Nomura Alternative Energy Global

2 July 2010 Nomura
NOMURA I NT E RNA T I ONA L ( HK ) L I MI T E D

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Nomura Anchor Reports examine the key themes and value drivers that underpin our
sector views and stock recommendations for the next 6 to 12 months.
Any authors named on this report are research analysts unless otherwise indicated.
See the important disclosures and analyst certifications on pages 349 to 352.
Alternative Energy | GL OBAL
POWER & UTI LI TI ES

Clarisse Pan +852 2252 2192 clarisse.pan@nomura.com
And the Global Utilities and Renewables Research Team

Gr een l i ght f or val ue
Given steep YTD declines globally in the shares of many alternative energy
companies, we see attractive investment opportunities as cost reduction is
encouraging demand and government stimulus has only just begun. Of the
US$177bn pledged towards investment in renewable energy and energy efficiency
measures by governments worldwide, only 14% was utilised in 2009. That said,
growth trends are asymmetric across subsectors and not every inexpensive stock is
undervalued. In this first-ever global collaborative report, Nomura analysts look at
the entire spectrum of alternative energy to identify shifts in the operational outlook
in each subsector and highlight the best investment ideas in our coverage. Our
conclusions: wind and nuclear remain the technology of choice for renewable energy
in emerging countries. Chinese mid to down stream solar should benefit as
European players look to outsourcing to maintain profitability. We also like European
polysilicon players and European solar equipment manufacturers. Chinese wind
component manufacturers with export and offshore potential should find themselves
in a sweet spot. China, India, Japan and Korea are set to lead the nuclear
renaissance, followed by Russia and the US. We also find potential in geothermal
and CBM in Asia, and CSP and small nuclear reactors in developed countries.
Investment opportunities
Shifts we see
Crystal ball gazing
Key beneficiaries: solar, wind, utilities and capital goods
RUNNING
THEME
Anal y s t s
Clarisse Pan
+852 2252 2192
clarisse.pan@nomura.com

Ivan Lee, CFA
Head of Asia Power, Utilities, and
Renewable Energy
+852 2252 6213
ivan.l ee@nomura.com

Manu Singh
+91 22 4053 3696
manu.si ngh@nomura.com

Martin Young
Head of European Utilities &
Renewables
+44 20 7102 1536
marti n.young@nomura.com

Catharina Saponar, CFA
+44 20 7102 1231
catharina.saponar@nomura.com

Shigeki Matsumoto, CFA (Japan)
+81 3 5255 1605
shigeki .matsumoto@nomura.com

2 Jul y 2010 Nomura 1
Alternative Energy | GL OBAL
POWER & UTI LI TI ES
Cl ar i sse Pan +852 2252 2192 clarisse.pan@nomura.com
And t he Gl obal Ut i l i t i es and Renewabl es Resear ch Team

Ac t i on
While we expect a rebound in clean energy investments in 2010F and 2011F, we
recommend a selective approach for stock picks given shifts in policies, demand
growth among geographies and technology/manufacturing bases. We like Chinese
manufacturers with cost leadership and export capability, and European and
Japanese manufacturers for high-quality materials/equipment and nuclear utilities.
Cat al y s t s
Government policy support, cost-down efforts for better economics, easier access
to project financing, grid and power storage technology development.

Anc hor t hemes

Global new energy demand growth is shifting from Europe to Asia and the US, with
wind power remaining the technology of choice, followed by nuclear and solar.
Lower-cost Chinese producers should continue to gain global share, while Europe
and Japan remain major suppliers of technologies and high-end products.

Gr een l i ght f or val ue
Investment opportunities
Performance of clean energy stocks, especially solar, has been lacklustre YTD,
owing to uncertainties over government subsidy plans, looming feed-in tariff (FIT)
cuts, volatile currency exchange rates and difficulty in project funding. Nonetheless,
given the expected funding from government stimulus plans, combined with
expected demand driven by falling ASPs of clean energy technologies and steep
declines in stock prices of most clean energy companies, we believe that the time
is ripe to look at clean energy names for emerging opportunities again.
Shifts we see
We expect Chinese solar companies to benefit from outsourcing, as European
players look to outsource to maintain profitability. The global wind turbine
manufacturers will be the prime beneficiaries of a global wind recovery. We also
like European polysilicon players and solar equipment manufacturers. Chinese
wind component manufacturers with export and offshore potential should find
themselves in a sweet spot, in our view. China, India, Japan and Korea look set to
lead the nuclear renaissance, followed by Russia and the US.
Crystal ball gazing
We believe Germany will lead strong solar PV volume growth in 2010F, while
emerging markets will lend support in 2011F. We expect the global wind energy
market to register modest growth in 2010F but see a rebound in 2011F. We expect
global nuclear capacity to grow by 139-427GW over 2010-30F, from 372GW in
2009. Other clean energy technologies have huge potential, but their time has yet
to come, in our view.
Key beneficiaries: solar, wind, utilities and capital goods
Key beneficiaries: 1) solar: JA Solar, Yingli, Wacker Chemie, SMA Solar,
Centrotherm and Ulvac; 2) wind: China High Speed (CHST), Vestas and Gamesa;
3) nuclear: KEPCO, Dongfang Electric, Electricit de France (EDF), GDF Suez,
E.ON, Toshiba Plant Systems & Services, Hitachi, Toshiba Corp, Tokyo Electric
and Kansai Electric; and 4) geothermal: Energy Development Corp.
St oc k s f or ac t i on

Stock Rating
Price
(local)
Price
target
(local)
JA Solar BUY 4.8 8.0
China High Speed Trans BUY 17.6 23.5
Yingli Green Energy BUY 10.5 23.0
Electricit de France BUY 35.1 53.0
Vestas BUY 286.9 390.0
Wacker Chemie BUY 121.6 145.0
Toshiba Plant Syst & Serv BUY 1,152 1,560
Tokyo Electric Power BUY 2,432 3,500
Energy Development Corp BUY 6.2 6.4
KEPCO BUY 34,000 43,000
GDF Suez BUY 25.6 35.0
China Longyuan* REDUCE 7.8 8.5
Solarworld REDUCE 10.4 9.0
Q-Cells REDUCE 6.2 6.0
Note: 23 June closing prices
* Price target under review
RUNNING
THEME
Anal y s t s
Cl ar i sse Pan
Asi a Renewabl es
+852 2252 2192
clarisse.pan@nomura.com

Ivan Lee, CFA
Head of Asi a Power , Ut i l i t i es, and
Renewabl e Ener gy
+852 2252 6213
ivan.l ee@nomura.com

Manu Si ngh (Indi a)
+91 22 4053 3696
manu.si ngh@nomura.com

El ai ne Wu (HK & Chi na)
+852 2252 2194
elaine.wu@nomura.com

Dani el Raat s (SE Asi a, Aust r al i a)
+852 2252 2197
dani el.raats@nomura.com

Mar t i n Young
Head of Eur opean Ut i l i t i es &
Renewabl es
+44 20 7102 1536
marti n.young@nomura.com

Cat har i na Saponar , CFA (Eur ope)
+44 20 7102 1231
catharina.saponar@nomura.com

Shi geki Mat sumot o, CFA (Japan)
+81 3 5255 1605
shigeki .matsumoto@nomura.com

Masaya Yamasaki (Japan)
+81 3 5255 0571
masaya.yamasaki@nomura.com

Tet suya Wadaki (Japan)
+81 3 5255 1797
tetsuya.wadaki @nomura.com

Shi geki Okazaki (Japan)
+81 3 5255 1719
shigeki .okazaki@nomura.com

Ryo Tazaki (Japan)
+81 3 5255 1743
ryo.tazaki @nomura.com

Kei t h Nam (Kor ea)
+82 2 3783 2304
kei th.nam@nomura.com

Sabi ne Par k (Kor ea)
+82 2 3783 2342
sabine.park@nomura.com

Alternati ve Energy | Global Global Utilities and Renewables Research Team
Contents
Executive summary 6
We see a rebound in clean energy investment in 2010F 6
but performance of clean energy stocks has been divergent 6
Shifts and key investment themes 8
Quick overview of different alternative energy technologies 11
Solar: strong volume growth driven by Germany in 2010F while emerging
markets lend support in 2011F 11
Wind: growth at 7% y-y and 14% y-y in 2010F and 2011F respectively; China and
US maintain dominance 13
Nuclear: capacity could reach 818GW in 2030F, from 372GW in 2009 15
Other technologies: significant potential but their time has yet to come 18
Clean energy investments to bounce back 22
Maximum benefit of green stimulus to accrue in 2010F 22
1Q10 reflects recovery underway 24
China emerges as the new market leader 25
US has recovered since 1Q10 26
while Europe turned weaker in 1Q10 26
Wind and solar energy have gained the most traction 27
Economic conditions in Europe remain a concern 27
Global solar PV outlook 29
Global solar demand to grow 55% in 2010F and 29% in 2011F 29
Germany to remain key demand driver but other regions catching up fast 29
Supply surplus to continue into 2H10F and 2011F 31
ASP to fall in 2H10F due to German FIT cut and rising supply 35
Outsourcing to China set to increase 36
Solar policy outlook 36
Global wind power outlook 40
Global wind demand to grow 7% in 2010F and 14% in 2011F 40
Offshore wind markets to take-off 42
Global nuclear power and uranium outlook 49
Current state of nuclear power 49
Russia, US and UK set to lead the non-Asian charge 55
Need for energy diversity and security 57
Uranium: the fuel and its outlook 60
Global outlook for other renewables 66
Other technologies hold significant potential, but their time is yet to come 66
Coal seam gas in Australia 71

China alternative energy 73
China wind power sector 73
China solar photovoltaic sector 84
China hydropower sector 100
China waste management & waste-to-energy sector 106
China bio-energy sector 112
India 117
Wind the leader in renewable energy in India 117
Solar India has huge potential 121
Nuclear significant growth expected in medium term 124
Korea 128
Nuclear power: a government priority 128
Nuclear power capacity to account for 33% by 2022F 128
Nuclear plants under construction 129
Exporting Koreas nuclear technology overseas 130
US$40bn UAE nuclear power deal 130
Australia 132
Wind among the best resources worldwide 132
Bio-energy adding 1GW capacity by 2020F 133
Solar growth to slow owing to less favourable subsidies 134
Australias uranium reserves are the worlds largest 135
Government policy 136
Thailand 139
Background to Thailands alternative energy drive 141
Renewable energy to account for 10% of installed capacity by 2022 142
Tariff-driven renewable energy incentives 142
Other measures to encourage renewable energy 145
Laos crucial to Thailand fuel diversification efforts 145
Nuclear planned for 2020, but we are sceptical of execution 147
Industry regulation and planning 147
The Philippines 149
Geothermal and hydro 34% of generating mix 149
Pro-renewable government policies 149
Feed-in tariffs under discussion 151
Philippines geothermal 151
Philippines hydro electric 155
Philippines nuclear power 157
Indonesia 159
A major geothermal growth node 159

Europe renewable energy 163
Investment thesis and stock picks 163
Drivers of renewables build out 165
Our views on technologies 168
Developments and policies, by country 169
Global nuclear renaissance Europe Nuclear 177
Nuclear renaissance driven by political, cost and environmental concerns 177
Russia, US and UK set to lead the non-Asian charge 178
Power prices not high enough to set incentives for new builds 178
How to participate utilities 178
What is driving the nuclear renaissance? 180
Cost overruns are an issue 182
Nuclear issues and policies, by country 184
France nuclear issues and policies 186
Germany nuclear issues and policies 188
Russia nuclear issues and policies 191
UK nuclear issues and policies 193
US nuclear issues and policies 196
North America renewables 198
Investment themes and picks 198
Drivers of renewables build 199
Views on technologies 199
Developments and policies 200
Japan alternative energy 204
Promoting nuclear power and renewable energy 204
Promoting nuclear power 208
Maintenance, heavy machinery companies poised to benefit 219
Measures to expand renewable energy 222
Current snapshot of renewable energy 232
Wind: Asia emerges as the new regional leader 235
Solar: Demand from a more diversified country base 236
Nuclear power 237
Other renewable technologies 238

Latest company views 245
Asian companies
Energy Development Corp 246
KEPCO 250
JA Solar 254
Yingli Green Energy 257
LDK Solar 260
China Longyuan Power 263
Suzlon Energy 266
GCL Poly Energy 269
China High Speed Transmission 272

European companies
Electricite De France 277
Fortum Oyj 281
Gamesa Corp Tecnologica Sa 284
Vestas Wind Systems A/S 288
Wacker Chemie Ag 292
Solarworld Ag 295
Centrotherm Photovoltaics Ag 299
EDF Energies Nouvelles Sa 302

Japanese companies
Toshiba Plant Systems & Services 307
Japan Steel Works 311
NPC Incorporated 316
Hitachi 320
Toshiba Corp 324
Ulvac 328
Mitsubishi Heavy Industries 333
Tokyo Electric Power Co 341
Kansai Electric Power Co 345

Also see our report:
Solar Picking the sunny spots
(4 Feb, 2010)

Also see our Anchor Report:
Asia Pacific Nuclear Power Asia
starts global nuclear chain reaction
(25 Jan, 2010)

Also see our report:
The nuclear renaissance
(15 Jan, 2010)

Also see our Anchor Report:
Asia Alternative Energy
Blue sky coming through
(29 Jan, 2010)

Executi ve summary
Exec ut i ve summar y
Cl ar i sse Pan +852 2252 2192 / cl ar i sse.pan@nomur a.com
Manu Si ngh +91 22 4053 3696 / manu.si ngh@nomur a.com
Ivan Lee, CFA +852 2252 6213 / i van.l ee@nomur a.com

We see a rebound in clean energy investment in 2010F
Of the total US$177bn pledged towards investment in renewable energy and energy-
efficiency measures by governments worldwide, only 14% was utilised in 2009.
According to New Energy Finance (NEF), nearly 68% of the clean energy stimulus
spending will be spent in 2010F (35%) and 2011F (33%). Consequently, we expect to
see government support for clean energy to continue in 2010F and 2011F. According
to 1Q10 data released by NEF, investment in clean energy is steadily returning after a
decline in 2009. Total new financial investment in clean energy grew 31% y-y in 1Q10
to US$27.3bn from US$20.8bn in 1Q09.
We note that wind energy remained the technology of choice for investors and
attracted US$14.1bn in 1Q10, the highest amongst all renewable energy technologies.
We believe that along with wind, solar is also attracting significant investor attention. In
1Q10, out of 111 deals by VC/PE, solar accounted for 29 of them, more than two times
that of wind, which registered 12 deals.

Exhibit 1. Total new financial investment in clean
energy
0
5
10
15
20
25
30
35
40
45
50
1
Q
0
4
2
Q
0
4
3
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4
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4
1
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5
2
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5
3
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5
4
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1
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6
2
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3
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6
4
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6
1
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3
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7
1
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8
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8
3
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8
4
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8
1
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0
9
2
Q
0
9
3
Q
0
9
4
Q
0
9
1
Q
1
0
New financial investment in clean energy
Four quarter rolling average
(US$bn)
Source: New Energy Finance, Nomura research

Exhibit 2. Total new financial investment in clean
energy 1Q10 vs 1Q09
0
5
10
15
20
25
30
Public
markets
VC and PE Asset
financing
Total
investment
1Q09 1Q10
(US$bn)
but performance of clean energy stocks has been divergent
Contrary to popular wisdom that upticks in clean energy investment should attract
investor interest, the story has been just the opposite. We note that performance of
clean energy stocks, especially solar, has been lacklustre YTD owing to several factors.
Uncertainties over government subsidy plans, looming cuts in feed-in tariffs (FIT) and
difficulties in raising funds for renewable energy projects are some of the reasons that
have led to negative sentiment, in our view.

According to New Energy
Finance, nearly 68% of the clean
energy stimulus spending will be
spent in 2010F (35%) and 2011F
(33%)
Sentiment weighed by
uncertainties regarding
government subsidy plans,
looming FIT cuts and difficulties
in raising funds

Exhibit 3. S&P global clean energy index
60
70
80
90
100
110
J
a
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-
1
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J
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J
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1
0
J
u
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-
1
0
(Index=100)

Note: Value on 1

January, 2010 = 100
Source: Bloomberg, S&P, Nomura research

While the investment community has concerns about the negative implications for
government subsidies owing to the macro woes in Europe and elsewhere, we note that
since in only a few countries are subsidies linked to government budgets (Spain, US),
there should not be too much impact from fiscal austerity. In reality, the only area
where we see a direct impact is Spain. The governments decision to review the entire
energy/utilities sector will lead to a long period of overhang over tariffs, likely to the end
of 2010. A number of European countries have followed suit to Germanys FIT
reduction, but this is on market grounds and a reflection of cost and technology
advance rather than fiscal concern.
Similarly, wind energy demand in the US has been affected as falling fossil fuel prices
have made wind energy less competitive, especially against natural gas-based power
plants. Moreover, US utilities are delaying signing the power purchase agreement
(PPA) with wind project developers amid expectations of a further decline in wind
turbine generator (WTG) ASP.
Nevertheless, countries across the world remain committed towards clean energy
technologies. We note that G-20 countries account for more than 90% of total clean
energy investment and over the past five years their investments in clean energy have
grown more than five times. Expected clean energy funds from previously announced
government stimulus plans, combined with expected demand driven by falling ASPs of
clean energy technologies and steep declines in stock prices of most clean energy
companies, should make the sector attractive for investment, in our view.

Exhibit 4. Top 10 countries by renewable energy
capacity 2009 (GW)
0
10
20
30
40
50
60
U
n
i
t
e
d
S
t
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(GW)
0
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r
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B
r
a
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(GW)
Source: New Energy Finance, PEW, Nomura research
Exhibit 5. Top 10 countries by renewable installed
capacity growth (2005-09)
0
50
100
150
200
250
300
S
o
u
t
h
K
o
r
e
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(%)
Investor concern on subsidy
reduction from Europe
Nevertheless, countries across
the world remain committed
towards clean energy
technologies

Shifts and key investment themes
We note that many governments prioritised clean energy in Economic Recovery
Funding last year. As the focus is largely on innovators, businesses and installers in
2010F and 2011F, we believe this should help lower the cost of clean energy
technologies and pave the way for their wider adoption.
Investors need to be selective in their stock selection and be aware of shifts in policy,
demand growth and technology/manufacturing base, among others. In this report, we
highlight the key shifts underway in different technologies and regions.
Market:
Global new energy end market demand growth is shifting from Europe to Asia
and the US, with wind power continuing to be the technology of choice, followed
by nuclear, biomass and solar.
We believe the changing nature of Europe and Japan as a manufacturing and
technology location in the broader global sector context, while outsourcing to
lower-cost Chinese manufacturers, should increase, owing to pressure on ASPs
and margins along the value chain.
Renewable energy as a challenge and opportunity for other sectors.
Policies:
We believe that in the near term, FIT or other financial incentives are critical to
trigger demand growth, while national portfolio standards play a significant role
in promoting renewable energy, sustaining its growth and attracting investments
in the long term. In our view, countries with strong national policies, such as
China, Germany and the US, have a higher probability of emerging as market
leaders in clean energy technology.
Solar:
Subsidy cuts in European countries should lead to increased outsourcing to
China. This should benefit Chinese solar players such as JA Solar, LDK and
Renesola, which have exposure to non-brand OEM businesses.
Strong growth in solar end demand, along with solar companies focus on cost
leadership and efficiency to maintain profitability amidst falling ASPs, should
lead to strong order inflows for European solar equipment manufacturers, such
as SMA Solar and Centrotherm.
Strong market growth benefits volume plays, namely European polysilicon
manufactuers, eg, Wacker Chemie.
Wind:
The timing and speed of the global wind recovery is the most important topic for
global turbine manufacturers, in particular Vestas. The swing factor is the
recovery in the US, but Asian growth also benefits the global names.
We find Chinese wind gearbox manufacturer CHST in a sweet spot, as it should
benefit from its strong position in China we expect China to remain one of the
top wind countries as well as the companys export potential due to its cost
competitiveness and product quality comparable to international peers.
Europe will be the main growth driver of the offshore wind market and we
expect the global offshore market to grow 113% y-y in 2010F and 111% in
2011F. The offshore wind segment will be the next growth driver for the Chinese
WTG market as attractive locations for onshore wind farm development have
already been exploited. Potential beneficiaries are Vestas and Repower in
Europe and Sinovel, China High Speed and Goldwind in China, in our view.
China, Germany and the US have
higher probability of emerging as
market leaders in clean energy
technology
With focus largely on innovators,
businesses and installers, we
expect lower costs of clean
energy technologies

Nuclear: New build in Asia is set to be dominated by China, India, Japan and Korea,
while that in the rest of the world is likely to be more widely spread. However, ex
Asia, three countries stand out as having significant new build aspirations over the
next 15 years. They are Russia, where we see 16GW of capacity additions, the US
(12GW) and the UK (10GW).
Key beneficiaries: 1) solar: JA Solar, Yingli, Wacker Chemie, SMA Solar,
Centrotherm and Ulvac; 2) wind: China High Speed, Vestas and Gamesa;
3) nuclear: KEPCO, Dongfang Electric, EDF, GDF Suez, E.ON, Toshiba Plant
Systems & Services, Hitachi, Toshiba Corp, Tokyo Electric and Kansai Electric; 4)
geothermal: Energy Development Corp.

Exhibit 6. Company snapshot
Companies with exposure to solar Ticker Rating
Yingli Green YGE US BUY
JA Solar JASO US BUY
Wacker Chemie WCH GR BUY
REC REC NO BUY
PV Crystaloxx PVCS LN BUY
Renesola SOLA LN BUY
Solar Millennium S2M GR BUY
Centrotherm CTN GR BUY
SMA Solar Technology S92 GR BUY
Ulvac 6728 JP BUY
LDK Solar LDK US NEUTRAL
GCL Poly 3800 HK NEUTRAL
Abengoa ABG SM NEUTRAL
Roth & Rau R8R GR NEUTRAL
Meyer Burger MBTN SW NEUTRAL
Solargiga 757 HK REDUCE
Q-Cells QCE GR REDUCE
Solarworld SWV GR REDUCE
Conergy CGY GR REDUCE
Solon SOO1 GR REDUCE
Manz Automation M5Z GR REDUCE

Companies with exposure to geothermal
Energy Development Corp EDC PM BUY
Source: Nomura research

Exhibit 7. Company snapshot
Companies with exposure to wind Ticker Rating
China High Speed 658 HK BUY
Vestas VWS DC BUY
Gamesa GAM SM BUY
Suzlon SUEL IN NEUTRAL
EDF Energies Nouvelles EEN FP NEUTRAL
China Longyuan 916 HK REDUCE

Companies with exposure to hydro
EGCO EGCO TB BUY
GLOW GLOW TB BUY
RATCH RATCH TB NEUTRAL
China Yangtze Power 600900 CH BUY
Fortum FUM1V FH REDUCE
Electricit de France EDF FP BUY

Companies with exposure to nuclear
KEPCO 015760 KS BUY
E.ON EOAN GR BUY
Electricit de France EDF FP BUY
GDF Suez GSZ FP BUY
Toshiba Plant Systems & Services 1983 JP BUY
Hitachi 6501 JP BUY
Toshiba Corp 6502 JP BUY
Tokyo Electric Power 9501 JP BUY
Kansai Electric Power Co Inc 9503 JP BUY
RWE RWE GR NEUTRAL
Japan Steel Works 5631 JP NEUTRAL
Mitsubishi Heavy Industries 7011 JP NEUTRAL
Fortum FUM1V FH REDUCE

Exhibit 8. Global alternative energy company universe
Environmental protection
Waste-to-energy Waste management and recycling Wastewater treatment Forestry
China Everbright International 257 HK Asaka Riken 5724 JP Beijing Capital Co 600008 CH China Grand Forestry Green Res. 910 HK
China Power New Energy Dev 735 HK Centillion Env CENR SP Bio-treat Technology BIOT SP China Timber Resources 269 HK
Covanta CVA US China Boqi Environmental 1412 JP China Everbright International 257 HK Forest Enterprises Australia FEA AU
HKC (Holdings) 190 HK China Ecotek Corporation 1535 TT China Water Affairs Group Ltd 855 HK Fujian Yongan Forestry Group 000663 CH
Tianjin Teda 000652 CH China Metal Recycling (listing pending) 773 HK China Water Industry Group Limited 1129 HK Great Southern GTP AU
Weifu High Tech 000581 CH Ecowise Holdings ECW SP Eguard Resources Development 000826 CH Guangzhao Industrial Forest GIFB SP
Zhongde Waste Tech ZEF GR Enviro-Hub Holding ENVH SP Guangdong Investment 270 HK Gunns Limited GNS AU
PRAJ Industries PRJ IN Epure International EPUR SP Hong Kong and China Gas 3 HK Jilin Forest Industry 600189 CH
Shriram EPC SEPC IN Fujian Longking 600388 CH Hyflux Limited HYF SP Lingui Dev Bhd LING MK
Fujikoh Co 2405 JP NWS Holdings 659 HK Mentiga Corp MENT MK
Air pollution control Hua Xia Healthcare Holdings 8143 HK Sinomem Technology Limited SINO SP Minho Malaysia MIN MK
CO2 Group Ltd COZ AU Insun ENT Co. 060150 KS Tianjin Capital Environmental Protection 1065 HK Samko Timber Ltd SAMKO SP
Eco-Tek Holdings 8169 HK Jiangxi Black Cat Carbon 002068 CH Veolia VIE FP Samling Global 3938 HK
Envair Holding B ENHB MK Keppel Corp Limited KEP SP Wuhan Sanzhen Industry 600168 CH Sumalindo Lestar SULI IJ
Fujian Longking Co Ltd 600388 CH Koentec Co . 029960 KS Xinjiang Tianye Water Saving 840 HK Tekala Corp Bhd TEK MK
Kael Co Ltd 082270 KS Shenzhen Dongjiang Environment 8230 HK Sino-Environment SINE SP TFS Corporation TFC AU
KC Cottrell Co Ltd 009440 KS Takeei Corp 2151 JP Phoslock Water S PHK AU Timberwell Bhd TWB MK
Zhejiang Feida Environment 600526 CH Transpacific Industries Group TPI AU Ion Exchange ION IN Wijaya Baru WIJ MK
Union Steel Hldg USH SP Shriram EPC SEPC IN Willmott Forests WFL AU
Wuhan Kaidi Electric 000939 CH Thermax TMX IN Yunnan Green 002200 CH
Zhejiang Feida Environmental 600526 CH Suez Environnement SEV FP
Zhonghui Holdings ZHL SP
Ion Exchange ION IN
Ecoboard India WBS IN
Clean and renewable
Solar Wind Hydro Nuclear
Cell Gearbox GD Power 600795 CH Nuclear equipment providers
China Sunergy CSUN US China High Speed Transmission 658 HK Guangdong Elec 000539 CH Areva SA CEI FP
E-Ton Solar 3452 TT Hansen Transmission HSN LN Guiguan Power 600236 CH General Electric Co GE US
Gintech 3514 TT Wind Turbine Guizhou Qianyuan Power 002039 CH Harbin Air Conditioning Co 600202 CH
JA Solar JASO US Baoding Tianwei Baobian Electric 600550 CH Hydroogkh HYDR RU Harbin Power Equipment 1133 HK
Motech 6244 TT Clipper CWP LN Inner Mongolia Mengdian 600863 CH Hitachi Limited 6501 JP
Q-Cells QCE GR Dongfang Electric 1072 HK Sichuan Minjiang Power 600131 CH Kajima Corp 1812 JP
Wafer, Cell and Module Gamesa GAM SM Unified Energy EESR RU Kimura Chemical Plants 6378 JP
Trina Solar TSL US Goldwind 002202 CH Yangtze Power 600900 CH Shanghai Electric Group 2727 HK
Yingli Green Energy YGE US Guizhou Changzheng Electric 600112 CH Lanco Infratech LANCI IN BHEL BHEL IN
Cell and Module Huayi Electric 600290 CH Tata Power TPWR IN HCC HCC IN
Canadian Solar CSIQ US Lanzhou Great Wall Electrical 600192 CH L&T LT IN L&T LT IN
Evergreen Solar ESLR US Ningxia Yinxing Energy 000862 CH GMR GMRI IN Toshiba 6502 JP
Solarfun SOLF US Nordex NDX1 GR GVK GVKP IN Toshiba Plant Systems & Services 1983 JP
Sunpower SPWR US Repower RPW GR Fortum FUM1V FH Japan Steel Works 5631 JP
Suntech Power STP US Shanghai Electric 2727 HK Electricit de France. EDF FP Mitsubishi Heavy Industries 7011 JP
Tata Power TPWR IN Suzlon SUEL IN Hydro Equipment Dongfang Electric 1072 HK
BHEL BHEL IN Vestas VWS DC BHEL BHEL IN Shanghai Electric 2727 HK
Moser Baer MBI IN Xiangtan Electric Manufacturing 600416 CH Kirloskar Brother KKB IN Nuclear power producers
XL Telecom XLE IN Shriram EPC SEPC IN Alstom India ABBAP IN CLP Holdings 2 HK
Bharat Electronics BHE IN Blade ABB India ABB IN Datang International 991 HK
Webel SL Energy WSES IN Jiangsu Miracle Logistics System 002009 CH NTPC NATP IN
Wafer Sinoma Science & Technology 002080 CH Tokyo Electric Power 9501 JP
Green Energy 3519 TT Tianjin Xinmao Science & Technology 000836 CH Kansai Electric Power 9503 JP
LDK LDK US Wind Project Operator
MEMC WFR US Acciona ANA SM
Renesola SOL US China Longyuan Power Group 916 HK
Solargiga 757 HK China Power New Energy 735 HK
Wafer Works 6182 TT China Windpower Group 182 HK
Module and System CLP Holdings 2 HK
Aleo Solar AS1 GR Guangdong Baolihua New Energy 000690 CH
Conergy CGY GR HK Electric Holdings 6 HK
Solon SOO1 GR HKC Holdings 190 HK
Full y Integrated Shanghai Huitong Energy Resource 600605 CH
Ersol ES6 GR Shenyang Jinshan Energy 600396 CH
REC REC NO Iberdrola Renovables IBR SM
SolarWorld SWV GR EDF Energies Nouvelles EEN FP
Pol ysilicon EDP Renovaveis EDPR PL
OCI Company (DC Chem) 010060 KS
Wacker Chemie WCH GR Solar thermal
Equipment Abengoa ABG SM
SMA solar technology SMA GR Solar Millennium S2M GR
Roth & Rau R8R GR
Centrotherm CTN GR
Meyer Burger MBTN SW
Manz automation M5Z GR
Biomass Coal-to-chemical Coalbed methane Natural gas
Bio-fuel producers Baike 000627 CH Caterpillar Inc. CAT US AGL Resources ATG US
Australian Biodiesel Group ABJ AU China Energy Limited CEGY SP Eastern Star Gas Limited ESG AU Atmos Energy ATO US
Australian Renewable Fuels ARW AU Datang International 991 HK Energy Developments Limited ENE AU Cheniere Energy LNG US
China Biodiesel Int'l Holdings CBI LN Lanhua 600123 CH Enric Energy Equipment 3899 HK China Gas 384 HK
Mission Biofuels MBT AU Lutianhua 000912 CH Enviro Energy International 8182 HK CR Gas 1193 HK
Verasun Energy Corp VSE US PetroChina 857 HK Far East Energy Corp FEEC US El Paso EP US
PRAJ Industries PRJ IN Shenhua Ningxia 1088 HK Green Dragon Gas GDG LN Enbridge Energy Partners EEP US
Shriram EPC SEPC IN Sinopec 338 HK Greenpower Energy GPP AU GAIL GAIL IN
Abengoa ABG SM Tiancheng 600392 CH Hong Kong and China Gas 3 HK HKCG 3 HK
Feedstock producers Tianke 600378 CH Karoon Gas Australia Limited KAR AU Korea Gas 036460 KS
Chaoda Modern Agriculture 682 HK Tianranjian 000683 CH Metgasco Limited MEL AU ONGC ONGC IN
China Agri 606 HK Zhongyu Gas Holdings Limited 8070 HK Pacific Asia China Energy Inc. PCE CN Osaka Gas 9532 JP
IOI Corporation IOI MK Xinao Gas Holdings Limited 2688 HK PetroChina 857 HK Perusahaan Gas PGAS IJ
Kuala Lumpur Kepong KLK MK Yanzhou 1171 HK Planet Gas Limited PGS AU Petronas Gas PTG MK
Noble Group NOBL SP JSPL JSP IN Sunshine Gas Limited SHG AU Reliance Industries RIL IN
Sinofert Holdings 297 HK Reliance Industries RIL IN Toho Gas 9533 JP
Wilmar Int'l Limited WIL SP Essar Oil ESOIL IN Tokyo Gas 9531 JP
Xiwang Sugar Holdings 2088 HK ONGC ONGC IN Towngas China 1083 HK
Xinao Gas 2688 HK
Water utilities Energy conservation
Beijing Capital Company 600008 CH Hyflux HYF SP Shanghan Chengtou 600649 CH Environmental Clean Tech ESI AU
Beijing Enterprises Water 371 HK Ion Exchange (India) ION IN Suez Environment SEV FP Environmental Solutions ESWW US
Bio-treat Technology BIOT SP Manila Water Co. Inc MWC PM Sinomem Technology SINO SP Hitachi Zosen 7004 JP
China Boqi Environ. Solutions 1412 JP Pan Asia Environmental 556 HK Tianjin Capital 1065 HK Takuma Co. 6013 JP
China Everbright International 257 HK PBA Holdings Berhad PBAH MK Veolia VIE FP Surya Roshini SYR IN
China Water Affairs 855 HK Puncak Niaga Holdings Bhd PNH MK Woongjin Coway Co Ltd 021240 KS Havells India HAVL IN
China Water Industry 1129 HK Qianjiang Water Resources 600283 CH Xinjiang Tianye Water Saving 840 HK Wipro WPRO IN
Eastern Water EASTW TB Ranhill Berhad RANU MK YTL Power International YTLP MK Battery
Guangdong Investment 270 HK Shanghai Youngsun 900935 CH BYD 1211 HK
Northumbrian Water NWG LNU United Utilities UNN/ LN Exide CHLR IN
Pennon PNN LN Severn Trent SVT LN


Sector overview
Qui ck over vi ew of di f f er ent al t er nat i ve
ener gy t echnol ogi es
Solar: strong volume growth driven by Germany in 2010F while
emerging markets lend support in 2011F
Germany to remain key demand driver but other regions catching up
fast
We expect global PV demand to grow 55% y-y in 2010F and 29% y-y in 2011F. The
rapid growth rate for 2010F owes mainly to Germany, which on our estimates, will
contribute 44% of total global capacity addition in 2010F. In addition to Germany, we
expect Italy, France and Spain to be the other key demand drivers of the global solar
PV market in 2010F. Europe as a region will continue to dominate the global solar PV
market and contribute approximately 76% of the global demand in 2010F. However,
we are positive that global solar PV demand is becoming more broad-based with the
emergence of new countries such as China and the US.
For 2H10F, we are particularly confident about the volume outlook of Chinese solar
companies given their cost competitiveness, as well as their improved brand image
and product quality. We believe most of the listed companies have already sold out
their FY10F available capacity.
For 2011F, we expect annual solar installation in France and Italy to record growth of
65% y-y and 30% y-y, respectively, and partly make up for the decline in solar demand
from Germany, for which we expect it to decline by 2% y-y. Along with France and Italy,
we see significant growth from emerging markets such as the US and China, which we
expect to witness growth of 75% and 90%, respectively, in 2011F. We believe that
even after incorporating the proposed and upcoming tariff reductions, returns will still
be attractive enough to support a strong solar end market in Europe.

Exhibit 9. Solar demand annual new installation
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2003 2004 2005 2006 2007 2008 2009 2010F 2011F
0
20
40
60
80
100
120
140
Demand (LHS) Growth y-y (RHS)
(MW) (%)

Source: EPIA, Solarbuzz, Nomura estimates

Europe as a region will continue
to dominate the global solar PV
market
Global solar PV demand is
becoming more broad-based with
the emergence of new countries
such as China and the US

Exhibit 10. Average IRRs for European renewables under current support
schemes
Technology Country Average IRR
Wind Germany 6-8%
France 6.5-9%
Spain 7-8%
Italy 12%
UK onshore 9%
US PTC c7%
US cash grant 7-8%

Solar Germany 8-10%
France 12-16%
Spain 12-15%
Italy 18-20%
Supply surplus to continue into 2H10F and 2011F
While we see tight supply for wafer and cell in 1H10F, we find that polysilicon supply
remains ample due to aggressive capacity expansion by both international incumbents
and new entrants in Asia. That being said, we see very high execution risk to these
capacities, and have had indications of delays, which could result in the poly market
ending up tighter than it might appear at first glance. We believe ASPs of wafers and
cells are likely to increase ~5% q-q in 2Q10F, while we only see polysilicon prices
stabilising at US$50-55/kg during the same period. We expect polysilicon capacity to
grow 40% y-y in 2010F and 30% y-y in 2011F. Consequently, we expect the surplus in
polysilicon to continue in 2H10F and 2011F, which should lead to a further price
decline, the brunt of which for the tier-2/3 manufacturers not just in polysilicon but
also flowing across the value chain.

Exhibit 11. Polysilicon surplus
(50,000)
0
50,000
100,000
150,000
200,000
250,000
2008 2009 2010F 2011F 2012F
Polysilicon supply
Global demand (solar+semi)
Supply-demand gap
(MT)

Source: Company data, Nomura estimates
Fall in ASPs to continue
With polysilicon ASPs in 2Q10F hovering in the same range (US$50-55/kg) as in 1Q10,
we are seeing some stability. Over the remainder of 2010, prices are likely to hold up
around the low US$50/kg level for incumbent polysilicon manufacturers while we
expect new entrants, such as GCL Poly, to continue lowering prices as production
ramp up. Thereafter, we would expect a trajectory towards the US$40-50/kg level in
2011F. European companies are likely to fetch ASPs above average and Chinese
ones below average. On account of the polysilicon price decline, the capacity
expansion across the value chain and the increased competition due to the entry of
new players, we expect to see further ASP declines in wafers, cells and modules in
2010F.
Aggressive polysilicon capacity
expansion by both international
incumbents and new entrants in
Asia
Capacity expansion and growing
competition to exert pressure on
ASPs of wafer, cell and module in
2010F
Capacity expansion and growing
competition to exert pressure on
ASPs of wafer, cell and module in
FY10F

Outsourcing to China set to increase
We expect high-cost European and Japanese companies to increase outsourcing to
China to maintain profit margins. Given the 15-16% FIT reduction in Germany, we
expect solar project developers to look for a similar ASP reduction. Tier-one Chinese
module companies have significant cost advantages compared with their European
peers and hence, can price their modules 15-20% cheaper than their European peers
without compromising on quality.
Nomuras solar stock picks
Within Asia, JA Solar (JASO US, BUY, PT: US$8.00) remains our top pick in the China
solar sector in the near term, given its strong earnings momentum over the next few
quarters, low exposure to euro depreciation and positive changes in its business
model and customer portfolio, which we expect to help a re-rating of the stock. We
maintain our BUY on Yingli (YGE US, BUY, PT: US$23.00), given its long-term
prospects, brand equity and cost leadership.
We note that Tier-1 European poly manufacturers should benefit from global solar end
market volumes, translating into poly volumes growth and from their sustainable
competitive advantages in businesses with high barriers to entry. Our preferred picks
are Wacker Chemie (WCH GR, BUY, PT: 145) and REC (REC NO, BUY, PT:
NOK25). Within the wafer segment, we like Renesola (SOLA LN, BUY, PT: GBp250)
for its cost advantages of its Chinese manufacturing. We also think that PV Crystalox
(PVCS LN, BUY, PT: GBp78) is well positioned, with the added benefit of selling into
the premium Japanese market. Demand growth, which is driving expansion, and the
need for innovation, which is driving upgrades and replacements, should translate into
strong order flow for Centrotherm (CTN GR, BUY, PT: 40), which is well positioned
with a strong high end product portfolio. We also like SMA (S92 GR, BUY, PT: 125)
as a direct beneficiary from end market growth due to its manufacturer agnostic
inverter business, which is leveraged into end market demand.
Wind: growth at 7% y-y and 14% y-y in 2010F and 2011F
respectively; China and US maintain dominance
We expect the global annual wind turbine generator (WTG) market to grow 7% y-y in
2010F and 14% y-y in 2011F, with China and the US to remain the top end markets.
We expect China and European WTG markets to be the key growth driver for the
global market in 2010F and contribute approximately 39% and 29% of the global
installation, respectively. A difficult credit environment combined with falling fossil fuel
prices would lead to subdued growth in 2010F, in our view. Consequently, we expect
the US market to decline 18% y-y in 2010F, but we expect the market to rebound in
2011F and grow 25% y-y.

Exhibit 12. Global WTG market new installation
0
10,000
20,000
30,000
40,000
50,000
60,000
2007 2008 2009 2010F 2011F 2012F
0
5
10
15
20
25
30
35
40
45
Global annual demand (LHS) Growth y-y (RHS)
(MW) (%)

Source: BTM Consult ApS, Nomura estimates
Tier-one Chinese module
companies have significant cost
advantages compared with their
European peers
Solar stock picks: JA Solar,
Yingli, Wacker Chemie, REC,
Renesola, PV Crystalox,
Centrotherm and SMA
A difficult credit environment,
combined with falling fossil fuel
prices should lead to subdued
growth in 2010F

Offshore wind markets to take off
We remain positive about the prospects of the offshore wind turbine market and expect
growth in this segment to take off. We note that most offshore projects are expected to
come up in Europe, especially in Germany and the UK. We expect the offshore wind
market to grow 113% y-y in 2010F and 111% in 2011F.
We see the offshore market as a major growth area within the wind segment. This is
the case globally, but Europe is a centre of development and will, in our view, witness
the most important growth at the early stage. We see offshore wind as an area of
significant growth over the next 10-20 years, particularly for those companies with
operations in northern Europe, where wind resources offer attractive opportunities.
Within Asia, the offshore wind segment in China should also be the next growth driver
for the Chinese WTG market, in our view. According to comments made by wind
operators including China Longyuan and China Windpower, a majority of attractive
locations for onshore wind farm development have already been occupied by industry
players. As a result, we expect offshore wind development to become the next growth
driver for the Chinese wind industry over the next three years.
Chinese WTG makers grow global share along with China market,
while European WTG makers maintain quality leadership
The entry of three Chinese players Sinovel, Goldwind and Dongfang into the top-
10 global wind turbine generator suppliers clearly reflects the growing prominence of
China in the global wind energy sector. With 13.8GW of new capacity installed, China
has become the largest wind market worldwide since 2009. Its cumulative wind
capacity grew at an impressive rate of 115% y-y in 2009, thanks to favourable
government policies and easier availability of project financing. We note that Chinese
wind turbine suppliers control more than 85% of the domestic market and hence the
significant growth in the Chinese market has helped Chinese wind turbine suppliers to
break into the global league.
We note that international players have entered the Chinese wind turbine market but
have been losing market share in the China market. Chinese players are able to price
their wind turbines 20-30% cheaper than their international peers, and this gives them
a decisive edge when bidding for projects in China. Consequently, Sinovel, Goldwind
and Dongfang together gained 10.2% incremental market share of the global wind
turbine market at the expense of incumbents in 2009. However, we are observing that
the Western quality proposition appears to be gaining ground again and think that
Vestas and Gamesa could improve order flows from China. We have recently seen
improving order flow for Western manufacturers. We take this as a sign of market
opening, as well as a change in customer mentality from pure cost per MW to cost per
MWh, and thus expect them to continue making inroads, while Chinese wind
companies should maintain dominance in the Chinese market.
We expect the Chinese WTG suppliers, with their superior cost competitiveness and
strong funding availability from the mother country, to start to attempt moving towards
overseas markets. However, we believe that this would be a long-term process, as the
majority of the Chinese WTG suppliers do not have long enough track records and
local customer relationships overseas. In our view, the European market leaders will
defend their market share through their customer relationships and technological edge.
Furthermore, as wind turbine manufacturing needs to take place close to the end
markets, Chinese manufacturers would lose their key cost advantages in other regions
and competition would move onto a level playing field.
Offshore market the major growth
area within the wind segment

Entry of bigger players a welcome change
There has been a shift in the customer base for wind energy towards bigger players,
such as power utilities and independent power producers (IPPs) over the past few
years. The fact that the market share of the top-15 wind operators has increased to
35% in 2009 from 23% in 2003 is a clear indication of the trend, of which the larger
players are beginning to dominate, in our view. We are positive about this shift in
customer base as the entry of these bigger players, who have much-deeper pockets,
should provide stability in demand.
A shift towards larger-size turbines
The average size of installed wind turbine continues to increase, especially in more
developed wind markets such as in European countries. However, the speed of the
transition towards larger-sized wind turbines is slow, as most of the new wind turbine
suppliers, especially in China, currently provide only smaller-size turbines of around
1.5MW, in our view. Another trend that we are witnessing is that wind turbine suppliers
are focusing their research and development efforts on products that can work
efficiently in areas which have weaker wind conditions. We note that the key reason for
the shift is that areas with stronger wind conditions in most developed wind markets
have already been exploited, leaving weaker wind areas for wind farm development.
Nomuras wind stock picks
Within Asia, CHST (658 HK, BUY, PT: HK$23.50) remains our top pick in the sector for
its strong margin outlook, cost-control capability, continuously improving product mix
and undemanding-looking valuations.
For Europe, turbine manufacturers are our preferred picks as we see them benefitting
from a market leadership position, high-end technology that will be an enabler for
levelised cost of energy (LOCE) and broad geographic exposure to global growth with
an increased presence in Asia. Vestas (VWS DC, BUY, PT: DKK390) is our top pick.
Nuclear: capacity could reach 818GW in 2030F, from 372GW in
2009
We now expect the next wave of nuclear power plant construction to begin under the
backdrop of rising electricity demand and a greater need for low-carbon energy. Based
on World Nuclear Associations (WNA) forecasts, global nuclear capacity will reach
818GW in 2030 (a 4% CAGR from 372GW in 2009) and will represent 16% of total
electricity generation (from 14%). This requires an investment of US$1.3tn during the
period. Our Nomura global nuclear model suggests a 180GW increase in capacity by
2024F, which is possibly conservative, but still indicates a 48% increase from existing
global nuclear capacity. Of this, Asia (China, India and Japan) will likely account for
more than half. We note that growing demand for electricity (especially from emerging
economies such as China and India), combined with the need for clean energy amid
threats of global warming and the need for energy security and diversification, is the
key driver for the upcoming growth in nuclear power.
Majority of the new additions to come from Asia
According to the WNA, there is 200GW of nuclear capacity planned or under
construction in the world, the majority of which (62%) is in Asia led by China (28%;
20GW under construction and 37GW planned), India (12%; 3GW and 22GW), Japan
(10%; 2.3GW and 18GW) and Korea (7%; 6.7GW and 8.2GW). There were 53 nuclear
reactors under construction in the world, with 33 located in Asia.

Wind stock picks: CHST and
Vestas
Asia is likely to account for more
than half of the 180GW expected
rise in capacity by 2024F, in our
view

Exhibit 13. Global nuclear power capacity
371 372
445
511
380
543
807
0
100
200
300
400
500
600
700
800
900
2008 2010F 2020F 2030F
(GW)
Low Case High Case
Source: IAEA
Exhibit 14. Global nuclear power generation
2,598
2,785
3,962
5,930
3,771
3,261
2,732
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2008 2010F 2020F 2030F
(TWh)
Low Case High Case
Source: IAEA
Uneven uranium distribution prompts increase in cross-border M&A
activity
As nuclear power development is picking up speed, uranium demand is set to grow at
approximately the same pace as the rise in nuclear power capacity. The increase in
demand has seen an expansion in uranium exploration and production. Uranium
exploration expenditures in 2006 were US$774mn, a 250% increase from 2004,
according to the International Atomic Energy Agency (IAEA).
World-known reserves of uranium (5.5mn tonnes) to 2006 consumption are 100 years,
but they are mostly held by Australia (23%), Kazakhstan (15%) and Russia (10%).
Because the US, France and Japan have the largest number of nuclear reactors in the
world, they make up over 58% of global uranium demand. As China, India, Russia and
South Korea have the largest amount of nuclear power capacity in the pipeline;
uranium demand growth will be driven mainly by these countries, which also raises
concerns about these countries fuel security. We believe the mismatch on uranium
resources and demand should drive more cross-border M&A and co-operation on
uranium to happen.
Uranium spot prices set to rise
Spot uranium per pound U3O8 traded at around US$41 in June 2010.
Nuclear has lowest generation cost
According to a study conducted by International Energy Agency (IEA) and the Nuclear
Energy Agency (NEA), which compiled data from 10 countries, the cost of nuclear
generation is the cheapest, followed by coal, gas, wind, micro-hydro and solar. Costs
of generating electricity depend on some country-specific factors. On average, nuclear
power has lower costs than others (coal, gas, on-shore wind), mainly due to its high
utilisation, long depreciation period and low O&M costs.
Smaller nuclear reactors attracting attention
Today, due to the high capital cost of large power reactors generating electricity via
steam cycles and the need to service small electricity grids under about 4GWe, we see
smaller nuclear reactor units being developed. These may be built independently or as
modules in a larger complex, with capacity added incrementally as required.
Westinghouse's IRIS (International Reactor Innovative & Secure) is an advanced third-
generation reactor. A 335MWe capacity is proposed, although it could be scaled down
to around 100MWe. For developed countries, small modular units offer the opportunity
of building as necessary; for developing countries it may be the only option, because
their electric grids cannot take 1,000-plus MWe single units.

