang remains our
preferred pick for its coal mines, coal chemicals and diversification efforts.

Contents
Potential options to help IPPs 3
The options 3
End-use tariff increment and coal price control 3
A better alternative? 4
Evaluating other alternatives 5
Policy dilemma could constrain action 7
Return of tight coal supply 7
Rebound in spot prices 7
Regulatory concerns 9
How much help is needed? 10
Disappointing 1Q08 results 10
Revising down FY08-09F earnings 10
A 10.2% tariff increment is needed 11
Recent rally may have jumped the gun 13
The rush for short covering 13
DCF and P/BV valuations 14
How far from historical trough? 15
Potential risks 19
Earnings and fair value sensitivity to US economy 19
Latest company views
Datang International Power 23
Huaneng Power International 27
Huadian Power International 31