We believe the mismatch in
uranium resources and demand
should drive more cross-border
M&A and co-operation

Nomuras nuclear-related stock picks
We identify AECL (Canada, although up for sale), Areva (France), Atomstroyexport
(Russia), GE Hitachi (US, Japan), Mitsubishi Heavy Industries (Japan), and Toshiba
(US, Japan) as the companies competing for reactor design and build. We
acknowledge that KEPCO (Korea) may participate and be successful in non-Asian
tenders, but assume that Chinese providers will stay largely domestically focused for
now. A number of European utilities are active in nuclear.
We like EDF, given its future nuclear expansion plan within and outside of France and
also due to lifetime extension benefits related to its nuclear portfolio. In addition to EDF,
we also like GDF Suez for its lifetime extension benefits of its existing nuclear plants,
which can be done at a fraction of the cost of new build.
Within Asia, we like KEPCO, Koreas consortium leader for overseas nuclear project
bids. The KEPCO-led consortium successfully bid for the largest overseas turnkey
nuclear power project to date, out of Abu Dhabi, in December 2009. Domestically, 85%
of KEPCOs generating capacity expansion through 2016 will come from nuclear
power. An impending fuel cost escalation scheme, which will bring about a tighter,
more guaranteed tariff scheme, also reaffirms our BUY rating on KEPCO. Also,
Hyundai E&C and Samsung C&T have a stake of 55% and 45%, respectively, in the
W7tn UAE nuclear plant-building contract and should see an 8-10% uplift to sales from
this project.
We also like Dongfang Electric, which we believe has immediate and the biggest
benefit from the robust growth of new energy investment (nuclear and wind) in China.
The company currently has a market share of 60% and 15% in nuclear and wind
power equipment market in China, respectively. Shanghai Electric (with a market share
of 33% in nuclear and 2% in wind), which has partnership with Westinghouse
(AP1000), should benefit from growth in 3G nuclear facilities in the longer term. With
Chinas aggressive capacity growth plans, a focus on nuclear power operators has
been the search for uranium.
Two Hong Kong-listed companies, CNNC International and Silver Grant have
respectively received investments from China National Nuclear Corp (CNNC) and
China Guangdong Nuclear Power Holding Co (CGNPC) (unlisted) with plans to
acquire uranium assets overseas. We are also on the lookout for potential listings of
China nuclear power operators. CGNPC stated it is targeting an IPO in 2011.
In India, of particular interest to us are Larsen and Toubro, which has formed a JV with
Nuclear Power Corporation of India for the manufacturing of nuclear forgings, and
Hindustan Construction Company, which has already played a big part in building
several of Indias nuclear power plants.
In Japan, we believe Electric power utilities increased capital spending will benefit the
sales and operating profits of shipbuilding/heavy machinery companies that build
thermal and nuclear power plants, other capital goods companies, and electric power
plant maintenance companies. We expect a particular boost to earnings at valve
manufacturers and plant maintenance companies with a high weighting of sales to
electric power companies.
In particular, we focus on two valve manufacturers that also provide maintenance
services, Okano Valve Mfg. and Toa Valve Engineering, and three plant maintenance
companies, Toshiba Plant Systems & Services, Tokyo Energy & Systems, and Taihei
Dengyo Kaisha. These companies generate more than half of their total sales from
electric power companies (10/3 estimates), and their earnings should be strong in 11/3
as well.

Nuclear stock picks: EDF, KEPCO

Exhibit 15. Weighting of sales to electric utilities at capital goods companies
(10/3 estimates): valve suppliers, maintenance companies lead the pack
0 20 40 60 80 100 120
[6501] Hitachi
[5631] Japan Steel Works
[6502] Toshiba
[7011] Mitsubishi Heavy Industries
[1983] Toshiba Plant Systems & Services
[1968] Taihei Dengyo
[1945] Tokyo Energy & Systems
[6466] Toa Valve Engineering
[6492] Okano Valve Mfg
(%)
Nuclear power
Thermal power, other types

Source: Weighting of sales to electric utilities at capital goods companies (10/3 estimates): valve suppliers,
maintenance companies lead the pack
Other technologies: significant potential but their time has yet
to come
Bioenergy
We expect China, India and the US to lead the biomass-to-power expansion in the
next few decades. In the medium term, the focus for biomass-to-power would be on
the decentralised biomass systems, especially at places where feedstock is easily
available. We expect biofuel production to grow 6-8% per year and will contribute
around 5% of total road transport fuel in 2030F.

Exhibit 16. Biomass-to-power installed capacity
0
40
80
120
160
200
2007 2015F 2020F 2025F 2030F
(GW)

Source: IEA, Nomura estimates
Geothermal
With nearly 8GW of projects under development, we see a lot of interest in geothermal
technology due to a combination of base load power, cost competitiveness and zero
emissions. According to the International Geothermal Association, installed capacity of
geothermal energy is expected to grow more than 70% to 18.5GW by 2015, from
10.7GW in 2009. The US has the largest geothermal capacity, now just over 3GW
(28.8% of the world total), followed by the Philippines (1.9GW), Indonesia (1.2GW) and
Mexico (1GW). As a global leader in geothermal energy production with expertise
throughout the geothermal value chain, we see appreciable scope for EDC to further
expand its geothermal energy capacity base over the medium term.

We expect biofuel production to
grow 6-8% per year
As a global leader in geothermal
energy production, we see
appreciable scope for EDC to
further expand its geothermal
energy capacity base

Exhibit 17. Geothermal installed capacity
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2003 2004 2005 2006 2007 2008 2009 2010F 2015F
(MW)

Source: IGA, Nomura estimates
Hydropower
According to the IEA, approximately 160GW of hydropower capacity is currently under
construction, of which half is in China, while India is constructing 13GW, Russia and
Brazil each has about 5GW under construction. There is limited scope for development
and expansion of hydropower in Organisation for Economic Co-operation and
Development (OECD) countries as the best sites have already been exploited, in our
view. In the Philippines, we believe EDC and Aboitiz are well placed to benefit from
increased hydroelectric utilisation over the medium term, which should underpin
earnings and valuations. In addition, we like China Yangtze Power, the worlds largest
hydropower producer with 21GW of capacity on hand, to benefit from the rapid growth
of hydropower in China.

Exhibit 18. Hydropower penetration by region
0
10
20
30
40
50
60
70
80
Africa Asia South
America
Australasia North
America
Europe
(%)

Source: World Atlas of Hydropower & Dams, Nomura research
Concentrating solar power (CSP)
According to industry estimates (Greenpeace International, SolarPACES, and Estela),
cumulative capacity of CSP technology is expected to reach 830GW by 2050F, from
around 1GW in 2009, implying a CAGR of 18% over the next 40 years, under the
moderate scenario. In our view, among different CSP technologies, parabolic trough
technology provides peak demand generation and would be the technology of choice.
We note that several emerging technologies that promise higher conversion
efficiencies and cost-competitive generation have been demonstrated on a smaller
scale. These technologies, such as point-focusing power towers and line-focusing
Fresnel reflectors, may extend the ability of CSP to provide shoulder or base-load
power in addition to peak.

Exhibit 19. CSP technology cumulative growth
0
100
200
300
400
500
600
700
800
900
2009 2010F 2015F 2020F 2025F 2030F 2035F 2040F 2045F 2050F
(GW)

Source: SolarPACES, Estela, Greenpeace, Nomura research
China eyes coal bed methane (CBM) to alleviate energy shortages
China has set an ambitious target to increase coal bed methane (CBM) use to 10bn
m3 (or 10% of total gas use) by 2010, from 0.5bn m3 (or 1% of total gas) in 2007.
Meanwhile, it targets increasing nationwide proven reserves to 300bn m3 and setting
up an integrated industry system by 2010F.
We expect a bright future for the CBM industry in China, mainly because: 1) natural
gas shortages will spur CBM demand; 2) there is government support in terms of
subsidies and VAT rebates; and 3) the high profitability the business enjoys. At the
same time, however, this business is intensive in terms of capital and technology, so
players have to come in with strong balance sheets. They also need to have sufficient
reserves, execution ability on the operating side and self-owned downstream gas
projects.

Exhibit 20. Global CBM resources Exhibit 21. Chinas CBM output
40
26
11
120
30
0
20
40
60
80
100
120
140
Russia Australia China US
Explored
10.9 tn m
3
is
minable
reserves
Untapped
Reserve
(trn m
3
)

1
10
30
116
0
20
40
60
80
100
120
140
2007 2010F 2015F 2020F
07-10F CAGR:
170%
10-20F CAGR:
28%
CBM output (bn cm)
Source: China's Ministry of Land and Resources, SinoPetro Industrial Express Source: Asia Pulse, NDRC, Nomura research
Coal seam gas in Australia
Current estimates point to Australia benefiting from over 3.2bn boe of coal seam gas
(CSG) reserves (2P) in the Surat-Bowen basin, and potentially an equal amount in the
deeper and more technically challenging Gunnedah basin. New ventures by AWE
could develop shale gas in Australias Perth basin, while Santos recent announcement
points to the potential for 2.5bn boe of unconventional gas possibilities in the Cooper
Basin. East coast unconventional gas production is also relatively new with BG
Groups A$5.0bn takeover of Queensland Gas in October 2008, marking the beginning
of an era of increased production and global interest in Australias CSG basins.

We expect a bright future for the
CBM industry in China

Exhibit 22. Australias CSG recent market transactions
Date Buyer Seller A$/GJ 2P A$/GJ 3P
2-Jul-09 Santos PEL 238 / 434 2.55 0.66
2-Jul-09 Santos Eastern Star Gas 3.75 0.97
22-Apr-09 Origin Pangaea na 0.57
3-Apr-09 Arrow Tipton West 0.71 0.3
9-Feb-09 BG Group Pure 1.96 0.41
24-Dec-08 AGL Sydney Gas 4.17 3.17
19-Dec-08 AGL PEL 285 2.11 0.97
28-Oct-08 BG Group QGC 1.93 0.75
8-Sep-08 ConocoPhillips Origin Energy 3.01 1.41
20-Aug-08 QGC Sunshine Gas 1.73 0.74
2-Jun-08 Shell Arrow 1.83 0.52
29-May-08 Petronas Santos 3.91 1.31
1-Feb-08 BG Group QGC 1.58 0.67
Average 2.44 0.96
Source: Eastern Star Gas, Deloitte, Nomura research

For more information on nuclear power development, please refer to our Anchor
Reports, Asia starts global nuclear chain reaction, 25 January, 2010, by our Asia
utilities team, and The nuclear renaissance coming to a country near you, 18
January, 2010, by our European utilities team.
For more information on alternative energy, please refer to our Anchor Reports, Asia
Climate Change the investors' roadmap to change, 2 July, 2009, and Blue sky
coming through, 29 January, 2010.
For more information on water and environmental protection, please refer to our
Anchor Report, Flowing strongly, 1 February, 2010.

Investment in alternati ve energy
Cl ean ener gy i nvest ment s t o bounc e
back
Manu Si ngh +88 05 33696 / manu.si ngh@nomur a.com
Maximum benefit of green stimulus to accrue in 2010F
Of the total US$177bn pledged towards investments in renewable energy and energy-
efficiency measures by governments across the world, only 14% was utilised in 2009,
as per New Energy Finance (NEF). According to NEF, nearly 68% of the worlds clean
energy stimulus funding will be spent in 2010F (35%) and 2011F (33%). This, in our
view, speaks directly to government support of clean energy in the next couple years.
We note that the total annual investment in clean energy declined by 6% y-y to
US$162bn in 2009, from a peak of US$173bn in 2008. However, we note this is far
less than expected when stacked up against NEFs earlier projection of a 26-32% y-y
decline in 2009; we think increased energy investments in Asia are what largely
narrowed the gap. We note that China recorded particularly high investments, such as
the US$2.6bn IPO of China Longyuan Power, and heavy spending on large-scale solar
and wind projects.
Despite a difficult credit environment almost everywhere, we remain optimistic about a
rebound in financial investments in clean energy in 2010F. NEF estimates financial
investments in clean energy will grow more than 20% y-y to some US$200bn this year.
We believe there will be a wide push toward diversifying into cleaner energy sources.
A considerable portion of the world now appears willing to adopt strong national
policies to reduce global warming and set clean energy incentives for a better and a
more sustainable tomorrow.

Exhibit 23. Global annual investments in clean energy
0
50
100
150
200
250
2004 2005 2006 2007 2008 2009 2010F
(10)
0
10
20
30
40
50
60
70
Global annual investment (LHS)
Growth y-y (RHS)
(US$bn) (%)

Source: New Energy Finance (NEF), PEW, Nomura research

Clean energy intersecting with
global stimulus packages

Exhibit 24. Distribution of investments in clean energy by sector (2005-09)
0 20 40 60 80 100 120
Argentina
Australia
Brazil
Canada
China
France
Germany
India
Indonesia
Italy
Japan
Mexico
South Africa
South Korea
Spain
Turkey
UK
US
Rest of Europe-27
Others
Biofuels
Solar
Wind
(%)

Source: NEF, PEW, Nomura research

Exhibit 25. Expected clean energy stimulus spending
0
10
20
30
40
50
60
70
2009 2010F 2011F 2012F 2013F
0
5
10
15
20
25
30
35
40
Expected clean energy stimulus spending (LHS)
% of total (RHS)
(US$bn) (%)

Source: NEF, Nomura research

Exhibit 26. Clean energy stimulus by country (2009)
0 10 20 30 40 50 60 70
Canada
Brazil
France
UK
Australia
Germany
Spain
Japan
EU27
S Korea
China
US
(US$bn)

1Q10 reflects recovery underway
Based on 1Q10 data released by NEF, we note that investments in clean energy are
rebounding steadily after a decline in 2009. Total new financial investments in clean
energy grew by 31% y-y to US$27.3bn in 1Q10, from US$20.8bn in 1Q09.
Asset financing continued to be the main form of investment in clean energy,
accounting for nearly 82% of total investments. Venture-capital and private-equity
funding (VC/PE) investment and public market fund-raising accounted for the rest of
the investments in clean energy, contributing 11% and 7%, respectively.

Exhibit 27. New financial investment in clean energy

0
5
10
15
20
25
30
35
40
45
50
1
Q
0
4
2
Q
0
4
3
Q
0
4
4
Q
0
4
1
Q
0
5
2
Q
0
5
3
Q
0
5
4
Q
0
5
1
Q
0
6
2
Q
0
6
3
Q
0
6
4
Q
0
6
1
Q
0
7
2
Q
0
7
3
Q
0
7
4
Q
0
7
1
Q
0
8
2
Q
0
8
3
Q
0
8
4
Q
0
8
1
Q
0
9
2
Q
0
9
3
Q
0
9
4
Q
0
9
1
Q
1
0
New financial investment in clean energy
Four quarter rolling average
(US$bn)

by investment type
0
5
10
15
20
25
30
35
40
45
50
1
Q
0
4
2
Q
0
4
3
Q
0
4
4
Q
0
4
1
Q
0
5
2
Q
0
5
3
Q
0
5
4
Q
0
5
1
Q
0
6
2
Q
0
6
3
Q
0
6
4
Q
0
6
1
Q
0
7
2
Q
0
7
3
Q
0
7
4
Q
0
7
1
Q
0
8
2
Q
0
8
3
Q
0
8
4
Q
0
8
1
Q
0
9
2
Q
0
9
3
Q
0
9
4
Q
0
9
1
Q
1
0
Public markets
VC and PE
Asset financing
(US$bn)

1Q10 data reflects a rebound in
clean energy investments

(1Q10 vs 1Q09)
0
5
10
15
20
25
30
Public
markets
VC and PE Asset
financing
Total
investment
(US$bn)


Exhibit 30. Global asset financing for newly built
clean energy assets
0
5
10
15
20
25
30
35
1
Q
0
4
2
Q
0
4
3
Q
0
4
4
Q
0
4
1
Q
0
5
2
Q
0
5
3
Q
0
5
4
Q
0
5
1
Q
0
6
2
Q
0
6
3
Q
0
6
4
Q
0
6
1
Q
0
7
2
Q
0
7
3
Q
0
7
4
Q
0
7
1
Q
0
8
2
Q
0
8
3
Q
0
8
4
Q
0
8
1
Q
0
9
2
Q
0
9
3
Q
0
9
4
Q
0
9
1
Q
1
0
(US$bn)

Exhibit 31. Global public markets new investments
in clean energy
0
3
5
8
10
13
1
Q
0
4
2
Q
0
4
3
Q
0
4
4
Q
0
4
1
Q
0
5
2
Q
0
5
3
Q
0
5
4
Q
0
5
1
Q
0
6
2
Q
0
6
3
Q
0
6
4
Q
0
6
1
Q
0
7
2
Q
0
7
3
Q
0
7
4
Q
0
7
1
Q
0
8
2
Q
0
8
3
Q
0
8
4
Q
0
8
1
Q
0
9
2
Q
0
9
3
Q
0
9
4
Q
0
9
1
Q
1
0
(US$bn)


Exhibit 32. Global VC and PE new investments in
clean energy
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1
Q
0
4
2
Q
0
4
3
Q
0
4
4
Q
0
4
1
Q
0
5
2
Q
0
5
3
Q
0
5
4
Q
0
5
1
Q
0
6
2
Q
0
6
3
Q
0
6
4
Q
0
6
1
Q
0
7
2
Q
0
7
3
Q
0
7
4
Q
0
7
1
Q
0
8
2
Q
0
8
3
Q
0
8
4
Q
0
8
1
Q
0
9
2
Q
0
9
3
Q
0
9
4
Q
0
9
1
Q
1
0
(US$bn)
China emerges as the new market leader
With total clean energy investments in China growing more than 50% y-y to
US$34.6bn in 2009, China has emerged as the market leader in financial investments
in clean energy. The Chinese governments strong policy support to renewable energy
and the easy availability of funds are the key factors, in our view, that have propelled
China to the leadership position.
We note that China was the largest investor in clean energy globally in 1Q10, with
investments of US$6.5bn.

China has become the largest
investor in clean energy globally

Exhibit 33. Top-10 countries in clean energy investment (2009)
0
5
10
15
20
25
30
35
40
C
h
i
n
a
U
n
i
t
e
d
S
t
a
t
e
s
U
n
i
t
e
d
K
i
n
g
d
o
m
R
e
s
t

o
f
E
U
-
2
7
S
p
a
i
n
B
r
a
z
i
l
G
e
r
m
a
n
y
C
a
n
a
d
a
I
t
a
l
y
I
n
d
i
a
(US$bn)

US has recovered since 1Q10
Difficult economic and financial market conditions in 2009 took their toll on the US,
which sank to second place after having been the global leader here over the past five
years. In 2009, clean energy investment declined 42% y-y to US$18.6bn in the US,
despite the long-term extension of federal production and investment tax credits, as
well as the availability of funds through the American Recovery and Reinvestment Act,
which, we believe, helped to stem the decline.
We foresee a recovery in new financial investment in the US, with asset financing in
the US rising to US$3.5bn in 1Q10, from US$2.4bn in 4Q09. 1Q10 was the strongest
quarter for the US since 2Q09, largely owing to the US$394mn construction debt
package for the Alta Wind Energy Centre in Tehachapi, California.
while Europe turned weaker in 1Q10
Despite the positive clean energy investment momentum in Asia and the US in 1Q10,
project investments in Europe declined to US$4bn in 1Q10, from US$6bn in 4Q09 and
US$7.6bn in 1Q09, based on NEF data. Credit financing conditions remain difficult in
Europe. With the ongoing sovereign debt issues, austerity may take the place of
investment in clean energy in the near future.

Exhibit 34. Top-10 countries by renewable energy
capacity (2009)
0
10
20
30
40
50
60
U
n
i
t
e
d

S
t
a
t
e
s
C
h
i
n
a
G
e
r
m
a
n
S
p
a
i
n
I
n
d
i
a
J
a
p
a
n
R
e
s
t

o
f

E
U
-
2
7
I
t
a
l
y
F
r
a
n
c
e
B
r
a
z
i
l
(GW)

Exhibit 35. Top-10 countries by five-year growth in
installed capacity (2005-09)
0
50
100
150
200
250
300
S
o
u
t
h

K
o
r
e
a
C
h
i
n
a
A
u
s
t
r
a
l
i
a
F
r
a
n
c
e
I
n
d
i
a
U
n
i
t
e
d

K
i
n
g
d
o
m
T
u
r
k
e
y
U
n
i
t
e
d

S
t
a
t
e
s
C
a
n
a
d
a
R
e
s
t

o
f

E
U
-
2
7
(%)
Recovery in financial investment
underway in the US

Wind and solar energy have gained the most traction
We note that wind energy remains the technology of choice for investors, attracting
US$14.1bn of investments in 1Q10, the highest figure among all the renewable energy
technologies. We believe that wind remains the most bankable clean energy
technology, owing to its cost competitiveness and scalability compared with other
renewables, and we expect wind energy to lead the investment table in the near future.
Along with wind energy, solar is also attracting investor attention. In 1Q10, of the total
111 deals by VC/PE, solar accounted for 29 deals, against wind at 12. We note that
investments in solar energy are quickly catching up with wind energy, and looking at
falling module ASPs, improving technology and increasing political support,
investments in solar energy could easily surpass wind energy once solar energy
achieves grid parity, in our view.

Exhibit 36. Global asset financing for new build
clean energy assets by technology (1Q10)
Wind
64%
Solar
13%
Small hydro
8%
Biofuels
3%
Biomass
and waste
11%
Marine
1%

Exhibit 37. Global VC/PE financing in clean energy
assets by technology (1Q10)
Wind 25%
Biomass
and waste
3%
Small hydro
7%
Biofuels 3%
Energy
smart
technologies
35%
Others 7%
Solar 17%
Geothermal
3%
Wind 25%
Biomass
and waste
3%
Small hydro
7%
Biofuels 3%
Energy
smart
technologies
35%
Others 7%
Solar 17%
Geothermal
3%

Economic conditions in Europe remain a concern
Despite the early progress made in 1Q10, we remain concerned about the fallout from
the sovereign debt trouble in Europe for clean energy investments. A decline in tax
revenues during the recession and the emergency increase in government spending to
prevent depression during 2008-09 have left many government budgets and national
debts in a perilous state.
European countries aim to lower their fiscal deficits. Only in a few countries are
subsidies linked to government budgets (Spain, the US), thus there should not be too
much impact from fiscal austerity, the discussion is open in a number of countries
prompting concern among investors. Over time, we project a period of less generous
financial subsidies from European governments. While it is too early to say whether a
weaker macro environment will have an immediate impact on clean energy investment,
we reckon this could be an overhang for investor sentiment towards the sector in the
near term.

Wind is the technology of choice
for clean energy investors, but
solar gaining traction

Exhibit 38. Cumulative solar PV capacity by region
0
5,000
10,000
15,000
20,000
25,000
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
ROW
Europe
North America
(MW)
Source: BP Statistical Review of World Energy 2010, Nomura research

Exhibit 39. Cumulative wind capacity by region
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
North America S.&Cent. America
Europe & Eurasia Middle East
Africa Asia Pacific
(MW)

Source: BP Statistical Review of World Energy 2010, Nomura research

We note that the renewable energy sector is largely policy-driven, rather than market-
driven, and the ongoing economic difficulties may jeopardise not only future
investments but also announced stimulus packages. We believe recent problems in
the Euro zone have increased investors risk perception towards renewable energy
and any sudden change in existing policies may scare away investors. Moreover, bank
lending for clean energy projects, which is already in short supply, could become even
more scarce if governments start cutting subsidies and existing feed-in tariffs for
renewable energy.

Exhibit 40. Current account balance as % of GDP

(8)
(6)
(4)
(2)
0
2
4
6
8
G
e
r
m
a
n
y
S
w
e
d
e
n
U
K
C
z
e
c
h
R
e
p
u
b
l
i
c
F
r
a
n
c
e
I
t
a
l
y
S
p
a
i
n
2009 2010F
(%)
Source: IMF, Nomura research
Exhibit 41. General government net debt as % of
GDP
0
20
40
60
80
100
120
France Germany Italy UK
2009 2010F
(%)
Source: IMF, Nomura research

Global outlook
Gl obal sol ar PV out l ook
Cat har i na Saponar , CFA +44 20 710 21231 / cat har i na.saponar @nomur a.com
Global solar demand to grow 55% in 2010F and 29% in 2011F
We expect global PV demand to grow 55% and 29% y-y in 2010F and 2011F,
respectively, helped by Germany, Italy and France. Moreover, we foresee strong long-
term demand from new markets such as the US (from 2011F) and China. Demand
elasticity triggered by a fall in ASP, combined with exceptionally strong demand in
Germany, are the key growth drivers in 2010F, in our view. Consequently, global solar
PV installed capacity is expected to reach 33.5GW in 2010F and 48GW in 2011F, from
22.3GW in 2009.

Exhibit 42. Solar demand annual new installation
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2003 2004 2005 2006 2007 2008 2009 2010F 2011F
0
20
40
60
80
100
120
140
Demand (LHS) Growth y-y (RHS)
(MW) (%)

Source: Nomura estimates

Germany to remain key demand driver but other regions
catching up fast
We expect Germany to be the key demand driver of this growth and contribute 44% of
the total global capacity addition in 2010F. Project developers in Germany are looking
to complete installation before a 15-16% tariff reduction, hence, demand in Germany is
exceptionally strong for 2010F. Consequently, Germanys annual solar installation is
expected to grow 30% to 4.9GW at the least, and potentially more than that. However,
after the feed-in tariff cut kicks in during 2H10, we expect demand from Germany to
flatten out post-2010F, and annual installation in Germany will likely decline by 2% in
2011F.
We expect Italy, France and Spain to be the other key demand drivers of the global
solar PV market in 2010F. Europe as a region will continue to dominate the global
solar PV market and contribute approximately 76% of global demand in 2010F.
However, we are positive about the fact that global solar PV demand is becoming
more broad-based with the emergence of new countries such as China and the US.
Supportive government policies, renewable standards at the national and state level,
and a steep decline in module ASP are helping the adoption of solar PV technologies
in these countries. We expect regional diversification in global solar demand to
continue; hence, Europes share should decline, in our view.

Germany likely to lead global
solar demand in 2010F but other
regions catching up fast

Exhibit 43. Global PV demand by country
PV demand in MW 2008 2009 2010F 2011F
Global capacity 13,347 16,882 20,320 24,417
Global production capacity 8,675 10,973 13,208 15,871
% growth 26.5 20.4 20.2

Global demand 5,606 7,216 11,206 14,424
% growth 28.7 55.3 28.7
-Thin film 901 1,543 2,341

Global demand by region
Germany 1,500 3,800 4,940 4,841
% growth 153.3 30.0 (2.0)

Italy 258 730 1,095 1,424
% growth 182.9 50.0 30.0

France 46 185 463 763
% growth 302.2 150.0 65.0

Spain 2,511 69 500 500
% growth (97.3) 624.6 0.0

Europe 4,549 5,618 8,524 10,195
% growth 23.5 51.7 19.6

US 342 477 620 1,085
% growth 39.5 30.0 75.0

China 45 160 592 1,125
% growth 255.6 270.0 90.0

Asia 589 842 1,644 2,579
% growth 43.0 95.2 56.9

RoW 126 279 419 565
% growth 121.4 50.0 35.0

Exhibit 44. Europes share likely to fall
0
4,000
8,000
12,000
16,000
20,000
2008 2009 2010F 2011F 2012F
60
65
70
75
80
85
Europe annual installation (LHS)
Global annual installation (LHS)
Europe share (RHS)
(MW) (%)


We note that solar companies across the value chain have come out with strong
results for 1Q10, thanks to higher-than-expected volume growth and margins. They
have also guided positively for 2Q10F. In our view, solid 2H10F operating results
especially for the Chinese solar companies would be the result of strong solar demand
in Germany at the beginning of 2H10F, followed by rising demand from other
European countries that could not secure sufficient supply in 1H10 due to rush
demand from Germany.

For 2H10F, we are particularly confident about the volume outlook of Chinese solar
companies given their cost competitiveness, as well as their improving brand image
and product quality. Euro weakness is, however benefitting European manufacturers
over the short term. We believe most of the listed companies have already sold out
their 2010F available capacity.
For 2011F, we expect annual solar installation in France and Italy to record y-y growth
of 65% and 30%, respectively, and partly make up for the decline in solar demand
from Germany which we expect to slip by 2% y-y. Along with France and Italy, we
expect significant growth from emerging solar markets such as the US and China,
which are expected to grow 75% and 90% in 2011F, respectively.

Exhibit 45. Solar PV demand by country (2011F)
0
1,000
2,000
3,000
4,000
5,000
6,000
Spain RoW France USA China Italy Germany
(MW)

Supply surplus to continue into 2H10F and 2011F
While we see tight supply for wafer and cell in 1H10F, we find that polysilicon supply
remains ample due to aggressive capacity expansion by both international incumbents
and new entrants in Asia. That being said, we see very high execution risk to these
capacities, and have had indications of delays, which could result in the poly market
ending up tighter than it might appear at first glance. We believe ASPs of wafers and
cells are likely to increase ~5% q-q in 2Q10F, while we only see polysilicon prices
stabilising at US$50-55/kg during the same period. We expect polysilicon capacity to
grow 40% y-y in 2010F and 30% y-y in 2011F. Consequently, we expect the surplus in
polysilicon to continue in 2H10F and 2011F, which should lead to a further price
decline, the brunt of which for the tier-2/3 manufacturers not just in polysilicon but
also flowing across the value chain.

Exhibit 46. Polysilicon surplus
(50,000)
0
50,000
100,000
150,000
200,000
250,000
2008 2009 2010F 2011F 2012F
Polysilicon supply Global demand (solar+semi)
Supply-demand gap
(MT)

Source: Company data, Nomura estimate
Aggressive polysilicon capacity
expansion by both international
incumbents and new entrants in
Asia

Exhibit 47. Global polysilicon supply
Pol ysilicon capacity (MT) 2008 2009 2010F 2011F
Wacker Chemie 15,000 18,191 23,165 30,902
% growth 50 21.3 27.3 33.4

REC 6,000 7,640 13,821 20,027
% growth 3 27 81 45

Hemlock 14,500 20,000 25,000 36,000
% growth 32 38 25 44

Tokuyama 5,200 8,200 11,000 14,000
% growth 4 58 34 27

Mitsubishi Materials 2,100 2,250 2,500 2,800
% growth 11 7 11 12

Mitsubishi Polysilicon 1,550 1,600 1,840 2,024
% growth 11 3 15 10

MEMC 8,200 8,500 10,000 15,000
% growth 37 4 18 50

Sumitomo Titanium 1,050 1,200 1,380 1,587
% growth 5 14 15 15

TIER-1 CAPACITY 53,600 67,581 88,706 122,340
% growth 27 26 31 38

TIER-2 CAPACITY 10,200 34,750 37,950 47,550
% growth 0 241 9 25

TIER-3 CAPACITY 17,010 28,160 39,860 43,010
% growth 217 66 42 8

METALLURGICAL SILICON 19,500 25,000 45,000 62,000
% growth 301 28 80 38

TOTAL POLY SI CAPACITY 100,310 155,491 211,516 274,900
% growth 86 55 36 30

Realistic Tier-1 48,240 60,823 79,835 110,106
Realistic Tier-1+2 56,910 90,360 112,093 150,524
Realistic Tier-1+2+3 67,967 108,664 138,002 178,480
Realistic Tier-1+2+3+umg-si 71,867 113,664 147,002 190,880
REALISTIC AVERAGE POLY CAPACITY 71,867 92,765 130,333 168,941
% growth 29 40 30
Total pol ysilicon demand 75,276 75,621 106,500 130,216

However, we note that there is execution risk attached to some of the Chinese solar
polysilicon manufacturers and not all their capacity may come on-stream in time. Our
channel checks suggest that some of the Tier-2 Chinese polysilicon manufacturers are
finding it difficult to lower their cost below the current ASP and, hence, are incurring
losses. This is positive for the European incumbents as the resulting polysilicon
surplus should be less than expected and thus lessen pricing pressure. It also
underpins their competitive advantage from execution and quality.

Exhibit 48. Cell production by country (2009)
Germany
14%
Japan
12%
China
36%
ROE
4%
India
2%
Africa & Middle
East
0%
America
4%
Malaysia
6%
Taiwan
11%
ROA
11%

Source: Photon International, Nomura research

After briefly holding back capacity expansion plans in 1H09, solar companies,
particularly in Asia resumed expansion and many players across the solar value chain
announced plans to increase capacity. Most players operated at full capacity utilisation
in 1H10, and our channel check suggests their capacities are fully booked for 2H10F.
In addition to polysilicon, companies across the solar value chain continue to invest in
capacity expansion. The expansion is broad-based, comprising companies across
different regions. Despite strong demand expected throughout 2010F, we look for the
supply surplus to continue until 2011F based on current capacity expansion plans
announced by major players across the value chain. We estimate that listed Chinese
companies are going to expand wafer capacity by 42% h-h and cell capacity by 73%
h-h in 2H10F.
In our view, cost reduction will be the key in deciding tomorrows winners in the solar
sector. Increase in competition, decline in subsidies and race to reach grid parity are
the main drivers for this trend. Given the falling ASPs across the solar value chain,
companies are focused on bringing down the cost of production quickly to maintain
profitability. At Intersolar, we found that companies are focused on scaling up,
increasing efficiency of cells and modules, with a particular focus on cell-to-module
efficiency, throughput increase and lowering of capex.
As the solar end market is mostly concentrated in Europe, modules are priced in euro.
A weaker euro means lower revenue realisation, which is negative for Chinese solar
companies whose revenue is in renminbi. Since material and labour expenses are
RMB-denominated, a weaker euro erodes profit margins, given that module ASPs are
in euro. Consequently, in the short term, euro depreciation should benefit the
European module players. However, we maintain that it is cost leadership and product
quality that will determine the winners, in the long term.

Cost leadership to decide
tomorrows winners in the solar
sector

Exhibit 49. Expansion plans announced across the solar value chain
Company Country Announcements
Wacker Germany Plans to expand silicon production from 18,000 tonnes in 2009 to 25,000 tonnes in 2Q10 (+39% y-y)
LDK China Plans to expand wafer production to 2.2GW by 2010 from 1.9GW in 2009 (16% y-y). We expect LDK to reach
annual polysilicon installed capacity of 16,000 tonnes by 2011 from 11,000 tonnes currently.
ReneSola China Wafer manufacturing capacity increased to 950MW in 1Q10 from 825MW in 4Q09. Plans to add 260MW by
2Q10, taking total capacity to 1210MW. Polysilicon production expected to reach 1,500-1,700 tonnes in FY10F.
Total solar product shipment expected in the range of 1-1.1GW in 2010, recently revised up from 900-950MW.
Gintech Taiwan Plans to expand cell capacity to 1GW by 2011 from 600MW currently.
Sanyo Japan Plans to expand cell/module capacity from 690MW in 2009 to 1.2GW by early 2011 (+74%).
Canadian Solar China Plans to expand module capacity from 820MW at end-2009 to 1GW (+22%), including China and Canada, by
mid-2010. It also announced plans to expand cell capacity from 420MW at end-2009 to 700MW by mid-2010F.
(+67%).
Trina China Plans to expand cell/module capacity from 600MW in 2009 to 850-950MW by end-2010F.
SMA Germany Plans to expand inverter manufacturing capacity to 11GW by end-FY10.
Juwi Germany Expects its installed base of PV system capacity to increase to 2,000MW by 2012 F from 400MW.
EDF Energies
Nouvelles
France Total installed PV capacity at 80MW by end-2009 vs 20MW in 2008. Target to achieve 500MW by end-2012F.
Source: Photon International, Company data, Nomura research

Exhibit 50. Capacity expansion by major wafer manufacturers in Greater
China
0
500
1,000
1,500
2,000
2,500
4Q09 1Q10 2Q10F 3Q10F 4Q10F
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Comtec Solar Trina Solargiga
Yingli Renesola GCL Poly
LDK Solar Total
(MW) (MW)


Exhibit 51. Capacity expansion by major cell manufacturers in Greater China
0
200
400
600
800
1,000
1,200
1,400
1,600
4Q09 1Q10 2Q10F 3Q10F 4Q10F
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Renesola Solarfun E-ton
CSIQ Gintech Neo Solar Power
Trina Motech Yingli
Suntech JA Solar Total
(MW)
(MW)


ASP to fall in 2H10F due to German FIT cut and rising supply
Given the potential delay in Germanys tariff cut and strong demand from other
European countries, we currently see solar ASP holding up well into the early part of
3Q10F. Yet, we see downside risk to 2H10F ASP guidance by companies, especially
Chinese solar companies which are guiding for 5-10% h-h ASP decline (in US dollar
terms) in 2H10F. We believe this is aggressive given the planned 15-16% German
tariff cut and weak euro outlook.
From the high of US$500/kg in 3Q08 to nearly falling 90% to the current spot price of
US$50-55/kg in 2Q10F, polysilicon has seen the steepest ASP correction in the solar
value chain, resulting in ASP declines across the other segments of the value chain.
With polysilicon ASP in 2Q10F hovering at the same range (US$50-55) as in 1Q10, we
are seeing some stability. However, looking at upcoming polysilicon capacity, we
expect the price to continue its downtrend in 2010F and 2011F. Over the remainder of
2010, prices are likely to hold up around the low US$50/kg level for incumbent
polysilicon manufacturers while we expect new entrants, such as GCL Poly, to
continue lowering their prices along with their production ramp up. Thereafter, we
would expect a trajectory towards the US$40-50/kg level in 2011F. European
companies are likely to fetch ASPs above average and Chinese ones below average.
Helped by the polysilicon price decline, capacity expansion across the value chain,
and growing competition due to the entry of new players, we expect to see further ASP
decline in wafer, cell and module in 2010F. In the short term, we are witnessing tight
supply in wafer and cell but looking at the upcoming capacity in the pipeline, we
believe the prices will come down. Consequently, we expect to see module ASP
decline to US$1.65/w in 2010F. There will continue to be regional differentiation of
ASPs.
We believe that Tier-1 Chinese module manufacturers are successfully moving into the
high-end module segment, which until recently has been dominated by European
module manufacturers. Focus on branding and marketing by Chinese Tier 1 players,
combined with successful R&D initiatives to improve module efficiency, are the key
reasons for their success, in our view. Consequently, increased competition in the
high-end market due to entry of the Chinese Tier 1 player will likely lead to a decline in
the premium earned by the European peers.

Exhibit 52. Solar cost decline scenario Asian case
Best Case Scenario Assumptions 2008 2009 2010F 2011F
Spot Polysilicon Cost (US$/kg) 150 70 45 40
Silicon consumption (g/watt) 6.40 6.21 6.02 5.84
Polysilicon Cost (US$/watt) 0.96 0.43 0.27 0.23
Non-silicon Module Cost (US$/watt) 1.00 0.87 0.78 0.70
Total Module Cost (US$/watt) 2.07 1.43 1.22 1.16
Installation and BOS Cost (US$/watt) 2.00 1.70 1.45 1.23
System Cost (US$/watt) 4.58 3.51 2.99 2.68
Note: We assume no disruptive conversion efficiency improvement

Exhibit 53. GM comparison across the value chain 2010F
US$/watt Pol ysilicon Wafer Cell Module
ASP 0.31 0.81 1.18 1.65
COGS 0.21 0.67 0.96 1.20
Gross margin (%) 32.3 17.2 18.6 27.3

China has been the leading manufacturing country for solar photovoltaic (PV) products
since 2007. According to Photon International, China accounted for 36% of global
solar PV cell production in 2009, up from 33% in 2008, and was more than twice the
size of the second-place Germany (15% global share). In 2009, Chinese solar
companies Suntech, Yingli, JA Solar, and Trina made it into the global top 10 cell
producers, accounting for 5.7%, 4.3%, 4.2%, and 3.2% of global supply, respectively.
Given the 15-16% FIT reduction in Germany, we expected solar project developers to
look for ASP reductions, but our channel checks so far suggest less than the headline
tariff reduction. Tier-1 Chinese module companies have significant cost advantage
over their European peers and, hence, can price their modules 15-20% cheaper than
their European peers without compromising on quality. We expect high-cost European
and Japanese companies to increase outsourcing to China to maintain profit margins.
We are already witnessing a trend where European module customers are requesting
Tier-1 Chinese solar companies such as JA Solar, Renesola, and LDK Solar to
manufacture modules for them. The trend of outsourcing to Chinese solar companies
enhances their volume outlook as it increases their addressable market size.
We note that solar manufacturers based in Europe and the US are looking to shift their
manufacturing base to Asian countries such Malaysia and Singapore. The idea behind
this move is to negate the cost advantage enjoyed by Chinese players and to compete
more efficiently. However, we do not expect any significant boost to their cost
competitiveness by this move given the higher cost incurred during ramp up. Moreover,
we believe China enjoys a significant advantage over other Asian countries in terms of
a much larger and established manufacturing base, which has given it a head start,
relatively inexpensive labour and supportive government policy.

Exhibit 54. Sales growth q-q for Asian and European players
(100)
(50)
0
50
100
150
200
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
Q-Cell SolarWorld Solon
Trina Solar Yingli Green Energy Suntech Power
Motech JA Solar E-Ton Solar
(%)

Source: Company data, Nomura research
Solar policy outlook
In our view, recent share price weakness within the solar section reflects market
concerns on the fallout of weakening European economies, which could have negative
implications for financial subsidies going forward. Nonetheless, given that only in few
countries subsidies are linked to government budgets (Spain; US), there should not be
too much impact from fiscal austerity, although the discussion is open in a number of
countries. Over time, we are looking forward to a period of less generous financial
subsidies from European governments. While it is too early to see whether a weaker
macro environment will have an immediate impact on solar companies earnings
outlook, we reckon that this could be an overhang to the investment sentiment towards
the solar sector in the near term.
Tier-1 Chinese solar companies
such as JA Solar, Renesola and
LDK Solar to gain from an
increase in module outsourcing
from Europe
Weaker macro environment in
European countries to weigh
down solar stocks in the near
term

Germany
Germanys upper house has voted down the subsidy cut, a 15-16% FIT reduction, in
Germany leading to a delay in implementation. Earlier Germanys lower house had
passed the subsidy cuts and they were expected to be implemented on 1 July, 2010.
We note that the issue will now be settled by a parliamentary mediation committee
raising hopes for a slight decrease in the rate of cut. We believe the chance of scaling
down the subsidy cut appears slim but any reduction would be positive for the sector.
Earlier, Germanys lower house had passed the law implementing a 16% decrease for
rooftops, 11% for reconversion areas, 15% for the other installations and no more
feed-in tariff for PV installations on agricultural land.
Spain
According to government sources, Spain will be following Germanys footsteps and is
expected to sharply cut to its solar subsidy programme. According to a Reuters news
item of 16 June, 2010, for big floor-mounted units Spain is looking to implement a 30%
subsidy cut for the existing solar panel plants and 45% for future solar plants, while a
subsidy cut for smaller roof mounted is expected to be 25%. Meanwhile, the
government has announced a full review of the utilities sector, which, in our view,
means that it will take into late 2010 at best for an update on the renewables regime.
Italy
The current feed-in tariff scheme will end on 31 December, 2010, and a new regime
will be in place from 2011. The latest draft for a follow-up regime, which was released
in early February, contains a total of 42 different tariffs, depending on system type and
power classification. It also includes three tariff reduction stages staggered throughout
2011, after which point cuts of 6% would take effect in 2012 and 2013. Moreover, the
draft law contains regulations that anticipate solar electricity production tariffs
combined with other local subsidy programs to provide a lump sum that would make
investments in PV systems more attractive.
Further, there are plans for a special tariff for CSP systems of 32 euro cents (US44.3)
per kWh for installations with up to 200 kW and 28 euro cents (US38.8) for all other
systems, which is about the same as the subsidies paid for equivalently sized ground-
mounted systems. CSP systems would also benefit from a lower annual degression
rate of 2% in 2012F and 2013F.
China
Various outlets in the Chinese press (including CBN, China Energy News) have
quoted industry experts and researchers at Energy Research Institute of NDRC, such
as Dinghuan Shi, the President of China Society for Renewable Energy, Zhongying
Wang, Director of Renewable Energy Development Centre of NDRC and Huanli Shi,
Researcher at Energy Research Institute of NDRC, on the event that NDRC is likely to
unveil higher targets for Solar PV. Based on their talks, NDRC is likely to raise its
2020F targets of solar power to 20GW (from original 1.8GW, up 1,011%). This implies
an 11-year CAGR of 46% through 2020F.
While the announcement of this new target has been later than market expectations
(originally expected in 4Q09 or 1Q10), our recent checks suggest that an
announcement is likely in 3Q10, when the Chinese government is expected to unveil
stimulus packages for alternative energy and several other industries.

Japan
In November 2008, a system was started for purchasing surplus electricity (the portion
not consumed by the owner) generated by solar power. Until FY10, the purchase price
for surplus electricity is 48/kWh generated by households (39/kWh for overlap with
other power generators on the owners premises) and 24/kWh for non-households
(20/kWh). The price of 48/kWh is about twice the price that electric power
companies pay voluntarily.
The Japanese government plans to lower the purchase price in stages, starting with a
cut to about 42/kWh in FY11 (officially it has not yet been decided), with the aim of
halving the system cost for solar power generation in three to five years. Investment in
solar power should thus be recovered in 10-15 years. The surplus electricity purchase
system will continue for 10 years at a fixed price; it excludes facilities for the power
generation business (above 500kW) and includes equipment already installed when
the system started. All consumers of electricity will bear the burden of the purchase
costs.
Nomuras solar stock picks
For Asia-ex Japan: JA Solar remains our top pick in the China solar sector in the near
term, given its strong earnings momentum over the next few quarters, low exposure to
euro depreciation and positive changes in its business model and customer portfolio,
which we expect to help a re-rating of the stock. We maintain our BUY on Yingli given
its long-term prospects, brand equity and cost leadership. We remain NEUTRAL on
LDK, given its stretched balance sheet, potential dilution risk from fund-raising and
unclear outlook beyond 2Q10F. We also remain NEUTRAL on GCL Poly, given its
expansion into wafers, which are not earnings-accretive and carry execution risks.
For Europe: our preferred pick for European poly manufacturers is Wacker Chemie
(WCH GR, BUY, PT 145), as we believe it stands to benefit from global solar end
market volumes translating into poly volumes growth and sustainable competitive
advantages in a business with high barriers to entry. We think that the share price of
REC (REC NO, BUY, PT NOK 25) could get re-rated on the back of its ongoing
turnaround across its poly, wafer and module operations. Within the wafer segment,
we see Asian manufacturers as benefitting from material cost advantages. Renesola
(SOLA LN, BUY, PT GBp 250) should thus benefit from the cost advantages of its
Chinese manufacturing. We also think that PV Crystalox (PVCS LN, BUY, PT GBp78)
is well positioned, with the added benefit of selling into the premium Japanese market.
At the cell and module level, we see Solarworld (SWV GR, REDUCE, PT 9) as a
likely high-end survivor, but expect pressure on profitability. Q-Cells (QCE GR,
REDUCE, PT 6) is making steps towards improving profitability but still faces major
strategic challenges from its business model that is very exposed to the commoditised
cell end. We like European equipment manufacturers as they stand to benefit from
solar PV demand growth which is driving expansion and the need for innovation
driving upgrades and replacements should translate into strong order flow.
Centrotherm (CTN GR, BUY, PT 40) is well positioned with a strong high-end product
portfolio. We also see SMA (S92 GR, BUY, PT 125) as a direct beneficiary from end
market growth due to its manufacturer-agnostic inverter business which is leveraged
into end market demand.

Exhibit 55. Solar peer valuation comparison
Price Mkt cap
P/E (x) P/BV (x) ROE (%)
Company Ticker Rating
(local) (US$mn) FY09 FY10F FY11F FY09 FY10F FY11F FY09 FY10F FY11F
Cell
Motech 6244 TT REDUCE 99.00 1,165 900.0 31.3 18.9 2.3 1.9 1.7 4.7 88.1 146.2
E-Ton Solar 3452 TT REDUCE 46.50 362 n.a. 387.5 91.2 1.1 0.9 0.9 (29.8) (1.2) 1.0
JA Solar JASO US BUY 4.77 801 n.a. 5.5 4.6 0.8 0.9 0.8 (1.9) 18.6 18.5
Q-Cells QCE GR REDUCE 6.24 904.1 n.a. n.a. 34.6 1.00 1.04 1.00 (184.1) (3.0) 2.9

Wafer, cell and module
Trina Solar TSL US BUY 18.58 1,445 9.7 13.2 9.0 1.7 1.4 1.2 17.6 12.6 15.8
Yingli Green Energy YGE US BUY 10.51 1,560 n.a. 10.3 9.3 1.3 1.5 1.3 (4.9) 15.4 14.7

Cell and module
Suntech Power STP US BUY 9.49 1,710 16.9 12.8 10.0 1.1 1.0 0.9 6.8 8.1 9.5
Canadian Solar CSIQ US BUY 11.10 474 10.8 7.1 6.2 0.9 0.8 0.7 13.0 12.5 12.5
Sunpower SPWR US NR 14.19 1,325 11.1 8.2 6.8 0.9 0.9 0.7 11.2 10.0 9.4
Evergreen Solar ESLR US NR 0.80 166 n.a. n.a. 15.1 0.5 0.6 0.5 (24.9) (7.0) 1.7

Wafer
LDK LDK US NEUTRAL 5.66 744 n.a. 9.0 8.2 0.8 0.8 0.7 (26.6) 8.9 9.0
Solargiga 757 HK REDUCE 1.43 332 10.9 8.1 n.a. 1.4 1.2 n.a. 13.8 15.9 n.a.
Renesola SOL US BUY 2.01 520.3 n.a. 7.3 5.3 1.11 0.92 0.74 (16.0) 15.1 17.3
MEMC WFR US NR 11.14 2,533 16.2 9.4 7.5 1.1 1.0 0.9 7.7 10.8 11.8
Wafer Works 6182 TT NEUTRAL 41.30 353 n.a. 17.6 9.3 2.2 2.0 1.6 (5.9) 11.8 19.2
Green Energy 3519 TT NR 67.90 342 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Pol ysilicon
Wacker Chemie WCH GR BUY 121.58 7,446 35.7 14.2 11.9 3.13 2.61 2.22 (3.7) 20.6 21.4
GCL Poly 3800 HK NEUTRAL 1.62 3,223 (90.3) 10.7 12.0 1.6 1.8 1.6 (3.8) 18.2 13.9
OCI 010060 KS NR 237,500 4,577 11.6 10.0 9.8 2.9 2.3 1.9 28.0 25.5 21.1
Tokuyama 4043 JT NEUTRAL 433.00 1,686 19.2 15.9 13.7 0.6 0.6 0.6 3.3 4.0 4.4
PV Crystalox Solar PVCS LN BUY 0.56 348 7.9 9.8 8.3 0.88 0.84 0.78 11.4 8.6 9.4

Module and System
Solon SOO1 GR REDUCE 5.07 78.2 n.a. n.a. 15.3 0.24 0.26 0.25 (41.5) (6.8) 1.6
Conergy CGY GR REDUCE 0.75 368.6 n.a. n.a. 43.0 2.86 3.57 3.25 (89) (25.5) (9.3)
Aleo Solar AS1 GR NR 10.63 170 5.7 11.4 n.a. 1.5 1.3 n.a. n.a. n.a. n.a.

Equipment Manufacturers
SMA Solar Technology S92 GR BUY 85.52 2,967.5 18.4 13.8 12.7 7.28 5.18 3.95 39.5 37.6 31.0
Centrotherm CTN GR BUY 28.86 610.6 21.4 15.7 12.4 1.77 1.59 1.40 8.3 10.1 11.3
Meyer Burger MBTN SW NEUTRAL 27.50 877 38.7 27.7 19.7 5.19 4.39 3.61 13.4 15.9 18.4
Roth and Rau R8R GR NEUTRAL 21.85 301.5 23.3 18.6 13.9 1.38 1.29 1.18 5.9 7.0 8.5
Manz Automation M5Z GR REDUCE 47.13 211.1 n.a. 54.1 15.4 1.18 1.15 1.07 (5.4) (2.1) 7.0

Solar Development
Solar Millennium S2M GR BUY 20.70 319 8.4 6.1 4.5 1.49 1.12 0.88 23.3 24.4 24.8

Diversified
Abengoa ABG SM NEUTRAL 17.74 1978 9.4 8.2 7.2 1.37 1.14 0.96 21.2 19.6 18.2

Full y Integrated
SolarWorld SWV GR REDUCE 10.37 1,428.2 19.6 21.6 17.6 1.34 1.26 1.18 6.8 5.8 6.6
REC REC NO BUY 18.8 2,899.1 n.a. 690.3 13.6 0.74 0.75 0.84 (13.9) 0.1 6.2
Note: Pricing as of 23 June, 2010
Source: Bloomberg consensus estimates for not rated companies

Global outlook
Gl obal w i nd power out l ook
Global wind demand to grow 7% in 2010F and 14% in 2011F
Over the years, wind energys contribution to global electricity supply has been steadily
increasing and according to BTM Consult ApS, wind energy contributed 1.6% of the
total global electricity generation in 2009. We note that electricity generation from wind
energy has grown at a much faster pace than total global electricity in the past decade
and we expect this trend to continue in the future.

Exhibit 56. Wind energy contribution to global
electricity generation
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
(%)
Source: BTM Consult ApS, Nomura research
Exhibit 57. Growth rate of wind vs global electricity
generation
0
5
10
15
20
25
30
35
40
45
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
0
3
6
9
12
15
Wind (LHS)
Total (LHS)
Multiple (wind/total) (RHS)
(%) (x)
China, the US and Europe to remain key demand drivers
We expect the global annual wind turbine generator (WTG) market to grow by 7% y-y
in 2010F and 14% y-y in 2011F, with China and the US remaining the top-end markets.
We expect the WTG markets in Europe and China to be the key growth drivers for the
global market in 2010F. We reckon that China and Europe will account for around 39%
and 29% of annual global installation in 2010F, respectively. While we believe that
policy support and growth visibility of China wind power will remain strong, we see
2010F as a transition year for players along Chinas wind value chain. We estimate
that the annual growth of wind capacity installation will start to slow from 100% y-y
each year between 2007 and 2009 to around 15% y-y in 2010F. As the majority of
Chinese wind companies have generated 70-90% of their wind revenues within China,
those unable to start generating meaningful overseas revenue are likely to suffer from
a significant slowdown in earnings growth, in our view.
We acknowledge that the difficult credit environment combined with the fall in fossil
fuel prices would make it difficult for utilities to sign power purchase agreements (PPA)
in the US, which could subdue growth in 2010F. Consequently, we expect the US
market to decline by 18% y-y in 2010F. However, we expect the market to bounce
back in 2011F, with growth of 25% y-y.
The US market is likely to decline in 2010F owing to the weak PPA market which we
see as fallout from the recession. We believe that the delay in the US recovery will hit
order inflows of international WTG players in the near term. For example, Vestas and
Suzlon have been hit hard by a slower-than-expected pace of recovery in the US
market, as the US is one of its key markets.
Electricity generation from wind
energy growing at faster pace
than total global electricity in the
past decade; trend expected to
continue in the future, in our view
China, US and Europe to remain
as the key markets

As for the impact on CHST, although GE Wind, the dominant WTG supplier in the US,
is its large customer, we believe CHSTs overseas shipment growth in 2010F is secure
given its competitive pricing, which helps its foreign customers to lower costs, as well
as the launch of its 2.5MW gearbox to GE Wind in 2H10F, which implies a share gain
at GE.
Wind has been the technology that got the most important scale deployment Europe
wide, with 76.5GW installed at the end of 2009. Going forward, we estimate an annual
installation rate of c.16GW pa in the European market. In the wind sector, we see
stable rates of installations in Europe, but we expect Asia and the US to overtake
Europe over time. Currently, Europe is providing the stable growth basis for both
developers and turbine manufacturers as they wait for a pick-up from the US and lack
market accessibility in China.
Turbine manufacturers are our preferred picks in Europe as we see them benefitting
from a market leadership position, high-end technology that will be an enabler for low
LOCE (levelised cost of energy) and broad geographic exposure to global growth with
an increasing presence in Asia. We estimate that developers valuations are attractive
as current share prices on average reflect only assets on the ground and under
construction. But we believe that the high levels of exposure to the weak PPA situation
in the US may pose a risk to execution on capacity growth target. This could be an
overhang on share prices until later in 2010.

Exhibit 58. Global WTG market new installation
0
10,000
20,000
30,000
40,000
50,000
60,000
2007A 2008A 2009A 2010F 2011F 2012F
0
5
10
15
20
25
30
35
40
45
(MW) (%)


Exhibit 59. Global WTG market cumulative installation
0
50
100
150
200
250
300
350
2007A 2008A 2009A 2010F 2011F 2012F
15
20
25
30
35
(GW) (%)


Exhibit 60. Nomura global wind model
WORLDWIDE WIND POWER ANNUAL INSTALLATION (MW) 2008 2009 2010F 2011F 2012F
Global Demand 28,191 38,104 40,874 46,614 53,666
% Growth 42 35 7 14 15

Europe 9,180 10,738 11,987 13,008 15,059
% Growth 11 17 12 9 16

Americas 9,527 11,433 9,983 12,386 14,863
% Growth 64 20 (13) 24 20

South and East Asia 8,201 14,991 17,441 19,469 21,711
% Growth 64 83 16 12 12

OECD-Pacific 1,056 623 830 976 1,099
% Growth 77 (41) 33 18 13

Africa 227 317 631 771 929
% Growth 173 40 99 22 20

Other Continents 0 2 3 4 5
% Growth (100) 50 50 25

OFFSHORE WIND POWER ANNUAL INSTALLATION (MW) 2008 2009 2010F 2011F 2012F
Europe 344 624 1,364 2,508 2,228
% Growth 72 81 119 84 (11)

North America 0 0 0 420 210
% Growth (50)

Asia 0 63 100 160 221
% Growth 60 38

Global Demand 344 687 1,464 3,088 2,659
% Growth 72 100 113 111 (14)

Wind Suppl y (MW) 2008 2009 2010F 2011F 2012F
Big six 21,472 19,960 23,400 25,399 27,691
% Growth 26 (7) 17 9 9
Others 9,855 15,852 18,558 22,060 25,305
% Growth 272 638 150 158 135

Global Supply 31,327 35,812 41,957 47,458 52,996
% Growth 41 14 17 13 12

CUMULATIVE INSTALLED CAPACITY 2008 2009 2010F 2011F 2012F
Cumulative Demand (GW) 122 160 201 248 301
% Growth 30 31 26 23 22

Cumulative Demand -Offshore (MW) 1,421 2,108 3,572 6,660 9,319
% Growth 32 48 69 86 40

Source: BTM Consult ApS, Nomura estimate
Offshore wind markets to take-off
With 687MW of annual installation, the offshore wind turbine market represents less
than 2% of the total wind energy annual installation in 2009. Despite the slow progress
made so far, we remain positive on the future prospect of the offshore wind turbine
market and expect growth in this segment to take off. We note that most of the
offshore projects are expected to come up in Europe, especially Germany and the UK.
We expect offshore wind market to grow 113% y-y in 2010F and 111% in 2011F.
Higher project cost and longer gestation period in comparison to onshore projects,
logistical difficulties, combined with lack of wind turbine suppliers for the offshore
technology, are the key reasons for the smaller market size in this segment, in our
view. Until recently, Repower, Siemens and Vestas were the only players who were
active in the offshore wind turbine market. However, with new players such as Areva,
Winwind, and Sinovel entering the offshore wind turbine market, we expect the supply
side constraints to start easing off.

Exhibit 61. Cumulative offshore wind capacity
0
4,000
8,000
12,000
16,000
20,000
2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F
0
20
40
60
80
100
Demand (LHS)
Growth (RHS)
(MW) (%)
0
4,000
8,000
12,000
16,000
20,000
2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F
0
20
40
60
80
100
Demand (LHS)
Growth (RHS)
(MW) (%)


Exhibit 62. Offshore wind under construction (Nov 2009, MW)
Siemens
50%
BARD
13%
Repower
6%
Multibird (Areva)
1%
Vestas
21%
Others
9%
Siemens
50%
BARD
13%
Repower
6%
Multibird (Areva)
1%
Vestas
21%
Others
9%

Source: EWEA, Nomura estimate

We expect the offshore wind segment to be the next growth driver for the Chinese
WTG market. According to comments made by wind operators, including China
Longyuan and China Windpower, we believe that the majority of the attractive
locations for onshore wind farm development have already been occupied by industry
players. As a result, we expect offshore wind development to spur China wind industry
growth over the next three years.
In our view, development of offshore wind projects could potentially benefit Chinese
wind component and equipment manufacturers. While the majority of these companies
do not have a track record in offshore applications, feedbacks we received from wind
farm operators reveal that cost considerations indicate that operators prefer Chinese
wind turbines and components.
We also expect Suzlon to benefit from the growth in the offshore market as Repower is
the technology leader in this segment. This can be highlight from the fact that in 2009
Repower signed a framework agreement with RWE Innogy for supply of 250 Repower
5M/6M offshore wind turbines, one of the biggest offshore wind turbine contracts,
worth approximately US$2bn.
We see the offshore market as a major growth area within wind. This is the case
globally, but Europe is a centre of development and will see the most important growth
early on, in our view. The UK and Germany will be the centres of development as
c.32GW from the Crown Estate concessions that have been awarded in Round 3 get
developed. Even though we only expect around 50% of the awarded concessions to

eventually fully develop, this is still substantial growth from the current base of just
below 1GW of offshore capacity. We also expect strong momentum in Germany as
developers aim to commission projects in order to capture the speedy bonus of
Eur20/MWh for projects commissioned before 2015 and total capacity of c.3GW by
2014. Beyond this, Belgium, the Netherlands, France and Scandinavia will also be key
areas of growth.
We see offshore wind as an area of significant growth over the next 10-20 years,
particularly for those companies with operations in northern Europe, where wind
resources offer the best opportunities. Significant investment will be required, and we
expect the likes of Centrica, DONG, EDPR, E.ON, Iberdrola, RWE, SSE and Vattenfall
to lead the development, with Siemens and Vestas dominating turbine supply, though
new entrants such as GE and REpower will seek to make headway.
From a sellers market to a buyers market
Until recently, wind turbine suppliers enjoyed a stronger bargaining power in
comparison to their customers, thanks to the strong demand and limited supply of wind
turbines, in our view. However, wind turbine manufacturers capacity expansion in the
past few years, combined with weakness in demand stemming from the impact of the
economic crisis, has created a surplus in the wind turbine market. This has shifted the
bargaining power from hands of wind turbine suppliers to customers.
Moreover, the shift in customers mix towards bigger players, such as utilities and
independent power producers (IPPs), has altered the equation in favour of wind
turbines customers. Unlike smaller players, utilities customers have much deeper
pockets and the capability to plan and execute on large projects, in our view. We
believe utilities have taken the advantage of the intense competition prevailing in the
wind turbine market, and have been able to get lower ASPs, shorter delivery times and
better after-sale services, in our view.

Exhibit 63. Cost structure of a typical wind turbine installed in Europe (2MW)
Land
4%
Foundations
7%
Grid connection
9%
Others
5%
Turbine
(Ex-works)
75%

Source: EWEA, Nomura estimate
Fall in ASP to continue in FY10F
Fall in price of key raw materials and removal of bottlenecks in critical components,
combined with the increase in competition, have led to decline in ASP of wind turbines.
We note that the price of steel, which contributes nearly 90% of the total cost of a wind
turbine, has fallen significantly from its peak in 2008 and suppliers have been quick to
pass on the benefit to their customers. Moreover, capacity expansion by gearbox
manufacturers has led to a more balanced supply of gearboxes for the wind turbines
and has helped shorten the lead times of wind turbines to customers.
Growing competition amongst wind turbine suppliers is also leading to pricing pressure
in the industry. Our channel checks suggest that prices for wind turbines had fallen

about 18% in China in 2009, given the aggressive capacity expansion and
consequently the fierce competition among wind turbine manufacturers. ASPs for
Western manufacturers have held firmer. We believe that this trend will continue in
2010F and expect another 10-15% y-y ASP decline this year for Chinese
manufacturers and less than that for Europeans. In our view, Chinese WTG players
are facing acute overcapacity and are willing to lower their selling prices to secure new
orders. According to our checks, European manufacturers are not willing to engage
into this behaviour Moreover, the wind turbine suppliers are looking to pass on the cost
savings to customers in the form of lower wind turbine prices owing to the reduced raw
material costs, especially falling steel prices since 2009.

Exhibit 64. World hot rolled coil price index
0
200
400
600
800
1,000
1,200
J
a
n
-
0
6
M
a
y
-
0
6
S
e
p
-
0
6
J
a
n
-
0
7
M
a
y
-
0
7
S
e
p
-
0
7
J
a
n
-
0
8
M
a
y
-
0
8
S
e
p
-
0
8
J
a
n
-
0
9
M
a
y
-
0
9
S
e
p
-
0
9
J
a
n
-
1
0
M
a
y
-
1
0
(US$/tonne)

Source: Bloomberg, Nomura research
Chinese WTG makers grow global share along with China
market, while European WTG makers maintain quality leadership
The entry of three Chinese players Sinovel, Goldwind and Dongfang into the top-
10 global wind turbine generator suppliers clearly reflects the growing prominence of
China in the global wind energy sector. With 13.8GW of new capacity installed, China
has become the largest wind market worldwide since 2009. Its cumulative wind
capacity grew at an impressive rate of 115% y-y in 2009, thanks to favourable
government policies and easier availability of project financing. We note that Chinese
wind turbine suppliers control more than 85% of the domestic market and hence the
significant growth in the Chinese market has helped the Chinese wind turbine
suppliers to break into the global league.

Exhibit 65. Chinese WTG manufacture gaining global market share
0
1
2
3
4
5
Dongfang Goldwind Sinovel
(%)


We note that international players have entered the Chinese wind turbine market but
have been losing market share in the China market. Chinese players are able to price
their wind turbines 20-30% cheaper than their international peers, and this gives them
a decisive edge when bidding for projects in China. Consequently, Sinovel, Goldwind
and Dongfang together gained 10.2% incremental market share of the global wind
turbine market at the expense of incumbents in 2009. However, we are observing that
the Western quality proposition appears to be gaining ground again and think that
Vestas and Gamesa could improve order flows from China. We have recently seen
improving order flow for Western manufacturers. We take this as a sign of market
opening, as well as a change in customer mentality from pure cost per MW to cost per
MWh, and thus expect them to continue making inroads, while Chinese wind
companies should maintain dominance in the Chinese market.
We expect the Chinese WTG suppliers, with their superior cost competitiveness and
strong funding availability from the mother country, to start to attempt moving towards
overseas markets. However, we believe that this would be a long-term process, as the
majority of the Chinese WTG suppliers do not have long enough track records and
local customer relationships overseas. In our view, the European market leaders will
defend their market share through their customer relationships and technological edge.
Furthermore, as wind turbine manufacturing needs to take place close to the end
markets, Chinese manufacturers would lose their key cost advantages in other regions
and competition would move onto a level playing field.
Entry of bigger players a welcome change
We note that there has been a shift in customer base for wind energy towards bigger
players such as power utilities and independent power producers (IPPs) over the last
few years. The fact that the market share of the Top 15 wind operators has increased
to 35% in 2009 from 23% in 2003 is a clear indication of the trend where the larger
players are beginning to dominate, in our view. We are positive about this shift in
customer base as the entry of these bigger players, who have much-deeper pockets,
provide stability in demand.
The increasing political support towards renewable energy has led to setting up of
longer term renewable energy targets (RETs) in many countries across the world. This
has put pressure on the power utilities companies in these countries to diversify their
installed capacity towards cleaner energy sources to meet the RETs, in our view.
Considering that most of these players have strong balance sheets, we believe that
this should also help in solving the project financing issue for the ongoing and future
projects, as banks find it easier to lend to bigger players. As the wind energy projects
are becoming bigger in size, they need much more capital than in the past; as a result,
the smaller players find it difficult to make the cut.

Exhibit 66. Top 15 utilities/IPP wind farm operators
Cumulati ve capacity (MW)
Name of the wind farm operator 2007 2008 2009
Iberdrola Renovables 7,362 8,960 10,350
NextEra Energy 5,077 6,374 7,544
Acciona Energy 3,824 4,566 6,230
EDP Renovaveis 3,639 5,052 6,227
China Longyuan 1,620 2,924 4,842
Datang 1,008 2,154 3,023
E.ON 855 1,890 2,873
EDF Energies Nouvelles 1,218 2,031 2,650
Invenergy 887 1,723 2,018
Eurus Energy 1,385 1,722 1,903
Infigen Energy 1,859 1,530 1,739
RWE Innogy 489 639 1,568
Huaneng New Energy 129 402 1,550
Enel 857 1,237 1,510
GDF Suez 690 1,054 1,492
Total 30,899 42,258 55,519

Shift towards larger-size turbines
We note that the average size of installed wind turbine continues to increase,
especially in more developed wind markets, such as European countries. However,
the speed of the transition towards larger-sized wind turbines is slow as most of the
new wind turbine suppliers, especially in China, currently provide only smaller-sized
turbines of around 1.5MW, in our view. The average size of wind turbine supplied in
2009 grew just 33KW y-y to 1,599KW.
However, going forward, we expect Chinese suppliers to move into higher-megawatt
turbines, around 2MW, to cater to international markets. This should help the global
market to shift towards larger-sized turbines. Moreover, looking at the growth potential
of the offshore market segment, which employs much larger wind turbines, combined
with increased installation of larger sized onshore wind turbines, we expect the pace of
the transition towards larger-sized turbines to quicken, in the mid-to-long term.
Another trend that we are witnessing is that wind turbine suppliers are focusing their
research and development efforts towards products that can work efficiently in areas
having weaker wind conditions. We note that the key reason for the shift is that areas
with stronger wind conditions in most developed wind markets have already been
exploited, leaving relatively weaker wind areas for wind farm development.

Exhibit 67. Product segmentation by size of global WTG supplied
0
20
40
60
80
100
Below 1500kW Above 1500 kW
2007 2008 2009
(%)


Exhibit 68. Average wind turbine capacity factor by country (2009)
0 5 10 15 20 25 30 35
USA
Germany
Spain
China
India
Italy
France
UK
Denmark
Portugal
Canada
Netherland
Japan
Australia
Greece
Sweden
Austria
ROW
Global avg.
(%)

Nomuras wind stock picks
Within Asia, CHST remains our top pick in the sector due to its strong margin outlook,
cost-control capability, continuously improving product mix and undemanding-looking

valuations. We re-iterate our conservative view on China Longyuan Power given its
demanding valuation, despite Longyuans scarcity value as the largest wind power
operator in Asia. We await further progress on Suzlons order inflows and balance
sheet clean-up to be positive for the stock despite its low-looking valuation.
For Europe, the turbine manufacturers are our preferred picks as we see them
benefitting from a market leadership position, high-end technology that will be an
enabler for low LOCE (levelised cost of energy) and broad geographic exposure to
global growth with an increasing presence in Asia. Vestas (VWS DC, BUY, PT: DKK
390) is our top pick, while we also like Gamesa (GAM SM, BUY, PT: 13.00). We
estimate that developers valuations are attractive as current share price on average
reflect only assets on the ground and under construction. But we believe that the high
levels of exposure to the weak PPA situation in the US may lead to risk to execution
on capacity-growth target. This could be an overhang on share prices until later in
2010. IBR (IBR SM, REDUCE, PT: 3.60) and EDF EN (EEN FP, NEUTRAL, PT: 39)
are our key names in the space.

Exhibit 69. Wind peer valuation comparison
Price Mkt cap
P/E (x)
EPS
growth
PEG
(x)
P/BV (x) ROE (%)
Company Ticker Rating
(local) (US$mn) 09 10F 11F (%) 10F 09 10F 11F 08 09 10F
Gearbox
CHST 658 HK BUY 17.60 2,818 19.9 13.7 10.5 37.6 0.4 4.3 3.5 2.3 23.7 28.3 26.6
Hansen Transmission HSN LN N-R 81.50 817 29.1 13.6 9.1 15.1 0.9 1.1 1.0 0.9 (1.4) 2.9 7.8

Wind turbine
Clipper CWP LN N-R 63.00 202 n.a. 6.2 4.8 n.a. n.a. n.a. n.a. n.a. n.a. 4.1 0.9
Gamesa GAM SM BUY 8.13 2,438.5 17.2 22.3 12.4 11.0 2.02 1.26 1.20 1.12 10.5 7.3 5.4
Nordex NDX1 GR N-R 8.17 672 18.7 12.0 8.5 48.6 0.2 1.5 1.3 1.2 7.2 8.0 12.0
Repower RPW GR N-R 118.00 1,336 17.6 14.6 n.a. n.a. n.a. 2.1 1.8 n.a. 13.4 13.4 13.8
Suzlon SUEL IN NEUTRAL 57.60 2,200 n.a. 9.8 5.0 n.a. n.a. 1.0 0.9 0.8 2.8 (1.6) 10.1
Vestas VWS DC BUY 286.90 9,681 13.3 18.0 11.6 6.0 3 2.28 2.07 1.75 26.1 17.2 11.5

Wind project operator
China Long Yuan Power Group 916 HK REDUCE 7.83 7,515 46.4 35.0 21.8 46.0 0.8 1.9 2.2 2.0 10.0 6.9 6.5
Acciona ANA SM BUY 69.42 5,431 19.5 14.8 11.9 27.8 0.5 0.7 0.7 0.7 22.3 4.1 4.9
Theolia TEO FP N-R 2.35 117 n.a. 50.0 11.7 n.a. n.a. 0.6 0.7 0.6 (12.9) (2.9) (0.5)
Iberdrola Renovables IBR SM REDUCE 2.81 14,587 26.0 22.8 18.7 17.9 1.3 1.0 1.0 0.9 3.3 3.9 4.3
EDF Energies Nouvelles EEN FP NEUTRAL 28.73 2,749 21.4 22.9 17.7 22.0 1.04 1.44 1.38 1.31 4.6 5.2 6.0
EDP Renovaveis EDPR PL NEUTRAL 5.01 5,380 32.3 24.4 20.1 26.7 0.9 0.8 0.8 0.8 2.1 2.5 3.2
Greentech Energy Systems GES DC N-R 13.30 106 14.0 2.1 2.3 147.6 0.0 0.0 0.0 0.0 (16.0) 2.3 4.7
China Power New Energy 735 HK N-R 0.74 678 19.0 12.5 12.1 25.1 0.5 1.0 0.9 0.9 3.3 5.3 8.0
China Windpower Group 182 HK N-R 0.69 646 16.4 11.5 8.1 42.3 0.3 1.4 1.2 1.0 6.4 9.2 11.7
Note: Pricing as of 23 June 2010
Source: Bloomberg consensus estimates for not rated companies

Global outlook
Gl obal nucl ear power and ur ani um
out l ook
Mar t i n Young +44 20 710 21536 / mar t i n.young@nomur a.com
El ai ne Wu +852 2252 2194 / el ai ne.wu@nomur a.com
Current state of nuclear power
Nuclear power contributed 14% of the worlds total electricity generation in 2007,
according to the International Energy Agency (IEA). It is the third-largest source of
generation after coal (41%) and hydro (16%). There are 435 nuclear power reactors in
operation worldwide (as of December 2009) with total net installed capacity of 372GW.
The US is the largest nuclear power user in the world, generating 31% of the worlds
nuclear energy in 2008, followed by France (16%) and Japan (9%).
Nuclear power was first put into commercial use in the 1950s and saw rapid growth in
capacity build-out during the 1960s and 1970s. However, development has slowed
significantly since the late 1980s (with capacity CAGR slowing to 0.8% during the
1990s, from 9.1% in the 1980s) following the Three Mile Island accident in 1979 and
the Chernobyl accident in 1986, which severely dented sentiment towards nuclear
power in the West and undermined the reputation of the nuclear power industry.

Exhibit 70. Number and capacity of nuclear power reactors (1956-2006)
0
50
100
150
200
250
300
350
400
450
500
1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Number of reactors (LHS) Capacity in MW (RHS)

Source: International Atomic Energy Agency (IAEA)

Nuclear power is the third-largest
source of generation after coal
and hydro
Development slowed significantly
in the past couple of decades
the fallout of two big accidents

Exhibit 71. Global nuclear capacity by country (1980-2008)
(MW) Growth (%) CAGR (%)
Countries 1980 1985 1990 1995 2000 2005 2007 2008 08 v 00 2000-08
China - - - 2,188 2,188 6,587 8,438 8,438 285.6 18.4
India 832 1,143 1,324 1,746 2,508 2,993 3,782 3,782 50.8 5.3
Japan 14,918 23,612 30,867 39,625 43,262 47,593 47,587 47,278 9.3 1.1
South Korea 564 3,580 7,220 9,115 12,990 16,810 17,451 17,647 35.9 3.9
Pakistan 125 137 125 125 425 425 425 425 0.0 0.0
Argentina 335 935 935 935 978 935 935 935 (4.4) (0.6)
Armenia 816 816 - 376 376 376 376 376 0 0
Belgium 1,670 5,464 5,501 5,631 5,712 5,801 5,824 5,824 2.0 0.2
Brazil - 626 626 626 1,976 1,901 1,795 1,766 (10.6) (1.4)
Bulgaria 1,224 1,632 2,585 3,538 3,760 2,722 1,906 1,906 (49.3) (8.1)
Canada 5,172 9,741 13,993 14,902 9,998 12,584 12,610 12,577 25.8 2.9
Czech Republic - 391 1,632 1,782 2,611 3,373 3,619 3,634 39.2 4.2
Finland 2,208 2,300 2,310 2,310 2,656 2,676 2,696 2,696 1.5 0.2
France 14,388 37,478 55,808 58,573 63,080 63,260 63,260 63,260 0.3 0.0
Germany 10,323 18,110 21,250 20,972 21,283 20,339 20,430 20,470 (3.8) (0.5)
Hungary - 825 1,710 1,729 1,729 1,755 1,829 1,859 7.5 0.9
Italy 1,112 1,273 - - - - - - NA NA
Kazakhstan 135 135 135 50 - - - - NA NA
Lithuania - 1,380 2,760 2,370 2,370 1,185 1,185 1,185 (50.0) (8.3)
Mexico - - 640 1,256 1,290 1,360 1,360 1,300 0.8 0.1
Netherlands 498 508 539 510 449 450 482 482 7.3 0.9
Romania - - - - 655 655 1,305 1,300 98.5 8.9
Russia 8,596 15,841 18,898 19,848 19,848 21,743 21,743 21,743 9.5 1.1
Slovakia 780 1,632 1,632 1,632 2,440 2,442 2,034 1,711 (29.9) (4.3)
Slovenia - 632 620 620 676 656 666 666 (1.5) (0.2)
South Africa - 1,840 1,840 1,840 1,840 1,800 1,800 1,800 (2.2) (0.3)
Spain 1,073 5,608 7,099 7,097 7,468 7,591 7,450 7,450 (0.2) 0.0
Sweden 5,515 9,450 9,919 10,058 9,417 8,916 9,034 8,996 (4.5) (0.6)
Switzerland 1,940 2,881 2,942 3,056 3,170 3,220 3,220 3,220 1.6 0.2
UK 8,686 12,485 13,496 13,718 13,059 11,852 10,222 10,097 (22.7) (3.2)
Ukraine 2,286 8,324 13,020 13,045 11,195 13,107 13,107 13,107 17.1 2.0
US 50,881 74,401 96,228 98,068 96,297 98,145 100,266 100,683 4.6 0.6

World 135,285 248,070 320,482 342,225 350,590 368,136 371,758 371,562 6.0 0.7
% covered by above Asian countries 12 11 12 15 18 20 21 21
Source: IAEA
The next nuclear boom
We look for the next wave of nuclear power plant construction to begin under the
backdrop of rising electricity demand and a greater need for low-carbon energy.
According to the International Atomic Energy Agency (IAEA), nuclear capacity will
grow by 139-427GW (or 37-112%) during 2010-2030F, from 372GW in 2009, based
on its low and high projections.

But growing electricity demand,
especially low-carbon energy, is
likely to drive a new wave of
nuclear capacity build out

Exhibit 72. Global nuclear power capacity
projections
371 372
445
511
380
543
807
0
100
200
300
400
500
600
700
800
900
2008 2010F 2020F 2030F
(GW)
Low Case High Case
Source: IAEA
Exhibit 73. Global nuclear power generation
projections
2,598
2,785
3,962
5,930
3,771
3,261
2,732
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2008 2010F 2020F 2030F
(TWh)
Low Case High Case
Source: IAEA

Summary of IAEA projections:
Nuclear power generation is expected to grow steadily in the next three decades, at
a CAGR ranging from 1.6% to 3.8%. Despite the rise in capacity, the Low-Case
projection estimates a decline in nuclears share in electricity generation because
the worlds aggregate power generation grows at an even faster rate. Nuclears
share of electricity generation is currently at about 14% and the ratio is expected to
range from 12.6% to 15.9% in 2030F, based on Low and High Case scenarios.
Nuclear power capacity is estimated to grow in a similar fashion as with nuclear
power generation, at a CAGR of 1.6-3.9% over 2010-2030F.
Emerging economies, especially those in Asia, will experience significant growth in
nuclear power capacity. Some developed countries, such as the US and France,
already have large amounts of nuclear power capacity and some European
countries are phasing out nuclear power due to environmentalist opposition. Hence,
this growth in developed countries is estimated to be comparatively slow in the next
few decades. Since electricity demand in emerging economies is expected to grow
at a faster pace than that of the developed countries, emerging countries require
more installed capacity to generate enough electricity to meet demand. Nuclear
power will be an important source to generate electricity as greenhouse gas
emissions become a worldwide issue.
WNA guides for similar growth in nuclear power capacity
The IAEA projections are in line with the projection from the World Nuclear Association
(WNA) which estimates nuclear power capacity will grow to 600GW and 818GW in
2030, based on its Reference-and Upper-Case projections, respectively.

The IAEA forecasts steady growth
in nuclear power generation over
the next three decades
mainly driven by capacity
growth in emerging economies

Exhibit 74. Projected nuclear power capacity by country based on WNAs
Reference Scenario
(MW) CAGR (%)
Asian countries 2008 2010F 2015F 2020F 2025F 2030F 2010-30F
Taiwan 4,884 4,884 7,484 7,484 8,784 8,876 3.0
Japan 47,577 47,122 52,408 56,666 64,757 65,904 1.7
Korea 16,920 16,920 24,710 28,700 32,690 38,050 4.1
Vietnam - - - - 950 950 NA
China 8,467 8,467 28,967 50,467 71,467 93,967 12.8
India 3,797 5,356 8,259 15,885 24,274 31,432 9.3
Indonesia - - - 950 950 950 NA
Malaysia - - - - 950 950 NA
Pakistan 425 425 600 900 900 900 3.8
Philippines - - - - - - NA
Thailand - - - - - - NA
Total 82,070 83,174 122,428 161,052 205,722 241,979 5.5

(GW) CAGR (%)
Region 2008 2010F 2015F 2020F 2025F 2030F 2010-30F
Latin America 4 4 5 7 10 10 4.6
US 100 101 102 106 117 122 1.0
Europe 135 136 131 135 135 130 -0.2
Asia 69 69 85 95 111 118 2.7
Canada 13 13 14 15 16 15 0.9
Other 6 9 12 23 36 45 8.6
Russia 21 22 24 28 36 46 3.7
Eastern Europe 14 14 14 16 19 20 2.0
China 9 9 29 51 72 94 12.8
World 371 375 415 476 551 600 2.4

Source: WNA

Exhibit 75. Projected nuclear power capacity by country based on WNAs
Upper Scenario
(MW) CAGR (%)
Asian countries 2008 2010F 2015F 2020F 2025F 2030F 2010-2030F
Taiwan 4,884 4,884 7,484 8,784 10,084 11,384 4.3
Japan 47,577 47,122 55,046 65,589 68,189 75,989 2.4
Korea 16,920 17,870 24,710 30,030 36,720 42,040 4.4
Vietnam 1,900 2,850 3,800 NA
China 8,467 8,467 29,967 72,967 95,467 134,467 14.8
India 3,797 5,356 12,092 21,458 32,920 41,939 10.8
Indonesia - - - 950 1,900 3,800 NA
Malaysia - - - 950 1,900 2,850 NA
Pakistan 425 425 725 1,200 2,500 3,500 11.1
Philippines - - - - - 1,900 NA
Thailand - - - - 950 1,900 NA
Total 82,070 84,124 130,024 203,828 253,480 323,569 7.0

(GW) CAGR (%)
Region 2008 2010 2015 2020 2025 2030 2010-2030F
Latin America 4 4 6 8 15 24 8.7
USA 100 101 102 112 135 144 1.8
Europe 135 136 138 149 170 186 1.6
Asia 69 70 87 110 125 146 3.7
Canada 13 14 15 17 19 19 1.6
Other 6 9 16 37 62 86 12.2
Russia 21 23 28 35 46 52 4.1
Eastern Europe 14 14 15 17 23 25 3.1
China 9 9 30 73 96 135 14.8
World 371 378 437 558 688 818 3.9

Source: WNA

All of these new capacity additions will translate into US$1.3tn in nuclear power
investment during 2010-2030F, according to the IEA.

Exhibit 76. Projected investment in renewables, CCS and nuclear by
country/region based on IEAs 450 Scenario
2010-20F 2021-30F
(US$2008bn) Renewables CCS Nuclear Renewables CCS Nuclear
OECD+ 866 51 189 1,190 411 449
US 228 35 87 371 273 130
EU 474 9 32 522 82 176
Japan 40 1 29 62 7 65
Other major economies 549 6 194 886 106 246
Russia 24 3 26 106 22 41
China 451 1 153 622 66 168
Other countries 292 1 39 948 20 151
India 102 1 15 365 9 73
World 1,707 58 422 3,024 537 846

Note: Figures do not include investment in photovoltaics in buildings
Source: IEA

Our Nomura global nuclear model suggests 180GW new build
Our European Utilities team has built a growth model for new nuclear around the world.
This is a country-by-country analysis and assumes a pragmatic and conservative
approach to the plans of each country. In particular, recession-driven demand
destruction is likely to prompt a reassessment of plans as well as a trend towards
lifetime extensions in Europe. Finance is also a concern in places like Europe and the
US, and may derail or delay many new build plans, in our view. As a consequence, our
global nuclear model suggests a capacity increase of 180GW by 2024F, which may be
conservative, but still indicates a 48% increase from existing global nuclear capacity.
Of this, Asia (China, India and Japan) is likely to account for more than half. Note:
growth models that include communicated plans/ambitions from countries will naturally
result in a higher growth profile. China is one such region, where significant plant
capacity (95GW+) has been proposed, but we do not include this in our model. Our
Asian utilities team includes planned nuclear reactors in China in their forecasts and
expects 70GW to be in operation by 2020F (this is included in our global model.)

Exhibit 77. Global nuclear additions (MW)
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2
0
0
9
2
0
1
1
2
0
1
3
2
0
1
5
2
0
1
7
2
0
1
9
2
0
2
1
2
0
2
3
Source: WNA, Nomura estimates
Exhibit 78. Global nuclear additions by region
Middle East
2%
Africa
2%
Americas
11%
Asia
57%
Europe
28%

Capacity growth to come from Asia
Much of the growth in nuclear power capacity will come from Asia, chiefly China, India,
Japan and South Korea. WNA expects these countries to contribute to more than 60%
of the worlds new capacity planned-and-under-construction.

Asia to drive much of the growth
in nuclear capacity
We forecast a global nuclear
capacity increase of 180GW by
2024F or a 48% increase from the
current levels

Exhibit 79. Nuclear power reactors planned or under construction
(as of December 2009)
Reactors under construction Reactors planned

Number MW
% of world
total Number MW
% of world
total
China 18 19,240 38.8 35 37,000 24.7
Russia 9 7,130 14.4 7 8,000 5.3
India 6 2,976 6.0 23 21,500 14.4
South Korea 6 6,700 13.5 6 8,190 5.5
Canada 2 1,500 3.0 4 4,400 2.9
Japan 2 2,285 4.6 13 17,915 12.0
Slovakia 2 840 1.7 0 0 0.0
Argentina 1 692 1.4 1 740 0.5
Finland 1 1,600 3.2 0 0 0.0
France 1 1,630 3.3 1 1,630 1.1
Iran 1 915 1.8 2 1,900 1.3
Pakistan 1 300 0.6 2 600 0.4
US 1 1,180 2.4 11 13,800 9.2
North Korea 0 0 6.0 1 950 14.4
Thailand 0 0 0.0 2 2,000 0.6
Vietnam 0 0 0.0 2 2,000 0.0
Indonesia 0 0 0.0 2 2,000 0.0
Asia 33 31,501 63.5 86 92,155 61.6
World 53 49,588 100.0 136 149,645 100.0

Source: WNA, Nomura research

Exhibit 80. Nuclear capacity under construction (as of December 2009)
0 5,000 10,000 15,000 20,000 25,000
Pakistan
Argentina
Slovakia
Iran
USA
Canada
Finland
France
Japan
India
South Korea
Russia
China
(MW)

Source: WNA

As of December 2009, nuclear power reactors under construction or planned in Asia
made up 62% of the world total 200GW, led by China (28%), India (12%) and Japan
(10%), according to WNA. There were 53 nuclear reactors under construction in the
world, with 33 located in Asia. As China and India have witnessed fast economic
growth in recent decades, their energy requirements are likely to be strong. China (as
of January 2010) has 20 reactors under construction, while India has six. Both have
aggressive plans to develop nuclear power, with an additional 59GW planned (China

37GW; India 22GW), accounting for 39% of capacity planned in the world. Japan and
South Korea have developed sophisticated nuclear power industries and are pursuing
steady growth with 13 and six reactors planned, respectively.
In our opinion, the key drivers for the upcoming growth in nuclear power include:
1) growing demand for electricity (especially from emerging economies such as China
and India); 2) the need for clean energy amid threats of global warming and; 3) the
need for energy security and diversification.
Russia, US and UK set to lead the non-Asian charge
New build in Asia is likely to be dominated by China, India, Japan and Korea, while
that in the rest of the world is likely to be more widely spread out. However, ex Asia,
three countries stand out as having significant new build aspirations over the next 15
years Russia, where we see 16GW of capacity additions, the US (12GW) and the
UK (10GW).
Russia is firmly embracing the nuclear renaissance, although given the recession
and demand decline, it revised its budget downwards in July 2009. Of the 37GW
capacity that has been proposed as part of delivering a 25%-30% nuclear share in
electricity supply by 2030, we believe that a plant without a start date in
construction may be delayed or not come to fruition. That being said, Russia
already has 7.5GW of new capacity under construction and a further 8.2GW with
planned construction start dates. We include this capacity within our global nuclear
model.
The UK is set to lead the way in terms of new nuclear build in Western Europe. The
government is firmly behind new nuclear build and in January 2008 published a
white paper setting out such a preference. The driver of this support is a need to
replace the coal capacity that will be shut down at the end of 2015, and the British
Energy capacity that reaches the end of its operational life. While the government
has no specific targets for new nuclear, most of the big European utilities are
interested in building new nuclear plants in the UK, although we take a more
conservative approach in our global nuclear model and suggest that only 10GW will
be built by 2022F.
There is strong support in the US for new nuclear build and a number of policy
instruments have been developed, including federal loan guarantees and tax
credits. Proposals have been tabled for over 46GW of new capacity, of which
1,180MW is under construction, and 11,000MW is planned with engineering,
procurement and construction contracts (EPCs) in place. With the exception of one
project, all are on the shortlist for a federal loan guarantee. Our global nuclear
model assumes that only the latter capacity will enter service in the next 15 years.
Nuclear power: the low carbon solution
Compared with conventional thermal fuels, nuclear power is almost free of greenhouse
gas (GHG) emissions. Electricity from a nuclear power generator is produced by
splitting uranium atoms to release heat, which in turn creates steam to generate power.
There is no production of greenhouse gases since there is no combustion of carbon
during this process, unlike fossil fuels which combine with oxygen to produce heat.
From the perspective of the overall lifecycle of different types of fuel, nuclear power
emits GHG only in plant construction, uranium mining, milling, enrichment and
fabrication. Therefore, nuclear power is expected to gain a bigger advantage over
conventional thermal sources.

Nuclear power is almost free of
greenhouse gas emissions
Elsewhere, Russia, the US and
the UK stand out with significant
new build aspirations

The chart below illustrates the amount of GHG emitted from various electricity
generation methods, based on the data from the IAEA. This shows that coal-generated
electricity emits the largest amount of emissions. Renewable sources emit a fraction of
the amount of those from fossil fuels. Nuclear power does not generate direct GHG
emissions from the production of electricity. Its indirect emissions from electricity
production are only 1-2% of those from coal. Data from the IEA in the table overleaf,
which breaks down emissions of CO2, SO2 and NOx, show similar results.

Exhibit 81. Greenhouse gas emissions from electricity production
1,017
790
575
362
289
176
113
77
236 4 280 100 48 10 21 9
0
200
400
600
800
1,000
1,200
1,400
C
o
a
l
C
o
a
l
G
a
s
G
a
s
H
y
d
r
o
H
y
d
r
o
S
o
l
a
r

P
V
S
o
l
a
r

P
V
W
i
n
d
W
i
n
d
N
u
c
l
e
a
r
N
u
c
l
e
a
r
Indirect emissions, from life cycle
Direct emissions from burning
grams CO2-e/kWh

Source: IAEA. Note: two bars indicate range

Exhibit 82. Lifecycle air emissions from various electricity generation
methods
Emission (g/kWh)
CO
2
SO
2
NO
x
Coal
Best practice 955.0 11.8 4.3
Flue gas desulphurisation & low NOx 987.0 1.5 2.9
Oil
Best practice 818.0 14.2 4.0
Gas
Combined cycle gas turbines 430.0 -- 0.5
Diesel
Embedded 772.0 1.6 12.3
Energy crops
Current practice 17-27 0.07-0.16 1.1-2.5
Future practice 15-18 0.06-0.08 0.35-0.51
Hydro
Small scale 9 0.03 0.07
Large scale 3.6-11.6 0.009-0.024 0.003-0.006
Solar
PV 98-167 0.20-0.34 0.18-0.30
Thermal electric 26-38 0.13-0.27 0.06-0.13
Wind 7-9 0.02-0.09 0.02-0.06
Geothermal 79 0.02 0.28
Source: IEA, Nomura research
CO2 emissions avoided
Nuclear energy accounts for 45% of global carbon-free electricity. It prevents 2.6bn
metric tonnes of CO2 emissions each year and has avoided 60bn tonnes of CO2
emissions to date compared with the equivalent coal-fired power, according to the
Nuclear Energy Institute (NEI) and the OECD Nuclear Energy Agency. This is in
contrast to the 26bn tonnes of carbon dioxide emitted globally by the transportation,
power generation and industrial sectors each year.
Nuclear powers indirect
emissions from electricity
production is only 1-2% of those
from coal
Nuclear energy accounts for 45%
of global carbon-free electricity

According to the NEA, the cumulative emissions of CO2 from fossil fuels used for
electricity production during 1971-2004 were 218Gt and the cumulative saving from
the use of nuclear power were 58Gt of CO2 equivalent.
The WNA has said that nuclear electricity avoids nearly 700mn tonnes of carbon
dioxide, 1.1mn tonnes of nitrogen oxide and 3.3mn tonnes of sulphur dioxide in the US.
Need for energy diversity and security
In order to ensure supplies of resources needed for energy and to become less reliant
on limited resources such as oil, various countries have taken a move to diversify from
their key sources of energy such as coal. China has been leading the way in this effort.
President Hu Jintao placed an emphasis on growing nuclear energy as a way to fight
climate change. Even though coal will continue to be its dominant source for electricity
generation, China has been making big efforts in expanding its renewable and nuclear
capacity. It has plans to revise its nuclear capacity target to 70-86GW by 2020 from
the current 40GW, according to government data.
The advantage of nuclear power is that nuclear fuel supplies are relatively inexpensive
and highly energy-intensive. Its small volume allows for easy stockpiling and it can act
as a buffer against energy insecurity.
Other than concerns over GHG emissions from coal generation, the reliability of power
grids is also an issue in the wintertime during snowstorms. Transportation of coal has
previously been held up by storms, leading to power shortages.
Similarly, countries that do not have rich resources, such as Japan and South Korea,
are continuing their efforts in expanding their nuclear power programmes.
Nuclear plays an important role in energy diversification because other renewable
energy sources are not enough to help control GHG emissions. The IEA projects that
these new renewable sources can only provide around 6% of world electricity by 2030
even with continued government subsidy and research support. IEAs executive
director, Nobuo Tanaka, said in October 2009 that the world would need to build 18
reactors a year to make nuclear power reach 18% of the global energy mix by 2030.
Smaller nuclear reactors attracting attention
Today, due partly to the high capital cost of large power reactors generating electricity
via the steam cycle and partly to the need to service the small electricity grids under
about 4GWe, there is a move to develop the smaller units. These may be built
independently or as modules in a larger complex, with capacity added incrementally as
required (see the section below on Modular construction using small reactor units).
The numbers produced provide economies of scale. There are also plans to develop
small units for remote sites.
Generally, modern small reactors for power generation are expected to have greater
simplicity of design, economy of mass production and reduced sitting costs. Many are
also designed for a high level of passive or inherent safety in the event of malfunction.
Modular construction using small reactor units
Westinghouse's IRIS (International Reactor Innovative & Secure) is an advanced third-
generation reactor. A 335MWe capacity is proposed, although it could be scaled down
to around 100MWe. IRIS is a modular pressurized water reactor with integral primary
coolant system and circulation by convection. Fuel is similar to present light water
reactors (LWRs) and (at least for the 335MWe versions) fuel assemblies are identical
to those in AP1000, according to Westinghouse. Enrichment is 5% with burnable
poison and fuelling interval of four years (or longer with higher enrichment). US design
certification is at the pre-application state.
Developers of IRIS have outlined the economic case for modular construction of their
design (about 330MWe), and the argument applies similarly to other smaller units.
They point out that IRIS, with its size and simple design, is suited for modular
construction in the sense of progressively building a large power plant with multiple
Countries are moving to diversify
from emissions-heavy energy
sources like coal
The world needs to build 18
reactors pa to make nuclear
power become 18% of the global
energy mix by 2030

small operating units. The economy of scale is replaced here with the economy of
serial production of many small and simple components and prefabricated sections.
They expect construction of the first IRIS unit to be completed in three years, with
subsequent reduction to only two years.
Site layouts have been developed with multiple single units or multiple twin units. In
each case, units will be constructed so that there is physical separation sufficient to
allow construction of the next unit while the previous one is operating and generating
revenue. In spite of this separation, the plant footprint can be very compact so that a
site with three IRIS single modules providing a 1,000MWe capacity is similar or smaller
in size than one with a comparable total power single unit.
Eventually, IRIS is expected to have capital cost and production cost comparable with
larger plants. However, any small unit such as this will potentially have a funding
profile and flexibility otherwise impossible with larger plants. It will generate positive
cashflow for the next module to be built as one module is finished and starts producing
electricity. Westinghouse estimates that 1,000MWe delivered by three IRIS units built
at three year intervals financed at 10% for ten years require a maximum negative
cashflow of less than US$700mn (compared with about three times that for a single
1,000MWe unit). For developed countries, small modular units offer the opportunity of
building as necessary. For developing countries, it may be the only option as their
electric grids cannot take 1,000+MWe single units.
Nuclears cost competitiveness
According to a study by the IEA and NEA, which compiled data from 10 countries, the
cost of nuclear generation is among the cheapest, followed by coal, gas, wind, micro-
hydro and solar. The cost of generating electricity depends on some country-specific
factors. On average, nuclear power has lower costs than other types of fuel.
Based on NEA and IEAs study, nuclear power generation cost is US$40-140/MWh,
demonstrating that nuclear power costs are lower than those for other types of plants.
NEA and the IEA found that the share of investment in total levelised generation cost
is around 70% while the other cost elements, O&M and fuel cycle, represent averages
of 20% and 10% respectively. Compared with other fossil fuels, nuclear powers
proportion of capital costs is higher and fuel costs are lower.

Exhibit 83. Generation cost of various energy sources
Source: NEA, IEA

Our European research team also did a cost analysis of new entrant power cost (see
exhibit below), which also shows that nuclear is the most economic form of new build
for large-scale generation capacity, although its relative merits depend on the price of
CO
2.

Nuclear generation cost is among
the cheapest

Exhibit 84. New entrant power costs (/MWh)
0
20
40
60
80
100
120
CCGT - EUR Coal Clean Coal Nuclear Wind - On Wind - Off Market CCGT Market Coal
Return Decommissioning O&M costs Carbon costs Fuel costs
(EUR/MWh)
Nomura long term price
assumption of 65/MWh
66/MWh 67/MWh
86/MWh
58/MWh 63/MWh
107/MWh
50/MWh
56/MWh

Exhibit 85. Cost structure of generation plants by type at 10% discount rate
50
20
70
15
7
20
35
73
10
0
10
20
30
40
50
60
70
80
90
100
Coal Gas Nuclear
Investment costs O&M Fuel
(%)

Source: NEA, IEA

With high fixed costs, nuclear power generation plants are subject to scale economies.
The unit cost of generation falls substantially with increased output. While base load
demand is growing, capacity factors of nuclear plants around the world have increased
by 10 percentage points since 1990 from 70% to 80%, according to the WNA. We
expect this trend to continue in the short term, hence further reducing operating and
management costs.
Prices of nuclear fuel also experienced a substantial decrease in recent decades.
Nuclear fuel costs in the US were 1.28 cents per kWh in 1985 and 0.44 cents per kWh
in 2004. Because uranium costs are only a small fraction of total kWh cost (around
5%), the impact on electricity costs will be relatively insignificant. Therefore, nuclear
fuel costs fell substantially although uranium prices have risen sharply in the past two
years. Considering possible technology progress in enrichment and spent fuel
management, we expect a further decline in fuel costs of nuclear power.
A combination of lower fuel costs and O&M costs provides nuclear power with
competitiveness from the perspective of operation. In the US, the cost of electricity
production for nuclear power fell to 1.76 US cents per KWh in 2007 from 2.60 US
cents per KWh in 1995, according to the NEI.

Fuel costs account for 10-20% of
nuclear power generation costs
Nuclear fuel price experienced a
substantial decrease in recent
decades

Exhibit 86. Production costs of power generation by type in the US
0
2
4
6
8
10
12
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(Cents/KWh) Coal Gas Nuclear Petroleum

Source: NEI
Uranium: the fuel and its outlook
As nuclear power development is picking up speed, we believe that uranium demand
is set to grow approximately at the same pace with the increase of nuclear power
capacity. The increase in demand has seen an expansion in uranium exploration and
production. Uranium exploration expenditures in 2006 were US$774mn, a 250%
increase from 2004, according to the IAEA.
Because the US, France and Japan have the largest number of nuclear reactors in the
world, they account for over 58% of the worlds uranium demand. As China, India,
Russia and South Korea have the largest amount of nuclear power capacity in the
pipeline; uranium demand growth will be mainly driven by these countries.

Exhibit 87. Worlds uranium requirement, 2009
USA , 29%
Others, 11%
Sweden , 2%
France , 16%
Japan , 13%
Russia , 5%
South Korea, 5%
UK, 3%
Canada , 3%
Germany , 5%
India , 1%
Ukraine , 3%
China , 3%


Primary supply of uranium is dominated by a few countries. Canada, Australia and
Kazakhstan are the largest providers of primary supply, collectively accounting for 60%
of the worlds total. In recent years, Kazakhstan has been aggressively increasing its
production, at an annual average rate of 21% over the past five years compared with
Canadas -3% and Australias 3%.

Uranium demand is set to grow
China, India, Russia and South
Korea driving demand growth

Exhibit 88. Worlds uranium production and capacity by country (2008)
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
France
Pakistan^
Romania^
Czech Rep
India^
Brazil
South Africa
China ^
Ukraine^
USA
Uzbekistan
Niger
Russia^
Namibia
Australia
Kazakhstan
Canada
(tU)
Production Capacity

Source: WNA. Note: ^ WNA/UI estimates

Major uranium mines are located in Australia, Canada, Niger, Namibia, Russia and
Kazakhstan. The top eight mines account for about 82% of the worlds total output.
According to the WNA, capacity utilisation at operating mines in 2008 was 90%.

Exhibit 89. World's major uranium mines (2008)
Mine Region Owner, stake% Mine type 2008 production (tU) % of world production
McArthur River Canada Cameco Conventional 6,383 15
Ranger Australia ERA (Rio Tinto, 68%) Conventional 4,527 10
Rossing Namibia Rio Tinto, 69% Conventional 3,449 8
Olympic Dam Australia BHP Billiton By-product (copper) 3,344 8
Priargunsky Russia ARMZ Conventional 3,050 7
Arlit Niger Areva Conventional 1,743 4
Rabbit Lake Canada Cameco Conventional 1,368 3
Akouta Niger Areva Conventional 1,289 3
McClean Lake Canada Areva Conventional 1,249 3
Akdala Kazakhstan Uranium One ISL 1,034 2
World total from top ten mines 27,436 63

Source: WNA

Camecos McArthur River mine in Canada is the largest mine in the world with a
capacity of 7,200tU. Cameco has another mine under development in Canada at Cigar
Lake, which will have a capacity of 6,925tU and will begin operation in 2013, according
to the WNA.
Camecos McArthur River mine
largest in the world

In Australia, BHP Billiton has plans to expand its uranium production level at Olympic
Dam by more than four times to 16,110tU from 3,385tU. The mine expansion is
expected to occur over 10 to 11 years.
From the perspective of companies, primary supply is dominated by eight producers.
Supply provided by these companies accounts for more than 80% of the worlds total
primary supply.

Exhibit 90. Major uranium miners based on production volume (2008)
Kazatomprom
12%
Areva
14%
Rio Tinto
19%
Cameco
15%
Other
13%
General Atomics
1%
Uranium One
3%
Paladin
2%
Navoi
5%
BHP Billiton
8%
ARMZ
8%

Source: WNA

Under the WNAs Reference-Case projection, the production of uranium will increase
rapidly in the next decade, at a 5% CAGR over 2008-2020F or nearly doubling from
43,853tU in 2008 to 80,238tU in 2020F. This is mainly a result of new mines coming
online. However, uranium production is projected to start to decline slightly in 2026F as
reserves and resources are exhausted.
In Africa, for example, seven new mines will help push production levels to double in
the next 10 years. In Russia, Atomredmetzoloto (ARMZ) has a goal of increasing its
annual production from 3,500tU to 20,000tU.
Under the WNAs Upper-, Lower- and Reference-Case projections on uranium
production, assumptions were made that production would rise in the next 10 years
under all three scenarios.

Exhibit 91. Projected uranium production (2008-30F)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2
0
0
8
2
0
0
9
F
2
0
1
0
F
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
2
0
1
5
F
2
0
1
6
F
2
0
1
7
F
2
0
1
8
F
2
0
1
9
F
2
0
2
0
F
2
0
2
1
F
2
0
2
2
F
2
0
2
3
F
2
0
2
4
F
2
0
2
5
F
2
0
2
6
F
2
0
2
7
F
2
0
2
8
F
2
0
2
9
F
2
0
3
0
F
(tU) Upper Reference Lower


Primary supply is dominated by
eight companies
Production of uranium will
increase rapidly

Uranium resources are sufficient to support nuclear power development, in our view. In
2007, 439 nuclear reactors in the world consumed about 65,000tU. According to the
WNA, world known reserves of uranium are more than adequate to satisfy reactor
requirements to well beyond 2030. World uranium production has been rising steadily
in the past decade from 33,719tU in 1998 to 43,853tU in 2008. The run-up of uranium
prices since 2003 has also given more incentives for further production and exploration
of the metal. The ratio of known uranium resources to 2006 consumption is 100 years,
according to the NEA, which implies there is still a lot of room for growth.
Spot prices of uranium peaked at US$138 per pound in June 2007 following tight
supply and intense bidding. In 2008, utilities in Europe and North America rebuilt their
inventory to protect themselves against further price rises and potential supply
shortages. Spot prices have since fallen to around US$41 per pound (June 2010).
As for the near-term future of the spot uranium market, TradeTech (a US firm that
provides market information and consulting services to the nuclear fuel industry),
expects a return to the market by the more traditional buyers in 2010. Although active
supply remains considerable, buying activity results in upward price pressure, with a
resulting price rise to a peak value of about US$55 per pound U3O8, followed by a
drop back to the high US$40s for the rest of 2010F. Well into 2011F, TradeTech sees
buying activity picking up for yet another major round, with another price rise to a peak
of slightly over US$60 per pound U3O8. Although these results are for only one
scenario, a fairly robust finding is that the spot price is projected to remain in the range
of US$45-60 per pound U3O8 over the next 24 months.

Exhibit 92. Uranium spot price history (1968-2009)
0
20
40
60
80
100
120
140
160
1
9
6
8
1
9
7
0
1
9
7
2
1
9
7
4
1
9
7
6
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
0
50
100
150
200
250
300
350
400
(per Pound U3O8) (per kgU as U3O8)

Source: TradeTech
Outlook on uranium demand and supply
Based on WNAs Reference-Case projections, uranium supply from primary and
secondary sources would be adequate to supply the reactor requirements up to 2020F.
Beyond that, more mines would have to be put into operation to satisfy demand. World
reactor requirements are projected to rise from 64,500tU in 2008 to 76,900tU in 2015F,
91,500tU in 2020F and 106,100tU in 2030F. The annual growth rate during 2008-
2030F would be 2.2%, same as the growth rate in nuclear generating capacity. Under
the Upper-Case projections, uranium requirements are expected to rise to 84,800tU in
2015F, 106,600 in 2020F and 140,100tU in 2030F.

Spot prices of uranium peaked at
US$138 per pound in June 2007
Supply looks adequate up to
2020F

Exhibit 93. Projected uranium demand and supply for 2008-30F,
under WNAs Reference Case
(000 tU)
0
20
40
60
80
100
120
140
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
2
0
2
2
F
2
0
2
4
F
2
0
2
6
F
2
0
2
8
F
2
0
3
0
F
Current capacity Secondary supply
Under development Planned
Prospective World requirements

Recent M&A activities of uranium assets
Cross border M&A on uranium assets is set to increase due to the mismatch of
uranium resources and demand, in our view. Especially, the huge nuclear capacity
build out in Asia has led to concerns over the nuclear fuel security and Asia countries
have been actively searching for uranium assets in Kazakhstan, Australia, Canada and
countries in Africa. In particular, China currently relies on imports for about half of its
uranium needs, with supplies coming from Russia, Namibia, Australia and Kazakhstan.
As we expect Chinas nuclear capacity to reach 70GW by 2020F (from the current
8.6GW), China is likely to import 80% of its uranium by then.
Uranium resources in Australia have been targets of acquisition, which require
approval from the Foreign Investment Review Board. One recent deal is China
Guangdong Nuclear Power Holding Corps (CGNPC) 70% stake purchase of uranium
explorer Energy Metals Ltd. The Australian government approved CGNPC subsidiary
China Uranium Development Cos A$83.6mn (US$76mn) offer for Energy Metals in
October 2009. Other acquisitions by foreign investors are listed below.

Exhibit 94. Foreign acquisition of Australian uranium assets
Company Main deposits Overseas investor, share Value of share (A$) Date
Pepinini Curnamona project, Crocker's Well Sinosteel, 60% of project 31mn Sep-06
Uranium One Honeymoon Mitsui, 49% of deposits 104mn Dec-08
Uranium One Honeymoon Japanese consortium, 20% of company Jan-09
Rio Tinto Kintyre Cameco & Mitsubishi, 100% of deposit 518mn Jul-08
Mega Uranium Lake Maitland Itochu consortium, 35% of project 77mn Feb-09
Energy Metals Bigrlyi 54% China Guangdong NPC, 70% of company 86mn Aug-09

Source: WNA

Kazakhstan, which has ambitious goals to double its uranium production to 30,000tU
by 2018, has attracted investments from China, Canada, Russia, and France in its
uranium assets. Similarly, Kazatomprom, the government-owned national atomic
company, has also made investments in foreign companies in the industry. In 2007, it
purchased a 10% stake in Westinghouse.
Kazakhstan has also been cooperating with China in a few projects. Following Chinese
President Hu Jintaos visit to Kazakhstan in December 2009, the two countries are
expected to sign an agreement for China to receive nuclear power assistance from
Kazakhstan, according to a China Daily report.
Australia uranium assets:
acquisition targets
China is a close partner

China Guangdong Nuclear Power Co (CGNPC) has already begun cooperating with
Kazakhstans state nuclear power firm for uranium. The legal framework will allow for
further cooperation in the nuclear energy field.
CGNPC is a 49% joint venture partner in two mines while China National Nuclear Corp
(CNNC) is a 49% joint venture partner in another. Sino-Kazakhstan Uranium
Resources Investment Co, a CGNPC subsidiary, will invest in the Semizbai-U JV for
the Irkol and Semizbai mines, with 640tU and 425tU per year, respectively. CNNC will
invest in the Zhalpak project, with 640tU per year. The uranium will be supplied to
China as fabricated fuel.

Exhibit 95. Foreign acquisition of Kazakhstan uranium assets
Company, project or mine Foreign investor and share Value of share or project if known
Inkai JV (Inkai mines) Cameco, 60% n.a.
Betpak Dala JV (South Inkai, Akdala mines) Uranium One, 70% US$350mn for 70% in 2005
Appak JV (W.Mynkuduk) Sumitomo, 25%, Kansai, 10% US$100mn total in 2006
JSC Akbastau & Karatau (Budenovskoye deposit) ARMZ, 50% (agreement to sell Karatau share to
Uranium One)
n.a.
Zhalpak CNNC, 49% n.a.
Katco JV (Moinkium, Tortkuduk mines) Areva, 51% US$110mn in 2004
Kyzlkum JV (Kharasan 1 mine) Uranium One, 30%, Japanese, 40% (Marubeni,
Tepco, Toshiba, Chubu, Tohoku, Kyushu)
US$75mn in 2005 for 30%, US$430mn
total in 2007 (both mines)
Baiken U JV (Kharasan 2 mine) Japanese, 40% (Marubeni, Tepco, Toshiba, Chubu,
Tohoku, Kyushu)
US$430mn total in 2007 (both mines)
Semizbai-U JV (Irkol, Semizbai mines) CGNPC, 49% n.a.
Zarechnoye JV (Zarechnoye & S.Zarechnoye mines) ARMZ, 49% US$60mn total

Source: WNA

CGNPC and CNNC already have
investments here

Global outlook
Gl obal out l ook f or ot her r enewabl es
Other technologies hold significant potential, but their time is
yet to come
Biomass: a longer-term story
According to the International Energy Associations (IEA) long-term estimate, biomass-
based energy can sustainably contribute 25-33% of global energy needs by 2050F.
The IEA study suggests that the theoretical potential for biomass is around
1500EJ/year by 2050F. However, we note that given several sustainability constraints
the prudent estimate comes down to 200-500EJ/year (excluding aquatic biomass). Of
this, forestry and agricultural residues and other organic wastes (including municipal
solid waste) would account for 50-150EJ/year, while the rest would come from energy
crops, surplus forest growth and increased agricultural productivity.
We believe that similar to other renewable energy technologies, a key factor that would
enable bioenergy reach its true potential is favourable government policies and
technological advancement that would bring down the cost. In the mid-term, ie up to
2030F, strong renewable targets will be the main driver behind the increase in biomass
demand, and feedstock such as use of residues and wastes, sugar, starch and oil
crops, and increasingly, non-food crops (organic wastes, forestry residues, high
yielding woody or grass energy crops and algae) will be utilised to meet this demand.
According to the IEA, China, India and the US are likely to lead the biomass-to-power
expansion in the next few decades. In the medium term, the focus for biomass-to-
power will likely be on decentralised biomass systems, especially where feedstock is
readily available. The IEA estimates biofuel production will grow by 6-8% pa and
contribute around 5% of total road transport fuel in 2030F.

Exhibit 96. IEA projections for biomass-to-power generation
0
200
400
600
800
1,000
1990 2007 2015F 2020F 2025F 2030F
(TWh)


Biomass can sustainably
contribute 25-33% of global
energy needs by 2050F

Exhibit 97. IEA projections for biomass-to-power installed capacity
0
40
80
120
160
200
2007 2015F 2020F 2025F 2030F
(GW)


Exhibit 98. Overview of global technical potential of land-based biomass
supply (primary energy)
Biomass category Technical biomass potential year 2050F (EJ/yr)
Energy crop production on surplus agricultural land 0 700
Energy crop production on marginal lands <60 110
Residues from agriculture 15 70
Forest residues 30 150
Dung 5 55
Organic wastes 5 >50
Total <60 >1100
Geothermal to grow more than 70% to 18.5GW by 2015F
With an addition of just 397GW of installed capacity, implying 3.8% y-y growth,
geothermal energy has lagged behind the high growth seen in other renewable energy
technologies such as wind and solar. We note that the growth in installed capacity in
2009 was concentrated in the US and Indonesia, which together contributed 79% of
the global capacity additions. The US has the largest geothermal capacity, now just
over 3GW (28.8% of the world total), followed by the Philippines (1.9GW), Indonesia
(1.2GW) and Mexico (1GW).
However, with nearly 8GW of projects under development, we are witnessing a lot of
interest in geothermal technology due to a combination of base load power, cost-
competitiveness and zero-emissions. According to the International Geothermal
Association, the installed capacity of geothermal energy is expected to grow more than
70% to 18.5GW by 2015F, from 10.7GW in 2009.

Geothermal energy is expected to
grow to 18.5GW by 2015F, from
10.7GW in 2009

Exhibit 99. Geothermal expansion plan by countries
Country Development
Kenya Looking to produce 490MW of geothermal power by 2012F and as much as 4,000MW
within 20 years.
Germany Has over 150 geothermal power plant projects at some stage of development and
expects to have over 280MW on line by 2020F, according to the European Commission.
Turkey Has a goal to reach 550MW of geothermal power on line by 2013F.
Philippines Energy from geothermal power makes up approximately 18% of the country's electricity
generation.
El Salvador Geothermal power plants provide 26% of the electricity.
Indonesia National Energy Blueprint sets a goal of 9,500MW of geothermal power production, an
800% increase.
Iceland Derives 25% of its electricity and 90% of its heating from geothermal resources.
US The world leader in geothermal electricity production with more than 3GW of installed
capacity from 77 power plants.
Source: IGA, Nomura research

Exhibit 100. Geothermal installed capacity
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2003 2004 2005 2006 2007 2008 2009 2010F 2015F
(MW)

Source: IGA, Nomura research
Hydropower is a mature energy source
According to the IEA, hydropower electricity generation is expected to reach
4,680TWh by 2030F, implying a CAGR of 1.7% over 2009-30F. We note that
maximum capacity additions will take place in Asia, owing to low hydropower
penetration, growing demand for electricity and huge hydropower resources. The
hydropower sector in Asia has seen tremendous growth, mainly backed by
hydropower rich countries such as China, Japan, India and Australia. With substantial
unexploited hydropower resources, these countries are likely to see significant
hydropower capacity additions, especially China and India.
We note that there is limited scope for development and expansion of hydropower in
the OECD countries as the best sites have already been exploited, in our view.
Moreover, environmental regulations constrain new development of hydropower
resources. We note that according to the IEA some 160GW of hydropower capacity is
currently under construction, of which half is in China; India is constructing 13GW,
while Russia and Brazil each have about 5GW under construction.
Hydropower capacity in China grew at 10-18% pa between 2004 and 2009. However,
based on recent comments by government officials on the nations hydropower
development plans, cumulative hydropower capacity is scheduled to expand from
197GW at end-2009 to 405GW (including 75GW of small-hydro projects) by end-
2020F, implying an 11-year CAGR of 7%.

Asia is seeing the most capacity
additions in hydropower

We expect China Yangtze Power, the worlds largest hydropower producer with 21GW
capacity on hand, to benefit from the growth of hydropower in China. We think the
company is well positioned, given: 1) future asset injection from its parent (around
43GW in hydro assets are under construction at the parent level); and 2) a likely tariff
hike to match the hydro tariff with the coal-fired tariff. Its shareholdings also offer an
earnings cushion.

Exhibit 101. IEA outlook for hydropower electricity generation
0
1,000
2,000
3,000
4,000
5,000
1990 2007 2015F 2020F 2025F 2030F
(TWh)


Exhibit 102. Hydropower penetration by region
7
22
33
49
69
75
0
10
20
30
40
50
60
70
80
Africa Asia South
America
Australasia North
America
Europe
(%)

Source: World Atlas of Hydropower & Dams, Nomura research
Concentrated solar power: strong takeoff expected in long term
We note that according to industry estimates (Greenpeace International, SolarPACES,
and Estela), the cumulative capacity of CSP technology is expected to reach 830GW
by 2050F, from around 1GW in 2009, implying a CAGR of 18% over the next 40 years,
under a moderate scenario.
In our view, among the different CSP technologies, parabolic trough technology
provides peak demand generation and will be the technology of choice. We note that
several emerging technologies that promise higher conversion efficiencies and cost-
competitive generation have been demonstrated on a smaller scale. These
technologies, such as point-focusing power towers and line-focusing Fresnel reflectors,
may extend the ability of CSP to provide shoulder or base-load power in addition to
peak.

CSP technology is expected to
reach 830GW by 2050F, from
around 1GW in 2009

Highlights of moderate scenario (source: Greenpeace International, SolarPACES,
and Estela)
Under the moderate CSP scenario, growth rates are expected to be substantially
higher than under the reference version. The assumed cumulative annual growth rate
starts at 17% for 2011F, and increases to 27% by 2015F. The growth rate stays at
27% pa until 2020F, then falls gradually to 7% by 2030F, 2% in 2040F and 1% after
2050F. As a result, the scenario foresees the following.
By the end of this decade, global solar power capacity is expected to reach 4GW,
with annual additions of 2.9GW.
By 2020F, global solar power capacity is expected to reach 68.6GW, with annual
additions of 12.6GW. By 2050F, the world is expected to have a combined solar
power capacity of more than 830GW, with the annual market running close to
41GW.
In terms of generated electricity, the moderate scenario assumes that more than
246TWh is produced by concentrated solar power in 2020F. Depending on demand
side development, this will account for 1.1-1.2% of global demand in 2020F and
8.5-11.8% in 2050F.

Exhibit 103. Operational experience, installed capacity and produced
electricity by technology type
Technology type
Installed capacity
2009 (MW)
Electricity produced
up to 2009 (GWH)
Approximate capacity,
under construction and
proposed (MW)
Parabolic trough 500 >16,000 >10,000
Solar tower 40 80 3,000
Fresnel 5 8 500
Dish 0.5 3 1,000


Exhibit 104. CSP technology cumulative growth
0
100
200
300
400
500
600
700
800
900
2
0
0
9
2
0
1
0
F
2
0
1
5
F
2
0
2
0
F
2
0
2
5
F
2
0
3
0
F
2
0
3
5
F
2
0
4
0
F
2
0
4
5
F
2
0
5
0
F
(GW)

Exhibit 105. CSP technology annual growth
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2
0
0
9
2
0
1
0
F
2
0
1
5
F
2
0
2
0
F
2
0
2
5
F
2
0
3
0
F
2
0
3
5
F
2
0
4
0
F
2
0
4
5
F
2
0
5
0
F
(MW)

Going forward, we see an abundance of solar resources and qualified land for
deployment of CSP. For example, as per government estimates, in south-western US
alone, using the suitable land in proximity to the transmission network can provide
200GW of potential CSP production. This would represent about one-fifth of the
projected US installed generating capacity by 2020F.

We see an abundance of solar
resources and qualified land for
deployment of CSP

China eyes CBM to alleviate energy shortage
With GDP growth long in the double digits, China has significant energy demand. The
nation has long relied on coal to generate roughly three-quarters of its electricity.
According to the Ministry of Land and Resources, Chinas CBM resources total 36.8tn
m3, the third-largest in the world, of which about 30% or 11tn m3 was exploitable
reserves as at end-2007. Regions with the most abundant CBM resources include
Shanxi, Shaanxi, Inner Mongolia and the northern parts of Xinjiang.
CBM, also known as coal seam gas or coal seam methane, is a form of natural gas,
and notorious as the main cause of coal mine explosions. Unlike most gases that are
stored in typical sandstone or other conventional gas reservoirs, methane is stored
within the coal by a process called adsorption. The methane is in a near-liquid state,
lining the inside of pores within the coal (called the matrix). It can be used as natural
gas in homes and in industry (chart below right). CBM has some green attributes. Its
use should help to reduce emissions of greenhouse gases and increase energy
supplies. And as a collateral benefit, tapping it will make coal mines safer.
China has set an ambitious target to increase CBM use to 10bn m3 (or 10% of total
gas use) by 2010F, from 0.5bn m3 (or 1% of total gas) in 2007. Meanwhile, by 2010F,
nationwide proven reserves should increase to 300bn m3 and an integrated industry
system should be set up.
We expect a bright future for the CBM industry in China, mainly because: 1) the
natural gas shortage should spur CBM demand; 2) there is government support in
terms of subsidies and a VAT rebate; and 3) it is a highly profitable business. At the
same time, however, this business is intensive in terms of capital and technology, thus
players need strong balance sheets. They also need sufficient reserves, execution
ability on the operating side and self-owned downstream gas projects.

Exhibit 106. Global CBM resources Exhibit 107. Chinas CBM output
40
26
11
120
30
0
20
40
60
80
100
120
140
Russia Australia China US
Explored
10.9 tn m
3
is
minable
reserves
Untapped
Reserve
(trn m
3
)

1
10
30
116
0
20
40
60
80
100
120
140
2007 2010F 2015F 2020F
07-10F CAGR:
170%
10-20F CAGR:
28%
CBM output (bn cm)
Source: Ministry of Land and Resources, SinoPetro Industrial Express Source: Asia Pulse, NDRC, Nomura research
Coal seam gas in Australia
Current LNG production in Australia is 100% conventional gas, derived from two
offshore basins, both located on Australias west coast. Woodside operates the North-
West Shelf (NWS) joint venture, which began exporting in 1989 and has a design
capacity of 16.3mtpa, sourcing natural gas from the Carnarvon Basin. Younger and
smaller Darwin LNG, operated by ConocoPhillips, began production in 2006, has a
production capacity of 3.6mtpa and sources gas from the Bayu-Undan field in the
Timor Sea.
East coast unconventional gas production is also relatively new, with BG Groups
A$5.0bn takeover of Queensland Gas in October of 2008 marking the beginning of an
era of increased production and global interest in Australias CSG basins.
We see a bright outlook for the
CBM industry in China

Exhibit 108. Australias CSG recent market transactions
Date Buyer Seller A$/GJ 2P A$/GJ 3P
2-Jul-09 Santos PEL 238 / 434 2.55 0.66
2-Jul-09 Santos Eastern Star Gas 3.75 0.97
22-Apr-09 Origin Pangaea na 0.57
3-Apr-09 Arrow Tipton West 0.71 0.3
9-Feb-09 BG Group Pure 1.96 0.41
24-Dec-08 AGL Sydney Gas 4.17 3.17
19-Dec-08 AGL PEL 285 2.11 0.97
28-Oct-08 BG Group QGC 1.93 0.75
8-Sep-08 ConocoPhillips Origin Energy 3.01 1.41
20-Aug-08 QGC Sunshine Gas 1.73 0.74
2-Jun-08 Shell Arrow 1.83 0.52
29-May-08 Petronas Santos 3.91 1.31
1-Feb-08 BG Group QGC 1.58 0.67
Average 2.44 0.96
Source: Eastern Star Gas, Deloitte, Nomura estimates

Current estimates point to Australia benefiting from more than 3.2bn boe of CSG
reserves (2P) in the Surat-Bowen basin, and potentially an equal amount in the deeper
and more technically challenging Gunnedah basin. New ventures by AWE could
develop shale gas in Australias Perth basin, while Santoss recent announcement
points to the potential for 2.5bn boe of unconventional gas in the Cooper basin.

Asia-ex Japan
Chi na al t er nat i ve ener gy
China wind power sector
We believe that wind power will continue to receive the strongest support from the
Chinese government as the preferred renewable energy, owing to its superior
economics and scalability. In addition to a standardised and improved wind tariff
scheme announced in July 2009, we note that the central government started refining
regulations on grid connections and wind power dispatches in late-2009 to resolve grid
bottleneck issues and ensure a healthy long-term outlook for wind power. In the
recently amended Renewable Energy Law, the government has also tried to
streamline funding sources for wind subsidies.
While we believe that policy support and growth here will remain strong, we see this
year as a transitional one for players along the China wind value chain. We estimate
that growth of annual wind capacity installation will start to slow from 100% y-y each
year between 2007 and 2009 to around 15% y-y in 2010F. As a majority of Chinese
wind companies have been generating 70-90% of their wind revenues within China,
those unable to start to bring in meaningful overseas revenue will, we believe, begin to
see earnings growth slow significantly.
Besides slowing the growth rate of capacity installation (end demand) within China, we
identify several other challenges: 1) grid connection bottlenecks; 2) overcapacity within
certain segments such as blades and wind turbine generators (WTG); 3) the outlook
for Clean Development Mechanism (CDM); and 4) quality concerns at Chinese
equipment/component manufacturers, which generally have a short track record.
According to several National Development and Reform Commission (NDRC) officials
and industry players, the Chinese government is likely to announce in 3Q10F a
cumulative wind power capacity target of 150GW by 2020F, implying an 18% 11-year
CAGR. We believe that the Chinese wind industry could surpass this target and we
remain confident about the clear visibility into wind demand growth in China.
Nonetheless, we adopt a more selective approach on stock picks and prefer
equipment/component manufacturers that can start meaningful overseas sales and
sustain a high earnings growth profile. We retain our conservative stance on wind
turbine manufacturers and wind farm operators. Our top pick is China High Speed
Transmission (CHST).
China is the worlds fastest-growing wind power market
The Chinese government unveiled its Renewable Energy Mid-to-Long-Term
Development Plan in September 2007, where the government has set a target for
cumulative wind power capacity to grow from 1.26GW at end-2005 to 5GW by end-
2010F and 30GW by end-2020F. However, the pace of wind power capacity
installation has, so far, significantly surpassed the goal set by the government.
According to the Global Wind Energy Council (GWEC), China installed 13.8GW of
wind power capacity in 2009, taking cumulative wind power capacity to 25.9GW at
end-2009.

As elsewhere, wind is the
cornerstone of the new green
energy drive
Significant growth has built such
a high base that overseas
markets must be built to maintain
momentum
We favour those with an overseas
strategy: our top pick is China
High Speed Transmission

Exhibit 109. Global top 10: cumulative capacity
(2009)
0
5
10
15
20
25
30
35
40
U
S
C
h
i
n
a
G
e
r
m
a
n
y
S
p
a
i
n
I
n
d
i
a
I
t
a
l
y
F
r
a
n
c
e
U
K
P
o
r
t
u
g
a
l
D
e
n
m
a
r
k
(GW)
Source: Global Wind Energy Council (GWEC), Nomura research
Exhibit 110. Global top 10: annual installation (2009)

0
2
4
6
8
10
12
14
16
C
h
i
n
a
U
S
S
p
a
i
n
G
e
r
m
a
n
y
I
n
d
i
a
I
t
a
l
y
F
r
a
n
c
e
U
K
C
a
n
a
d
a
P
o
r
t
u
g
a
l
(GW)
Source: GWEC, Nomura research

According to several NDRC officials and industry players, Chinas NDRC is drafting a
stimulus plan for the alternative energy industry, which will raise the countrys
cumulative capacity target for wind power from the current 30GW to 150GW by
end-2020F, which implies a very steady CAGR of 18% through 2020F.

Exhibit 111. Potential new NDRC targets for renewable energy sources
Existing 2020F targets Potential new 2020F targets
(GW) 2009
2020F 09-20F CAGR (%) 2020F 09-20F CAGR (%)
Nuclear 9 40 15 70 20
Wind 25 30 2 150 18
Solar 0.3 1.8 18 20 46
Note: potential 2020F targets for wind, solar and nuclear power are based on recent news flow
Source: CBN, China Energy News, Nomura estimates

Moreover, based on our estimates, China could install another 15.8GW of wind
capacity in 2010F, which would lift Chinas cumulative wind power capacity beyond
40GW by end-2010F. This implies China will far surpass the NDRCs current plan of
30GW by end-2010F.

Exhibit 112. China: cumulative and new installation wind capacity
0
2
4
6
8
10
12
14
16
18
2007 2008 2009 2010F
0
5
10
15
20
25
30
35
40
45
New installation (LHS)
Cumulative capacity
(GW)
(GW)
Source: BTM Consult, GWEC, Nomura estimates

Chinas wind power market is expected to grow consistently faster than the global
market through to 2030F, based on our estimates, as we expect China to steadily gain
share in the global wind power market. We forecast that Chinas global wind market
share will gradually expand from 16% in 2009 to around 18% in 2020F.

Exhibit 113. China: cumulative wind power capacity and global market share
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2007 2008 2009 2010F 2020F
0
5
10
15
20
25 China cumulative capacity
China global share (RHS)
(MW) (%)

High visibility but growth to slow to a normal 15% in 2010F
With 13.8GW of new capacity installation, China has become the largest wind power
market in the world since 2009. Cumulative wind power capacity in China grew at an
impressive rate of 115% y-y in 2009, owing to favourable government policies and
easier availability of project financing. The entry of three Chinese players Sinovel,
Goldwind and Dongfang into the top-10 global wind turbine generator (WTG)
suppliers also clearly reflects the growing prominence of China in the global wind
energy sector.

Exhibit 114. Global WTG market share (2009)
GE Wind
13%
Sinovel
9%
Enercon
9% Goldwind
7%
Gamesa
7%
Dongf ang
7%
Suzlon
7%
Siemens
6%
Others
19%
Vestas
13%
REpower
3%

Source: BTM, Nomura research

Although we believe that visibility into wind demand in China remains strong this year,
we expect the growth rate to slow in 2010F to a more normal 15% y-y rate, owing to a
high base effect and grid connection bottlenecks. We estimate Chinas annual
installation will reach around 15.8GW in 2010F.

China likely to deliver about a
fifth of the worlds wind power in
2020F, on our estimates
Three Chinese players rank in the
global top-10

Exhibit 115. China: annual installation
0
2
4
6
8
10
12
14
16
18
2007 2008 2009 2010F 2011F
0
40
80
120
160
Annual installation
Growth y-y (%)
(GW) (%)

Exhibit 116. China: cumulative installation
0
10
20
30
40
50
60
70
2007 2008 2009 2010F 2011F
0
20
40
60
80
100
120
140
Cumulative installation
Growth y-y (%)
(GW) (%)
Grid connection bottlenecks remain a serious challenge
Based on cumulative wind capacity data from the China Electricity Council (CEC) and
China Wind Energy Association (CWEA), we estimate around 37% of installed wind
turbine generators were not connected to the grid as at end-2009. This was a
significant jump from 26% in 2008. Although we expect this gap to trend slightly
downwards to 35% in 2010F, we believe grid connection bottlenecks remain a serious
challenge for wind power companies in China.
While the central government started to grapple with such issues in 2009 and is
expected to adopt measures to improve grid connection and wind power generation
conditions, we only expect the grid issue to be resolved gradually over the next three
to five years.

Exhibit 117. China: % of WTG lacking grid connection
0
5
10
15
20
25
30
35
40
45
2007 2008 2009 2010F
0
5
10
15
20
25
30
35
40
CEC cumulative capacity
CWEA cumulataive capacity
Gap estimate (RHS)
(GW) (%)

Source: China Electricity Council (CEC), China Wind Energy Association (CWEA), Nomura estimates

In our view, the grid connection problem in China is a result of:
Mismatch between locations of wind resource and power consumption.
Chinas onshore wind resources are concentrated in the north, north-western and
north-eastern regions, while power consumption is higher in the south-eastern
coastal areas. According to the CWEA, by end-2009, the top-five provinces with the
highest cumulative wind capacity were Inner Mongolia, Hebei, Liaoning, Jilin and
Heilongjiang. These five provinces comprised some 70% of Chinas cumulative
wind capacity at end-2009.
Better grid connection needed
But it is not windy where the
economy is thriving

On the other hand, power consumption was the highest in Guangdong, Jiangsu,
Shandong, Zhejiang and Hebei provinces in 2009, according to the CEC. These
five provinces accounted for some 40% of Chinas overall power consumption in
2009.
To resolve this issue, the Chinese government has been exploring the possibility of
establishing or relocating high energy consumption industry bases to provinces with
rich wind resources. Moreover, the government has plans for the construction of
ultra-high-voltage grid lines to transmit power from north, north-western and north-
eastern China to Beijing, Tianjing and Tanggu and environs to the middle of China.

Exhibit 118. China wind resource distribution
Source: Center for Wind and Solar Energy Resources Assessment

Lack of centralised planning for construction of grid network and wind farms.
Due to poor economics, grid operators normally have less incentive to construct
networks in remote provinces, where wind resources tend to be richer. The
difference between construction lead time of grid operators and wind farm
operators (more than two years and one year, respectively) intensifies the
mismatch between construction of grid network and wind farms, in our view.
To resolve this issue, the Chinese government has stated in the updated
Renewable Energy Law (revised in 2H09 and coming into effect in April 2010) that
the nation ought to have centralised planning for construction of grid network and
wind farms. While at the provincial level, each province will have near-term and
medium-term planning, the central government would provide long-term, bigger-
picture guidance and ensure consistency between plans of different provinces.
Immature grid quality and operating technology to handle wind power
effectively. The intermittence of wind power generation has increased the difficulty
for grid operators to manage and utilise wind power effectively. As major grid
operators lack adequate experience handling wind power, and the quality of grid
networks in remote areas (with their richer wind resources) tends to weaker; at
times wind farm operators will be told by grid operators to halt feeding power into
the grid for the sake of grid network safety.
To resolve this issue, the Chinese government has stated in the updated
Renewable Energy Law that grid operators are responsible for enhancing grid
Move the industry to where the
wind is?
Wind comes and goes and this
challenges the grid

quality and establishing a smart grid network to better utilise power generated by
renewable energy projects.
More importantly, in the updated Renewable Energy Law, the Chinese government
specified that relevant government agencies would soon announce minimum
requirements on renewable energy purchase (in terms of percentage of overall
power purchase) for grid operators to ensure there is no waste in renewable power
generation.
Favourable government policy to continue
We expect the Chinese government to unveil a stimulus package for the new energy
industry in 3Q10F, which should be widely expected by the market, since the capacity
targets have been circulated by the industry since mid-2009. We expect the Chinese
government to raise the cumulative wind capacity target from the original 30GW to
150GW by 2020F.
We also believe that the Chinese government will provide a clearer guideline to
enhance grid connection and grid quality. Based on our estimates, by end-2009, about
37% of the installed wind capacity in China was not connected to the grid, implying
waste in wind farm investments. While the central government has thought through
such issues and is expected to adopt measures to improve current conditions, we only
expect the grid issue to be resolved over the next three to five years.
While the NDRC issued a notice at the beginning of 2Q10 indicating that power tariffs
and prices of certain natural resources will trend upwards, we do not expect the
government to raise wind power tariffs in 2010F or 2011F, given declining WTG prices
and robust project pipelines announced by major wind farm operators.
Although we do not expect the standardised wind power tariffs (next exhibit) to be
raised in the near term, checks with wind farm operators suggest the Chinese
government will raise wind power tariffs for certain national-level concession projects,
with tariffs even lower than benchmark coal-fired tariffs.

Exhibit 119. China: wind tariff scheme
Location Feed-in-tariff
Wind resource
Province (RMB/kWh)
Type I (Strongest) Inner Mongolia, Xinjiang 0.51
Type II Hebei, Inner Mongolia, Gansu 0.54
Type III Jilin, Heilongjiang, Gansu, Ningxia, Xinjiang 0.58
Type IV
(Weakest)
Beijing, Tianjin, Hebei, Shanxi, Liaoning, Jilin, Heilongjiang,
Shanghai, Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi,
Shandong, Henan, Hubei, Hunan, Guangdong, Guangxi,
Hainan, Chongqing, Sichuan, Guizhou, Yunnan, Shanvxi,
Qinghai
0.61
Source: NDRC

Other policy supports include:
Initiation of national-level concession projects. Before the announcement of the
Renewable Energy Law, which provides fundamental guidelines for the
development of renewable energies in China, the government conducted
concession projects annually at the national level to promote the development of
wind power since 2003. Through public tendering, the government granted
exclusive rights to successful bidders to develop large-scale (above 50MW) wind
projects. The government will ensure grid connections, as well as guarantee that
power companies purchase electricity generated from wind projects at pre-
determined rates. Other government support initiatives include wind resource
evaluations and feasibility studies.
While we do not expect the government to be aggressive in launching onshore
concession projects, we note that there are currently four offshore concession
Quite a bit of wind off grid

projects open for public bidding. We believe that the Chinese government will again
adopt national-level concession projects as a tool to boost development of offshore
wind farms in China.
Grid operators must provide grid connection to renewable energy. According
to the Renewable Energy Law, power grid operators must provide grid connection
services and take up all the electricity resources available.
Incremental renewable energy cost must be shared among electricity users.
According to the Provisional Administrative Measures on Pricing and Cost Sharing
for Renewable Energy Power Generation and the Provisional Regulation on
Renewable Energy Surcharge, the difference resulting from higher on-grid tariffs of
renewable energy over average on-grid tariffs of conventional thermal electricity,
should be shared equally by all electricity users across the nation.
The Chinese government has a Renewable Energy Development Fund through
collecting Renewable Energy Surcharges of RMB0.2/kwh, RMB0.2/kwh, and
RMB0.1/kwh from secondary, tertiary, and residential electricity users (primary
users are exempted), respectively, along with their electricity bills. So far, this fund
has subsidised various types of renewable energy projects including wind, biomass,
concentrated solar and solar PV, while wind power received the majority of the
subsidies given that it has the most robust development in China.
Renewable energies R&D subsidies. The Ministry of Finance has set up the
Renewable Energy Development Fund to support R&D and demonstrative projects
of renewable energy, as well as encourage the localisation of equipment production.
In addition, renewable energy companies can apply for R&D subsidies from: 1) the
National Natural Science Foundation of China; and 2) the Ministry of Science and
Technologys High-Tech Research and Development Program of China (863
Program) and the National Basic Research Program of China (973 Program).
Preferential tax treatment. Wind project operators enjoy a preferential value-
added tax of 8.5% (compared with 17% originally). Import tariffs on wind turbines
have been halved to 6%; the import tariff on wind components is 3%. In addition,
the government recently raised export VAT rebates on wind gearboxes and related
components to 15%.
Compulsory renewable energy capacity share. According to the Renewable
Energy Mid-and-Long-Term Plan, any power producer with capacity of more than
5GW must increase actual ownership of power capacity from non-hydro renewable
energies to 3% and 8% of its total capacity by end-2010 and 2020, respectively.
Given that wind power is currently the cheapest and most scalable among non-
hydro renewable energies, we believe that it will be the likely choice for power
producers to meet their renewable energy requirements.
Chinese government to pursue regulated growth
China wind capacity installation has been growing at more than 100% pa since 2006.
This super-charged growth rate, in our view, is the root cause of several major issues
in Chinas wind industry, including grid connection bottlenecks, oversupply of low
quality components/equipment and low returns for wind projects.
We note that the Chinese government has changed its stance, pursuing more
regulated growth since mid-2009. Senior government officials have publicly
categorised wind turbine manufacturing as being a significantly oversupplied industry
in China, and have requested that local banks tighten lending to wind turbine
manufacturers to keep the boom from turning to bust.
Recently, according to Reuters (9 June, 2010 ), Chinese regulators have been ordered
to freeze some IPOs of renewable energy companies on concerns over overcapacity
issues in the wind turbine and polysilicon manufacturing industries, which is another
measure to prevent over-expansion.
Preferential tax rates one way to
help build the industry
Growth has been a bit too rushed
Government putting the brakes
on a bit

According to CWEA, Chinas wind turbine manufacturing segment was highly
fragmented in 2009, with the top-three producers (Sinovel, Goldwind and Dongfang)
comprising 60% of the market and the rest of the market made up of more than 70
small producers.

Exhibit 120. China: WTG market share (2009)
Sinovel
26%
Goldwind
20% Guodian
6%
Dongfang
15%
Mingyang
5%
Vestas
4%
Xiangtan
3%
GE
2%
Suzlon
2%
Gamesa
2%
Shanghai Electric
2%
Windey
2%
Repower
1%
Others
10%

Source: CWEA, Nomura research

In the medium term, the Chinese government is likely to encourage greater
consolidation within the wind turbine manufacturing segment. The top four state-owned
suppliers are Sinovel, Goldwind, Dongfang and Guodian.
Another aspect reflecting the Chinese governments tightening control over the wind
sector is the governments centralised approach to monitoring the expansion of wind
capacity and grid construction. The Chinese government has stated in the updated
Renewable Energy Law that the nation ought to have centralised planning for the
construction of grid network and wind farms. While each province will have near-term
and medium-term planning, the central government will provide long-term, bigger-
picture guidance and ensure consistency between plans of different provinces.
In our view, a more regulated market with a more normal growth rate would help to
enhance the quality of wind components/equipments in China and consequently lift
wind farm operators return profile. However, during the transition period, we believe
that smaller domestic players and foreign players could suffer.
Consolidation part of the plan
Oversight part of the plan

Chinese wind companies should continue to dominate the market
We observe that Chinese wind turbine producers have increased their share in the
China wind market from 20% in 2004 to 87% in 2009. We expect Chinese wind turbine
and component manufacturers to sustain their dominant market share in China over
the next few years, given their close ties with local wind farm operators (mainly state-
owned power producers) and cost leadership.
We note that the wind farm operators in China are generally very cost sensitive, owing
to the low wind power tariffs in China. Based on our checks, foreign turbine
manufacturers have recently seen improving order flow. We take this as a sign of
market opening, as well as change in customer mentality from pure cost per MW to
cost per MWh.
In our view, even though the Chinese government lifted the 70% local content
requirement in December 2009, the impact on Chinese manufacturers will be minimal
as a majority of the leading foreign wind turbine manufacturers such as Vestas, GE,
Gamesa and Suzlon, have had production facilities set up in China for more than three
years and have constantly lost market share to their Chinese peers.

Exhibit 121. Chinese wind turbine makers gaining share in China
20%
31%
41%
56%
77%
87%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2004 2005 2006 2007 2008 2009
0
10
20
30
40
50
60
70
80
90
100
International
Locals
Local %
(MW) (%)

Source: CWEA, Nomura research

Recently, the Chinese government started to encourage development of offshore wind
farms. While the majority of the Chinese wind turbine manufacturers do not have a
track record in offshore applications, the feedback we received from wind farm
operators shows that they might still prefer Chinese wind turbines, since they are so
cost competitive.
WTG oversupply leading to ASP decline
Our channel checks suggest that prices for WTG have declined by around 18% in
China in 2009, given aggressive capacity expansion, softer raw material prices and
fierce competition between WTG manufacturers. We believe this trend will continue in
2010F and expect another 15% y-y ASP decline this year.
In our view, WTG players in China are facing high overcapacity and are willing to lower
their selling prices to secure new orders. Moreover, WTG players are looking to pass
on savings to customers in the form of lower WTG prices, owing to reduced raw
material costs, especially falling steel prices since 2009.
Based on our checks with wind farm operators, foreign turbine manufacturers currently
command an ASP premium of 10-15% to that of their Chinese peers. It will be
interesting to observe to what degree foreign turbine makers will try to compete on
price; the fall in the euro has surely freed up some room here.
Formidable cost advantage in
turbines
A cheaper euro likely means more
competition

Offshore wind development to be the next growth driver
According to comments made by wind operators including China Longyuan and China
Windpower, the majority of the attractive locations for onshore wind farm development
have already been occupied by industry players. As a result, we expect offshore wind
development to become the next growth driver of Chinas wind industry over the next
three years.
Based on industry checks, the Chinese government launched a public bidding for four
offshore wind projects (Jiangsu Binhai, Sheyang, Dafeng and Dongtai) in May 2010,
the results of which are expected to be announced this September. According to China
Securities Journal, China Longyuan Power, Huaneng New Energy, China Guangdong
Nuclear, and Guohua Energy Investment are participating in the bidding.
So far, China does not have a standardised tariff scheme for offshore wind projects
and the tariff rates are expected to be granted on a project-by-project basis. The wind
tariff granted for the Donghai Bridge project near Shanghai was RMB0.978/kwh,
significantly lower than the tariffs of offshore wind farms in Europe at around
0.15/kwh. Nonetheless, according to Longyuan, operators expect to generate profits
from offshore wind projects if the tariff is above RMB0.80/kwh.
Given the unclear outlook on offshore wind tariffs and thus the uncertainty over
offshore wind farm returns, we believe that the development of offshore wind farms
could be neutral to Chinese wind farm operators at the current stage.
However, in our view, the development of offshore wind projects could benefit Chinese
wind component and equipment manufacturers. While the majority of these companies
do not have track records in offshore applications, the feedback we took in from wind
farm operators suggests that they might still prefer Chinese wind turbines and
components based on cost considerations.
According to CWEA, so far, only Sinovel has launched 3MW wind turbines for offshore
applications, while Shanghai Electric and Dongfang have used 2MW and 1.5MW
turbines, respectively, for offshore installations. We expect Goldwind to launch its 3MW
hybrid-drive turbines in 2H10F for offshore installation. Based on checks with China
High Speed Transmission, we believe that other leading turbine manufacturers are
also in the process of launching 3MW turbines.

Exhibit 122. Chinese turbine makers with offshore installations (2009)
Company Unit Capacity (MW)
Sinovel 2 6
Dongfang 41 61.5
Shanghai Electric 3 6
Haizhuang 4 8
Source: CWEA

To summarise, we expect companies such as CHST to benefit from the offshore wind
development trend in the near term. Other players in this sector include Sinovel and
Goldwind. However, we do not view this as a positive catalyst for wind farm operators,
given the unclear tariff and return outlook.
Again, low cost goes a long way
in winning bids, even absent a
track record

We prefer component/equipment makers ready to start export
Based on our expectation of flattish wind power tariffs and slowing growth in China this
year, we continue to prefer wind component/equipment makers that are capable to
start exporting out of China, such as CHST, as this should help to sustain growth in the
near future.
In addition to CHST, in 2009, domestic wind turbine manufacturers including Sinovel,
Goldwind and Shanghai Electric, had very minimal overseas shipments, accounting for
0.2-2.0% of overall shipments.

Exhibit 123. Chinese turbine makers with overseas shipments (2009)
Company Destination Capacity (MW)
Sinovel India 15
Goldwind US 4.5
Shanghai Electric UK, Thailand 6.25
Source: CWEA

We remain conservative on downstream wind farm operators given unattractive project
returns, uncertainty from CDM income and grid connection bottlenecks.
CHST remains our top pick
CHST remains our top sector pick, owing to its strong margin outlook, cost control
capability, steadily improved product mix and undemanding-looking valuation. We
reaffirm our conservative view on China Longyuan Power, given what we see as
demanding valuation (despite its position as the largest wind operator in Asia). We
await further progress on Suzlons order inflows and balance sheet clean-up to turn
positive on the stock despite its undemanding valuation.

Exhibit 124. Listed Chinese wind-concept companies
Gearbox
China High Speed Transmission 658 HK
Blade
Jiangsu Miracle Logistics System 002009 CH
Sinoma Science & Technology 002080 CH
Tianjin Xinmao Science & Technology 000836 CH
Wind turbine
Dongfang Electric 1072 HK
Shanghai Electric 2727 HK
A-Power Energy Generation Systems APWR US
Baoding Tianwei Baobian Electric 600550 CH
Guizhou Changzheng Electric 600112 CH
Huayi Electric 600290 CH
Lanzhou Great Wall Electrical 600192 CH
Ningxia Yinxing Energy 000862 CH
Xiangtan Electric Manufacturing 600416 CH
Wind project operator
Guangdong Baolihua New Energy 000690 CH
Shanghai Huitong Energy Resource 600605 CH
Shenyang Jinshan Energy 600396 CH
Ningxia Yinxing Energy 000862 CH
China Windpower Group 182 HK
China Power New Energy 735 HK
CHST seems best positioned for
expansion

China solar photovoltaic sector
Chinas solar PV sector used to be unloved by the government given its much higher
generation costs relative to the cost of conventional or even other renewable energy
sources, such as hydro and wind power. The NDRCs current Renewable Energy
Development Plan only targets 1.8GW of cumulative solar PV capacity by 2020, far
lower than the 40GW target for nuclear and 30GW target for wind.
Nonetheless, with China becoming the worlds largest producer in 2008, the Chinese
government has turned more supportive to develop domestic consumption for solar.
That being said, we believe that it is unlikely the government will unveil feed-in tariffs
for solar PV in 2010F. Moreover, we expect domestic demand to enhance only the
volume outlook for Chinese companies, not their earnings outlook, given current low
solar project returns at home.
Our top pick is JA Solar, given its strong earnings momentum over the next few
quarters, low exposure to euro depreciation and positive changes in its business
model and customer portfolio, which we expect to help drive a valuation re-rating of the
stock. We maintain our BUY rating on Yingli, given its long-term prospects, brand
equity and cost leadership. We see long-term investment value emerging after recent
weak share performance.
China has been the chief solar producer since 2007
China has been the leading manufacturing country for solar photovoltaic (PV) products
since 2007. According to Photon International, China accounted for 38% of global
solar PV cell production in 2009, up from 33% in 2008, and more than double the
share of the number-two player, Germany (15% global share). In 2009, Chinese solar
companies Suntech, Yingli, JA Solar and Trina made it into the global top-10 cell
producers, accounting for 5.7%, 4.3%, 4.2% and 3.2% of global supply, respectively.

Exhibit 125. Chinas share of global solar cell production
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2007 2008 2009 2010F
0
10
20
30
40
50
60
Volume (LHS) Global Share (RHS)
(MW) (%)

Source: Photon International, Nomura estimates

China is the worlds largest solar
producer
JA Solar stands out here
China has four solar producers
among the global top-10

Exhibit 126. Global solar cell production by country (2009)
China
36%
Germany
14%
Taiwan
11%
Malaysia
6%
Japan
12%
Africa and Middle
East
0%
India
2%
US
4%
Rest of Europe
4%
Rest of Asia
11%


Going into 2010F, we expect Chinas solar production to rise by 50% y-y, enabling it to
maintain its lead in the global market. Based on company guidance, major listed
Chinese solar companies, on average, will ramp up capacity by 57% y-y this year. We
estimate that listed Chinese solar companies accounted for roughly 50% of Chinas
solar production in 2009.

Exhibit 127. Cell capacity of major Chinese solar companies
(MW) 2009 2010F (% y-y)
Renesola 120 240 100
Solarfun 360 480 33
CSIQ 420 700 67
Trina 600 900 50
Yingli 600 1,050 75
Suntech 1,100 1,400 27
JA Solar 800 1,500 88
But China remains a small end market for solar as of 2009
Demand for solar PV has historically been very weak in China, owing to high
generation costs, poorer scalability and the lack of government support. Despite being
the largest solar PV producer in 2009, China had only cumulative solar PV capacity of
0.25GW by end-2009, much smaller than major solar PV markets such as Germany
(9.1GW), Spain (3.3GW) and Japan (2.4GW).
Although annual solar installation jumped 4x from 45MW in 2008 to 160MW in 2009
(see chart below), owing to a wave of favourable government policy, the 2009 annual
installation figure fell short of market expectations of 400-500MW. We believe that part
of this was due to the time lag between project completion and grid connection, as well
as the lack of a standardised feed-in tariff scheme in China.

But not as keen to use solar as to
make it

Exhibit 128. China: solar PV new installation
0
20
40
60
80
100
120
140
160
180
200
2003 2004 2005 2006 2007 2008 2009
0
10
20
30
40
50
60
70
80
90
100
China new installation (LHS)
% of global (RHS)
(MW) (%)
Source: EPIA, Nomura research
Exhibit 129. Cumulative solar PV capacity (2009)
0
2,000
4,000
6,000
8,000
10,000
12,000
G
e
r
m
a
n
y
J
a
p
a
n
U
S
S
p
a
i
n
I
t
a
l
y
C
h
i
n
a
(MW)
China turning more supportive on domestic solar consumption
Since mid-2009, the Chinese government has turned more supportive on domestic
solar consumption, which we view as a result of listed Chinese solar companies
lobbying during the global solar downturn in 4Q08 and 1H09. We note that since the
listed Chinese solar companies are typically among the top economic contributors in
their localities, they are well supported by local governments.
With the end demand of these Chinese solar companies highly concentrated overseas,
most of them were hard hit by the global downturn in 2H08 and 1H09, as money dried
up worldwide.
We believe that the Chinese government has incentives to change its stance not so
much from the angle of adopting solar PV as a major source of energy, but rather to
maintain the nations leading position as a solar product supplier. This, in our view, is
evidenced by the governments limited financial subsidies to solar projects so far.

Exhibit 130. Global top-10 solar producers share (2009)
First Solar
9%
Q-Cells
5%
Others
55%
Trina
3%
Sunpower
3%
Gintech
3%
Kyocera
3%
JA Solar
4%
Yingli
4%
Sharp
5%
Suntech
6%


The Chinese government is
backing the lead here

Major solar subsidies in China
MOF and MOHURD have rolled out subsidies for BIPV projects. At the end of
March 2009, Chinas Ministry of Finance (MOF) and Ministry of Housing and
Urban-Rural Development (MOHURD) jointly issued a policy that subsidises the
installation cost of building-integrated PV (BIPV) projects in China at a rate of
RMB1.5-2.0/watt, representing two-thirds of the solar system cost in China.
MOF announced its Golden Sun Programme . In July 2009, Chinas Ministry of
Finance (MOF) announced Temporary Management Method of Financial Subsidies
for Golden Sun Demonstrative Projects, the second set of solar PV subsidy
schemes by the ministry. Under the programme, the MOF will provide financial
support to Golden Sun Demonstrative Projects, including on-grid and off-grid solar
PV projects with scale larger than 300kw. The MOF will subsidise 50% and 70% of
the investment costs of on-grid and off-grid solar PV projects, respectively,
including solar system costs and grid connection costs. As at end-2009, the MOF
had granted subsidies to some 500MW solar projects under the Golden Sun
Programme.
NDRC likely to unveil much higher targets for solar PV. Various Chinese media
have quoted industry experts and researchers at the Energy Research Institute of
the NDRC, such as Dinghuan Shi, the President of the China Society for
Renewable Energy, Zhongying Wang, Director of the Renewable Energy
Development Centre of the NDRC and Huanli Shi, Researcher at the Energy
Research Institute of the NDRC, on the event that the NDRC is likely to unveil
higher targets for solar PV. Based on their talks, the NDRC is likely to raise its 2020
solar power target to 20GW (raised by about 1,000% from 1.8GW previously). This
implies an 11-year CAGR of 46% through 2020F.
While the announcement of this new target has been later than the markets
expectation (originally expected in 4Q09 or 1Q10), our recent checks suggest that
an announcement is likely in 3Q10F, when the Chinese government is expected to
unveil stimulus packages for alternative energy and several other industries.

Exhibit 131. NDRCs potential new targets for renewable energy sources
Existing 2020 targets Potential New 2020 targets
(GW) 2009
2020F 09-20F CAGR (%) 2020F 09-20F CAGR (%)
Nuclear 9 40 15 70 20
Wind 25 30 2 150 18
Solar 0.3 1.8 18 20 46
Note: 2020F potential targets for wind, solar and nuclear power are based on recent news flows
Source: CBN, China Energy News, Nomura research
China can be a major solar market based on potential NDRC targets
Based on the NDRCs potential new 2020 target of 20GW, we estimate that cumulative
solar PV capacity would rise at a 46% CAGR over the next 11 years. We also estimate
that Chinas annual new installation of solar PV products on average will account for 8-
15% of the global annual market, making China one of the top-five solar PV markets in
the world over the next decade.

Higher targets likely for solar PV

Exhibit 132. China cumulative solar capacity and global share
0
5
10
15
20
25
2009 2020 - Existing 2020 - Potential new target
0
2
4
6
8
10
12
14
16
China cumulative solar capacity (LHS)
China as % of global market (RHS)
(GW) (%)

Current lack of preferential feed-in tariff for solar PV a major hurdle
There is currently no standardised preferential tariff for solar in China, and we estimate
that system owners would have an IRR of negative 8% without financial subsidies.
Although there has been some speculation since the middle of 2009 that the Chinese
government will unveil a feed-in tariff scheme for solar PV, we believe it is unlikely the
government will finalise such a scheme this year, which should cap the installation
potential, particularly for 2010F.
In 2009, the Chinese government hosted a public bidding for a 10MW project in
Dunhuan and granted a RMB1.09/kwh preferential tariff to the project winner. Since
then, the industry has expected a similar level of feed-in tariff to be announced for
solar PV projects in China. We estimate that systems owners would have IRR of
around 1% at this RMB1.09/kwh tariff level.
Chinese solar manufacturers believe that a tariff in the range of RMB1.2-1.5/kwh
would ensure more reasonable returns, triggering demand growth.
In our view, the Chinese government is likely to opt for the establishment of a
standardised national tariff scheme for solar (similar to the one implemented for the
wind sector), ie, the central government will host public biddings for several solar
projects in different regions to gradually learn what is the cost level for solar project
investors and what is the tariff level that would give them the incentive to build solar
projects.
We expect the tariff coming out of such a public bidding approach would be low, based
on the experience of the Dunhuan bidding in 2009, as well as Chinas wind power
industry. Consequently, we believe that any feed-in tariff to be announced for solar PV
would more likely provide a lift for volume, but not profitability for listed Chinese solar
companies.

Introduction of a feed-in tariff
would help to lift volume, but not
profitability

Chinese polysilicon producers have scaled back expansion but
oversupply should hold sway
We note that Chinese polysilicon makers have delayed or scaled down expansion
since 2009. For example, we see slower-than-expected capacity expansion at LDK
Solar, Shunda and Asia Silicon, while GCL Poly is the only exception. In general, we
expect 2010F polysilicon capacity increase in China to be 10-15% slower than our
original expectation.
In our view, the lack of sufficient funding as well as technology know-how to ramp up
production in a timely manner are two major reasons for the delays. Although the
credit environment in China has more or less been the envy of the world since 2008,
the government, recall, has categorised polysilicon manufacturing as an industry in
over-capacity and has made it clear to banks to reel in lending here. Recently,
according to Reuters, Chinese regulators have been ordered to freeze some initial
public offerings of renewable energy companies on concerns over overcapacity issues
in the wind turbine and polysilicon manufacturing industries (9 June, 2010 ).

Exhibit 133. Chinese polysilicon manufacturers capacity expansion
0
20,000
40,000
60,000
80,000
100,000
120,000
2006 2007 2008 2009 2010F 2011F 2012F
(MT)


This being said, we believe oversupply of polysilicon will hold up in China as foreign
incumbents have no difficulty exporting their production to China. Moreover, in this
case, these incumbents generally offer a better price and higher product quality.

Exhibit 134. Polysilicon supply-demand gap
(50,000)
0
50,000
100,000
150,000
200,000
250,000
2008 2009 2010F 2011F 2012F
Polysilicon supply Global demand (solar+semi)
Supply-demand gap
(MT)


Polysilicon oversupply likely to
persist in China

Given the 15-16% FIT reduction in Germany, we expected solar project developers to
look for a similar ASP reduction. Tier-one Chinese module companies have significant
cost advantages compared with their European peers and, hence, can price their
modules 15-20% cheaper than these peers without compromising quality. We expect
high-cost European and Japanese companies to increase outsourcing to China to
maintain profit margin. We are already witnessing a trend where European module
customers are requesting tier-one Chinese solar companies such as JA Solar,
Renesola and LDK Solar to manufacture modules for them. In our view, the trend of
outsourcing to Chinese solar companies has enhanced their volume outlook, not just
because of orders, but because it is also growing addressable market size.
Impact from weak EU outlook mid-to-upstream more immune
As the outlook for European economies seems to be turning weaker, we currently see
risks to solar demand in 2H10F and 2011F, given potential for a tighter credit/financing
environment, and less generous financial subsidies from European governments.
While it remains early to see whether a weaker macro environment will have an
immediate impact on solar companies earnings outlook, we reckon that this could be
an overhang to the solar sector in the near term. Given the depreciating euro, we
believe profitability of downstream players, such as Yingli, could be hit in 1H10F, since
50-60% of its revenues are euro-denominated but only 0-20% of COGS is euro-
denominated. We estimate 50-60% of its revenue is euro-denominated, 30% is in US
dollars and the rest is in renminbi. In terms of costs, we estimate that 15-20% of its
COGS are in euro, 70-75% in renminbi and the rest in US dollars.
However, with the majority of revenue and costs denominated in renminbi, mid-to-
upstream players, such as JA Solar and LDK, appear more protected from euro
depreciation in the medium term, in our view.
JA Solar is our top pick
JA Solar (BUY) remains our top pick from the China solar sector in the near term,
given its strong earnings prospects over the next few quarters, low exposure to euro
depreciation and positive changes in its business model and customer portfolio that we
expect to help drive a valuation re-rating of the stock. We maintain our BUY rating on
Yingli given its long-term prospects, brand equity and cost leadership. We see long-
term value emerging after recent weak share performance, and believe there will be
earnings upside in the near term as the company has adopted measures to mitigate
the impact from euro depreciation. These measures count discounting accounts
receivable to domestic banks, renegotiating contracts into US-dollar denominated ones,
and raising euro-based ASP.
We remain NEUTRAL on LDK, given its stretched balance sheet, potential dilution risk
from fund-raising and unclear outlook beyond 2Q10F. We also remain NEUTRAL on
GCL Poly given its expansion into wafers, which does not appear to be earnings
accretive and carries execution risks, in our view.

Nuclear power in China
China is undergoing its largest-ever nuclear power development programme. Although
nuclear power accounted for only 1.1% of total installed power capacity in China in
2008 and 2% of total power generation, the government has plans to grow the nuclear
share of Chinas total generating capacity to 5% by 2020. This is based on recent
reports by state media, which indicate that central authorities plan to revise their 2020
nuclear power capacity target from 40GW to 70-86GW. (China currently has 11
reactors in operation, with 8.6GW of generating capacity.) These plans are also
supported by the head of China National Energy Administration, Zhang Guobao, who
has a preference for nuclear power among the various alternative energy sources
given its scalability, reliability and low generation costs.
Largest nuclear power
development programme in
history
Weaker macro backdrop likely to
cast a shadow on the solar sector
We like JA Solar for its strong
near-term earnings prospects and
limited euro exposure

Exhibit 135. China: nuclear power plants in operation
Name Type Location Net capacity (MW) Date connected
Guangdong-1 PWR Guangdong 944 8/31/1993
Guangdong-2 PWR Guangdong 944 2/7/1994
Lingao 1 PWR Guangdong 935 2/26/2002
Lingao 2 PWR Guangdong 935 12/15/2002
Qinshan 1 PWR Zhejiang 279 12/15/1991
Qinshan 2-1 PWR Zhejiang 610 2/6/2002
Qinshan 2-2 PWR Zhejiang 610 3/11/2004
Qinshan 3-1 PHWR Zhejiang 665 11/19/2002
Qinshan 3-2 PHWR Zhejiang 665 6/12/2003
Tianwan 1 PWR Jiangsu 1,000 5/12/2006
Tianwan 2 PWR Jiangsu 1,000 5/14/2007
Total: 6 plants, 11 reactors 8,587
Source: World Nuclear Association (WNA)

Both Chinas nuclear power installed capacity and generation have been growing
rapidly since 1991. Installed capacity grew from 279 MW in 1991 to 8.6GW in 2008,
which is equivalent to a CAGR of more than 25%. Meanwhile, nuclear generation grew
from 0.5bn KWh in 1992 to 62.6bn KWh in 2008, representing a CAGR of more than
35%. The share of nuclear power in the generation mix also grew from 0.1% to 1.9% in
2007.

Exhibit 136. China: nuclear generation
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2003 2004 2005 2006 2007 2008
(m kWh)
9% 5-yr CAGR
Source: China Electricity Council, Nomura research
Exhibit 137. China: nuclear capacity
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
(MW)
Source: NDRC, Nomura research

One of the reasons for China to expand into nuclear power is its heavy reliance on
coal, which accounted for 82% of electricity generation in 2008. The problem with coal-
fired power generation, other than its high GHG emissions, is that most of Chinas coal
reserves are located in the north or northwest regions, away from most of Chinas
economic activity. Nearly half of Chinas rail capacity is currently used in transporting
coal. Transportation becomes a bigger problem in the winter months when tracks are
blocked by heavy snow, leading to delays in the delivery of coal and thus power
shortages.
Nuclear power fits well into the equation to solve this problem because it emits no
greenhouse gases during power generation and because nuclear power plants can be
located in coastal areas, closer to economic centres. This base load electricity source
also helps to meet Chinas growing electricity demand, which the IEA projects will
register a 4% CAGR over 2007-30.

Exhibit 138. China: electricity generation projections
3,318
5,622
6,692
7,810
8,847
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2007 2015F 2020F 2025F 2030F
(TWh)


The governments potential capacity target of 70GW by 2020 is achievable, in our view.
According to the World Nuclear Association (WNA), there are 57 nuclear power plants
planned or under construction in China, which would increase nuclear power capacity
by 61GW to 70GW by end-2020, exceeding the NDRCs target of 40GW. If we include
the 20 nuclear power projects under planning or in the application stage, then the
cumulative nuclear power capacity could surpass 100GW by 2020F, more than double
the governments target. If all the announced projects materialise, we expect that
average annual new installation of nuclear capacity to be 7.5GW over the next 12
years, implying a 12-year capacity CAGR of 22% through 2020F.

Exhibit 139. China: nuclear reactors in operation, under construction,
planned and proposed, as of January 2010

Source: IAEA, WNA, Nomura research

11
90
20
37
79.0
38.9
8.6
21.9
0
10
20
30
40
50
60
70
80
90
100
Operating Under construction Planned Proposed
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Capacity (RHS) # of reactors (LHS)
(GW) (No.)

Exhibit 140. China: nuclear power plants planned and under construction, as of January 2010
Plant Province MWe gross Reactor model Project control Construction start Operation
Lingao Phase II, units 1&2 Guangdong 2x1080 CPR-1000 CGNPC 12/05, 5/06 12/10, 8/11
Qinshan Phase II, units 3&4 Zhejiang 2x650 CNP-600 CNNC 4/06, 1/07 2011, 2012
Hongyanhe, units 1-4 Liaoning 4x1080 CPR-1000 CGNPC 8/07, 4/08, 3/09, 7/10 10/12, 2014
Ningde units 1-4 Fujian 4x1080 CPR-1000 CGNPC 2/08, 11/08, 12/09, 15/7/10 12/12/2015
Fuqing units 1&2 Fujian 2x1080 CPR-1000 CNNC 11/08, 6/09 10/13, 8/14
Yangjiang units 1-4 Guangdong 4x1080 CPR-1000 CGNPC 12/08, 8/09, 15/7/10, 15/3/11 8/13/2016
Fangjiashan units 1&2 Zhejiang 2x1080 CPR-1000 CNNC 12/08, 7/09 12/13, 10/14
Sanmen units 1&2 Zhejiang 2x1250 AP1000 CNNC 3/09, 12/09 10/13, 6/14
Haiyang units 1&2 Shandong 2x1250 AP1000 CPI 9/09, 31/7/10 5/14, 3/15
Taishan units 1&2 Guangdong 2x1700 EPR CGNPC 10/09, 1/7/10 12/13, 11/14
Shandong Shidaowan Shandong 210 HTR-PM Huaneng 10-Jan 2013 or 2014
Fangchenggang units 1&2 Guangxi 2x1080 CPR-1000 CGNPC 15/12/09 2014
Fuqing units 3-6 Fujian 4x1080 CPR-1000 CNNC 2010
Changjiang units 1&2 Hainan 2x650 CNP-600 CNNC or Huaneng Dec-09 2014, 2015
Tianwan units 3&4 Jiangsu 2x1060 VVER-1000 CNNC Oct-10
Hongshiding (Rushan) units 1&2 Shandong 2x1080 CPR-1000 CNEC/CNNC 2009 2015
Ningde units 5&6 Fujian 2x1080 CPR-1000 CGNPC
Dafan, Xianning, units 1&2 Hubei 2x1250 AP1000 CGNPC late 2010
Xiaomoshan (Jiulongshan), units 1&2 Hunan 2x1250 AP1000 CPI Apr-10 4/2015 - 2018
Taohuajiang units 1&2 Hunan 4x1250 AP1000 CNNC Sep-10 2015
Pengze units 1&2 Jiangxi 2x1250 AP1000 CPI 2010 2013-14
Haiyang units 3&4 Shandong 2x1250 AP1000 CPI 2010
Wuhu units 1&2 Anhui 2x1080 CPR-1000 CGNPC late 2011 2015
Total: 57 reactors 60,730
Note: China Guangdong Nuclear Power Holding (CGNPC), China National Nuclear Corporation (CNNC), China Power Investment Corporation (CPI)

Exhibit 141. China: nuclear power reactors in operation and under construction, as of Jan 2010
Beijing
Heilongjiang
Jilin
Liaoning
Hebei
Shanxi
Shandong
Anhui
Zhejiang
Fujian
Jiangxi
Hubei
Hunan
Guangdong Guangxi
Hainan
Yunnan
Guizhou
Sichuan
Shaanxi
Ningxia
Gansu
Qinghai
Xinjiang
Inner Mongolia
Henan
Jiangsu
Power reactors in mainland China
In operation
Under construction
Daya Bay 2
11
20
Ling Ao 2 2
Taishan 1
Yangji ang 2
Fuqing 2
Ningde 2
Sanmen 2
Qinshan 5 4
Tianwan 2
Hai yang 1
Hongyanhe 4
Tibet
Beijing
Heilongjiang
Jilin
Liaoning
Hebei
Shanxi
Shandong
Anhui
Zhejiang
Fujian
Jiangxi
Hubei
Hunan
Guangdong Guangxi
Hainan
Yunnan
Guizhou
Sichuan
Shaanxi
Ningxia
Gansu
Qinghai
Xinjiang
Inner Mongolia
Henan
Jiangsu
In operation
Under construction
Daya Bay 2
11
20
Ling Ao 2 2
Taishan 1
Yangji ang 2
Fuqing 2
Ningde 2
Sanmen 2
Qinshan 5 4
Tianwan 2
Hai yang 1
Hongyanhe 4
Tibet
Beijing
Heilongjiang
Jilin
Liaoning
Hebei
Shanxi
Shandong
Anhui
Zhejiang
Fujian
Jiangxi
Hubei
Hunan
Guangdong Guangxi
Hainan
Yunnan
Guizhou
Sichuan
Shaanxi
Ningxia
Gansu
Qinghai
Xinjiang
Inner Mongolia
Henan
Jiangsu
In operation
Under construction
Daya Bay 2 Daya Bay 22
11 11
20
Ling Ao 2 2 Ling Ao 22 22
Taishan 1 Taishan 11
Yangji ang 2 Yangji ang 22
Fuqing 2 Fuqing 22
Ningde 2 Ningde 22
Sanmen 2 Sanmen 22
Qinshan 5 4 Qinshan 55 44
Tianwan 2 Tianwan 22
Hai yang 1 Hai yang 11
Hongyanhe 4 Hongyanhe 44
Tibet


Based on our China power equipment teams estimates and a target of 70GW nuclear
capacity by 2020F, we estimate that Chinas nuclear power equipment market will
reach about RMB350bn over the next decade. If we apply a localisation rate of 70% for
nuclear island equipment, 80% for conventional island equipment, 90% for balance of
plant (BOP) equipment, 100% for other equipment, plus an overall discount factor of
85%, cumulative revenue from now to 2020F attributable to local equipment suppliers
will reach RMB250bn twice the combined FY08 revenue of the Big-3 power
equipment players, namely Dongfang Electric, Shanghai Electric and Harbin Power.
Assumptions
1. Installed capacity. We estimate installed capacity will reach 70GW by 2020F,
versus the current target of 40GW, according to the mid- to long-term targets set
by the government. We believe that the government will revise up its target, given
strong momentum in the nuclear power sector.
2. Technology mix. Our analysis of existing nuclear projects in China indicates that
CPR1000 (2.5G) is the most widely deployed technology, with a market share of
more than 50%. On the 3G front, AP1000 is the most widely selected 3G+
technology, with a market share of 29%, with EPR taking a relatively minor 6%. We
expect CPR1000 to continue to take half of the market, with AP1000 seen to be
gaining share as China develops its own 3G-plus technology. We believe that EPR
will remain a relatively minor technology, with a market share of around 5%.

We estimate Chinas nuclear
power equipment market will
reach about RMB350bn over the
next decade

Exhibit 142. China: technology mix for projects under construction/planning
AP1000
29%
EPR
6%
CPR-1000
56%
Others (e.g. CNP-
600/ HTR-PM/
AES-91)
9%


3. Unit cost for CPR1000. The most recently published cost of CPR1000 is around
US$1,500/KW (source: CNNC). We believe the cost can be lowered as the
technology enters mass production and components are further localised
(currently 60-70%). Our view is that costs could ultimately fall to less than
RMB10,000/KW (or US$1,400/KW), as targeted by the government.
4. Unit cost for AP1000. Our research reveals that the average cost of AP1000 is
US$2,674/KW in China, or just 58% of the comparable cost for AP1000 projects
overseas. We believe that the discount is justifiable, given the use of local content.
Moreover, we believe that the cost can be reduced to US$2,000/KW as the
localisation ratio increases.
5. Unit cost for EPR. Our research reveals that the unit cost for EPR reactors is
some US$2,626/KW in China. This is about 64% of the current average of
overseas contracts. We believe that the cost can be reduced to US$1,800/KW.
The cost is lower than for AP1000, since we believe domestic power equipment
players, such as Dongfang Electric, have already captured certain technologies
needed to produce components for EPR reactors through extensive expertise in
the 2.5G nuclear area.

Exhibit 143. Current AP1000 and EPR projects overseas
AP1000 projects
Project name Progress energy VC-Sumer Gorgia
Details 2 x 1,100KW reactors 2 x 1,117KW reactors 2 x 1,100KW reactors
Contract cost (US$) 11,000,000,000 9,800,000,000 9,600,000,000
Installed capacity (KW) 2,200,000 2,234,000 2,200,000
Unit cost (US$/KW) 5,000 4,387 4,364

Average unit cost (US$/KW) 4,583
Local unit cost (US$/KW) 2,674
Implied discount (%) 42

EPR projects
Project name Flamanville Olkiluoto
Details 1 x 1,650KW reactor 1 x 1,650KW reactor
Contract cost () 3,960,000,000 5,300,000,000
Installed capacity (KW) 1,650,000 1,650,000
Unit cost (/KW) 2,400 3,212
Unit cost (US$/KW) 3,504 4,690

Average unit cost (US$/KW) 4,097
Local unit cost (US$/KW) 2,626
Implied discount (%) 36

6. Total cost breakdown. We have applied a share of total investment costs for
nuclear island, conventional island, BOP and other equipment at 37%, 17%, 11%
and 35%, respectively. This is consistent with the current share of a standard 2.5G
project, as reported by the CNNC.
For a standard 2.5G reactor project, about 35-40% of the total investment goes
towards the construction of the nuclear island. Although a typical nuclear reactor
consists of hundreds of parts, the steam generator and reactor pressure vessel
combined represent 18-20% of the total investment (or 50% of the total investment
in a nuclear island). In particular, the combination of steam generator, steam
turbine and generator accounts for some 20-30% of the total cost for a nuclear
power plant. Other major parts include the nuclear reactor inner core, reactor
coolant pump, valves, steam turbines and the generator, each contributing 4-6%
of the total nuclear reactor cost.

Exhibit 144. Investment budget for a 2.5G nuclear plant
Modules RMB / KW RMB / KW % to total cost Big 3 suppliers
Pre-construction preparation 189 1.7

Steam Generator 906 8.0 DFE, SEG, HPE
Reactor Pressure Vessel 1,133 10.0 DFE, SEG, HPE
Pressuriser 227 2.0 DFE, SEG, HPE
Control Rod / Nuclear Reactor
Internals
453 4.0 SEG
Reactor Coolant Pump 566 5.0 DFE, SEG, HPE
Valves 566 5.0 n.a.
Others 290 2.6 DFE, SEG, HPE
Nuclear Island 4,142 36.6

Steam Turbines 680 6.0 DFE, SEG, HPE
Generator 680 6.0 DFE, SEG, HPE
Others 521 4.6
Conventional Island 1,880 16.6

Balance of Plant 1,232 10.9 DFE, SEG, HPE
Nuclear fuel 552 4.9
Others 3,334 29.3
Total 11,329 100.0
Total (US$/KW) 1,666

Note: Dongfang Electric (DFE), Shanghai Electric (SEG) and Harbin Power (HPE).
Source: CNNC, Nomura estimates

7. Localisation and discount factor. Chinas overall long-term target localisation
rate for nuclear power equipment is around 70%, as some complex components
will still have to be imported. Since nuclear island components are relatively
complex, we believe that conventional island and BOP components should have a
higher localisation rate. The estimated long-term localisation rate for nuclear island
equipment, conventional island equipment, BOP equipment and other equipment
should be 70%, 80%, 90% and 100%, respectively, according to government
mandate. We believe that it will be difficult to reach such localisation ratios over
the next two to three years, since construction of an AP1000 unit takes five to six
years (including planning and consultation stages). We apply an overall discount
factor of 15% to reflect the actual revenue flowing to local power equipment
players over the next 10-11 years.

Exhibit 145. Revenue for nuclear equipment industry
Installed capacity (GW)
2008 8.6
2020F 70.0
Increase in capacity 61.4

Expected technology mix
CPR1000 (2.5G) (%) 50
AP1000 (3G+) (%) 45
EPR (3G+) (%) 5

Share of increase in capacity (GW)
CPR1000 (2.5G) 30.7
AP1000 (3G+) 27.6
EPR (3G+) 3.1

Unit cost (US$/KW)
CPR1000 (2.5G) 1,400
AP1000 (3G+) 2,000
EPR (3G+) 1,800

Total cost per technology (US$bn)
CPR1000 (2.5G) 43.0
AP1000 (3G+) 55.3
EPR (3G+) 5.5
Total 103.8
Total (RMBbn) 705.6

Equipment share (US$) 50
Expected revenue (RMBbn) 352.8

Bear case Base case Bull case

70% localisation
across all
categories
Localisation rate:
NI-70%; CI-80%; BOP-90%;
Others-100%
100% localisation
across all
categories

Nuclear island share (%) 37.0 37.0 37.0
Conventional island share (%) 17.0 17.0 17.0
BOP share (%) 11.0 11.0 11.0
Other (%) 35.0 35.0 35.0

Localisation rate
Nuclear island share (%) 70 70 100
Conventional island share (%) 70 80 100
BOP share (%) 70 90 100
Other (%) 70 100 100

Revenue to local players before discount (RMBbn) 247 298 353

Discount factor (%) 15 15 15

Revenue to local players after discount (RMBbn) 210 253 300

Chinas search for uranium
With the governments track record in executing nuclear power constructions on
schedule, we believe one of the largest obstacles that could impede growth in nuclear
power development is the procurement of uranium. Hence, we believe a focus for
Chinas nuclear power sector in the coming years is the acquisition of overseas
uranium assets.
This is evidenced by CNNCs and CGNPCs recent foray into the international markets.
Through a backdoor listing in November 2008, CNNC established Hong Kong-listed
CNNC International, with a main goal to procure uranium assets overseas. In June
2009, CNNC International bought 69.5% of a Canadian company called Western
Prospector, which has a uranium mine in Mongolia with 8,000 tonnes of reserves.
Estimated annual production is 1,000-2,000 tonnes.
Similarly, in November 2009, CGNPC invested HK$728mn for a 16.67% stake in HK-
listed Silver Grant. Silver Grant will use the proceeds for investment projects or
acquisition opportunities relating to natural resources, energy and nuclear related
matters, according to the company statement. We believe this is a way for CGNPC to
indirectly make investments in overseas uranium assets through a listed vehicle. As
mentioned earlier, CGNPC has already started making these acquisitions through its
subsidiary, China Uranium Development Co., with its investment in Energy Metals Ltd.
Such investments will continue in order for the two nuclear power operators to secure
enough fuel supply in the long run, in our view. We believe they will continue to look for
investments in Kazakhstan, Australia, Canada and countries in Africa.
China relies on imports for about half of its uranium needs, with supplies coming from
Russia, Namibia, Australia and Kazakhstan. According to WNAs estimates, China
produced 769 tonnes of uranium in 2008. CNNC, which is the dominant domestic
uranium producer by output, said it aims to raise its domestic uranium production to
2,000 tonnes a year by 2020.
This is still far below the projected amount of uranium required by China. According to
the head of CGNPCs uranium supply unit (Guangdong Nuclear Uranium Resources
Co), Zhou Zhenxing, the company alone will need more than 100,000 metric tonnes of
uranium between 2009 and 2020. This is a 5x increase from 2,000 tonnes in 2009 to
10,000 tonnes a year in 2020.
Based on the WNAs Reference Scenario projections which make a conservative
assumption that nuclear power capacity will grow only to 50GW by 2020 Chinas
uranium requirement will grow by more than 3x to 9,676 tonnes in 2020F from 2,875
tonnes in 2010F. If China increases its cumulative nuclear power capacity to 70GW by
2020F, as we are projecting, the requirement for uranium would be even larger.

Procurement of uranium is key
Both CNNC and CGNPC are
investing in uranium overseas
According to WNAs estimates,
China produced 769 tonnes of
uranium in 2008

Exhibit 146. Chinas uranium requirement as projected by WNAs Reference
Scenario
2,875
6,720
9,676
15,675
20,368
0
5,000
10,000
15,000
20,000
25,000
2010F 2015F 2020F 2025F 2030F
(tonnes U)

Source: WNA

China hydropower sector
In our view, China hydropower, particularly small-hydro, stands to benefit from
government policy aimed at lowering GHG emission and promoting use of renewable
energies. China is the largest hydropower country worldwide in terms of exploitable
resources and actual development. Hydropower is also the second-largest source of
power supply in China, accounting for 16% of Chinas power generation in 2009.
Based on the governments latest comments, we estimate that China hydropower
capacity is scheduled to post a CAGR of 7% between 2009 and 2020F, far slower than
other alternative energy such as wind, solar and biomass, which we estimate will see a
CAGR of 18-35% during the same period.
Moreover, we project that the planned capacity for 2020F would represent 74% of the
countrys technically exploitable hydro resources, and thus believe that the growth
potential of hydropower will be more constrained in China over the long term.
Although we expect much slower growth from hydropower than the same from other
alternative energy sources in China, we note that the government has turned more
supportive to hydropower since early 2010, owing to Chinas pressing need to achieve
its renewable energy consumption target (15% from non-fossil fuel sources) by 2020F.
Further, we continue to expect even stronger government support to small-hydro in
China. This, we believe, is because of small-hydros position as a low-cost renewable
source, and a tool to expand power supply coverage to the remote and rural areas to
boost economic growth in these regions. Current listed small-hydro companies include
Minjiang Power, Mindong Power, Qianyuan Power, Guiguan Power, Wenshan Power
and Guidong Power.
China hydro is the largest worldwide
According to Chinas Ministry of Water Resources (MWR), China has technically
exploitable hydro resources of 542GW, the largest in the world. By end-2009, Chinas
cumulative hydropower capacity totalled 197GW, topping that of other countries by a
large margin. In 2009, Chinas hydropower generation reached 513Twh, some 55%
higher than Canadas and Brazils, respectively, the second- and third-largest hydro
countries worldwide, based on BP statistics.

Hydropower is the second-largest
source of power in China

Exhibit 147. Global top-10 hydropower countries (2009)
0
20
40
60
80
100
120
140
160
C
h
i
n
a
C
a
n
a
d
a
B
r
a
z
i
l
U
S
R
u
s
s
i
a
n
N
o
r
w
a
y
I
n
d
i
a
V
e
n
e
z
u
e
l
a
J
a
p
a
n
S
w
i
t
z
e
r
l
a
n
d
(m tonnes of oil equivalent)

Source: BP Statistics, Nomura research

Within China, hydropower also plays a key role as the second-largest power supply
after thermal power. By end-2009, hydropower capacity accounted for 23% of Chinas
overall power capacity, and the annual power generation of hydro contributed 14% of
Chinas overall generation.

Exhibit 148. China hydropower capacity by type
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
2003 2004 2005 2006 2007 2008 2009 2020F
0
5
10
15
20
25
30
Small hydro (<50MW) (LHS)
Large hydro (LHS)
Hydro as % of overall (RHS)
(MW) (%)

Source: NDRC, China Electricity Council, Nomura International (Hong Kong)

The hydropower resources are abundant but unevenly distributed in China. As shown
below, Chinas hydropower projects are concentrated in south-west, north-west,
middle and southern China, along the Jinsha, Yangtze, Yanglong and Huang rivers.
Further, the water runoff also fluctuates significantly throughout the year given
seasonality effects.

Exhibit 149. China water resources

Source: Company data
China hydropower growth could slow to a 7% CAGR through 2020F
Hydropower capacity in China grew at 10-18% y-y between 2004 and 2009. However,
based on China government officials latest comments on the nations planning for
hydropower development, cumulative capacity of hydropower is scheduled to expand
from 197GW by end-2009 to 405GW (including 75GW of small-hydro projects) by end-
2020F, implying an 11-year CAGR of 7%.
This is not only slower than the historical growth of hydropower in China, but also a lot
slower than the planned growth of other alternative energy sources such as wind, solar
and biomass, which we estimate to see a CAGR of 18-35% during the same period.
We believe that such slower growth of hydropower results from a much higher base
effect, as well as the hydro resources available in China. We estimate that our
projected 2020F hydropower capacity will account for 74% of the countrys technically
exploitable hydropower resources, which means that by 2020F, installed hydropower
capacity could be more than 74% of the countrys economically exploitable resources.
Consequently, we expect the growth rate of hydropower to gradually slow over the
next couple of decades.

Exhibit 150. China hydro generation and growth
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
2003 2004 2005 2006 2007 2008 2009 2020F
(15)
(10)
(5)
0
5
10
15
20
25
Large hydro (LHS)
Growth (RHS)
(GWh) (%)

Source: NDRC, China Electricity Council, Nomura estimates

Hydropower growth likely to lag
far behind other alternative
energy sources

Exhibit 151. China hydro capacity and growth
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
2003 2004 2005 2006 2007 2008 2009 2020F
0
2
4
6
8
10
12
14
16
18
20
Large hydro (LHS)
Growth (RHS)
(MW) (%)

Source: NDRC, China Electricity Council, Nomura estimates
But we see government support turning more positive lately
Over the past few years, the development of hydropower, particularly large-scale
hydro, in China has faced obstacles such as environmental damage as well as
having to displace and re-habit people. According to the NDRC, China has only
approved 14GW of hydro projects since 2007, less than 5GW per year. In 2Q09,
Chinas Ministry of Environmental Protection also halted the approvals of large-hydro
projects at Jinsha River by China Huadian Corp and China Huaneng Group for
environmental violations, citing that the halt aimed to prevent low-level surplus
construction and building of excess capacity.
However, since the beginning of 2010, we have sensed a change in the governments
attitude towards the development of large-scale hydropower in China; we freely admit
that this is a subjective call. The CEC recently issued a report advocating that if the
government does not resume approval of large-hydro projects in the near term, there
will be very minimal incremental capacity increase from large-hydro projects during the
13
th
Five-Year Plan period (2016-2020F). Mr Guobao Zhang, the head of the China
Energy Bureau, also commented that China needs to approve 120GW of hydro
projects (61% of cumulative hydro capacity by 2009) during 2010-15F, which he felt is
difficult to achieve based on the current approval status. Thus he encouraged the
relevant agencies to accelerate the process of getting the approval.
In our view, the positive change in governments stance towards large-scale hydro is
mainly about the pressing need to accelerate clean energy generation to meet its non-
fossil fuel energy consumption targets (15% of overall energy consumption from non-
fossil fuel sources) by 2020F. According to Mr Guobao Zhang, the Head of the China
Energy Bureau, Chinas non-fossil fuel energy consumption accounted for less than
8% of overall energy consumption in 2009, down from 8.9% in 2008.

The government seems to be
turning more supportive of hydro
projects
although perhaps only with
meeting clean energy
consumption target in mind

Exhibit 152. China non-fossil fuel energy consumption as % of total energy
consumption
0
2
4
6
8
10
12
14
16
2005 2008 2009 2020F
Government target: 15%
(%)


We believe that large-scale hydro would be one of the cheapest and most scalable
ways to help China achieve its clean energy consumption target. Although the Chinese
government does not define large-scale hydro as a type of renewable energy in certain
cases (since large-hydro projects normally require change in landscape and/or re-
habitation, and are not environment-friendly), we believe that in the near and medium
term, growth of large-scale hydro would be more aggressively supported by the
government.
Small-hydro receives stronger government supports than large-hydro
Chinas Ministry of Water Resources (MWR) categorises hydro-power into two types:
large-hydro and small-hydro, where small-hydro indicates those with capacity of less
than 50MW. According to the MWR, the technically exploitable hydropower resources
of small-hydro is 128GW, most of which is located in less developed rural areas in the
mid-western, north-western and northern regions.
Compared to large-hydro projects, small-hydro projects have advantages including no
requirement for strong water runoff, simpler design, shorter time for construction, less
negative impact on environment, and easier O&M (operating and maintenance).
Further, since small-hydro projects are normally located close to the end market, loss
from transmission is minimal and construction of complicated grid networks is not
required.
Given the natural distribution of resources and the features of small-hydro, we note
that the Chinese government has viewed small-hydro projects as an effective tool to
extend power supply networks to remote areas, which the government believes will
subsequently enhance economic growth.
China started promoting small-hydro projects in the 1950s, in conjunction with the
countrys agricultural and rural development. Based on comments made by officials
from Chinas MWR, small-hydro projects have provided power supply to a rural
population of more than 300mn. The MWR also noted the development of small-hydro
has increased electricity penetration rates in rural villages from less than 40% in 1980
to 99.6% in 2008. The government expects to increase small-hydro capacity through
2015 to resolve power supply issues for, say, another 677mn people.
By end-2009, the installed capacity and annual generation of small-hydro reached
55GW and 16Twh, both figures accounting for some 30% of Chinas overall
hydropower capacity and generation in 2009.

Exhibit 153. China small-hydro generation and growth
0
50
100
150
200
250
300
2003 2004 2005 2006 2007 2008 2009 2010F 2020F
(5)
0
5
10
15
20
25
Growth (RHS)
(bn kwh) (%)

Source: NDRC, China Electricity Council, Nomura research

We note that, in some cases, the Chinese government does not regard large-hydro as
a renewable energy, since the development of large-hydro projects most of the time
requires re-habitation or changes to landscape. Consequently, we believe that small-
hydro would more directly benefit from the governments move toward greater
renewable energy usage.
Incentives and tariff scheme for small-hydro projects: 8% ROE
To encourage development, the Chinese government has introduced various
incentives for small-hydro since the early 1990s. The MWR issued a circular in 1991
stating that electricity users living within the service areas of small-hydro projects are
required to pay RMB0.02/kwh along with their electricity bills to establish a small-
hydro development fund to support future construction of new small-hydro projects.
Moreover, since 1994, small-hydro project owners have received VAT rebates, which
lowered their VAT to 6%, much lower than the 17% rate for large-hydro projects. In
terms of income tax credits, some provinces return half or even 100% of income tax
payments to small-hydro project operators to help to finance their operation and future
capital spending.
At present, the pricing of small-hydro projects is determined by local governments on a
case-by-case basis. The local governments will calculate the appropriate tariffs based
on a guaranteed project ROE of 8%. Owing to lower generation cost of small-hydro,
we note that the tariffs granted to small-hydro are normally a good deal lower than the
tariffs granted to coal-fired power, even when the electricity from both projects are sold
to the same grid line. The Chinese government has recently resolved to launch a new
policy that enables small-hydro projects to receive the same tariffs as the coal-fired
power projects when both are selling to the same local grid company. We believe that
this is positive to small-hydro project owners, since their tariffs could be raised under
this circumstance.
Moderate small-hydro capacity growth to 75GW by 2020F
We believe that Chinas stronger support for small-hydro than for large-hydro is mainly
about the governments intention to create additional income sources for agricultural
and rural areas, and not because the government wants to use small-hydro to optimise
its power supply structure. Such a stance is evident from NDRCs moderate plan for
small-hydro. Based on NDRCs present plan, Chinas cumulative capacity of small-
hydro will expand from the current 55GW to 75GW, implying an 11-year CAGR of 3%.

Small-hydro favoured by
government mainly to boost
economic growth in rural areas

Exhibit 154. China: small-hydro capacity
0
10
20
30
40
50
60
70
80
2003 2004 2005 2006 2007 2008 2009 2020F
(GW)

Source: NDRC, China Electricity Council, Nomura research
Listed players in the China hydropower field

Exhibit 155. Listed Chinese hydropower companies
Type Company Code
Large-hydro China Yangtze Power 600900 CH
Mindong Power 000993 CH
Qianyuan Power 002039 CH
Minjiang Power 600131 CH
Whenshan Power 600995 CH
Guiguan Power 600236 CH
Small-hydro
Guidong Power 600310 CH
China waste management & waste-to-energy sector
Chinas solid waste problem
Chinese municipalities generated about 154mn tonnes of residential (municipal) waste
in 2008 and, by 2030, this could increase to 480mn tonnes nearly double that
projected for the US over the same period. Every year, Chinese cities generate one-
third of the total waste produced in the world, and this is growing at a rate of 10%
annually, compared with 8% worldwide.

Exhibit 156. Industrial solid waste in China
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Industrial solid waste generated
Industrial solid waste utilizaed
(mn tonnes)
Source: National Bureau of Statistics
Exhibit 157. Residential solid waste in China
0
20
40
60
80
100
120
140
160
180
2000 2001 2002 2003 2004 2005 2006 2007 2008
Residential solid waste disposed
Harmless residential solid waste treated
(mn tonnes)
Source: National Bureau of Statistics

Waste is growing faster in China
than in the rest of the world

According to a study by the China Council for International Cooperation on
Environment and Development (CCICED) in 2006, about 860mn people will be living in
cities by 2020F, exerting further pressure on the already overburdened urban waste
disposal system. Trends and estimates of Chinas waste industry are as follows:
According to the World Waste Survey, China came in just after Europe and the US
in terms of waste output in 2004. The average Chinese urban resident generates
440kg of waste a year (compared with 766kg in the US), but China will overtake the
US within a decade if it maintains waste output at its historical 19% CAGR.
Among Chinas 660 cities, 52 of the big and medium cities (with populations
exceeding 500,000) account for 60% of the countrys total garbage. Less than a
dozen of these cities have adopted comprehensive municipal waste reduction and
recycling programmes, according to government statistics.
Garbage pile-up in 2020 could reach 400mn tonnes for China, the volume
generated by the entire world in 1997, according to the CCICED.
Landfills of solid waste have already rendered 50,000 hectares of land around cities,
and in another 12 years, the landfills in Chinas urban areas will reach capacity,
according to CCICED.

Exhibit 158. Municipal waste collection volume
0
50
100
150
200
250
United
States
China Germany Japan Italy United
Kingdom
France
(mn tonnes)
Source: United Nations MBS database
Exhibit 159. Treatment of municipal waste
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
United
States
Kingdom
France
Landfilled Incinerated
Recycled/composted Others/untreated


In 2005, the World Bank reported that for China to adequately address its growing
solid waste the country must:
Increase the national waste management budget eightfold over the next 15 years.
Develop approximately 1,400 more landfills over the next 25 years.
More of an emerging market than wastewater treatment
Solid waste treatment has been overlooked by local governments in the past, since
this problem is not as pressing as water shortages, but has gradually accumulated to
an alarming level as industrialisation and urbanisation accelerates. Only 40% (260
cities) of the Chinese cities have adopted some level of waste treatment fee-charging
mechanism, and waste treatment accounts for some 2% of the total expenditure by
municipal governments in public utilities.
It is a newer market than wastewater treatment, since a charging system for waste
treatment was established in 2002 (wastewater tariff mechanism was introduced in
1998), followed by guidelines for forming concessionary rights in 2004 (those
wastewater treatment was set in 2003), and regulatory requirements for proper waste
disposal issued by the Ministry of Environmental Protection in 2006 (wastewater
treatment was fully opened up by the Ministry of Construction in 2004).
Solid waste had been a second-
tier problem, but disposal is
becoming more urgent

Recently targeted by the
Ministry of Construction,
versus 70% set under the
11
th
Five-Year Plan
Assumed target for 12
th

Five-Year Plan
Waste treatment, which is considered a downstream operation, has already been
opened up by the central government for commercialisation and foreign investments,
while processing fees (payable to treatment operators) are generally subsidised in full
owing to lack of tariff collection systems, as authorities have not yet settled on if such
costs should be recovered through billings of water, electricity or other means
legislative powers of these utilities are segregated among different offices of the city.
Services for waste collection and transportation, which involve more social and safety
concerns, are still being rendered directly by local governments. We believe the
current structure should last for some time until unified policies are rolled out to reform
the waste industry in terms of pricing and environmental standards. Until unified
policies are rolled out to reform the waste industry in terms of pricing and
environmental standards, we believe the current structure should last for some time.
While the waste treatment industry is still in its infancy where growth and penetration
are top priorities of the government creating a compelling landscape for expansion
in the next three-five years that is similar to the water industry since 2004 and gas
distribution in 2000-06 we believe local governments are more likely to allow stable
margins for the downstream operators.
Accelerating growth in waste treatment capacity
For residential solid waste, China has a waste treatment ratio of 67% in 2008 in urban
areas, a substantial improvement from 2005s 52%, and implied a treatment capacity
CAGR of 7%. Assuming the treatment ratio in urban China reaches 72% by end-2010F
as targeted by the Ministry of Construction on 5 January, 2010 (higher than the 70%
set during the 11th Five-Year Plan) and 90% by end-2015F, we estimate capacity
growth will accelerate to 10% pa.
Such growth is seen from prevailing under-penetration in the sector, given that past
investments made in waste treatment were only 2.2% of total expenditure for municipal
public utilities, and only 40% (260 cities) of Chinas cities had adopted some level of
waste treatment fee-charging mechanism. Except for the few cities that have built-in
waste treatment fee into water tariffs, most other cities have a fee collection ratio of
only 30%. As a result, municipal governments are encouraged to privatise and
commercialise the market to bring efficiency in waste collection and treatment.

Exhibit 160. China: residential solid waste treatment in urban areas
Residential solid waste in urban area 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F 2013F 2014F 2015F
Capacity for waste treatment ('000 tonnes/day) 219.6 238.5 256.3 258.0 271.8 315.2 345.2 378.2 417.0 458.7 503.5 551.7 603.4
Capacity growth (%) 9 7 1 5 16 10 10 10 10 10 10 9

Residential waste collected (mn tonnes/year) 148.6 155.1 155.8 148.4 152.2 154.4 162.1 170.2 178.7 187.6 197.0 206.9 217.2
Waste output growth (%) 9 4 0 (5) 3 1 5 5 5 5 5 5 5
Residential waste treated (mn tonne/year) 75.4 80.8 80.5 77.5 94.3 103.1 108.2 113.6 119.3 125.3 131.5 138.1 145.0
Implied utilisation/efficiency (%) 95 94 87 83 96 91 90 90 90 90 90 90 90

Waste treatment ratio (%) 51 52 52 52 62 67 69 72 76 79 83 86 90

Source: China Statistical Yearbook; Nomura International (Hong Kong) Limited

Exhibit 161. Municipal waste collection volume
0
50
100
150
200
250
United
States
Kingdom
France
(mn tonnes)
Exhibit 162. Treatment of municipal waste
% 0
10
20
30
40
50
60
70
80
90
100
United
States
Kingdom
France
Landfilled Incinerated
Recycled/composted Others/untreated
(%)

WTE set for a 17% capacity CAGR through 2015F
Alongside gradual growth in waste treatment demand, we have identified waste-to-
energy (WTE) as outshining other waste treatment projects in terms of capacity growth,
since it has higher environmental standards and energy efficiency but accounts for
less than 20% of Chinas residential waste currently being treated, versus 80% being
processed by landfill sites.
Based on guidelines set out by the Environmental Protection Bureau, China is
expected to have 300 WTE plants by end-2015F, from ~100 in 2008 and 75 in 2007;
and also electricity generation from WTE plants of 3bn kWh in 2010 (0.1% of total
power demand), up from 0.2bn kWh in 2007.
This would imply a capacity CAGR of 17% for WTE projects during this period, which
looks higher than the 10% implied for wastewater treatment, and 6-8% for power and
coal industries during 2010-12.
Although dominant, landfill sites are becoming less preferred
Since landfill is a less capital-intensive approach toward waste treatment, it has been
widely used among less developed cities in China. Although landfills are easy to
construct with immediate effect, solid waste can cause considerable threats to the
environment and human health as it decomposes. Land filling may produce
contaminated land that is unsuitable for some future uses. When poorly managed,
leachate (ie, contaminated liquid arising from solid waste) will contaminate
underground water. Landfill gases, such as methane and carbon dioxide, pose serious
health concerns. According to the World Bank, as most of Chinas older landfills do not
have proper linings (ie, a dense synthetic material that acts as a barrier between the
waste and ground), these landfills will leach toxins into nearby soil, ground and surface
water resources. Residents of China are already suffering from the impact of landfills,
reporting health concerns such as respiratory diseases, cancers and high blood
pressure. The US Environmental Protection Agency indicated dioxins from landfills are
considered a serious threat to public health, and it has been widely reported that
landfills could have an adverse effect on health and increase the likelihood of cancer.
While industrial waste is commonly treated by landfills and recycling due to their
hazardous nature, municipal waste would be ideally treated by incineration. Although
waste incineration also emits chemicals detrimental to human health (for instance,
dioxins, furans and mercury), this can be captured by air-filtration while landfills
produce a larger volume of methane and other hazardous gases over time owing to
waste decomposition, as compared with ashes arising from incineration. Also, the
Ministry of Environmental Protection recently lifted the standards for landfill operations,
among which wastewater emissions from underground have to meet a Grade 1A
standard, bringing the initial capex for landfill closer to that of waste incineration.
Landfill is an easy solution, but
one with long-term consequences
Incineration seems more toxic,
but decay over time releases
more toxins and greenhouse
gases
WTE running ahead of both
energy and power industries

Government support in waste treatment
In 1995, the Solid Waste Law and Regulations was passed as Chinas first
comprehensive law to prevent and control environmental pollution from solid waste,
which authorised the Chinese government to impose solid waste discharge fees on
enterprises responsible for discharging waste in a manner that failed to comply with
relevant environmental laws governing the land filling of hazardous wastes. In 2004,
the import of hazardous wastes was banned, while the imports of solid wastes could
only be used as raw materials or for recycling. Under the 11
th
Five-Year Plan (2006
2010F), the central government re-emphasised the need to reduce industrial waste,
which includes the goal of reusing 60% of industrial solid waste and to reduce waste
output by 10%.
Examples of tax concessions for waste-related and environmental projects include:
Corporate income tax: three-year exemption plus three-year 50% reduction (under
FY08 new tax law) for Sino-foreign enterprises.
Value-added tax in on-grid power tariff will be refunded immediately upon collection
for waste-to-energy and methane-to-energy projects.
On-grid power tariffs at a premium of RMB0.25/kWh above the provincial
benchmark tariffs for waste-to-energy and methane-to-energy projects.
Priority dispatch: electricity generated from WTE plants are dispatched by power
grid with priority, under current renewable energy initiatives.
VAT refund on purchases of local equipment during construction.
No VAT and import tax chargeable on imported equipment, for environmental
protection projects that have investments by foreign entities.

Exhibit 163. Tendering timeline for WTE project
The Tendering Process Timeframe
The Government Authority commissions the tendering company to announce the public tender 1 month
The tendering company screens received application according to the governments specifications 1 month
Accepted applicants submit their tenders 1 month
Tenders are reviewed by a panel of specialists invited by the tender company 3 days
The government authority engages in negotiations with the tender winner 2-3 months
Tender results are released 2 weeks
The government authority and the tender winner sign a (BOT) agreement

Source: NEE; Nomura research

Getting more serious about
recycling

Exhibit 164. Chinas regulatory reform for the waste industry
Date Rules & regulations Authorities Particulars
Jun 2002 Directive for Establishing
Charging System for Municipal
Residential Waste Treatment
NDRC, Ministry of
Finance, Ministry
of Construction,
SEPA
Establishes the requirement for treating municipal residential waste.
Defines requirements and scope for calculating, charging and regulating waste
collection and treatment services.
Promotes commercialisation of waste treatment, to foster a sustainable
environment.
Defines national standards to meet.
May 2004 Management Policy of
Operating Concession Rights
for Hazardous Waste
State Council Defines requirements and procedures for obtaining concession rights for
hazardous waste treatment, transport, landfill and incineration.
May 2004 Management Policy of
Operating Concession Rights
for Municipal Utilities
Ministry of
Construction
Defines the requirements, responsibilities, procedures for obtaining concession
rights in operating municipal utilities, which includes water supply, gas supply,
heat supply, public transport, sewage treatment, waste treatment, etc.
This rule opens up Chinas utilities market for foreign investment opportunities, in
order to accelerate commercialisation of public utilities among major
municipalities.
Mar 2005 Management Policy for
Municipal Construction Waste
Ministry of
Construction
Defines requirements for disposing, treating and transporting municipal
construction waste (e.g. facilities treating construction waste are prohibited to
treat residential and industrial waste).
Defines penalty charges for violations.
Apr 2005 Management Policy for
Preventing Pollution from Solid
Waste Disposal
National Congress Defines the prevention of solid waste generation, promotes recycling and proper
treatment.
Defines guidelines in collecting, treating and transporting solid waste, which
includes municipal residential waste, industrial and hazardous waste.
Oct 2005 Management Policy for
Preventing Pollution from
Disposing Hazardous Chemical
Waste
SEPA Defines treatment and disposing policies for disposing hazardous chemical
waste.
Encourages hazardous chemical waste be centrally and professionally treated.
Jan 2006 Subsidized Tariff for Power
Generated from Renewable
Energy Rule
NDRC Power generated from renewable/alternative energy (eg, wind, solar, biomass
and waste) will be given a subsidised tariff of RMB0.25/kWh over respective
provincial benchmark tariffs, for 15 years, but allowance of which would be
reduced by 2% pa for operations entered after 2010.
Jul 2006 Disclosure Requirement for
Solid Waste Pollutants for Big
and Medium Size Municipalities
SEPA Requires all state environmental protection authorities in big and medium size
municipalities to regularly disclose information such as solid waste generation,
treatment situation, type, etc.
Jun 2007 List of Products encouraged to
be developed (revised)
NDRC The NDRC has revised the list of products/equipments for environmental
protection which the government encourages to develop. This includes sewage
treatment facilities, waste incineration equipments, flue gas filtrations, solid
waste disposal facilities, etc. This revised list covers 107 products, and
development which would receive government subsidizes/concessions.
Jul 2007 Management Policy for
Municipal Residential Waste
Ministry of
Construction
Defines requirements for disposing, treating and transporting municipal waste.
Defines minimum capital requirement for entering into residential waste
treatment operations (register capital of RMB5-50mn for landfill, > RMB100mn
for incineration).
Defines the extent of use in automatic equipments.
Defines penalty charges for violations.
Aug 2007 New Dispatch Priorities for
Renewable Energy
NDRC, SEPA,
SERC, Energy
Council
The NDRC has ordered grid companies to give dispatch priorities to renewable
energy providers, and then to efficient power generators according to fuel
consumption and pollutant emission levels. Trial process has already started in
September in five southern provinces Jiangsu, Guangdong, Guizhou, Sichuan
and Henan.
Source: Various entities, Nomura research

China bio-energy sector
We believe that Chinas bio-energy sector, including bio-mass to electricity, bio-gas
and bio-fuel, will benefit from the Chinese governments stance on reducing GHG
emissions and raising consumption of renewable energy. In our view, bio-mass to
electricity was the first among the renewable energy sources to see a standardised
preferential tariff in China, and the most generous one at that, because the Chinese
government sees bio-energy as a way to boost farmers income, which some claim are
not fully participating in Chinas growth.
Despite strong support from the government, we note that the sector so far has not
grown as rapidly and vigorously as the government initially planned. According to the
CEC, China had biomass-to-electricity capacity of 3.15GW by end-2008, up 2GW y-y,
which seemed on track to achieve the governments target at 5.5GW by 2010.
Nonetheless, we note that utilisation rates and profitability remain low, particularly from
the agricultural and forestry biomass-to-electricity segments.
We identify some obstacles for the bio-energy sector: 1) lack of a centralised network
for collection of biomass feedstock, 2) shortages of fuel sources including forestry,
straw and other crop residue, 3) lack of centralised near- and long-term planning by
the government, 4) lack of standardised technology, processes and product
certification to enable large-scale production and 5) difficulty in obtaining grid
connection.
Three government agencies have set aggressive targets
According to the 11
th
Five-Year Renewable Energy Development Plan and the
Renewable Energy Mid-to-Long-Term Development Plan, the NDRC has set targets
for various types of bio-energy, including biomass-to-electricity, biogas and biofuel for
the end of 2010 and 2020.

Exhibit 165. China governments plan for bio-energy
(MW) 2005 2010F 2020F 05-10 CAGR (%) 10-20 CAGR (%)
Biomass-to-electricity 2,000 5,500 30,000 22 18
Agricultural biomass 1,700 4,000 24,000 19 20
Biogas 100 1,000 3,000 58 12
Waste 200 500 3,000 20 20

Biogas (bn m3) 8 19 na. 19 na.
Household 7 15 30 16 7
Large-scale livestock farms 1 1 na. na. na.
Industrial waste water 0 3 n.a. n.a. n.a.

Fuel (k tonnes)
Solid biomass n.a. 1,000 50,000 n.a. 48
Bioethanol 1,020 3,000 10,000 24 13
Biodiesel 50 200 2,000 32 26
Source: NDRC, China Ministry of Agriculture, Nomura research

To complement the NDRC targets, the Ministry of Agriculture issued the Agricultural
Bio-energy Industry Development Plan 2007-2015 in 2007, which laid out a more
detailed implementation plan for bio-energy development, particularly in agricultural
and rural areas. The State Forestry Administration published the National Plan for
Energy Forest in 2010 to ensure sufficient fuel supply for biodiesel and biomass-to-
electricity by 2020F. Moreover, it is drafting a National Forestry Biomass Energy
Development Plan for 2011-2020.

First among the renewable energy
sources to see support from the
Chinese government in the form
of a generous preferential tariff

Biomass-to-electricity
Biomass-to-electricity refers to the process of generating electricity by burning bio-
mass feedstock including forestry residues (a by-product of timber and pulp
production), agricultural residues (eg, straw from cereal production), agro-processing
residues (from crop processing), urban waste and biogas generated from waste
treatment.
The NDRC and the Ministry of Agriculture have scheduled expanding biomass-to-
electricity capacity to 4GW and 24GW by 2010 and 2020, respectively, representing
CAGRs of 22% and 18% over 2005-2010 and 2010-2020. We note that more focus will
be on agricultural bio-mass to electricity and forestry bio-mass to electricity, which are
slated to reach 3GW and 1GW capacity by 2010, based on the government plans.
At present, the Chinese government grants preferential tariffs for bio-mass to electricity
power plants at RMB0.25/kwh on top of the local benchmark coal-fired power tariff.
This is much more generous than the preferential tariff scheme for wind power, which
is now RMB0.12-0.22/kwh above the national average coal-fired power tariff.

Exhibit 166. Growth of different types of biomass-to-electricity in China
0
5,000
10,000
15,000
20,000
25,000
30,000
2005 2010F 2020F
0
5
10
15
20
25
Agricultural biomass (LHS)
Biogas (LHS)
Waste (LHS)
Overall CAGR (RHS)
(MW) (%)


Currently, the majority of the bio-mass to electricity projects in China are fuelled by
sugar cane residue. For agricultural and forestry biomass, the governments plan is to
establish demonstrative power plants, using straw and residue of crops or sugar cane
as feedstock at major cotton and crop growing areas, including Hebei, Inner Mongolia,
Liaoning, Jilin, Heilongjiang, Jiangsu, Henan, Shandong, Hubei, Hunan, Jiangxi, Anhui,
Yunnan and Sichuan provinces.
Based on estimates of the Ministry of Agriculture, China could produce 780mn tonnes
and 900mn tonnes of straw by 2010 and 2015, respectively, from which 400mn tonnes
and 450mn tonnes could be used to fuel bio-mass to energy power plants and
generate electricity of 200mn TOCE and 225mn TOCE. As of 2009, Chinas annual
production of straw was around 700mn tonnes.

Exhibit 167. China crop straw distribution (tonne/thousand square meters)

Source: China Ministry of Agriculture

For bio-gas to energy, since the bio-gas can be produced along with waste treatment
at poultry/livestock farms or waste-water treatment at paper, brewery and leather
manufacturers, the government encourages these industries to construct mid-to-large
scale biogas-to-energy projects. The government targets achieving bio-gas to energy
capacity of 1GW and 3GW by 2010 and 2020, respectively.
We discuss waste-to-energy in further detail in a subsequent section of this report.
Bio-gas
Bio-gas is generated when bacteria degrade biological material in the absence of
oxygen in a process known as anaerobic digestion. Since bio-gas is a mixture of
methane and carbon dioxide, it is a renewable fuel produced from waste treatment.
Bio-gas can be obtained directly from a variety of sources, including landfill, waste
water and sewage treatment sites, livestock and poultry slurries, and other waste
facilities. It can also be produced in dedicated anaerobic digestion facilities that take in
a wide variety of feedstocks, such as farm and food waste, to produce biogas. The gas
can be used in gas engines to generate electricity or in boilers to provide process heat
or space heating.

Exhibit 168. China rural household bio-gas production targets
0
5
10
15
20
25
30
35
2005 2010F 2020F
0
2
4
6
8
10
12
14
16
18
Rural household (LHS) CAGR (RHS)
(bn m3) (%)


For rural and agricultural households, the Chinese government is aiming to promote
bio-gas as a supplementary source of gas supply. Moreover, the government believes
that the production process of bio-gas could at the same time enhance agricultural
waste treatments and protect the environment. According to the Ministry of Agriculture,
as of 2009, there were 35mn agricultural households with biogas facilities. The
government targets expanding to another 5mn agricultural households in 2010,
perfectly on track to achieve NDRCs 11
th
Five-Year Plan.
For urban areas, the Chinese government targets accelerating construction of bio-gas
projects at locations such as large-scale livestock and poultry farms, industrial organic
waste-water treatment plants and urban sewage water treatment plants. The
government targets building 6,300 large-scale bio-gas projects by 2010.
Bio-fuel
Bio-fuel is defined as a solid, liquid or gaseous fuel obtained from relatively recently
lifeless or living biological materials. There are two common ways of producing biofuel:
one is by growing crops with high sugar and starch, another is by growing crops high
in vegetable oils. Currently, the common use of bio-fuel includes home heating,
cooking and powering vehicles.
Bio-fuels are far less carbon neutral than other green energies, as the combustion of
biofuels produces carbon dioxide and other greenhouse gases. The potential for
biofuels to be carbon neutral relies on the notion that the carbon being emitted is
reused in the next cycle of plant growth.
According to the Ministry of Agriculture, there are 200 types of crops and plants the
government sees as suitable for the production of bio-fuels. However, as the
governments highest priority is to ensure food supply and security for the population,
the Ministry of Agriculture has narrowed the scope of energy crops to four. These are:
sugar cane, sweet sorghum, sweet potato and tapioca, which it sees as crops suitable
for bio ethanol production. Corn (maize) and potato are excluded from the list for food
supply security reasons.
Based on the Ministry of Agricultures plan, focused provinces for energy sugar cane
include Guangxi, Guangdong, Yunnan, Hainan, and Fujian. Focused provinces for
sweet sorghum include Heilongjiang, Shandong, Inner Mongolia, Xinjiang, and Hebei.
Focused provinces for sweet potato include Guangxi, and Sichuan. Focused provinces
for tapioca include Guangxi, Guangdong, Hainan, Fujian, and Yunan.

Exhibit 169. China crop production
(mn tonnes) 2003 2004 2005 2006 2007 2008 Tonnes required to produce a tonne of ethanol
Rice 161 179 181 182 186 192 3
Wheat 86 92 97 108 109 112 4
Corn 116 130 139 152 152 166 3
Potatoes and Tapioca 35 36 35 27 28 30 Sweet potato: 7-8; tapioca: 6-7
Sugar Cane 90 90 87 97 113 124 17
Beets 6 6 8 8 9 10 10
Source: National Bureau of Statistics of China, Nomura International (Hong Kong)

According to reports from the Ministry of Commerce, currently the nation mainly adopts
tapioca and sweet sorghum as sources for biofuel production, while there is limited
development in sugar cane-based bio-fuel, given the huge sugar consumption in China.

The government aims to promote
biogas as a supplementary
source of gas in rural areas

Exhibit 170. China bio-fuel resources

Note: Red: sugar cane residue; Green: rice husk; Yellow: corn
Source: China Ministry of Agriculture

Exhibit 171. China bio-fuel targets
0
10,000
20,000
30,000
40,000
50,000
60,000
2005 2010F 2020F
Solid biomass Bioethanol Biodiesel (k tonnes)


Asia-ex Japan
I ndi a
Ivan Lee, CFA +852 2252 6213 i van.l ee@nomur a.com
We note that under Indias National Action Plan on Climate Change, the target for
minimum renewable purchase standards has been set at 5% of total power purchases
in 2010 and, thereafter, should increase by 1% each year for 10 years, leading to 15%
by 2020. The target is for renewable energy to contribute 10% of total power
generation capacity and have a 4-5% renewables share in the electricity mix by 2012.
Consequently, we expect renewable energy to grow faster than traditional power
generation, accounting for around 20% of total added capacity planned for 2008-12.
This should provide a major fillip to renewable energy in India, especially wind, which
is a well established technology.

Exhibit 172. India renewable energy installed capacity as of 31 March, 2010
Power from renewable energy
Grid-interacti ve renewable power (MW) Added in FY10 Cumulati ve installed capacity Estimated potential
Biomass Power (Agro residues) 153 866 16,881
Wind Power 1,565 11,807 45,795
Small Hydro Power (up to 25MW) 305 2,735 15,000
Cogeneration-bagasse 295 1,334 5,000
Waste to Energy 5 65 2,700
Solar Power 8 10 50MW/sq km
Sub-total 2,332 16,817
Off-Grid/Distributed Renewable Power (including Capti ve/CHP Plants)
Biomass Power / Cogen.(non-bagasse) 51 232
Biomass Gasifier 13 122
Waste to- Energy 16 47
Solar PV Power Plants 0 2
Aero-Generators/Hybrid Systems 0 1
Sub-total 80 405
Total 2,412 17,222

Remote Village Electrification 1,013 Villages & Hamlets 5,348 villages/1,408 hamlets

Decentralised Energy Systems
Family Type Biogas Plants 1.06 lakh 42.40 lakh
SPV Home Lighting System 72,886 nos. 5,83,429 nos.
Solar Lantern 82,999 nos. 7,92,285 nos.
SPV Street Lighting System 8680 nos. 88,297 nos.
SPV Pumps 106 nos. 7,334 nos.
Solar Water Heating - Collector Area 0.62mn. sq.m. 3.53 Mln. sq.m.
Note: 1 lakh = 0.1mn
Source: Ministry of New and Renewable Energy (MNRE), Nomura research
Wind the leader in renewable energy in India
India wind market to grow 30% y-y in 2010F
In 2009, Indias Ministry of New and Renewable Energy (MNRE) announced a new
generation-based incentive (GBI) of INR0.5/kWh for electricity fed into the grid using
wind power. We note that this is an additional incentive on top of the tariff fixed by the
State Electricity Regulatory Commissions (SERCs). We believe that the GBI should
encourage actual wind energy generation, which we believe is a better utilisation of
wind resources rather than capacity addition.
Renewable energy should
account for 20% of total capacity
added over 2008-12
GBI should help in better
utilisation of wind resources

We note that the GBI will have an overall cap of INR6.2mn/MW, which is to be availed
in a minimum period of four years and a maximum period of 10 years. The GBI will be
limited to cover a maximum capacity addition of 4,000MW under the 11
th
Five-Year
Plan (2007-12) only.
We believe that new government incentives, both at the central and state level, will
help the Indian wind energy market grow significantly from current levels. At present,
annual capacity additions in India are generally around 1,200-1,800MW, which we
expect to jump to 2,000-2,500MW in the next few years. We expect annual wind
energy installation in India to grow 30% in 2010F and 25% in 2011F.

Exhibit 173. Annual wind installation in India
0
500
1,000
1,500
2,000
2,500
2007A 2008A 2009A 2010E 2011E 2012E
(40)
(30)
(20)
(10)
0
10
20
30
40
Annual wind installation (LHS)
Growth y-y (RHS)
(MW) (%)


We also expect the GBI to help attract investment from independent power producers
(IPPs) and make the market more broad based. Unlike other countries, where utilities
are the major customer of wind turbines, we note that the Indian wind energy market is
dominated by manufacturing companies, which use wind energy for captive purposes.
Incentives in the form of accelerated depreciation and a poor supply of grid-based
electricity are the key reasons behind this trend, in our view.
In 2009, tough economic conditions combined with an uncertain policy environment
due to delays in government budget led to a 35% y-y decline in annual wind energy
installation in India to just 1,172MW.
New entrants to increase competition but Suzlon should maintain
dominance
With more than 60% wind turbine market share, Suzlon has dominated the Indian wind
energy market over the past 11 years. However, we believe that the competition will
intensify in the next few years as new wind turbine players are looking to enter India,
which they find attractive given its growth potential.
We note that the competition is from both domestic and international players,
especially Chinese companies looking to win customers through attractive pricing. We
believe that Chinese companies are beginning to make inroads in the Indian wind
turbine market, as evidenced from the fact that Sinovel supplied 15MW
of wind turbines to India in 2009.

In India, the vagaries of the grid
have seen corporates building
wind capacity to power their
plants
China making a bid for the India
market

Exhibit 174. India: wind turbine market share (2009)
Suzlon
61%
Vestas
8%
Sinovel
1%
Others
21%
Vestas RRB
9%


Despite the growing competition on its home turf, we remain confident that Suzlon can
protect its market share given its deep understanding of the domestic market, long-
standing customer relationships and the width of its product offerings, which provides
Suzlon an edge over its rivals in India. Suzlon has a diverse customer mix, consisting
of small, medium and large-scale businesses, private and public sector companies,
power utilities, independent power producers and even high net worth individuals.
In India, Suzlon follows an end-to-end model, which covers everything from land and
site identification to operations and maintenance over the entire life of the project and
also securing the financing for the projects. This is valuable for Indian customers since
many of them do not have any experience in the sector.
We believe international players will find it difficult to match up to Suzlon when it
comes to project execution and service offering, as local understanding and long-term
relationships play a big role in securing deals, as well as in successful and timely
execution of projects. As testimony to its clout in India, Suzlon has installed more than
4,800MW of wind turbines in India to date, accounting for 44% of Indias cumulative
wind capacity. Consequently, we expect Suzlon to continue to dominate the India wind
turbine market and maintain its current market share.

Exhibit 175. Suzlon market share in India
0
200
400
600
800
1,000
1,200
FY 2007 FY 2008 FY 2009 FY 2010
40
45
50
55
60
65
70
75
Suzlon domestic shipment (LHS)
Suzlon's market share in India (RHS)
(MW) (%)

Source: BTM Consult ApS, Company data, Nomura research

But we see Suzlon as more than a
match for competitors,
home-grown and otherwise
as a local, Suzlon can take you
from finding a site to lights on

Exhibit 176. Guidelines/incentives for wind power generation in various states
State Wheeling Banking Buy-back Third-party sales Capital subsidy Other incentives
Andhara
Pradesh
5% of
energy
wheeled
Not allowed Rs. 3.50/per KWh w.e.f. 09.09.2008
(frozen for 10 years)
Allowed under
Electricity Act 2003
subject to regulation
framed by
respective SERs
Industrial status Reactive Power: 10
paise per KVARh
up to 10% & 25
paise per KVARh
above 10%.
Tamil Nadu 5% of
energy
5% (12 months
financial year April
to March)
Rs. 3.39/ per KWh (No Escalation) Allowed under
framed by
respective SERs
Nil Reactive Power: 25
paise perKVARh up
to 10% & 50 paise
per KVARh above
10%.
Karnataka 5% of
energy
Allowed @ 2% of
energy Input
Rs. 3.40/ per KWh without any
escalation for 10 years of commercial
operation
Allowed under
framed by
respective SERs
No Electricity Duty or 5
years
Reactive Power: 40
paise per KVARh
Kerala To be
decided by
SERC
To be decided by
SERC
Rs. 3.14/ KWh for 20 years Allowed under
framed by
respective SERs

West
Bengal
7.5%. of
energy fed
off grid
Rs. 4/ KWh Allowed under
framed by
respective SERs
Reactive Power: 20
paise per KVARh
Gujarat 4% of
energy
Settlement to be
done month to
month & surplus
energy at end of
month & surplus
energy at end of
month shall be
deemed as sold to
utility as per tariff
rate.
Rs. 3.50/KWh for 20 years Allowed under
framed by
respective SERs
Electricity duty
exempted
Reactive power <
10% energy
exempted, then 10
paise/ KVARh.
Reactive Power >
10% of energy
exported, then 20
paise/ KVARh
Madhya
Pradesh
2% of
energy
Allowed, but
proposal for this
invited from
DISCOM
Year wise rates (Rs./kWh) from 1st to
20th year 1styr- 4.03 2nd yr - 3.86
3rd yr- 3. 69 4th yr- 3.52 5th yr - To
20th yr - 3.36
Allowed under
framed by
respective SERs
No Electricity Duty for
5 years
Reactive Power: 27
paise for KVARh
Maharashtra 2% of
energy + 5%
as T&D loss
12 months Rs. 3.50/KWh (first year of
commissioning) (escalation of 15
paise per year for 13 years)
Allowed under
framed by
respective SERs
Power evacuation
arrangement,
Approach Road,
Electricity Duty, Loan
to Cooperative
Societies
Reactive Power: 25
paise per KVARh
Rajasthan 50% of
normal
charge as
applicable
for 33 KV, in
addition to
transmission
charges of
3.6%
Six months (Apr
to Sep. 8 Oct to
Mar. Utilisation of
banking energy
not permitted in
Dec to Feb)
Rs. 4.2S/ KWh for Jaisalmer, Barmer
8 Jodhpur. Rs. 4.50/KWh for all other
districts
Allowed under
framed by
respective SERs
Exemption from
Electricity Duty @50%
for 7 years
Reactive Power
5.75 paise per
KVArh with
escalation of 0.25
paise per year
Source: MNRE, Nomura research

Exhibit 177. Policy support for wind energy sector
Fiscal and financial incentives Concession on import duty on specified wind turbine parts
80% accelerated depreciation over one or two years
10-year income tax holiday for wind power generation projects

Excise duty relief on certain components
Some states have also announced special tariffs, ranging from INR3-4 per kWh, with a national average of
around INR3.50 per kWh
Wheeling, banking and third-party sales, buy-back facility by states
Guarantee market through a specified renewable portfolio standard in some states, as decided by the state
electricity regulator by way of power purchase agreements
Reduced wheeling charges as compared to conventional energy
Land policies The Ministry of Environment and Forests has issued guidelines for diversion of forest lands for non-forest
purposes, particularly to enable wind generation
Clearance of leasing and forest land for up to a period of 30 years for wind developers
Financial assistance Setting up of the Indian Renewable Energy Development Agency (IREDA), the premier finance agency of
the Government of India to provide soft loans for renewable energy projects, particularly for demonstration
and private sector projects
Wind resource assessment The government set up the Centre for Wind Energy Technology (C-WET) to map wind energy potentials
The C-WET has set up more than 1,000 wind monitoring and wind mapping centres across 25 states
Wind mapping at 50 metres (C-WET) and 60-80 metres height (private companies)
Source: GWEC, IWTMA, Nomura research

Solar India has huge potential
India solar market to grow 75% in 2010F
Being a tropical country, India has huge potential for solar power generation. As per
government estimates, India receives 5,000tn kWh per year, with most parts of the
country receiving 4-7 kWh per square metre per day. Looking at the poor power
transmission and distribution infrastructure of the country, we note that there is ample
opportunity for both grid and off-grid solar power systems.
The launch of Jawaharlal Nehru National Solar Mission (JNNSM) has created a lot of
interest in the India solar sector. According to Phase 1 of the solar mission, India is
looking to have 1.1GW of solar PV installed capacity by 2013. Consequently, to
achieve this target, cumulative solar PV installed capacity will need to grow by more
than 7x by 2013F from the current level. To create demand and attract investment in
the sector, the government is looking to provide various incentives. We expect Indias
solar PV market to grow by 75% y-y in 2010F and 50% y-y in 2011F. We believe India
has huge potential for solar PV and given the right policy support India can become a
key solar market in the longer term.

Exhibit 178. Planned incentives and targets for domestic solar industry
manufacturing
Domestic solar manufacturing Installed capacity 4-5GW
2020 target Create dedicated manufacturing capacities for poly-silicon to
manufacture 2GW capacity of solar cells annually

Financing and other incentives Zero import duty on capital equipment, raw materials
Excise duty exemption
Low interest rate loans
Priority sector lending
Incentives under Special Incentive Package (SIPs) policy to set up
integrated manufacturing plants
Single window clearance mechanism for all related permissions
Create 2-3 large solar manufacturing tech parks consisting of
manufacturing units covering the entire solar value chain

Quality Solar components be covered under the Bureau of Energy
Efficiencys star rating programme to ensure high standards
As a sunny country with an iffy
grid, solar power is a good
opportunity
indeed, we see 75% growth in
this market in 2010F

Exhibit 179. India: solar PV annual installation
0
100
200
300
400
500
600
700
800
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
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0
7
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9
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2
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0
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F
2
0
1
3
F
2
0
1
4
F
2
0
1
5
F
(50)
0
50
100
150
200
250
300
Annual solar PV installation (LHS)
Growth y-y (RHS)
(MW)
(%)
0
100
200
300
400
500
600
700
800
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
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0
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F
2
0
1
4
F
2
0
1
5
F
(50)
0
50
100
150
200
250
300
Annual solar PV installation (LHS)
Growth y-y (RHS)
(MW)
(%)

Source: EPIA, Nomura estimates

Exhibit 180. India: solar PV cumulative installation
0
500
1,000
1,500
2,000
2,500
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
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0
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2
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2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
2
0
1
5
F
0
20
40
60
80
100
120
140
Cumulative solar PV installed capacity (LHS)
Growth y-y (RHS)
(MW) (%)
0
500
1,000
1,500
2,000
2,500
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
F
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
2
0
1
5
F
0
20
40
60
80
100
120
140
Cumulative solar PV installed capacity (LHS)
Growth y-y (RHS)
(MW) (%)

Source: EPIA, Nomura estimates

JNNSM road map
We note that the mission is back-end loaded and most of the demand will be realised
in Phase 3. The mission has been divided into a three phase approach, Phase 1 spans
the remaining period of the 11
th
Five-Year Plan (until FY12) and the first year of the
12the Five-Year Plan (up to FY12-13), Phase 2 will cover the remaining four years of
the 12
th
Five-Year Plan (FY13-17) and Phase 3 will encompass the full 13th Five-Year
Plan (FY17-22).
Given the emerging cost and technology trends, we note that the mission will be
regularly evaluated and reviewed to protect the government from subsidy exposure in
case expected cost reduction does not materialise or is more rapid than expected. The
mission expects to achieve grid parity by 2022 and expects to compete with coal-
based power plants by 2030.

Exhibit 181. India solar road map
Application segment Target for Phase I (2010-13)
Cumulati ve target for Phase 2
(2013-17)
Cumulati ve target for Phase 3
(2017-22)
Grid solar power incl. roof top 1,100MW 4,000MW 20,000MW
Off-grid solar applications (incl.
rural solar lights)
200MW 1,000MW 2,000MW
Solar collectors 7mn sqm 15mn sqm 20mn sqm

Exhibit 182. India: PV road map efficiency targets towards 2022F
Conversion efficiency target (%)
Type of solar cell
Present status production (R&D)
2011-12F 2017-18F 2021-22F
Crystalline silicon solar cell 13 16% (19.7%) 18 (22) 22(23.5) 24 (25)
Thin-film a-Si solar cell 5 6%* (10 12%) * Pilot plant 8 (13.5) 9 (14.5) 11 (14.5)
CdTe (12%) 10 (15 ) 15(20) 20(25) Polycrystalline solar cell
CIGS (13%) 10 (15) 15(20) 20(25)
GaAs Conc solar cell NA (27) 35(40) 40 (45)
Dye/ organic nano based solar cell (2-5%) (5 -10) 8- 10(15) 12-17 (25)

Exhibit 183. India: PV road map targets towards 2022F
Target
Present Status 2011-12F 2017-18F 2021-22F
Module life in years 20-25 > 25 > 30 > 35
Electronics life in years (efficiency) 10 (96%) > 10 (97%) > 15 (98%) >20 (98%)
Battery life 1,200-1,500 1,500-1,800 1,800-2,200 2,200-2,800
India lacks solar manufacturing infrastructure
We note that unlike China, India does not have a strong manufacturing base in solar
based technology. According to government sources, there are currently around 15
players in cell manufacturing, more than 20 players in modules and more than 50 in
solar assembly. Currently, Indian companies import most of their polysilicon
requirements, as there is no domestic infrastructure for polysilicon manufacturing.
Similar to the global trend, crystalline silicon technology dominates the market and
accounts for nearly 90% of the solar modules manufactured in India, while the rest is
based on Thin Film technology.
Despite the low solar PV manufacturing capacity, India still exports most of the solar
products as domestic demand is almost non-existent. However, we expect this to
change and believe that most of the domestic capacity will be utilised to meet the near-
term target of 1GW by 2013, as envisaged in Phase 1 of the solar mission. Looking at
the missions long-term target of 20GW by 2022F, we expect private investments to
flow in all verticals of the solar value chain.

Exhibit 184. India: solar PV by application
Exports 65%
Lights 6%
Pumps 2%
Off grid plants 4%
Grid plants 1%
Railways 5%
Telecom 6%
Others 11%


India has plenty of sunshine, but
it does not have polysilicon
manufacturing

Nuclear significant growth expected in medium term
Nuclear power capacity to reach 20GW by 2020F and 63GW by 2032F
With the addition of 440MW (220MWX 2) in 2010 (by March 2010), Indias nuclear
power plant cumulative capacity increased to 4,560MW in 2010, from 4,120MW in
2009. Another 5,020MW of nuclear power capacity is under construction and is
expected to be commissioned between 2010 and 2016. Beside the plants under
construction, India will need to add about 10GW of incremental new capacity to meet
its mid-term target of 20GW by 2020. The government realises that it would not be
possible for the government-owned National Power Corporation of India Ltd (NPCIL)
alone to achieve the target, and hence participation of the private sector, both
domestic and international, is imperative.
India plans to import Light Water Reactors (LWR) of 1,000MW and above capacity
from countries such as France, Russia and the US. Simultaneously, India will continue
to work on its domestic Pressurised Heavy Water Reactor (PHWR) technology.
Given that India can now access the international uranium market, it plans to expand
its nuclear portfolio by using higher-capacity PHWR of 700MW. The expansion of the
PHWR portfolio is an important component in getting plutonium, the fuel for Fast
Breeder Reactors (second stage) and, hence accelerating Indias progress towards the
third stage of its nuclear power programme. For more information on Indias three-
stage nuclear power plan, please refer to the India section of our Anchor Report, Asia
starts global nuclear chain reaction.

Exhibit 185. India: nuclear power road-map
1
,
0
9
5
1
,
5
6
5
1
,
7
8
5
2
,
2
2
5
2
,
7
2
0
2
,
7
2
0
2
,
7
2
0
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,
7
7
0
3
,
3
6
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,
9
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2
0
4
,
5
6
0
2
0
,
0
0
0
6
3
,
0
0
0
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1
9
8
0
-
8
5
1
9
8
5
-
9
0
1
9
9
0
-
9
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9
7
1
9
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-
0
2
2
0
0
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-
0
3
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0
0
3
-
0
4
2
0
0
4
-
0
5
2
0
0
5
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0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
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-
0
9
2
0
0
9
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1
0
2
0
2
0
F
2
0
3
2
F
(MW)
1
,
0
9
5
1
,
5
6
5
1
,
7
8
5
2
,
2
2
5
2
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2
0
4
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5
6
0
2
0
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0
0
0
6
3
,
0
0
0
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1
9
8
0
-
8
5
1
9
8
5
-
9
0
1
9
9
0
-
9
2
1
9
9
2
-
9
7
1
9
9
7
-
0
2
2
0
0
2
-
0
3
2
0
0
3
-
0
4
2
0
0
4
-
0
5
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
2
0
F
2
0
3
2
F
(MW)

Source: DAE, Nomura research

India needs the private sector to
help develop its nuclear capacity
Sourcing nuclear capacity at
home and abroad

Exhibit 186. Nuclear power plants under operation
Plant Unit Type Capacity (MW) Date of commercial operation
TAPS 1 BWR 160 Oct-69
TAPS 2 BWR 160 Oct-69
TAPS 3 PHWR 540 Aug-06
TAPS 4 PHWR 540 Sep-05
RAPS 1 PHWR 100 Dec-73
RAPS 2 PHWR 200 Apr-81
RAPS 3 PHWR 220 Jun-00
RAPS 4 PHWR 220 Dec-00
RAPS 5 PHWR 220 Feb-10
RAPS 6 PHWR 220 Mar-10
MAPS 1 PHWR 220 Jan-84
MAPS 2 PHWR 220 Mar-86
KAIGA 1 PHWR 220 Nov-00
KAIGA 2 PHWR 220 Mar-00
KAIGA 3 PHWR 220 May-07
NAPS 1 PHWR 220 Jan-91
NAPS 2 PHWR 220 Jul-92
KAPS 1 PHWR 220 May-93
KAPS 2 PHWR 220 Sep-95
Total 4,560
Note: Kaiga Generating Station (KGS), Kakrapar Atomic Power Station (KAPS), Madras Atomic Power Station
(MAPS), Narora Atomic Power Station (NAPS), Rajasthan Atomic Power Station (RAPS), Tarapur Atomic Power
Station (TAPS), Pressurised Heavy Water Reactor (PHWR), Boiling Water Reactor (BWR)
Source: NPCIL, Nomura research

Exhibit 187. Nuclear power plants under construction
Project Capacity (MW) Expected commercial operation
Kudankulam 2 x 1000 Unit 1 Dec-2010
Unit 2 Jun-2011

Rajasthan 2 x 700 Unit 7 Jun-2016
Unit 8 Dec-2016

Kaiga 1 x 220 Unit 4 Jul-2010

Kakrapar 2 x 700 Unit 3 Jun-2015
Unit 4 Dec-2015
Total 5,020
Source: NPCIL, Nomura research

We note that the Indian government has given in principle approval for five greenfield
sites in October 2009 to set up Pressurised Heavy Water Reactors (PHWRs) in
Haryana (4 x 700 MW), Madhya Pradesh (2 x 700 MW) and Light water Reactors
(LWRs) based on international cooperation in Gujarat (6 x 1000 MW), Andhra Pradesh
(6 x 1000 MW) and West Bengal (6 x 1000 MW). NPCIL has commenced pre-project
activities at these sites. The pre-project activities will be undertaken in four phases.
Work on the first phase, comprising site investigation and various related studies in
respect of these five sites have been initiated in full swing.
Moreover, we note that the government has also sanctioned for capacity expansion at
Kudankulam (6 x 1,000, LWRs) and accorded for Jaitapur (6x1,650, LWRs). Looking
at ongoing and future capacity expansion plans, we believe that India can easily
surpass its mid-term target of 20GW by 2020F (Indias FY20F).

Five greenfield power sites in the
works

Exhibit 188. In-principle approved sites
Site Units Capacity (MW) Total Remarks
Kumharia, Haryana 4 700 2,800 Pre-project activities initiated
Bargi, Madhya Pradesh 2 700 1,400 Pre-project activities initiated
Kudankulam, Tamilnadu 6 1,000 6,000 KK 1&2 under construction
Jaitapur, Maharashtra 6 1,650 9,900 Land acquisition in progress
Haripur, West Bengal 6 1,000 6,000
Mithi Virdi, Gujarat 6 1,000 6,000
Kovvada, Andhra Pradesh 6 1,000 6,000
The exact capacity of the sites
would depend on the number
and type of reactors set up at
each site
Total 36 38,100
Source: Department of Atomic Energy (DAE)
Joint venture with NPCIL will be the preferred route for private sector
As per the Atomic Energy Act of 1962, only government-controlled entities can engage
in production of nuclear power generation. Looking at the perceived risk associated
with the operation of nuclear power plants, we do not expect any changes in this policy.
In our view, the only way out for the private sector is to form joint ventures with NPCIL
to tide over this problem. We are already seeing plenty of activity in terms of
partnerships being signed between NPCIL and the private sector (domestic and
international players alike). Even some public-sector companies operating in the
energy and power sector are jumping on the nuclear bandwagon.
After the Nuclear Suppliers Group (NSG) waiver, NPCIL has signed Memorandum of
Understandings (MoU) with players from different countries across the nuclear value
chain, from mining to nuclear plant manufacturers. We believe this will lay a strong
foundation to execute on Indias ambitious nuclear power plans.

Exhibit 189. Recent activities in the Indian nuclear sector
Date Events
September 30, 2008 India signs Civilian Nuke Pact with France
October 10, 2008 India signs of 123 Agreement with the US
December 6, 2008 India sign Civilian Nuke Pact with Russia
January 24, 2009 NPCIL and Kazakhstan's KAZATOMPROM sign MOU broadening cooperation in the nuclear industry
February 4, 2009 NPCIL and AREVA sign MOU to set up nuclear power plants at Jaitapur in Maharashtra State. This MOU provides for
engagement of NPCIL and AVERA into the discussion for preparing the contract and related detail of setting up of two
to six 1,650MW EPRTM reactor units including life-time fuel supply for these reactors. AREVA also signed agreement
to supply 300 tonnes of uranium
February 11, 2009 DAE and TVEL, Russian Federation sign contract for long-term supply of 2,000 tonnes of natural uranium pellets for
India's PHWR and another contract for about 60 tonnes of low-enriched uranium for the two BWRs
February 14, 2009 NPCIL and NTPC sign MOU to incorporate a joint venture for setting up nuclear power plants in India
March 23, 2009 NPCIL and GEH, US sign MOU to start discussions on techno-commercial aspects of Advanced Boiling Water Reactor
May 28, 2009 NPCIL and WEC (US) sign MOU to set up AP1000 reactors in India
August 27, 2009 NPCIL and KEPCO ink MOU covering bilateral cooperation in the field of nuclear power
November 4, 2009 NPCIL and IOCL sign MOU to set up nuclear power plants in India
November 30, 2009 NPCIL and L&T set up JV to build facility for special steels and ultra-heavy forgings
April 07, 2010 Rolls-Royce and Larsen & Toubro to collaborate on global nuclear opportunities
April 27, 2010 NPCIL and NTPC Limited sign a JV agreement
Source: NPCIL, L&T, Nomura research

Post the India-US nuclear deal and the NSG waiver, India has been courted by all the
top nuclear power plant (NPP) manufacturers (including Westinghouse, Areva and GE).
The NPP manufacturers are either trying to tie up with NPCIL or other domestic
engineering companies (L&T), anticipating the opening up of Indias nuclear sector for
private players in the near future. We believe that Russia has a head start and holds
an edge over other international players given its long-standing relationship with
NPCIL. As Indias trusted partner, Russia Atomstroyexport (ASE, Russia) has supplied
reactors for Kundankulam-1 & 2 (under construction).
The private sector must join
hands with the government on
nuclear
Russia would seem to have the
inside track in working with India
on nuclear

International equipment suppliers awaiting policy amendment
Despite the successful passing of the India-US nuclear bill and getting a waiver from
the NSG, we note that the nuclear power plans of the international players have been
stuck. The reason for this is that India does not have any law to ascertain liabilities in
case of a possible nuclear mishap. We believe in the present environment,
international players will find it to difficult to supply nuclear equipment to India.
To solve this problem, the Indian government recently introduced The Civil Liability for
Nuclear Damage Bill, 2010 in the Parliament. The bill deals with liabilities in case of a
possible nuclear mishap. However, we note that the opposition political parties are
vehemently opposing the bill. Their main opposition stems from the fact that the
amount of liability is small compared to international standards.
We note that the passage of the bill is a key requirement for implementing the
landmark 2008 India-US nuclear deal. The government tabled the bill in the Lok Sabha
(House of the People) in May 2010, which has since been referred to as the
Parliamentary Standing Committee on Science and Technology. Considering the
contentious nature of the bill and opposition of the political parties, we expect to see
further delay in passing of the bill. The bill will now be debated in a Parliamentary
Standing Committee, which is expected to submit its report by July 2010.

Some legal infrastructure needed
as well
current law in the works is
seen as letting international
players shirk their fair burden by
some

Alternative Energy | Global Global Utilities and Renewables Research Team
2 July 2010 Nomura 128
Asia ex-Japan
Korea
Keith Nam +82 2 3783 2304 / keith.nam@nomura.com
Sabine Park +82 2 3783 2342 / sabine.park@nomura.com
Ivan Lee, CFA +852 2252 6213 / ivan.lee@nomura.com
Nuclear power: a government priority
The Korean government published its green road map in the National New Growth
Engine in August 2008, promoting economic growth by developing low-carbon energy
sources. The road map includes various innovation programmes to foster green
growth through 2012F, thereby further developing the economy and creating more jobs.
The National Green Growth Engine Program selected nuclear power as the most
workable source of low-carbon energy. Non-nuclear alternative power sources, mostly
solar power, contribute less than 0.5% of Koreas power generation. The government
is aware that building nuclear power plants can cost 2-3x more per MW than thermal
and incremental power plants. Meanwhile, uranium is cheaper than other fuel types,
such as coal and LNG, in terms of power generation.
KEPCO leads Koreas nuclear drive both domestically and overseas
In Korea, we highlight KEPCO, Koreas consortium leader for overseas nuclear project
bids. The KEPCO-led consortium successfully bid for the largest overseas turnkey
nuclear power project to date, out of Abu Dhabi, in December 2009. Domestically, 85%
of KEPCOs generating capacity expansion through 2016 will come from nuclear
power. An impending fuel cost escalation scheme, which will bring about a tighter,
more guaranteed tariff scheme, also reaffirms our BUY rating on KEPCO stock.
Nuclear power capacity to account for 33% by 2022F
According to the Fourth Power Supply Plan announced by the Ministry of Knowledge
and Economy (MKE), Korea will invest W37tn (about US$33bn) in increasing
generation capacity over the period to 2022F to meet electricity demand. The plan
includes the establishment of 12 nuclear power reactors, seven coal-fired units and 11
liquefied natural gas (LNG) units.
As such, we estimate that installed nuclear power capacity will account for 33% of total
installed capacity in Korea by 2022F, versus 25% in 2008, overtaking coal and LNG-
fired capacity, which currently account for the highest portions (33% and 25%,
respectively). In terms of generating volume, we estimate the nuclear portion will grow
from 34% in 2008 to 48% in 2022F, while the coal portion shrinks from 39% to 36%
over the same period. The MKE expects electricity demand to grow at an average
2.1% pa to some 500.1bn kilowatt hours in 2022F.

Exhibit 190. Korea: nuclear generation
0
2
4
6
8
10
12
14
16
18
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
(kWh mn)
Exhibit 191. Korea: nuclear capacity
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
(MW)
Nuclear power capacity to
account for 33% in 2022F vs 25%
in 2008

Korea promoting nuclear power
as the most workable source of
low-carbon energy
Non-nuclear alternative energy
sources contributing 0.4% of
power generation
KEPCO: also, a tighter tariff
scheme pending

Exhibit 192. Korea: generating capacity by power plant type
0
20,000
40,000
60,000
80,000
100,000
120,000
FY08 FY10F FY15F FY20F FY22F
Nuclear Coal LNG Oil Hydro Other
(MW)

Source: Ministry of Knowledge and Economy
Nuclear plants under construction
Since Koreas first nuclear power plant Kori No.1 started operation in April 1978, the
country has continued to build nuclear power plants to secure a steady supply of
power. The country currently has 20 operating nuclear reactors.
As energy demand continues to rise, the government plans to build a total of 12 new
nuclear reactors by 2022F. With these new reactors, we estimate that electricity
generated by nuclear power plants will account for more than half of all electricity
produced in Korea. The 12 new nuclear reactors include eight under construction or on
order, all due to start up between 2010F and 2016F, with another two plants proposed
to be on line by 2030F. Work began on two of the new units Shin Wolsong 2 and
Shin Kori 1 in 2008.
Korea ranks sixth in terms of energy produced by nuclear reactors, behind the US,
France, Japan, Russia and Germany. Nuclear power plants provide more than 36% of
the countrys electric power supply, compared with a global average of around 16%.

Exhibit 193. Korea: nuclear reactors under construction
Generating Start Commercial
Power plant Type capacity (MW) construction operation
Shin Kori 1 OPR-1000 1,000MW Jun-06 Dec-10
Shin Kori 2 OPR-1000 1,000MW Jun-07 Dec-11
Shin Wolsong 1 OPR-1000 1,000MW Nov-07 Mar-12
Shin Wolsong 2 OPR-1000 1,000MW Sep-08 Jan-13
Shin Kori 3 APR-1400 1,350MW Oct-08 Sep-13
Shin Kori 4 APR-1400 1,350MW Sep-09 Sep-14
Shin Ulchin 1 APR-1400 1,350MW Mar-11 Dec-15
Shin Ulchin 2 APR-1400 1,350MW Mar-12 Dec-16
Shin Kori 5 APR-1400 1,350MW Aug-14 Dec-18
Shin Kori 6 APR-1400 1,350MW Aug-15 Dec-19
Shin Wolsong 3 APR-1400 1,350MW Jun-20
Shin Wolsong 4 APR-1400 1,350MW Jun-21
Total: 12 14,800MW

Source: World Nuclear Association, WNA

The government plans to build a
total of 12 new nuclear reactors
by 2022F

Exporting Koreas nuclear technology overseas
Koreas nuclear technology has advanced to the level of exporting nuclear power
plants on a turnkey basis ie, the construction and transfer of ready-to-use power
plants to clients. The nuclear industry, led by Korea Hydro Nuclear Power, endeavours
to export the APR1400, an advanced power reactor developed in Korea.
The domestic industry is also pushing ahead with the APR+ Technology Development
Project, with support from the MKE. The APR+ project is designed to overcome export
constraints by localising essential design computer codes and technology for potential
buyers. If this project is successfully completed, Korea will ultimately be able to export
nuclear power plants on a turnkey basis.
The APR+ project focuses on exporting homegrown nuclear power plant designs on a
turnkey basis. The project aims to further advance existing nuclear technologies, such
as essential design tools, nuclear plant design and nuclear plant construction/
operating know-how to the level of major nuclear vendors.
The government's nuclear technology development strategy, Nu-Tech2015, has two
main components. One concerns the localisation of key technologies such as nuclear
reactor design computer codes, reactor coolant pumps and man-machine interface
systems. The other component is the APR+ project, which is aimed at developing
globally marketable nuclear power plant designs by making the original reactor type
safer and more economically efficient. The success of the APR+ project is essential for
the success of the Nu-Tech2015 strategy. We think Korea will emerge as one of the
top nuclear-reactor exporting countries by 2015F, when these technology development
projects are expected to bear fruit.
The APR+ project was launched on 1 August, 2007. The APR+ project will be
developed as a kind of Generation III+ reactor type, with improved safety and
economic efficiency. The project will be carried out in three phases and is scheduled to
be completed by 2015F. The APR+ project is expected to boost the national economy
and the export capability of the domestic nuclear industry.

Exhibit 194. Reactor models for nuclear power plants

US$40bn UAE nuclear power deal
Korea won a contract at the end of 2009 to set up four nuclear reactors for the oil-rich
United Arab Emirates (UAE). The deal, signed on 27 December, will authorise a
consortium led by state-owned KEPCO to design, build and run reactors that will
produce 5,600MW of electricity. We reiterated our positive view on the Korean power
and construction sectors in our 28 December, US$40bn UAE nuclear power deal.
Korea endeavours to export the
APR 1400, an advanced power
reactor developed in Korea
Korea should emerge as a top
nuclear-reactor exporting country
by 2015F when the Nu-Tech2015
nuclear development projects are
expected to bear fruit
Korean consortium wins first
major Gulf nuclear project

Koreas big first step in a US$1tn-plus market
While the contract to build the four reactors is worth about US$20bn, the consortium
expects to earn another US$20bn by jointly operating the plants for 60 years,
according to Al Jazeera News. The reactors the first nuclear plants in the Gulf Arab
region are scheduled to start supplying electric power to the UAE grid in 2017. This
deal is the largest mega-project in Korean history, according to a statement from the
office of Lee Myung-bak, the South Korean president. Koreas Ministry of Knowledge
Economy (MKE) expects 430 new nuclear power plants to be built worldwide by 2030
at a cost of over US$1tn. The Korean bid won for pricing, efficiency and shorter
construction period.
The Korean bid had turned out to be surprisingly competitive against bids from France
and a joint US-Japanese consortium. We think Koreas APR1400 (Advanced Power
Reactor) is praised for: 1) a shorter construction period of 48 months, versus EPRs
(European Pressurized Reactor) and US-made reactors 57-60 months; 2) a 20-30%
cost saving compared with French, US and Japanese project costs; 3) a track record
of 93% nuclear plant capacity usage in Korea, the highest in the world; and 4) safety
features and improved materials.

Exhibit 195. Evolution of the nuclear reactor industry
AP600
Business cooperation
B&W (USA)
Framatome (France)
Siemens (Germany)
Mitsubishi (Japan)
Combustion
Asea-Atom (Sweden)
Brown Boveri
(S it l d)
Westinghouse (USA)
Toshiba (Japan)
G.E. (USA)
Hitachi (Japan)
AEP (Russia)
AECL(Canada)
1980s 1990s 2000s 2007
Framatome (France)
Siemens (Germany)
Framatome ANP
ABB-CE
Westinghouse (USA)
AREVA-NP
Mitsubishi
Korea nuclear
industry (DHIC, KOPEC)
Westinghouse (USA)
Toshiba (Japan)
G.E. (USA)
Hitachi (Japan)
AEP (Russia)
AECL (Canada)
B WR bus i nes s
c o o per at i o n
Fo undat i o n o f an
as s o c i at i o n
i
ABWR ESBWR
AP1000
ECR - CANDU
WWER-1000
ACR 1000
EPR
US APWR
APR-1400 OPR-1000
System 80 +
P WR
bus i nes s
Source: International Atomic Energy Agency (IAEA)

UAE contract gives Korean
consortium a chance to win
operation and maintenance
contracts
UAE win puts Korean nuclear
players in good position for
future global projects
Koreas APR1400 reactor design
now among IAEAs major global
reactor technologies

Asia-ex Japan
Aust r al i a
Dani el Raat s +852 2252 2197 / dani el .r aat s@nomur a.com
With 305 renewable energy projects (of greater than 100kW in size) contributing more
than 10.6GW, renewable energy amounts to 16% of the total installed power capacity
in Australia. Of the total installed capacity of renewable energy, hydro contributes 77%
and leads the list. Wind energy, which contributes 16% of total renewable energy, is
second. As per the Clean Energy Council of Australia, seven new wind energy projects
totalling 559MW of installed capacity, along with new hydro projects totalling 171MW
and bio-energy projects totalling 23MW, are currently under construction.

Exhibit 196. Australia renewable energy installed capacity (November 2009)
Fuel source
Installed capacity
(MW)
Number of
projects
Percentage
(%)
Hydro 8,186 113 77.0
Wind 1,668 48 15.7
Bio-energy:
Bagasse cogeneration 474 29 4.5
Black liquor 77 3 0.7
Crop waste 2 1 0.0
Food and agricultural wet waste 4 2 0.0
Landfill gas 163 69 1.5
Sewage gas 37 18 0.3
Wood waste 9 3 0.1
Bio-energy sub-total 766 125 7.2
Large scale solar PV & solar thermal 9 17 0.1
Wave 1 1 0.0
Geothermal 0.1 1 0.0
Renewable total 10,629 305 100.0

Note: Smaller generation units of solar PV (~145MW) have not been included
Source: Clean Energy Council (Australia), Nomura research
Wind among the best resources worldwide
With new capacity addition of 300MW, Australias total wind installed capacity grew
19% y-y to 1,886MW in 2009. At the close of 2009, there were 51 wind farms in
Australia generating approximately 4,284GWh or 1.6% of Australias national electricity
demand. Another seven projects totalling 588MW are under construction and are
expected to be commissioned within the next three years.
South Australia has the largest installed wind capacity, accounting for 43% of the
nations total installed wind capacity. We note that Australias wind resources are
among the best in the world. As per Australias Clean Energy Council (CEC), there are
currently 7,000MW large large-scale wind farm energy projects proposed in the
pipeline, with many of them having already received planning permission.
For 2010F and 2011F, we expect Australias annual wind installation to grow by 50%
y-y and 10% y-y, respectively, backed by effective government policies, such as the
recently legislated expanded Renewable Energy Target (RET).

Exhibit 197. Newly added wind power capacity in 2009
Owner Location State Installed capacity (MW)
Acciona Waubra Victoria 192
Infigen Energy Capital Wind Farm New South Wales 141
Pacific Hydro Portland Stage 3 (Cape Nelson South) Victoria 44
Origin Energy Cullerin Range New South Wales 30

Australia is a dry continent, but
hydro still supplies more than
two-thirds of the renewable mix
Australia is wind rich
Overall, we see 50% y-y growth in
installed capacity this year, and
10% y-y next year (off a much
higher base)

Exhibit 198. Australia: wind farms under construction
Owner Location State
Expected
commission
year
Installed
capacity (MW)
AGL Hallett Stage 2 South Australia 2010 71
Pacific Hydro Clements Gap South Australia 2010 57
Union Fenosa Crookwell 2 New South Wales 2010 92
Infigen Energy Lake Bonney Stage 3 South Australia 2010 39
AGL Oaklands Hill Victoria 2011 67
Roaring 40s Musselroe Tasmania 2011 129
AGL Hallett Stage 4 (Nth Brown Hill) South Australia 2012 132


Exhibit 199. Australia: total installed wind capacity
0
100
200
300
400
500
600
700
2
0
0
0
A
2
0
0
1
A
2
0
0
2
A
2
0
0
3
A
2
0
0
4
A
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
E
2
0
1
1
E
2
0
1
2
E
(100)
(50)
0
50
100
150
200
250
300
350
Wind annual installation (LHS)
Growth y-y (RHS)
(MW) (%)

Source: BTM Consult ApS, Nomura estimate

Exhibit 200. Australia: installed wind capacity by state
South Australia
43%
Western Australia
12%
Victoria 25%
Tasmania 8%
New South Wales
11%
Queensland 1%

Bio-energy adding 1GW capacity by 2020F
With installed capacity of 765MW, bio-energy represents 7.2% of the total renewable
energy capacity in Australia. Of all types of bio-energy, bagasse (the leftovers of
sugarcane production) cogeneration contributes the most with 62.4%, followed by
landfill gas, which represents 21.2%. As per government estimates, some 11,000GWh
each year could be delivered from bio-energy, equivalent to 1,845MW of installed
capacity by 2020F. We note that new capacity is currently being commissioned and
more plants are in the construction phase, notably in New South Wales.

Bio-energy a significant part of
the mix; no surprise in an
agricultural nation

Exhibit 201. Australia: installed bio-energy capacity by type
Bagasse
cogeneraton 63%
Black liquor 10%
Landfill gas 21%
Sewage gas 5%
Wood waste and
others 1%


Exhibit 202. Australia: bio-energy plants currently under construction
Fuel source Location Owner State
Commission
year
Installed
capacity
(MW)
Food and Agricultural
Wet Waste
Mt Cotton Darwalla Group QLD 2009/10 7.6
Landfill Gas Woodlawn Stages
II-IV
Veolia
Environmental
Services
NSW 2010 19
Sewage Gas Warriewood Sydney Water NSW 2009/10 0.25
Sewage Gas Wollongong Sydney Water NSW 2009/10 0.51
Sewage Gas Glenfield Sydney Water NSW 2009/10 0.53
Wood Waste Dandenong Consolidated
Energy Resources
VIC 2009/10 2.4
Sewage Gas Liverpool Sydney Water NSW 2009/10 0.33
Solar growth to slow owing to less favourable subsidies
Despite the global financial crisis, the Australian solar PV industry grew approximately
38% in 2009, owing mainly to government incentives in the form of rebates. In 2009,
more than 56MW of grid-connected solar power was installed in Australia. At the end
of 2009, Australia had installed capacity of about 145MW. We note that more than
41,000 homes across Australia have solar PVs installed.
Solar PV has a long history of supplying reliable off grid power to remote and regional
Australian communities. Around 70% of all PV installations are currently off-grid.
However, with the introduction of recent government incentives, the number of grid-
connected solar PV installations has grown rapidly, now accounting for about 30% of
Australias total solar installed capacity.
We note that the growth in 2009 was mainly driven by a federal government rebate of
A$8/watt (capped at A$8,000), which when combined with Renewable Energy
Certificates (RECs) meant that zero-cost 1kW solar power systems were being offered
by a number of companies. However, the government rebate was replaced by Solar
Credits, a point-of-sale discount based upon the market value of a multiplied number
of RECs, and hence the upfront government support has significantly diminished.

Like Germany and other nations,
Australia is reeling back solar
subsidies

Exhibit 203. Total solar PV installed capacity in
Australia
0
20
40
60
80
100
120
140
160
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
0
5
10
15
20
25
30
35
40 Solar PV installed capacity (LHS)
Growth YoY (RHS)
(MW) (%)

Exhibit 204. Percentage of households using solar
energy
0
10
20
30
40
50
60
V
I
C
T
A
S
A
C
T
N
S
W
S
A
Q
L
D
W
A
N
T
(%)
Australias uranium reserves are the worlds largest
We note that according to the World Nuclear Organisation, Australia has the worlds
largest uranium reserves, representing 23% of global reserves. We note that over the
past three years, Australian uranium exports have averaged almost 10,000tonnes/year,
providing about 22% of world uranium supply from mines. Australias uranium, which is
used only for electricity generation, is supplied under arrangements which ensure that
none finds its way into nuclear weapons. In the year 2008-09, Australia exported more
than 10,000 tonnes of uranium oxide concentrate with a value of more than A$1bn.
Uranium comprises about 35% of the Australias energy exports.

Exhibit 205. Global uranium resources
Australia 23%
Kazakhstan 15%
South Africa 8%
Canada 8%
Brazil 5%
Namibia 5%
Others 20%
Russia 10%
US 6%

Source: World Nuclear Organisation, Nomura research

Australia holds just shy of a
quarter of the worlds uranium;
and this comprises some 35% of
its energy exports

Government policy
Given below is the summary of government policies both at the central and state level
in Australia.

Exhibit 206. Clean energy state-by-state snapshot
State
Installed
capacity
% of
nationwide
installed
capacity (%)
Number
of
projects Technologies Feed-in-tariff Support for clean energy established In 2009
Australian
Capital Territory
(ACT)
6 0.1 5 Bioenergy
Hydro
50.05 cents /
kWh for less than
10kW; 40.04
cents / kWh for
10-30kW (gross)
Committed A$30mn of funding for large-scale solar
projects

New South
Wales
4,860 45.7 77 Wave
Solar Thermal
Solar PV
Bioenergy
Wind
Hydro
60 cents / kWh
(gross)
NSW Wind Renewable Energy Precincts.
State governments A$700mn Climate Change
Fund, established in July 2007, operational. Since
2007 funds have been allocated in the following
areas:
A$100mn Residential Rebate Program
A$30mn NSW Green Business Program
A$30mn Public Facilities Program
A$40mn Renewable Energy Development Fund
A$20mn School Energy Efficiency Program
A$20mn Rainwater Tanks in Schools Program
A$150mn programme under the Energy
Efficiency Strategy

Northern
Territory
2 0.0 6 Solar PV
Bioenergy
N/A

Queensland 1,107 10.4 56 Geothermal
Bioenergy
Wind
Hydro
44 cents / kWh
(Net)
State governments A$50mn Renewable Energy
Plan to increase deployment of renewable energy
initiatives and accelerate growth of this sector
established in 2009.
A$15mn Queensland Geothermal Energy Centre
of Excellence to drive geothermal research and
technology
Solar Bonus Scheme a feed-in tariff to pay
domestic and small energy customers for the
surplus electricity generated from roof-top solar
systems

South Australia 774 7.3 24 Solar PV
Bioenergy
Wind
Hydro
44 cents / kWh
(Net)
The South Australian Government claims to offer
national best practice land use planning for
accommodating wind farms.
Solar feed-in scheme under review. Current rates;
A$0.44 per unit of electricity (kilowatt-hour, kWh)
for householders and small business customers
who feed solar electricity into the grid.
Renewable Energy Target (RET) 33% of electricity
to be produced by renewable energy by 2010

Tasmania 2,442 23.0 43 Bioenergy
Wind
Hydro
Current retail
offer at
20 cents / kWh
FiT TBC
The Tasmanian Government released its Energy Policy
Statement in December 2009 and has set up a
Tasmanian Renewable Energy Industry Development
Board

Western
Australia
267 2.5 31 Bioenergy
Wind
Hydro
20 cents / kWh
FiT TBC"
Sustainable Energy Development Office (SEDO)
Grants Program A$5,000 to A$50,000 for community-
based sustainable energy projects targeting
householders to increase use of renewable energy

Victoria 1,171 11.0 62 Solar PV
Bioenergy
Wind
Hydro
Premium FiT for
solar PV 60
cents / kWh F&R
Tariff at least
1:1 (FiT/Net))
Victorian Renewable Energy Target Scheme
(VRET) commenced 1 January, 2007 10% by
2016 3274GWh VRET will be absorbed into the
national RET scheme when it commences in 2010
Sustainable Energy Large Scale Demonstration
Program A$72mn grants programme to support
the development of larg-scale, pre-commercial
demonstrations of sustainable energy technologies
Total 10,629 100.0 304

Exhibit 207. Federal renewable energy initiatives
Programme/
scheme name
Type/ cost of
policy Purpose
Eligible
renewable
technologies
Participant
eligibility/
requirements
Duration/
introduction Grant amount
Additional
information
Solar
Solar Flagships
Program (Part of
A$4.5bn Clean
Energy Initiative)
A$1.5bn over
6 years.
Competitive
funding for
solar energy
plants
To create an additional
1,000MW of solar
generation capacity
Commercially
proven solar
technologies.
Proposal may
include solar
thermal and solar
PV with
generation
capacity of at
least 150 MW.
Proposals must
meet Solar
Flagships criteria
and Education
Investment Fund
criteria
Technology used in
the project must
have been
demonstrated in
operation at a scale
of at least 30 MW
generation capacity
for 12 months
Round 1 closed
15 February,
2010.
Successful
projects
expected to be
announced in
2H 2010.
Expected to
leverage A$2 of
industry and
state government
funding for A$1
of
Commonwealth
investment
Round 1 projects
scheduled to
complete
commissioning
of plant by 31,
December, 2015
National Solar
Schools
(Temporaril y
suspended until
Jul y 2010)
Grants
programme
To allow schools to
generate electricity from
renewable sources, improve
energy efficiency, reduce
energy consumption
Solar power
systems, small
wind, small
hydro, solar &
heat pump hot
water systems
Government and
non-government
schools
July 2008 until
30 June, 2015.
Currently
suspended to
new claims
until July 2010.
Systems >2kW
up to A$50,000
grant Systems
<2kW up to
A$30,000
Administered
through DEWHA
Solar Cities A$75mn
programme
Solar cities
are: Adelaide,
Alice Springs,
Blacktown,
Central
Victoria,
Moreland,
Perth,
Townsville
To demonstrate effects of
combining cost reflective
pricing with widespread use
of solar technology and
examine barriers.
Solar
Technologies
Solar cities Duration 2005 -
2013
N/A Data collected &
analysed to find
the most
effective energy
management for
communities
Australian Solar
Institute (Part of
A$4.5bn Clean
Energy Initiative)
A$100mn over
4 years.
Competitive
grants
programme
To support solar
researchers
Concentrating
solar thermal
energy and solar
PV
Researchers from
public and private
sectors
To commence
operations by
July 2009
Variable. Round
1 successful
projects
announced
December 2009
Round 2 projects
proposals
expected to be
called for first
half 2010

Bioenergy
Second Generation
Biofuels Research &
Development
Program(Part of
A$4.5bn Clean
Energy Initiative)
A$15mn
competitive
grants
programme
To support research,
development &
demonstration of new
biofuel technologies &
feedstocks
2nd generation
biofuels
Applicant must be
research institution,
university or
business with
capability to
undertake research,
development or
demonstration of 2nd
generation biofuels
Delivered over
4 years from
2008-2009 to
2011-12
Matching grants
of A$1- $5mn
Administered
through ACRE

Geothermal
Geothermal Drilling
Program (Part of
A$4.5bn Clean
Energy Initiative)
A$50mn
competitive
grants
programme
To support cost of drilling
geothermal wells for proof
of concept
Geothermal Applicant must be
non-tax exempt
incorporated.
Australian company
which holds
Australian
geothermal
exploration licence
Launched 20,
August 2008
Grants of up to
A$7mn provided
as dollar-for-
dollar matched
funding
Administered
through ACRE

Policy common for all renewable energy technologies
Australian Centre
here for Renewable
Energy (ACRE) (Part
of A$4.5bn Clean
Energy Initiative)
A$567mn
programme.
One stop shop
for renewable
energy
businesses
To promote development,
commercial guidelines on &
deployment of renewable
energy technologies
Renewable
technologies
Organisations
governance and
guidelines TBC
To be
established
2009-10
N/A - Advisory
body
Under Minister
for Resources &
Energy
Renewable Energy
Demonstration
Program (Part of
A$4.5bn Clean
Energy Initiative)
A$300mn
competitive
grants
programme
Funding to assist in
demonstration of renewable
energy for power generation
commercial scale in
Australia
Solar,
geothermal,
wind, biomass,
hydro, ocean
energy,
combination
technologies
Applicant must be
non-tax exempt
incorporated
Australian company
Launched 20
February,
2009. Funding
provided in
rounds
Size of grants
expected to be
A$50-100mn (up
to one third of
eligible
expenditure on
the project
Administered
through the
Australian
Centre for
Renewable
energy (ACRE).
Applications
invited for
funding
2009/2010 and
beyond

Exhibit 207. Federal renewable energy initiatives (Contd)
Programme/
scheme name
Type/ cost
of policy Purpose
Eligible
renewable
technologies
Participant
eligibility/
requirements
Duration/
introduction Grant amount
Additional
information
Other policy support measure
Renewable Energy
Target (RET)
Mandates
Australias
use of
electricity
generated
from
renewable
sources.
Investment
estimated at
A$5bn
To encourage additional
generation of electricity
from renewable energy
sources.
Renewable
energy
generated or
deemed to have
been generated
Accredited power
stations or small
generation units that
have generated
renewable energy
or deemed to have
generated
renewable energy
Expanded
renewable
energy target
(RET)
commenced 1
January, 2010
N/A. Market
price paid for
Renewable
Energy
Certificates
(RECs)
Target set at
additional
45,000 GWh by
2020
Carbon Pollution
Reduction Scheme
(CPRS)
Proposed
emissions
trading
scheme
To reduce Australias
carbon emissions by
placing a cap on amount of
carbon pollution the
economy can emit
N/A Scheme will include
75% of Australias
emissions and
involve mandatory
obligations for
approx 1,000
entities
Scheduled to
commence 1
July 2011 but
has not been
legislated
N/A Targets
between 5 -
25% of 2000
emissions
levels by 2020
and 60% by
2050
Innovation
Investment Fund
Venture
capital
support
programme
To support
commercialisation of
Australian research by co-
investing in innovation
funds
Investing in
early stage and
commercialising
Australian R&D
Fund managers Round 3
applications
close 31 May
2010
Investment
provided to
venture capital
fund on 1:1 ratio
- maximum
commonwealth
capital A$20mn

Clean Energy
Innovation Centre
EnterpriseConnect
Network
Part of
A$50mn
Enterprise
Connect
Initiative
Centre offers services to
clean energy industry
including free business
reviews and supporting
grants
Clean energy
technologies eg
solar, wind,
wave, tidal,
biofuels and
cogeneration,
development
and supply of
methods,
equipment and
technology used
to reduce
energy demand
or increase
energy
efficiency.
Small & medium
sized businesses in
the clean energy
industry
Launched
2009
Business
reviews,
ongoing
mentoring,
grants up to
A$20,000 (will
contribute to half
the cost of
approved
projects)
Centre located
in Newcastle
Retooling for
Climate Change
Program (Part
A$240mn Clean
Business Australia
initiative)
A$75mn over
4 years
Competitive
grants
programme
Aims to help Australian
manufacturers reduce their
environmental footprint
Small-scale
cogeneration
plants
Applicant must be
non-tax exempt
incorporated
Australian company
and have annual
turnover of less than
A$100mn
Commenced
2008 until
2012
A$10,000 -
A$500,000, up
to a maximum of
half the cost of
project.
Applications
may be
submitted at
any time and
will be
assessed on a
regular basis
Climate Ready
Program (Part of
A$240mn Clean
Business Australia
initiative)
A$75mn over
4 years
Competitive
grants
programme
To support research &
development, proof-of-
concept & early-stage
commercialisation activities
Small scale
renewable
energy
technologies
Applicant must be
non-tax exempt
incorporated
Australian company
and have an annual
turnover of less than
A$100mn
Commenced
28 July 2008
A$50,000 -
A$5mn on a
matching
funding basis
Currently
closed for
application
Clean Energy
Trade and
Investment
Strategy
A$14.9mn
will be spent
over 3 years
To attract investment into
Australia's clean energy
sector and assist
Australian clean energy
companies to access
international markets
Solar, wind,
geothermal,
marine,
bioenergy and
biofuels
Australian business TBC N/A Austrade to
appoint industry
specialists in
Australia and in
major offshore
markets

Asia-ex Japan
Thai l and
Thailand is endowed with one of the largest agricultural sectors in Southeast
Asia, near all-year sunshine and a geography which is, in certain areas,
conducive to the exploitation of wind power. Moreover, while hydro potential is
limited domestically, neighbouring Laos offers significant untapped potential.
This, combined with the governments desire to reduce Thailands dependence
on natural gas and imported oil-based fuels and to promote indigenous energy
sources, has seen Thailand emerge as a leading developer of renewable and
alternati ve energy resources in Southeast Asia. We believe this strong
momentum in renewable energy development will be sustained over the medium
term, while large-scale hydro and nuclear alternati ves form a cornerstone of
regulators long-term planning.

Generating mix heavily gas-dependent
Thailands electricity supply industry (and its economy in general) relies heavily on
natural gas as a fuel source. According to data from the Energy Policy and Planning
Office (EPPO), gas-fired plants accounted for circa 70% of electricity generated in
Thailand and the electricity industry was responsible for 70.4% of overall natural gas
consumption in Thailand in 2008. Moreover, the industrys leverage to gas as a fuel
source is even larger if one takes into consideration that about 10% of total Thai gas
consumption is by industrial customers, which accounted for the largest proportion
(45%) of electricity consumption in 2008
While gas-based electricity production has appeal, due to lower capital costs, shorter
gestation period, high efficiency, environmental characteristics and modular
technology, the heavy reliance on it as a fuel source has become an increased cause
for concern with regards to Thailands energy security.
Natural gas transportation and supply in Thailand is undertaken by the Petroleum
Authority of Thailand (PTT). According to the Department of Mineral Fuels, as at
December 2008, Thailand had proven (2,012mm BOE) and probable (2,098mm BOE)
reserves, which at current levels of usage, represents about 25 years of supply.

Exhibit 208. Generating mix by fuel type
0
50
100
150
200
250
300
350
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
2
0
2
1
Natural Gas Hydro
Lignite Imported Coal
Heavy Oil Power Import
Renewable Energy Nuclear
Source: EPPO, Electricity Generating Authority of Thailand (EGAT), Nomura
research
Exhibit 209. Generating mix by fuel type
0
20
40
60
80
100
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
2
0
2
1
Natural Gas Hydro Lignite
Imported Coal Heavy Oil Power Import
Renewable Energy Diesel Nuclear
(%)

Source: EPPO, EGAT, Nomura research

At current production levels
Thailand has proven and
probable reserves to sustain
consumption for 25 years
Gas accounts for roughly 70% of
Thailands generation mix
Thailand, one of the most
proactive countries in Southeast
Asia in promoting alternative
energy

Exhibit 210. PTT gas sales by customer (2008)

Industry
12%
GSP
17%
SPP
13%
IPP
28%
EGAT
30%
Note: GSP = gas separation plant
Source: PTT, Nomura research
Exhibit 211. PTT gas sales by customer (1998 vs
2008)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1998 2008
IPP SPP
EGAT GSP
Industry
(mmscfd)
Gas prices affected by oil and currency volatility
The Petroleum Authority of Thailand (PTT) sells gas to the power sector at a price
comprising a gas pool price, the PTTs marketing margin charge and a pipeline tariff.
The gas pool price is the weighted average cost of natural gas from all gas producers
in the Gulf, Thailand and neighbouring counties, such as Myanmar. Since the quantity
of gas purchased from each producer remains relatively stable given the long-term
nature of supply contracts, the key variable in the weighted cost is the respective gas
wellhead price, which is indexed to economic factors including fuel oil prices, currency
exchange rates plus CPI and PPI.
This indexing mechanism, written into the respective gas purchase agreement
between the PTT and the gas producer, introduces price volatility, especially during
periods of high oil prices (since it is linked to fuel oil prices in Singapore), potentially
amplified by exchange rate volatility. Together, these two variables the fuel oil price
and the exchange rate are particularly important since they introduce the sensitivity
of world energy markets and the world economy to Thailands gas price.
From the perspective of Thailands electricity supply industry, post our discussions with
market participants, we understand gas input costs to the power industry generally lag
movements in oil prices by roughly six months and trace oil price movement with a
correlation coefficient of about 40-50%, all else being equal.

Exhibit 212. Natural gas price structure to power producers
Power Producers ~71%
EGAT ~30%
IPP ~28%
IPP ~13%
Customer
Sales Price Structure
Gas Pool Pri ce
+
+
Aver age Pur chased
Gas Pr ice
1.75%
1.75%
9.33%
~21.7 Bt /MMBtu* (Td
20.6553 + Tc 1.1112)
Suppl y Margi n
Pi pel i ne Tari ff

Note: Thailand's Energy Regulatory Commission has approved the pipeline tariff increase from Bt19.7/MMbtu to Bt21.7/MMbtu, effective 1 April 2009
PTT sells gas to the power sector
at a price comprising a gas pool
price, PTTs marketing margin
charge and a pipeline tariff
This indexing mechanism
introduces price volatility,
especially during periods of high
oil prices
The gas input costs to the power
industry generally lag movements
in oil prices by roughly six
months

Background to Thailands alternative energy drive
In 1992, Thailand undertook its earliest legislative foray into the renewable energy
sector through its Small Power Producer (SPP) Programme, under which the
implementation of cogeneration and renewable energy projects was governed. In 1994,
a separate Independent Power Producer (IPP) Programme was introduced for larger
power plants. The SPP Programme was initially restricted to plants of 60 MW or less,
but later amended to include plants up to 90 MW and incorporated qualifying criteria
on issues such as the plants use of steam and cogeneration levels of efficiency.
Under the programme, SPPs are allowed to sell a maximum of 90 MW to the grid
under long-term power purchase agreements (PPAs) with the Electricity Generating
Authority of Thailand (EGAT) ranging, generally, between five and 25 years. Unlike
IPPs, which are obligated to sell their entire output to the EGAT, SPPs are also able to
sell electricity and/or steam (for cogen plants) to industrial customers located adjacent
to their plants using private distribution lines. The long-term PPAs allocate market risk
to the EGAT (and its captive rate-payers), allowing SPPs to focus on managing
operation and fuel-related risks.
Generators that can guarantee (firm) supply must generate a minimum of 7,008 hours
a year (equating to an availability of circa 80%) if fired by traditional fossil fuels or
4,760 hours (utilisation of 54.3%) if they utilise renewable energy sources and are
remunerated with references to the EGATs long-run avoided capacity and energy
costs. Non-firm generators are free to generate as many hours as they please, but are
remunerated at a lower rate equating to the EGATs short-run avoided energy costs.
The ability of SPPs to sell 90 MW to the grid is important, as it provides an element of
surety to earnings that greatly enhances the operations financial viability, since direct
sales to industrial customers are subject to demand-side risk.
To be competitive, sales of electricity to industrial customers are indexed to the
national grid at rates slightly lower than those of the Provincial Electricity Authority
(PEA), which means that SPPs are affected by the fuel transfer payment (Ft)
component of electricity tariffs, designed to compensate the company for fuel price
fluctuations. However, since officials have the ability to defer Ft adjustments, the
margins for SPP electricity sales to industrial customers may be affected by a short-
term divergence between tariffs and fuel prices. Yet over the longer term, any
divergence is intended to reverse (ie, Ft should play catch-up with fuel costs on a
cumulative basis). Industrial users that purchase directly from SPPs benefit from lower
electricity tariffs and greater surety of supply since electricity is not subject to central
grid-related interruptions.
The programmes initial success was largely derailed by the Asian Financial Crisis of
1997, when a glut of power availability festered the suspension of long-term purchase
agreements for new cogeneration facilities. Even in the subsequent recovery,
producers burdened with reluctant utilities, unattractive tariffs, technological risks and
expensive interconnection requirements, continued to struggle.
Partially in response to this, in May 2002, Thailand initiated its Very Small Power
Producer (VSPP) programme, which facilitates the interconnection of renewable
energy generators less than 1 MW in size. Under the regulation, generators are able to
offset their own consumption at retail rates in what is referred to as net metering. If
they are able to generate a net surplus of electricity, the regulation stipulates that the
PEA and the Metropolitan Electricity Authority (MEA) are obligated to purchase this
electricity at the same rate purchased from the EGAT. Unlike in the case of SPPs, the
important feature of this tariff structure is that there is no firm versus non-firm
distinction; instead, generators receive higher tariffs during peak hours. In December
2006, VSSP regulations were expanded to hand similar terms for renewable and
fossil-fuel combined heat and power (CHP) projects with a capacity of up to 10 MW.

SPPs can sell a maximum of 90
MW into the grid, and can sell
electricity/steam directly to
industrial users
Firm supply is remunerated with
references to EGATs long-run
avoided capacity and energy
costs
Ft is not always exactly correlated
to fuel price movements
Thailand initiated its VSPP
programme in May 2002
Thailands SPP Programme was
initiated in 1992

Renewable energy to account for 10% of installed capacity by
2022
Thailands existing Power Development Plan (PDP) aims to have renewable energy
contribute about 10% of installed capacity by 2022 and, according to comments made
by Thailands Energy Minister Wannarat Charnnukul (23 May, 2009, The Nation), the
country intends, in broader terms, to increase the share of renewable energy from the
current 6% to 20% of total energy consumption over the next 15 years. Thailands
Draft PDP 2010, currently subject to a public consultation process, estimates that
renewable energy (excluding hydro) will account for about 6% of aggregate power
consumption by 2030, up from around 3% currently. This implies renewable energy
generation will register a CAGR of 7.8% over the next 20 years.

Exhibit 213. Thailand: 15-year alternative energy targets
0
1,000
2,000
3,000
4,000
5,000
6,000
Existing 2008-2011 2012-2016 2017-2022
Biomass Wind Solar Hydropower Biogas MSW
(MW)

Source: EGAT, Nomura research

Exhibit 214. Thailand: alternative energy master plan targets (2008-22)
(MW) Existing 2008-2011 2012-2016 2017-2022
Shortfall relati ve to
potential
Solar 32 55 95 500 49,500
Wind 1 150 400 700 900
Hydropower 5 165 281 324 376
Biomass 1,597 2,800 3,235 3,700 700
Biogas 29 60 90 120 70
MSW 5 100 130 160 160
Total 1,669 3,330 4,231 5,504 51,706
Source: Department of Alternative Energy Development and Efficiency
Tariff-driven renewable energy incentives
Overview of upstream tariffs
Upstream electricity tariff structures between basic generators (IPPs, SPPs and
VSPPs) and the EGAT as a single buyer vary as a function of the amount and type of
electricity generated and the firmness (both the duration and obligation to buy the
generated power) of the contractual relationship.
Tariffs for IPPs consist of availability or capacity payments, designed to
compensate IPPs for fixed investment costs (including debt service) and fixed
operating and maintenance costs, and to provide IPPs with a rate of return and an
energy charge designed to cover variable costs including fuel payments. In
addition to insulating IPPs from fuel and demand risks, IPP payments incorporate
dollar indexation as a hedge to earnings against foreign currency-denominated
debt. Because capacity payments are designed to compensate IPPs for investment
costs, while they vary on a case-by-case basis, they tend to be front-loaded to
IPP tariffs consist of an
availability or capacity payment
and an energy charge
Thailands Alternative Energy
Master Plan targets 5,500 MW of
alternative capacity by 2022

match the IPPs debt repayment profile, tapering off towards the end of the PPA,
especially for older generation IPPs, which came into existence at a time when debt
markets were not sufficiently deep. With depreciation unaltered, this decline in
capacity charges has implications for the earnings profile of IPPs with maturing
PPAs if they do not have a pipeline of replacement projects.
SPP payments. As mentioned earlier under the SPP discussion, payments to
SPPs vary according to whether the capacity is regarded as firm or not, which is a
function of the ability to guarantee power generation availability. Firm SPPs get an
unbundled base tariff comprised of capacity payments based on the EGATs long-
run avoided capacity and energy costs. Non-firm SPPs receive only an energy
payment benchmarked off the EGATs short-run avoided energy costs. A
distinguishing factor between SPP and IPP payments is that SPP contract terms
are standardised, whereas IPP PPA terms are generally tailored to the IPPs
specific circumstances and, unlike the case with IPPs whose payments tend to
decline as the PPA matures and retires debt, SPP payments are level, implying
reduced marked deterioration for earnings in the later stages of a PPA.
VSPP payments. As described above, VSPP payments are based on net metering,
which in essence means that generators are able to use excess electricity
produced to turn back their electricity metres and effectively bank the electricity
until required. This ensures that generators receive the full retail value of all
electricity produced. If the VSPP produces electricity greater than its consumption
needs over a monthly billing period, the VSPP regulation stipulates that the MEA
and the PEA must purchase the electricity at wholesale (ie, rates at which electricity
is purchased from the EGAT), which is about 80% of the retail rates. A key
distinguishing factor between VSPPs and SPPs is that there is no firm versus non-
firm distinction and, instead, generators receive higher tariffs during peak times.
Adder tariffs. A key element of the existing renewable energy regime is the green
subsidy available to both SPPs and VSPPs using renewable energy in the form of
an adder tariff for a period of seven to 10 years from COD, which is fixed for
certain fuel sources such as municipal wastes (MSW), wind and solar, or
determined through a competitive bidding process for fuels such as biomass, in
which the lowest proposed adder tariff is given priority. On 10 March, 2009,
Thailands National Energy Policy Council (NEPC) approved an increase in these
adders, which we outline below. We also note that SPP/VSPPs in the three
southernmost provinces of Thailand namely Yala, Pattani and Narathivath are
eligible for special adder tariffs (THB1/Kwh for biomass/gas, min/micro hydro,
MSW, and THB1.5/Kwh for wind and solar) to alleviate the incremental investment
risk of generating power with renewable energy sources in these locales. We note
that, based on our channel checks with companies in Thailand under our coverage,
we understand that regulators are considering a reduction in the solar adder tariff
from the current THB8.0/Kwh to THB6.5/Kwh, although nothing is official yet.

VSPP payments are based on net
metering, and receive adder
tariffs for using renewable fuels
Payment to SPPs for electricity
sales to EGAT varies depending
on the firmness of capacity and
the fuel source

Exhibit 215. Thailand: renewable and alternative energy generation
Adder
Bht/KWh US cents/ kWh
Targeted capacity
2009-21 (MW)
Biomass 3,700
< 1MW 0.5 1.43
> 1MW 0.3 0.86
Biogas 120
< 1MW 0.5 1.43
> 1MW 0.3 0.86
Waste 160
Fertilisation/landfill 2.5 7.14
Thermal process 3.5 10.00
Wind 800
<50kW 4.5 12.86
>50kW 3.5 10.00
Hydro 324
50kW<200kW 0.8 2.29
<50kW 1.5 4.29
Solar 8.0 22.86 500
Total 5,604
Source: Energy Regulatory Commission
Overview of downstream tariffs
Downstream tariffs are made up of wholesale (the rate that the EGAT sells to the MEA
and the PEA) and retail (the rate at which the MEA and the PEA sell to final customers)
rates. In addition, given direct competition with the grid, off-grid SPP electricity sales to
industrial customers can be viewed as being linked to PEA tariffs.
The EGAT sells electricity to the MEA and the PEA at a uniform wholesale rate.
To ensure that tariffs are uniform for both rural and urban consumers, the MEA is
required to make a lump sum subsidy to the PEA to account for the higher
transmission costs.
Retail electricity tariffs are comprised of: 1) a base tariff; 2) an automatic fuel
adjustment mechanism (Ft); and 3) a value-added tax, currently at 7%. The base
tariff includes costs associated with generation, transmission and distribution, and
varies according to consumer categories. The Ft component is calculated by
making certain assumptions for variables such as fuel costs, inflation rates and
exchange rates in an attempt to have tariffs reflect the actual cost of production and
compensate operators for cost changes that are beyond their control. While Ft is
adjusted once every four months, as noted, the authorities have the ability to
obscure this transmission mechanism over short intervals to dampen the impact of
fuel price volatility or extreme fuel shock. Over time, however, Ft will be allowed to
recoup any such deviations from the cost of production so that, on a cumulative
basis, the intended relationship between production costs and tariffs holds.
SPPs electricity sales to industrial customers. In addition to electricity sales to
the EGAT, SPPs sell electricity directly to industrial customers at what is generally
a small (circa 5%) discount to PEA tariffs, with the size of the discount varying
depending on intensity of competition. As such, regardless of the fuel source used
by the SPP to generate electricity, revenues are linked to PEA tariffs, which are
designed to reflect movements in the grid-wide fuel costs (predominantly natural
gas) which may have an implication for SPPs margins. Moreover, for seven gas-
fired SPPs, the margins may be exposed during times of sharp gas price rises
when Ft does not adjust commensurately, although hypothetically this should
eventually reverse.

On 10 March, the NEPC approved
a higher adder tariff to further
stimulate the development of
renewable technologies
SPP electricity sales to industrial
customers are indexed to PEA
tariffs
Retail electricity tariffs consist of
a base tariff, an automatic fuel
adjustment mechanism and a 7%
VAT

SPP steam sales. In addition to electricity sales to the EGAT and industrial
customers, cogen SPPs sell steam to industrial users subject to inherent limitation
on the ability to transport steam over long distances greater than 4/5km. Steam
sales are generally priced on an avoided cost model, which, in turn, implies
indexation to gas prices as a fuel source. Given that steam production is effectively
a by-product of the cogen process, avoided cost pricing for steam sales offers
attractive margins to SPPs, in our view.
Other measures to encourage renewable energy
To encourage the use of renewable fuel sources, Thailand introduced a Renewable
Portfolio Standard (RPS) requiring IPPs that wish to sell electricity to the EGAT have at
least 5% of their installed capacity fuelled by renewable sources. Other promotional
measures include Board of Investment (BOI) tax incentives and a Revolving Fund,
which aims to ensure that projects have access to affordable funding.
Laos crucial to Thailand fuel diversification efforts
While the targeted capacity to be imported from Laos was scaled down heavily in
March 2009s PDP revision (from 5,574 MW to 2,187 MW, on our numbers), we
believe Laos, in particular, will continue to feature prominently in Thailands future
capacity plans since it offers the country an opportunity to diversify its generating mix
in ways it is unable to do domestically whether it be due to geographical limitations
(for hydro projects) or opposition from the public and environmental groups (for coal-
fired and hydro projects).
Laos is a mountainous, landlocked country with a substantial endowment of natural
resources and covers a significant part of the Mekong River basin almost 35% of
the total inflows in the Mekong River are contributed by main tributaries throughout
Laotian territory. Laos Ministry of Energy and Mines estimates that the country has
theoretical hydroelectric potential of about 26,500 MW, excluding the mainstream
Mekong. Of this, about 18,000 MW is technically exploitable, with 12,500 MW found in
the major Mekong sub-basins and the remainder in minor Mekong or non-Mekong
basins. Less than 5% of the countrys hydropower potential has been developed over
the past 30 years, but we believe this is set to change dramatically in the coming years
as Laos government actively courts investment through promotional policies.
Moreover, Laos offers a stable social-political setting and Thailand enjoys a relatively
friendly government-to-government relationship (perhaps more so than with
neighbouring Cambodia, for instance).
We note that according to Thailands Draft PDP 2010, purchases from neighbouring
countries are expected to register a CAGR of 10% over the coming 20 years driven
primarily by cross-border hydro projects which will see this power sources share of
the overall generation mix escalate from around 6% in 2010F to roughly 19% by
end-2030F.
In response to greater cross-boarder business prospects, unexciting prospects for
capacity additions at home and, in contrast to the domestic situation, the absence of a
return-eroding competitive bidding process, Thai IPPs have looked to partner with
Laotian state-linked enterprises and international partners in greenfield coal (Ratch
and Banpu) and hydro (EGCO and Ratch) projects. In 2009, Glow received approval
from Laotian authorities for the acquisition of a 67.25% stake in the already operational
Houay Ho from its parent.
Currently, EGCO has the largest exposure to Laos through its 25% interest in Nam
Theun 2. Assuming a COD in 2010F, we estimate additional attributable hydro
capacity of 272 MW. The recent acquisition of Houay Ho means that Glow has 102
MW in Laos-based hydro capacity. Ratchs exposure to Laos also looks set to increase
significantly over the coming five years, with the completion of Nam Ngum 2 (+154 MW)
in 2013F and Hongsa Lignite (+751W), which is slated to achieve a COD in 2015F.
Being essentially a by-product of
the cogen process, avoided cost
pricing for steam sales to
industrial customers offers
attractive margins, in our view
Laos represents a key growth
node for Thai IPPs

The company also has interests in the Num Ngum 3, Xie Pian-Xe Namnoy and Nam
Bak hydro plants, although these projects still do not have signed PPAs with the EGAT.

Exhibit 216. Glow Energys attributable capacity and pipeline
Details Total attributable capacity (MW) Power purchase agreement details Non-power capacity

Domestic International
Processed Water
(Cm/hr)

%
owned Fuel type
IPP
SPP/
VSPP Laos Others
Total
attr.
Power
capacity
COD
date
Capacity
under PPA
with EGAT
PPA
Duration
PPA
expiration
date
Remaining
PPA years
Steam
(t/hr)
Clarified
Demine-
ralized
Existing projects
Glow IPP 95 Gas 677 0 0 0 677 2003 677 25 2028 19 0 0 0
Glow Energy Phase 1 100 Gas 0 0 0 0 0 1994 0 na na na 250 1110 230
Glow Energy Phase 2 100 Gas 0 281 0 0 281 1996 180 21 2017 8 300 900 280
Glow Energy Phase 4 100 Gas 0 77 0 0 77 2005 0 na na na 137 600 200
Glow SPP 1 100 Gas 0 124 0 0 124 1998 110 23 2021 12 90 0 190
Glow SPP 2/3 100 Coal/Gas 0 513 0 0 513 1999/00 300 25 2024/25 15/16 190 0 150
Houay Ho Hydro 67 Hydro 0 0 102 0 102 1999 85 30 2029 20 0 0 0
Projects under construction
CFB# Coal 100 Coal 0 70 0 0 70 2010 0 na na na 140 0 0
Phase 5 Gas 100 Gas 0 342 0 0 342 2012 74 25 2037 na 120 0 0
Gheco 65 Coal 429 0 0 0 429 2011 429 25 2036 na 0 0 0
Projects under development
HHPC expansion* 67 Hydro 0 0 67 0 67 ~2015 na na na na na na na
Summary
Total existing capacity 677 995 102 0 1775 967 2610 1050
Capacity under construction 429 412 0 0 841 260 0 0
Capacity under dev. with PPA 0 0 0 0 0 0 0 0
Total growth factored into forecasts 429 412 0 0 841 260 0 0
Capacity under dev. w/o PPA (not in forecasts) 0 0 0 0 0 0 0 0
Note: * These projects are not currently factored in to our earnings estimates given lack of pricing clarity and the probability of the projects proceeding

Exhibit 217. Ratchs attributable capacity and pipeline

Processed Water
(Cm/hr)

%
owned
Fuel
type
IPP
SPP/
VSPP Laos Others
Total
attr.
Power
capacity COD date
Capacity
under PPA
with EGAT
PPA
Duration
PPA
expiration
date
Remaining
PPA years
Steam
(t/hr)
Clarified
Demine-
ralized
Existing projects
Ratch. Power Plant (TH) 100 Gas 1,470 0 0 0 1,470 2000 1470 25 2025 16 0 0 0
Ratch. Power Plant (CCGT) 100 Gas 2,175 0 0 0 2,175 2001 2175 25 2026 17 0 0 0
Tri Energy Power Plant 50 Gas 350 0 0 0 350 2000 350 20 2020 11 0 0 0
Ratchaburi Power (RPCL) 25 Gas 350 0 0 0 350 2008 350 25 2033 24 0 0 0
Pratu Tao-A 100 Fl. gas 0 2 0 0 2 2007 2 5 2012 3 0 0 0
Num Ngum 2 25 Hydro 0 0 154 0 154 2013 154 25 2038 na 0 0 0
Hongsa Lignite 40 Lignite 0 0 751 0 751 2015 751 25 2040 31 0 0 0
Num Ngum 3* 25 Hydro 0 0 110 0 110 2017 na na na na 0 0 0
Xie Pian - Xe Namnoy* 25 Hydro 0 0 98 0 98 2017 na na na na 0 0 0
Nam Bak* 25 Hydro 0 0 40 0 40 2017 na na na na 0 0 0
Khao Kor Wind Farm* 30 Wind 0 18 0 0 18 2011 na na na na 0 0 0
Summary
Total existing capacity 4,345 2 0 0 4,347 0 0 0
Note: * These projects are not currently factored in to our earnings estimates given lack of pricing clarity and the probability of the projects proceeding

Exhibit 218. EGCOs attributable capacity and pipeline

Processed Water
(Cm/hr)

%
owned Fuel type
IPP
SPP/
VSPP Laos Others
Total attr.
Power
capacity
COD
date
Capacity
under PPA
with EGAT
PPA
Duration
PPA
expiration
date
Remaining
PPA years
Steam
(t/hr)
Clarified
Demine-
ralized
Existing projects
Rayong Power Plant 100 Gas 1,232 0 0 0 1,232 1994 1232 20 2014 5 0 0 0
KEGCO 1 100 Gas 70 0 0 0 70 1996 70 15 2011 2 0 0 0
KEGCO 2 100 Gas 754 0 0 0 754 1996 754 20 2016 7 0 0 0
BLCP 50 Coal 717 0 0 0 717 2006/07 717 25 2031/32 22/23 0 0 0
GEC-GPG (KK2) 50 Gas 755 0 0 0 755 2007/08 755 25 2032/33 23/24 0 0 0
EGCO Cogen 80 Gas 0 94 0 0 94 2003 48 21 2024 15 24 0 0
ROI-ET Green 70 Rice husk 0 7 0 0 7 2003 6 21 2024 15 0 0 0
GEC-GCC 50 Gas 0 55 0 0 55 1998 45 21 2019 10 8 0 0
GEC-NKCC 50 Gas 0 63 0 0 63 2000 45 21 2021 12 12 0 0
GEC-SCC 50 Gas 0 63 0 0 63 1999 45 21 2020 11 12 0 0
GEC-GYG 50 Parawood 0 12 0 0 12 2006 10 25 2031 22 0 0 0
Conal-WMPC 18 Diesel 0 0 0 19 19 1998 na 18 2016 7 0 0 0
Conal-SPPC 18 Diesel 0 0 0 10 10 1998 na 18 2016 7 0 0 0
EGCO BVI-QPL 26 Coal 0 0 0 131 131 2000 na 25 2025 16 0 0 0
Nam Theun 2 25 Hydro 0 0 272 0 272 2010 249 25 na na 0 0 0
Nam Theun 1* 48 Hydro 0 0 248 0 248 na na na na na 0 0 0
Summary
Total existing capacity 3,528 293 0 160 3,981 56 0 0
Note: * These projects are not currently factored in to our earnings estimates given lack of clarity pricing and the probability of the projects proceeding
Nuclear planned for 2020, but we are sceptical of execution
According to Thailands existing system planning guidelines, the country hopes to add
its first 1,000 MW nuclear power plant to the power system by 2020, followed by a
further 1,000 MW in 2021. The Draft PDP 2010 suggests that after making an initial
contribution to the generation mix in 2020, nuclear generation will see a 10-year CAGR
of 18% over 2020-30, eventually accounting for 11% of Thailands electricity
consumption needs. While there is still ample time for public relations work, given the
significant social resistance faced by developers of coal-fired power plants within
Thailands borders, we see significant execution obstacles in this regard.

Exhibit 219. Draft PDP 2010 generation mix evolution
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
N
a
t
u
r
a
l

g
a
s
I
m
p
o
r
t
e
d
c
o
a
l
N
e
i
g
h
b
o
u
r
i
n
g
c
o
u
n
t
r
i
e
s
N
u
c
l
e
a
r
R
e
n
e
w
a
b
l
e
E
n
e
r
g
y
H
y
d
r
o
2010 2010-2030 additions
(GWh)

Source: EPPO, Glow Energy, Nomura research
Industry regulation and planning
The Energy Industry Act, which came into effect on 11 December 2007, separates the
regulatory process from policy formulation and electricity as well as natural gas
industry operation. The new law also set provisions for the establishment of the Energy
Regulatory Commission (ERC) as an independent regulatory body tasked with,
The Energy Industry Act
separates the regulatory process
from policy formulation and
electricity as well as natural gas
industry operations

amongst others, setting electricity tariffs, issuing power plant licences, inspecting
industry operations and issuing regulations for the effective functioning of the industry.
The idea behind the Act is to demarcate the policy setting, regulation and monitoring,
and service provision for the energy industry (including power). The National Energy
Policy Council (NEPC), chaired by the prime minister, oversees the policy aspect,
while the Ministry of Energy, through the Energy Policy and Planning Office (EPPO)
and the ERC, looks after the regulation and monitoring of the industry. The three
government enterprises, the EGAT along with the MEA and the PEA, look after the
effective implementation of services as per the plans. The Department of Alternative
Energy Development and Efficiency (DEDE) is tasked with promoting energy efficiency
and conservation through the use of renewable energy sources.
While the ERC is not strictly independent, given that seven of the board members are
elected by the Energy Ministry, its establishment does (finally) provide a single
regulatory body for the industry, as was initially proposed as a critical component to
the successful implementation of the Thailand Enhanced Single Buyer model. We
concur with the view that having a single regulator should facilitate better integration
and coordination, while also expediting any industry reforms.

Exhibit 220. Breakdown of regulatory roles
Regulation and
Agency Policy Monitoring Implementation
National Energy Policy Council (NEPC)
Ministry of Energy (i.e. EPPO)
Energy Regulatory Board (ERC)
Electricity Generating Authority of Thailand (EGAT)
Metropolitan Electricity Authority (MEA)
Provincial Electricity Authority (PEA)
Private Sector
Source: World Bank Thailand Infrastructure Report (2008)
Power Development Plan
Thailands electricity supply planning process follows essentially a two-step process.
First, the Thai Load Forecasting Committee generates load forecasts to predict energy
demand, and these forecasts, in turn, form the basis for a long-term Power
Development Plan (PDP) that determines what centralised power plants are built and
the timing of their introduction. The PDP is reviewed by the Ministry of Energy and
approved by the NEPC and Council of Ministers. Plants are added subject to two
criteria.
First, Thailand aims to maintain a minimum reserve margin of 15% (note: the PDP
defined reserve margin as capacity in excess of annual peak demand as a
proportion of capacity, whereas popular convention is for this ratio to be expressed
as a percentage of peak demand), with capacity restricted to what EGAT deems
dependable. Non-dependable capacity includes a certain proportion of hydro
capacity since the availability of these plants varies significantly in the dry season
and from year to year.
Second is the loss of load probability (LOLP) a measure of the probability that
system demand will exceed capacity during a given period should not exceed an
hour per year (ie, every place in the country should have sufficient generation and
transmission to have power 99.99% of the time).
The current PDP 2007 has been revised twice since its release in light of weaker-than-
anticipated demand growth. An entirely new PDP is scheduled to be released by end-
2010.

We concur with the view that
having a single regulator should
facilitate better integration and
coordination, while also
expediting any industry reforms
The Power Development Plan
determines what power plants are
built and the timing thereof. An
entirely new PDP is scheduled to
be released by end-2010

Asia ex Japan
The Phi l i ppi nes
Geothermal and hydro 34% of generating mix
In the Philippines, the harnessing and utilisation of renewable energy (RE) comprises
a critical component of the government's strategy to provide energy supply for the
country. This is evident in the power sector, where increased generation from
geothermal and hydro resources has lessened the country's dependence on imported
and polluting fuels. According to statistics provided by the DOE, in 2008, geothermal
(18%) and hydroelectric (16%) energy combined accounted for 34% of the Philippines
generating mix. Renewable energy sources such as solar, micro-hydro, wind and
biomass are also seeing widescale use in the government's rural electrification efforts.

Exhibit 221. The Philippines: generation by fuel
source (2008)
Hydro
16%
Diesel
6%
Wind and
solar
0%
Oil 1%
Coal
26%
Natural
Gas
32%

Geothermal
18%
Gas
Turbines
0%
Combined
cycle 1%
Oil based
8%
Source: DOE, Nomura research
Exhibit 222. The Philippines: capacity by fuel source
(2008)
Oil based
21%
Solar
0%
Wind
0%
Coal
25%
Natural gas
20%
Geothermal
11%
Hydro
23%
Pro-renewable government policies
The government's policy aims to facilitate the energy sector's transition to a
sustainable system with RE as an increasingly prominent, viable and competitive fuel
option. The shift from fossil fuel sources to renewable forms of energy is a key strategy
in ensuring the success of this transition. Current initiatives in the pursuit of this policy
are directed towards creating a market-based environment that is conducive to private
sector investment and participation, and one that encourages technology transfer and
research and development. To this end, current fiscal incentives provide for a
preferential bias to RE technologies and to projects that are environment friendly.
Based on current DOE projections, renewable energy is expected to provide up to
40% of the country's primary energy requirements by end-2013. As an aggressive
move to promote RE development and use, the DOE has identified long-term goals,
namely: 1) to increase RE-based capacity by 100% by 2013; and 2) to increase the
non-power contribution of RE to the energy mix by 10mn barrels of fuel oil equivalent
(MMBFOE) in the next 10 years. In support of these general goals, the government
aims to be the number one geothermal energy producer in the world; be the number
one wind energy producer in Southeast Asia; double hydro capacity by 2013 and
expand the contribution of biomass, solar and ocean waves by about 131 MW.
The Renewable Energy Act of 2008 became effective on 30 January, 2009 and
provides a strategic alternative to fossil fuels that is aimed at fostering sustainable
growth, a cleaner environment, energy independence and security for the country
Harnessing renewable energy is a
crucial component of the
governments policy to diversify
the Philippines energy mix
Passing of the RE Act not only
creates value for existing
operating assets, but enhances
the viability of projects in the
pipeline as well
To promote private sector
investment and participation,
current fiscal incentives favour
RE technologies and projects

through the development and utilisation of renewable and indigenous energy
resources. The act institutionalised both fiscal (a seven-year tax holiday, after which a
tax rate of 10% applies; net operating loss carry-over for the first three years from the
start of commercial operation; accelerated depreciation; tax- and duty-free import of
machinery and equipment; 0% VAT on the sale of fuel or power generated from
renewable energy sources; tax-exempt sale of carbon emission credits) and non-fiscal
(renewable portfolio standard and priority dispatch) incentives to sustain existing and
attract new investment.

Exhibit 223. The Philippines: salient features of the Renewable Energy Act (I)
Pre-RE Act legislation RE Act
Income tax holiday BOI registration
6 years ITH under pioneer status
4 years ITH under non-pioneer status
Plus one extra bonus year
7 years ITH from commercial operations
Government share Steam 60% of gross value
Hydro Share of LGUs-National Wealth (1%
of gross receipts)
Steam 1.5% of gross income
Others 1% of gross income
Existing projects covered by change in government share
Importation of materials/
equipment
0% duties for 3-5 years
(on BOIs discretion)
0% duties for 10 years
(on registration)
Net operating loss carry-over 3 years 7 years
Realty tax rate 2% (cities) and 1% (provinces) of assessed
values;
1% of assessed values for SEF
1.5% of net book value; integrated development and generation facility
taxed only on the power plant component
Corporate income tax rate
(after ITH period)
30% 10%
VAT on sale of power
generated from RE
0% 0%
Tax on carbon credits 30% income tax and 0% VAT Tax exempt
Others Other BOI incentives:
Additional 50% deductible wages for the
first 5 years of operation
Applications for accelerated depreciation
Cash incentive for missionary electrification
Tax credit on domestic capital equipment and services
Market incentives:
Creation of renewable energy market to implement minimum
percentage of generations from RE sources (Renewable Portfolio
Standards)
Direct contraction by RE facilities with end users for supply of power
(Green Energy Option)
Source: EDC, DOE, Nomura research

Exhibit 224. The Philippines: salient features of the RE Act (II)

Source: DOE, Aboitiz Power, Nomura research
Feed-in tariffs under discussion
The government has dangled another incentive for potential investors in the RE field
that would allow them to charge slightly higher tariff rates for the production of energy
from renewable or alternative raw materials. According to Marriz Agbon, president of
the Philippine Agricultural Development and Commercial Corp (PADCC), the
Renewable Energy Board has applied with the Energy Regulatory Commission (ERC)
for a feed-in tariff for biofuels. The feed-in tariff, Agbon said, would be in addition to the
regular generating cost of power generating firms. Thus, a firm generating power, for
example from biomass or biofuel, could charge an additional feed-in tariff based on the
renewable material the firm is using. The National Renewable Energy Board, created
by the RE Act, is coming up with its proposal for the feed-in-tariff (FIT) rules to the
ERC. The tariff incentive is likely to be implemented within the year.
Philippines geothermal
A major player in geothermal production
The Philippines has the second-largest geothermal installed capacity in the world, with
1,958MW as at end-2008, according to disclosure by the DOE. This is roughly 12% of
the countrys aggregate 2008 installed capacity of 15,680MW (and about 22.6% of the
Philippines 2008 dependable capacity of 13,049MW). Based on data from the World
Geothermal Congress (2005), the Philippines accounted for approximately 21% of the
worlds entire geothermal production capacity.

In 2005, the Philippines
accounted for 21% of global
geothermal installed capacity
Feed-in tariff expected to be
finalised by end-2010F

Exhibit 225. Geothermal capacity by country (1995,
2000, 2005)
0
500
1,000
1,500
2,000
2,500
3,000
U
S
A
P
h
i
l
i
p
p
i
n
e
s
M
e
x
i
c
o
I
n
d
o
n
e
s
i
a
I
t
a
l
y
J
a
p
a
n
N
e
w
Z
e
a
l
a
n
d
I
c
e
l
a
n
d
C
o
s
t
a
R
i
c
a
E
l
S
a
l
v
a
d
o
r
1995 2000 2005 (MW)
Source: Geothermal Energy Forum, Nomura research

Exhibit 226. Global installed geothermal capacity
(2005)
USA
27%
Philippines
21%
Mexico
11%
Indonesia
9%
Italy
9%
Japan
6%
New
Zealand
5%
Other
12%
Source: Geothermal Energy Forum, Nomura research

In terms of the generating mix, in 2008, geothermal energy accounted for roughly 18%
of the Philippines aggregate electricity production. In terms of different grids, while
Luzons generating mix is dominated by fossil fuels (geothermal energy accounts for
only 8% of Luzons generating mix), geothermal energy dominates the generating mix
in Visayas in the central Philippines (72% of the mix).

Exhibit 227. The Philippines: generating mix by fuel type (2008)

Geothermal
18%
Natural
Gas
32%
Coal
26%
Wind and
solar
0%
Oil -based
8%
Hydro
16%

Ample scope for geothermal growth in the Philippines
The Philippines is located within the so-called Pacific Ring of Fire an area encircling
the Pacific Ocean and parts of the Indian Ocean where active earthquakes and
volcanoes are concentrated along tectonic plate boundaries. Most of the worlds
richest geothermal sources are located within the area. As a result, the Philippines is
endowed with significant geothermal potential, which the DOE has estimated at
4,500MW, of which only 1,958MW was being utilised as at end-2008, according to the
DOEs disclosure.
The DOE aims to step up geothermal energy utilisation significantly over the next five
years by some 1,000MW, which equates to a further 51% on the countrys existing
installed geothermal generation capacity and would, by our calculations, elevate the
Philippines to the worlds number one geothermal energy producer.
In this regard, according to a Reuters article dated 6 November, 2009, the Philippine
government aims to approve 19 new contracts to explore and develop the country's
geothermal energy resources over the coming five months, which could attract more
Geothermal energy accounts for
18% of the generating mix, and
dominates the generating mix in
Visayas
The DOE estimates that the
Philippines has geothermal
potential of around 4,500MW
Government aims to approve 19
new contracts to explore and
develop the countrys geothermal
energy resources in the coming
five months

than US$2.5bn in private investment from both domestic and foreign entities.
According to the report, the government has issued tenders for the development of 10
geothermal sites and negotiated nine more deals directly with various companies;
combined, the exploration areas could harness more than 620MW of geothermal
energy.

Exhibit 228. World pattern of plates, oceanic ridges, oceanic trenches, subduction zones, and geoth. fields

Note: Arrows show the direction of movement of the plates towards the subduction zones. (1) Geothermal fields producing electricity; (2) mid-oceanic ridges crossed by
transform faults (long transversal fractures) and (3) subduction zones, where the subducting plate bends downwards and melts in the asthenosphere
Source: Geothermal-energy.org

Philippines

Exhibit 229. The Philippines: geothermal production areas (2005)

Source: DOE

For the 10 geothermal sites earmarked to be allocated through competitive bidding,
the DOE set a deadline for the submission of proposals of 27 November, 2009, and is
currently evaluating the proposals based on scores weighted according to technical
(30%), financial (30%) and work programme (40%) merits. We note EDC has
submitted bids for four geothermal exploration zones, and based on our discussions
with management, we understand that EDC will also be negotiating directly with the
government for exploration contracts in the frontier zone.
Given EDCs status as a global leader in geothermal energy production, with expertise
throughout the geothermal value chain, we see appreciable scope for EDC to further
expand its geothermal energy capacity base over the medium term.

Exhibit 230. The Philippines: details of, and qualifying bids for, the 10 geothermal exploration areas

Daklan,
Benguet Natib, Bataan
Labo,
Camarines
Norte
Acupan,
Benguet
Montelago,
Oriental
Mindoro
Isarog,
Camarines
Sur
Sta. Lourdes
Tagburos,
Puerto
Pincesa City,
Palawan
Mainit,
Surigao del
Norte
Maibarara in
Laguna and
Batangas
Area
(hectares)
23,639 11,929 9,324 18,408 4,033 16,279 1,600 37,691 1,600
Pre-qualified
bidders
Clean Rock
Renewable
Energy
Resources
Corp
Clean Rock
Renewable
Energy
Resources
Corp
PNOC
Renewables
Corp
Primary
Energy
Constellation
Energy Corp
PNOC
Renewables
Primary
Energy
Energy
Development
Corp
Petro Energy
Resources
Corp
Pan Pacific
Power Corp
Pan Pacific
Power Corp
Aragorn Power
and Energy
Corp

Energy
Development
Corp
Energy
Development
Corp
Energy
Development
Corp

Envent
Holdings
Magma Energy
Corp
Envent
Holdings

Winning bid TBA TBA TBA TBA TBA TBA TBA TBA TBA
Source: Assorted press, Manila Standard Today, Nomura research
Geothermal production areas in
the Philippines
EDC has submitted bids for four
of 10 geothermal exploration
zones

Philippines hydro electric
Positive on hydroelectric potential
Rising hydrocarbon fuel prices, intensifying global environmental awareness, and the
Philippines RE Bill, in our view, further accentuate the marginal cash cost advantage
that hydropower has relative to competing fuel sources. In our view, this will accelerate
exploitation of the Philippines significant hydroelectric resources. We believe EDC and
Aboitiz in particular are well placed to benefit from increased hydroelectric utilisation
over the medium term, which should underpin earnings and valuations.
Significant untapped hydro capacity
According to the DOE, the Philippines has more than 13,000MW in untapped
hydropower resource potential, of which 85% is considered large and small hydros
(>10MW), 14% is classified as mini-hydro (101kw-10MW) and less than 1% is
classified as micro-hydro (1kW-100kW).
Given the low level of current hydroelectric resource utilisation (<3.3GW at end-2008)
and pro-renewable fiscal and non-fiscal government policies introduced pursuant to
the RE Act, we see significant scope for further organic growth in this area over the
medium term, which we believe could drive earnings and valuations for the listed
Filipino IPPs under our coverage.
Factoring in the acquisition of the Magat and Ambuklao-Binga hydroelectric power
plants, Aboitiz Power is the largest Filipino-owned private sector company in
hydroelectric power generation in terms of installed capacity (c.341MW, which equates
to roughly 18% of its attributable capacity, including Pagbilao and PB117/118), and
with extensive experience in all things hydro, we believe the company is in an
excellent position to capture future market share and benefit from what promises to be
significant growth in the Philippines hydroelectric power utilisation.
Despite being a predominantly geothermal power producer, following its entry into
hydroelectric power generation through the acquisition of a 60% interest in
Pantabangan-Masiway hydroelectric complex (112MW, roughly 6% of its attributable
capacity), EDC has also articulated ambitions to pursue hydroelectric growth
opportunities as the group looks to build out its exclusive RE-based power generation
portfolio.

Exhibit 231. Aboitiz Power: attributable capacity breakdown by fuel type
(9M09)
Oil/Diesel
18%
Geothermal
24%
Coal
40%
Hydro
18%
462 MW
341 MW
779 MW
358 MW

Note: Factors in Pagbilao and PB117/118

According to the DOE, the
Philippines has more than
13,000MW in untapped
hydroelectric power potential
Hydro accounts for 18% of
Aboitiz Powers installed power
generation capacity

Exhibit 232. The Philippines: Installed capacity by fuel type (2008)
Hydro
21%

Geothermal
12%
Natural
Gas
18%
Coal
28%
Non convl
0%
Diesel/Oil
21%

Source: Source: DOE, Nomura research

Exhibit 233. The Philippines: breakdown of installed capacity
(MW) 2003 2004 2005 2006 2007 2008
Coal 3,958 3,967 3,967 4,177 4,213 4,213
Diesel/Oil 3,604 3,669 3,663 3,602 3,616 3,353
Natural Gas 2,763 2,763 2,763 2,763 2,834 2,831
Geothermal 1,932 1,932 1,978 1,978 1,958 1,958
Hydro 2,867 3,217 3,222 3,257 3,289 3,291
Non conventional - - 26 26 26 34
Total 15,124 15,548 15,619 15,803 15,936 15,680
Impounding hydro allows generators to target peak times
Impounding hydroelectric power plants, such as Aboitizs Magat and Ambuklao
Binga facilities, which have the ability to store water for use in generating electricity,
allows generators the flexibility to target peak hours of the day and periods of
favourable spot market prices and defer generation in times when spot rates are
unfavourable. According to Aboitiz, Magat (attributable capacity: 180MW) can store
sufficient water to support one months worth of generation, while the companys other
merchant facility, Ambuklao Binga (attributable capacity: 88MW), has two weeks of
storage capacity.
No marginal cash cost, downside protection
In addition, hydroelectric power plants have no fuel costs and thus have very limited
marginal operating costs. Gencos hydroelectric power plants can therefore sell at
prices below the marginal fuel costs of fossil fuel-fired plants and still generate
cashflow. Where the ability to store water offers merchant hydroelectric power plants
upside through targeting peak hours and periods of favourable spot rates, gencos with
merchant hydroelectric capacity are also afforded downside protection in the form of
price floors defined by the marginal cost of fossil fuel-fired plants.
Tropical climate, diversified portfolio mitigates hydrology risk
In years of less favourable hydrological conditions, such as when there are droughts,
merchant hydro plants face volume constraints, while gencos with power purchase
agreements (PPAs) could potentially incur penalties should they be unable to satisfy
take-or-pay conditions. However, since the Philippines has a tropical climate, it has
regular seasonal rainfall patterns, which combined with a geographically diversified
hydroelectric power generation portfolio, in our view, goes a long way towards
mitigating risks associated with adverse hydrological conditions.
Impounding hydroelectric power
plants affords gencos the
opportunity to target peak times
and favourable spot rates
Merchant hydroelectric facilities
have downside protection
through low marginal costs and
price floors defined by the
marginal cost of fossil fuel-fired
plants
Hydrological risks are mitigated
by geographic diversification and
the Philippines tropical climate

Seasonality and location have a direct bearing on precipitation levels. In Luzon, where
the rainy and summer seasons are more pronounced, higher rainfall is normally
experienced over the months of June to September, and as a result, hydropower
plants located in Luzon operate at their maximum capacity over this period. In contrast,
in Mindanao, hydropower plants experience well-distributed rainfall over the duration of
the year, with a modestly higher level of precipitation over the months of December
until April. This seasonality in rainfall has a significant impact on the utilisation of run-
of-river hydroelectric power plants such as Aboitizs Hydro Electric Development
Corporation, COR (38 MW, wholly owned) and Luzon Hydro Corporation, LHC (70 MW,
50%-owned) since these plants do not have the means to impound water.
Relationship between rainfall and tariffs insulates margins
There has historically been an inverse relationship between rainfall and spot prices. In
times of high rainfall, prices of electricity drop as expensive fossil fuel supply is
displaced by cheaper hydroelectric capacity, while the converse is true during times of
drought. As a result, while gencos with merchant hydro capacity may see volumes
decline during periods of low rainfall, this is partially offset by a more favourable pricing
environment owing to supply served by more expensive fossil fuel-fired plants a
dynamic that introduces an attractive hedge to hydroelectric gencos EBITDA.
Philippines nuclear power
Nuclear power under consideration
Nuclear energy is somewhat of an exposed nerve in the Philippines after the countrys
first attempt at building a nuclear power plant remains as the biggest white elephant in
its history and is seen by many as symbol of corruption and cronyism in the Philippines.
During the first oil price shock in the early 1970s, the Philippine government under
President Ferdinand Marcos decided to construct a nuclear power plant in Bataan,
North of Manila on the Island of Luzon to support the countrys ambition to become an
industrial hub in the region at a cost of more than US$2.3bn. From the very beginning,
the nuclear plant undertaking was politicised. Marcos awarded the project to a losing
bidder and his contacts were awarded many of the subcontracts for the project.
Contrary to the positive findings of a government-commissioned safety and technical
study conducted in 1992, the design of the Yogoslav power plant was not applicable to
the humidity and geographical conditions in the Philippines, while the location for the
plant was chosen less than 10km from an active volcano, and was also within 25 miles
of three geological faults.
An independent inspection conducted by several technical experts discovered that the
reactor had 200 defects, and safety issues were also raised by the Philippine Atomic
Energy Commission about the damaged containment structure, unshielded electric
cables and faulty steam generator. In 1990, another independent study pointed out the
structural weaknesses of the plant, mentioning deficiencies in the component cooling
system, quality assurance programme and emergency power system.
When Marcos was ousted from power in 1986, the nuclear plant was not yet finished.
The succeeding government of Corazon Aquino mothballed the plant because of
strong local opposition, and to date, the plant has yet to produce a single Kwh of
electricity.
In late 2008, faced with a looming power shortage and high fuel prices, the debate to
revive the Bataan Nuclear Power Plant resurfaced, after Koreas Kepco reportedly
expressed interest in operating the plant although there is currently little clarity over
whether this is feasible or not.
On 10 May, 2010, The Philippines Star, quoting Energy Secretary Jose Ibazeta,
reported that Mindanao could be the best site for a nuclear power facility, since it is
close to Indonesia and Malaysia, which means the Philippines may be in a position to
An inverse relationship between
rainfall and spot market tariffs
insulates EBTIDA
Nuclear energy is a sensitive
issue in the Philippines after
Bataan turned out to be the
biggest white elephant in the
countrys history
However, faced with mounting
power shortages, there has been
talk of potentially revi ving the
project more than 30 years after
its initial inception

export power. At the same time, the new facility would serve to boost the local
economy, where power shortages have been a key constraint to growth.
The national government had earlier identified more than 10 potential sites for the
countrys first nuclear power plant. In a related development, Napocor president
Froilan Tampinco said a communication plan is already being drawn up in preparation
for comprehensive nuclear power development for the country. Tampinco said an
inter-agency group created to study the option of using nuclear as an alternative
source of power for the Philippines, is now looking into all aspects of nuclear energy
development. The Napocor chief earlier said it would be wise for the Philippines to
consider medium-sized nuclear power facilities with capacity of 400-600MW.

The national government has also
identified more than 10 alternative
sights for the Philippines first
nuclear power plant

Asia-ex Japan
I ndonesi a
A major geothermal growth node
An active volcanic belt in Indonesia, measuring 7,000km in length and 50-200km in
width, distributes geothermal energy resources along the volcanic lines of Sumatra,
Java, Bali, West Nusa Tenggara, Northern Sulawesi and Maluku most of which are
located at the base or old caldera area of volcanoes. The Indonesian government has
estimated that the country may have as much as 27,670MW (c.40% of estimated
global geothermal resources) in geothermal energy resources, of which less than 4%
is currently being utilised. Geothermal energy accounts for only c.1% of Indonesias
primary energy mix (excluding biomass), which is dominated by oil (45%), coal (32%)
and natural gas (19%). In 2008, hydropower accounted for 5% of the ex-biomass
primary energy mix.

Exhibit 234. Indonesia: geothermal resources and reserves

Source: Indonesian Institute for Energy Economics, Statistics Geothermal Business Indonesia 2008, Nomura research

Exhibit 235. Indonesia: geothermal resources and reserves (2008)

Source: Statistics Geothermal Business Indonesia 2008, Nomura research

Currently less than 4% of
Indonesias c.27,670MW of
geothermal capacity is being
utilised
13,334M
9,656MW
45MW
1,757MW
2,094MW
734MW
50MW
Reserves
13,103MW
Resources
14,567MW
Resour ces and r eser ves
Proven
2,288MW
Possible
1,050MW
Probable
11,229MW
Reser ves
Indonesia has probable
(11,229MW), possible (1,050MW)
and proven (2,288MW)
geothermal reserves of 13,103MW

Exhibit 236. Indonesia: geothermal resources and reserves
Resources Reserves
Location
Speculati ve Hypothetical Probable Possible Proven
Total
Sumatera 5,000 2,194 5,745 15 380 13,334
Jawa 1,960 1,771 3,225 885 1,815 9,656
Bali-Nusa Tenggara 410 359 973 - 15 1,757
Sulawesi 875 32 959 150 78 2,094
Maluku 370 37 327 - - 734
Kalimantan 45 - - - - 45
Papua 50 - - - - 50
Total 8,710 4,393 11,229 1,050 2,288 27,670

Source: Statistics Geothermal Business Indonesia 2008

Geothermal energy utilisation is poised to increase drastically, in our view. Higher and
volatile oil prices, surging power demand and creaking infrastructure in the power
sector have greatly enhanced the sense of urgency within Indonesia to exploit its
alternative fuel sources especially the countrys significant geothermal energy
potential. The countrys long-term energy blueprint, as articulated by Presidential
Decree No 5/2006, outlines the governments plans to increase the share of
geothermal energy in Indonesias overall primary energy mix to about 5% by 2025,
along with nearly doubling the countrys installed geothermal power generation
capacity to c.9500MW. This equates to roughly 30% of the additional 30,000MW of
power capacity the government has targeted for development over this period.
In our view, such targeted high growth represents huge potential for both geothermal
project developers and equipment manufacturers (such as Toshiba, Fuji, Mitsubishi,
Ansaldo Energy, among others). Indonesian energy firms like Medco Energi
Internasional and Star Energy are exploring possibilities for making new investments,
while international energy giant Chevron has voiced its intention to double its existing
geothermal operations in Indonesia (from roughly 630MW currently, according to
company disclosure). Similarly, the Philippines-based EDC has stepped up its
business development efforts in Indonesia and aims to leverage the technical
expertise gained in its local market to secure both geothermal resource extraction and
conversion contracts, most likely through JV agreements with local firms, we believe.
The company has set up a Jakarta office and is in the exploratory stage, according to
management.

Exhibit 237. Indonesia: existing and targeted primary fuel mix

Note: The 2008 primary fuel mix excludes biomass, which accounted for c.17.6% of the aggregate primary fuel mix
Source: Presidential Decree No.5/2006, Nomura research

Natural gas (LPG
and LNG)
19%
Coal
32%
Geothermal
1%
Hydro
5%
Crude oil and f uel
45%
2008 primary fuel mix
Biofuels
5%
Geothermal
5%
Liquif ied coal
2%
Other RE
5%
Other
17% Coal
33%
Crude oil and f uel
20%
Natural gas (LPG and LNG)
30%
2025 targeted primary fuel mix
By 2025, almost 30% of an
additional 30,000MW planned
capacity may rely on geothermal
energy
The governments energy plans
harbour significant growth
potential for geothermal project
developers and equipment
manufacturers, in our view

Exhibit 238. Indonesia: non-fossil fuel resources and utilisation (2007)
Types Resources Equi valent value Existing utilisation
Hydro 845.00 juta BOE 75.67GW 4.2GW
Geothermal 219.00 juta BOE 27.00GW 0.8GW
Mini/Micro Hydro 0.45GW 0.45GW 0.084GW
Biomass 49.81GW 49.81GW 0.3GW
Solar - 4.80 kWh/m2/day 0.008GW
Wind 9.29GW 9.29GW 0.0005GW
Uranium 24.112 ton* e.q. 3GW for 11 years - -
Note: * Resources only exist in Kalan region West Kalimantan
Source: Indonesian Institute for Energy Economics, Nomura research

Exhibit 239. Indonesia: installed generating capacity by fuel type
Year Hydro Steam Gas Combined gas-steam Geothermal Diesel Combined oil-gas Wind Total
2000 4,199 11,117 3,805 6,863 525 11,223 - - 37,733
2001 3,113 7,946 1,973 6,998 785 3,016 - - 23,831
2002 3,155 6,900 1,225 6,863 785 2,589 - - 21,517
2003 3,170 9,574 1,225 7,148 785 2,879 - - 24,781
2004 3,199 10,865 2,340 6,846 800 3,277 12 - 27,339
2005 3,221 10,865 2,724 6,716 800 3,326 12 - 27,663
2006 3,532 12,990 2,727 7,895 800 3,001 12 - 30,958
2007 3,529 13,244 2,727 7,845 1,043 3,016 12 0 31,416
2008 3,510 12,014 3,453 7,306 933 3,070 12 0 30,298

Exhibit 240. Indonesia: installed generating capacity
by fuel type (2008)
Steam
40%
Gas
11%
Combined
gas-steam
24%
Geothermal
3%
Diesel
10%
Combined
oil-gas
0%
Wind
0%
Hydro
12%
Exhibit 241. Indonesia: electricity generated by fuel
type (2007)
Steam gas
23%
Geothermal
2%
Gas
turbines
3%
Water
8%
Steam
34%
Diesel
7%
Purchased
23%
Source: CEIC, Nomura research

Exhibit 242. Indonesia: total electrification percentage
52.0%
52.1%
52.5%
53.0%
53.4%
64.3%
62.1%
63.0%
45%
50%
55%
60%
65%
70%
2000 2001 2002 2003 2004 2005 2006 2007

Source: Key Indicators of Indonesia Energy and Mineral Resources (2008), Nomura research
Geothermal plants to account for 48% of the second 10,000MW plan
Indonesias power supply market is currently characterised by a chronic supply
shortage, underpinning frequent and extended blackouts and, in the eyes of
government, acting as a key constraint to what appears to be significant economic
growth potential. In response, the government launched the first 10,000MW crash
power project in 2006 in a bid to anticipate increasing electricity demand, which has
been growing in excess of 7% annually.
In the planning stage, the second 10,000MW crash programme, which unlike the
entirely coal-fired first accelerated programme, is open to private sector participation
and diversified across geothermal (48%), coal (26%) natural gas (14%) and hydro
(12%). It is scheduled to be implemented between 2010 and 2014. In a presentation in
August 2009 (according to Jakarta Post), PT Perusahaan Listrik Negara (PLN) said
the projects under the programme were expected to generate a total electricity
capacity of 10,580MW (of which 5,685MW would be located in Java with the remaining
4,895MW outside Java) at a total projected cost of roughly US$10bn.
According to a recent Jakarta Post article (27 January, 2010), however, Indonesia has
revised the planned capacity for geothermal-fired power plants under the second
10,000MW crash programme down by about 700MW, as some of the initially proposed
projects cannot be finished within the programmes time frame. The government
initially planned to produce as much as 4,733MW under the second 10,000MW power
programme from geothermal power. In its latest report, state power utility PLN said the
electricity supply to be generated from geothermal energy would be reduced to 3,975-
4,077MW.

Exhibit 243. Indonesia: fuel mix of second 10,000MW crash programme
Geothermal
48%
Gas
14%
Coal
26%
Hydro
12%

Source: Jakarta Post, PLN, Nomura research

and geothermal plants are to
account for 48% of new capacity
The second 10,000MW
accelerated plan is scheduled to
be implemented between 2010
and 2014
Indonesias government has set a
target of achieving 95%
electrification by 2020
geothermal energy will play a
crucial role, in our view

Europe
Eur ope r enewabl e ener gy
Europe is where renewable energy started, and the region still accounts for the largest
portion of global installed capacity.

Exhibit 244. Global renewable energy capacity
0
50
100
150
200
250
300
W
o
r
l
d
D
e
v
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p
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a
p
a
n
(GW) Ocean (Tidal) power
CSP
Geothermal power
Solar PV, Grid-connected
Biomass power
Small hydropower
Wind power
0
50
100
150
200
250
300
W
o
r
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a
p
a
n
(GW) Ocean (Tidal) power
CSP
Geothermal power
Solar PV, Grid-connected
Biomass power
Small hydropower
Wind power
Source: REN 21
Exhibit 245. EU 27 share of renewables capacity
0
10
20
30
40
50
60
70
80
90
100
W
i
n
d

P
o
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EU 27 RoW (%)
0
10
20
30
40
50
60
70
80
90
100
W
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d

P
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(
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p
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i
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y
EU 27 RoW (%)
Source: REN 21

We see the key investment themes as:
End market demand growth within Europe for the global renewable energy sector;
The changing nature of Europe as a manufacturing and technology location in the
broader global sector context; and
Renewable energy as a challenge and opportunity for other sectors beyond
renewable energy.
Investment thesis and stock picks
Wacker Chemie (WCH GR, BUY, PT: 145) and Vestas (VWS DC, BUY, PT:
DKK390) are our top picks.
We expect strong solar end markets, but prefer exposure to the upstream and
downstream parts of the value chain, while avoiding the cell and module ends. We
see equipment manufacturers as long-term beneficiaries.
Wind turbine manufacturers will likely see an order recovery in 2010F and thus
return onto a trajectory of outperformance.
We believe the wind sector is characterised by a challenging macro environment,
mainly due to US exposure. However, we look for the European names to outperform
once demand recovers. In contrast, we prefer a more selective stance on the
European names with regards to the greatly improved macro backdrop in solar.
Wind
In the wind sector, we see stable rates of installation in Europe. Over time, however,
we expect Asia and the US to overtake Europe. While there is competition at the
manufacturing end, we believe that European manufacturers have sustainable
competitive advantages from technology and quality, as well as relationships with the
largest global developers. It is also worth noting that wind turbine manufacturing tends
to require factories close to the end markets due to high transport costs.

Largest renewables region

Top picks: Wacker and Vestas

The turbine manufacturers are our preferred picks as we see them benefiting from: 1)
a market leadership position; 2) high-end technology that enables low loce (cost of
energy); and 3) broad geographic exposure to global growth with an increasing
presence in Asia. Vestas (VWS DC, BUY, PT: DKK390) is our top pick.
Developers valuations appear attractive as current share prices on average reflect
only assets in the ground and under construction. But high exposure to the weak PPA
situation on the US may lead to risks to execution on capacity growth targets. This
could present share overhang until later in 2010F. IBR (IBR SM, REDUCE, PT: 3.60)
and EDF EN (EEN FP, NEUTRAL, PT: 39.00) are our key wind names.
Solar
The solar sector is characterised by strong end market growth but with intense
competition, ASP pressure, manufacturing dislocation and a fast innovation cycle.
In our view, Tier-1 European poly manufacturers stand to benefit from global solar
end market volumes translating into poly volume growth. They also boast sustainable
competitive advantages in a business with high barriers to entry. This, we believe,
comes from their solid track records, higher quality grade, contracts with prepayments
and lower manufacturing costs attributable to the advantage of having experience. Our
preferred pick is Wacker Chemie (WCH GR BUY, PT: 145.00). We also look for a re-
rating of REC (REC NO, BUY, PT: NOK30) on the back of the ongoing turnaround
across its poly, wafer and module operations.
Within the wafer segment, we see Asian manufacturers benefiting from material cost
advantages. Renesola (SOLA LN, BUY, PT: GBp250) should thus benefit from the
cost advantages of its manufacturing in China. We also think that PV Crystalox
(PVCS LN, BUY, PT: GBp78) is well positioned, with the added benefit of selling into
the premium Japanese market.
At the cell and module level, the European names are challenged, in our view.
Europe is likely to remain a premium market compared to other regions, namely Asia
and the US. This should sustain higher-than-average price premiums for European
high-end manufacturers. But the premium end appears to be getting more crowded as
the industry moves towards a new quest for brand equity in recognition of the premium
features preferred by European consumers. In particular, Chinese Tier-1
manufacturers are successfully increasing brand recognition and acceptance. As a
result, we see the price premium for European manufacturers eroding. We expect
ongoing margin pressure despite companies making strides in cost reduction in order
to improve competitiveness vis a vis lower-cost Asian manufacturers. We see
Solarworld (SWV GR, REDUCE, PT: 9.00) as a likely survivor at the high end, but
expect pressure on profitability. Q-Cells (QCE GR, REDUCE, PT: 6.00) is taking
steps to improve profitability but still faces major strategic challenges from a business
model that is highly exposed to the commoditised cell segment.
We see European equipment manufacturers as potential winners from the reshaping
of the sector. With a traditional engineering, technology and quality focus, we view the
segment as an enabler for the manufacturing industry in achieving technology
advances and cost reductions. Demand growth driving expansion and the need for
innovation driving upgrades and replacements should translate into strong order flow.
Centrotherm (CTN GR, BUY, PT: 40.00) appears well positioned, with a strong high-
end product portfolio. We also see SMA (S92 GR, BUY, PT: 125.00) as a direct
beneficiary of end market growth, given its manufacturer agnostic inverter business
which is leveraged to end market demand.

Drivers of renewables build out
We believe the EU 20-20-20 targets and subsidy schemes are the most important
drivers for renewables growth.
An increasingly carbon-constrained world favours renewables on a large scale,
while small-scale development comes on the back of strong financial returns.
EU renewables policy and regulation
EU and national renewables targets and incentives will remain the most important
drivers of renewables capacity build out, in our view. The EU has in place mandatory
targets for renewables both on an EU-wide level and on a national level. At the EU
level, the target is for 20% of energy production from renewables by 2020 (the 20-20-
20 target). This is translated into specific country targets.

Exhibit 246. EU renewables targets
(0.3) (0.2) (0.1) 0.0 0.1 0.2 0.3 0.4 0.5 0.6
Belgium
Bulgaria
Czech Republic
Denmark
Germany
Estonia
Ireland
Greece
Spain
France
Italy
Cyprus
Latvia
Lithuania
Luxembourg
Hungary
Malta
Netherlands
Austria
Poland
Portugal
Romania
Slovenia
Slovakia
Finland
Sweden
United Kingdom
Reduction targets in sectors not covered by the EU ETS compared to 2005
Share of renewables in final energy demand 2020
Share of energy from renewable sources in final consumption of energy. 2005

Source: EU Commission

Exhibit 247. Investment cases of key European names
Stock Ticker Rating Price target Investment points
Wacker Chemie WCHG DE / WCH GR Buy 145 Market leading Tier-1 poly manufacturer with sustained price, quality, cost
and execution advantage
REC REC NO / REC OL Buy NOK 30 Tier-1 poly manufacturer. The current share price weakness reflects
negative sentiment on wafer prices and execution of the company's
capacity build. We see this as a buying opportunity as long-term growth
prospects should return to focus later in the year
PV Crystalox PVCS LN / PVCS L Buy GBp 78 As a low-cost, high-quality wafer manufacturer with outsourced production,
PV Crystalox should hold near-term profitability as we expect it to pass
through pricing pressure. This positions the company to benefit from long-
term growth with high profitability
Renesola SOLA LN / SOLA L Buy GBp 250 We think that Renesola has a superior business model, with low-cost
China-based wafer manufacturing, coupled with in-house poly production
and increasing vertical integration through module manufacturing. With this
comes an intriguing strategy that pursues manufacturing white labelling for
European manufacturers which could be anticipating where the sector might
head over the long term. We recognize high execution risk as a new
entrant, but the growth prospects imply strong upside.
Q-Cells QCE GR / QCEG DE Reduce 6 We are concerned that the company will be left out of the recovery as the
impact of its restructuring will come too late and many questions relating to
the business model remain open
Solarworld SWV GR / SWVG.DE Reduce 9 We think that the company is one of the few likely survivors, but we are
concerned over long-term profitability. We are not tempted by the current
share price level, but recognise that the stock may trade as a benchmark for
the sector
Conergy CGY GR / CGYG DE Reduce 0.5 We see little barriers to entry in the company's installation and wholesale
business, and the manufacturing business appears to be lacking in terms of
competitiveness. With substantial balance sheet issues and being in breach
of its banking covenants, the company's survival depends on its ability to
negotiate further covenants and a refinancing. Its major shareholder who is
also an underwriter of the main financing facility is looking to sell. Takeover
speculation could continue.
Solon SOO1 GR / SOOG DE Reduce 4.50 Despite growth prospects, the company's business model of module
manufacturing and solar park development is undifferentiated and
constrained by a tight balance sheet. This might limit its ability to build up
strength in some of the downstream areas where it is attractively positioned.
We forecast it will take well into this year to return to profitability despite the
attractive sector backdrop.
Solar Millennium S2M GR / S2MG DE Buy 45 On our bullish expectations for solar thermal, we like Solar Millennium as a
pure play
Abengoa ABG SM / ABG MC Neutral 25 We see the growth prospects from new solar thermal capacity and biofuel
plants as reflected in the current share price
Centrotherm CTN GR / CTNG.DE Buy 40 Centrotherm stands out in the equipment sector as one of the few
companies with growth and with the highest quality orderbook. We expect
the companys market leading products to support further order momentum
this year
Roth & Rau R8R GR / R8RG.DE Neutral 27 Roth and Rau could be a late recovery name with its focus on single
equipment by large manufacturers which we think will pick up this year
Manz Automation M5Z GR / M5GG.DE Reduce 38 We think the share price is discounting too much optimism on a 2010F
recovery and future growth potential from lithium ion batteries. Even with a
sizeable recovery built into our numbers and some growth contribution from
lithium ion batteries, our price target implies around 50% downside. Manz is
the most expensive stock in our equipment universe
Meyer Burger MBTN SW / MBTN.S Neutral SWF26 The companys attractions as the market leader in wafer sawing equipment
are in our view reflected in the current share price. For a further leg up,
increased firm order momentum is required, in our view. We see the
companys drive towards vertical integration as reflective of a sector trend.
SMA Solar Technology S92 GR / S92G.DE Buy 125 Recent weakness in the share price on the back of concerns over the
component shortage in the industry provides a buying opportunity in a
downstream name that is directly geared to end market volume growth
Vestas VWS DC / VWSC. CO Buy DKK390 A market-leading global turbine manufacturer that should outperform once
order growth returns
Gamesa GAM SM /GAM.MC Buy 13 Increasing exposure to new markets should broaden the company's
exposure to turbine order flow as global growth picks up. Underpinning from
multi-year contracts with large developers
EDF Energies Nouvelles EEN FP / EEN.PA Neutral 39 While there is risk of wind development being affected by the weak PPA
market in the US, the company's growing solar development business will
likely underpin capacity growth
Iberdrola Renovables IBR SM/ IBR. MC Reduce 3.60 A quality name with broad spread in the wind development segment, but we
see short-term risk from the weak US PPA market
Source: Regulators publications, BTM Consult, Photon and Nomura

In our view a quest for growth and higher-than-average returns is driving increasing
utility adoption of renewables build, firstly and already well underway in wind, and
increasingly in solar. We estimate that wind projects deliver IRRs of 7-14% in Europe.

Exhibit 248. Average IRRs for European renewables under current support
schemes
Average IRR (%)
Wind Germany 6-8
France 6.5-9
Spain 7-8
Italy 12
UK onshore 9
US ptc c7
US cash grant 7-8

Solar Germany 8-10
France 12-16
Spain 12-15
Italy 18-20
Source: Nomura

The solar market is, in our view, almost entirely driven by regulated financial returns.
We see grid parity as a much lower-ranking consideration. Germany is the prime
example; we estimate solar rooftop IRRs of around 9% after assuming that the 16%
tariff reduction will become effective in July (see below). We believe that even on
incorporating proposed and upcoming tariff reductions, returns will be attractive
enough to support a strong solar end market in Europe.
CO
2
getting tighter
Increasing costs of CO
2
and more stringent EU-wide emission targets will, in our view,
alter the European energy mix towards an increasing contribution of renewables. A
step up of the 20% 2020 GHG emission target towards 30% is proposed, but this will
depend on progress of international negotiations over a post-Kyoto regime.
The CO
2
constraint in the EU will take a step forward with the end of free allowances
post 2012. We expect this to lead to a consistent drive by generators to build or
acquire low carbon generation capacity. While nuclear energy is clearly a very
important part of this for the long term, renewables are arguably the most important
change in the generation mix over the short term. In our view, wind is most likely to
dominate due to its mature technology, its loce (cost of energy) being very close to
competitiveness with conventional sources and scalability.

Exhibit 249. EU CO
2
emissions to 2020 vs target
(35)
(30)
(25)
(20)
(15)
(10)
(5)
0
1
9
9
0
1
9
9
3
1
9
9
6
1
9
9
9
2
0
0
2
2
0
0
5
2
0
0
8
2
0
1
1
2
0
1
4
2
0
1
7
2
0
2
0
Annual total emissions
Projections with additional measures
Projections with existing measures
EU unilateral target
EU target under international agreement
(%)
(35)
(30)
(25)
(20)
(15)
(10)
(5)
0
1
9
9
0
1
9
9
3
1
9
9
6
1
9
9
9
2
0
0
2
2
0
0
5
2
0
0
8
2
0
1
1
2
0
1
4
2
0
1
7
2
0
2
0
Annual total emissions
Projections with additional measures
Projections with existing measures
EU unilateral target
EU target under international agreement
(%)
Source: European Environmental Agency
Exhibit 250. EU CO
2
emissions vs national caps
0
500
1,000
1,500
2,000
2,500
2005 2006 2007 2008 2009
(Mln tCO2)
EU27
Western Europe
CEE
Benelux, Scandinavia
and Other
EU27 cap
Western Europe cap
CEE cap
Benelux, Scandinavia &
Others cap

Source: Bloomberg

Our views on technologies
Wind and solar will remain dominant technologies over the near and medium term.
We see potential for marine technology development over the long term and small-
scale geothermal deployment.
Wind and solar are the most important technologies as far as short and medium term
deployment are concerned; marine technology might become very important for
Europe but on a much longer horizon, more towards the end of this decade. We see
deployment of biomass, but on a smaller scale. Geothermal will be a growing
technology, but given geographic characteristics more in the small scale, low
temperature segment rather than large scale, high temperature.
Wind
Wind technology saw the most important scale deployment across Europe with
76.5GW installed at the end of 2009. While initially, single and smaller scale projects
made up the market, it is now large developers and utilities that are driving capacity
growth. Going forward, we estimate the European market at an annual installation rate
of c16GW pa. Currently, Europe is providing stable growth for both developers and
turbine manufacturers as they wait for a pick-up from the US and given the lack of
market accessibility in China. Given the latest points of evidence, this might continue
to be the case for most of 2010.
The bulk of capacity is onshore wind, but offshore is picking up pace very quickly as
some onshore markets are getting saturated. The Spanish and German onshore
markets are beginning to near saturation, while we see further growth in France, Italy
and Greece. In the UK, there is potential for growth onshore, but a difficult planning
and permitting process is capping actual development and installations. At the same
time, a dynamic offshore sector is developing (see below), and we see large
developers concentrating on offshore as a result. Turkey and Central Europe have
very good wind characteristics and we expect them to be new growth drivers for
European wind.
We see the offshore market as a major growth area within wind. This is the case
globally, but Europe is a centre of development and will, in our view, see the most
important growth early on. The UK and Germany will be the centres of development as
c 32GW from the Crown Estate concessions that have been awarded in Round 3 are
developed. Although we only expect c 50% of the awarded concessions to eventually
be fully developed, this is still substantial growth from the current base of just below
1GW of offshore capacity. We also expect strong momentum in Germany as
developers aim to commission projects to capture the speedy bonus of 20/MWh for
projects commissioned before 2015 and we see total capacity of around 3GW by 2014.
Beyond this, Belgium, the Netherlands, France and Scandinavia will also be areas of
growth.
Solar
Europe is the single most important region as far as global solar end market demand is
concerned. Germany accounts for over 50% of global demand. We expect German
demand to moderate from 2011 to gradually return towards a run rate of 3-3.5GW of
annual installations from the likely over 5GW in 2010. At the same time, we expect
new markets, namely France and Italy, to pick up the slack. The impact of the
introduction of the new UK feed-in tariff remains to be seen. At GBp41/kWh plus
GBp3/kWh as an export tariff for electricity feed into the grid rather than own
consumption by the producer, it is an attractive rate even given the low sun intensity.
However, the market is very immature with very low levels of awareness, limited panel
infrastructure and supply chain and importantly, hardly any specialised financing. We
are hearing anecdotal evidence of growth in the Czech Republic as the feed-in tariff
Wind and solar remain dominant;
strong growth in offshore wind
and new solar markets

there is very attractive at 480/MWh, but believe that financing is more of a bottleneck
here than in other regions within Europe.
Within solar, PV is the dominant technology. Solar thermal is growing fast, but given
the space and sun characteristics required, we expect it to remain confined to the
Mediterranean region.
Other technologies
Marine and tidal technology are in the pilot stages, principally in the UK, but also off
the Iberian coast. Growth potential for marine technology in Europe, especially in the
UK is vast. However, we do not expect major commercial deployment this decade,
given that capital costs still exceed the 6,000/MWh level and operating costs are also
highly uncertain.
We expect geothermal to be a growing technology, but on a small scale and low
temperature level. Within this segment, we expect increasing uptake for heatpumps
and application within new build housing and potentially commercial developments as
well as district heating. Only Italy lends itself to large scale, high temperature
geothermal development on a utility scale and we expect Enel, the dominant player, to
continue to develop its resource.
We see deployment of biomass but on a smaller scale.
Developments and policies, by country
Germany
Germany is the worlds fourth-largest wind market and largest solar market.
Offshore drives wind development in Germany as onshore becomes saturated.
We expect strong 2H solar demand and c. 5GW of installations in 2010.
Solar tariffs will be reduced by 16% in July 2010 despite the Upper House rejection
and by 11-12% in January 2011.

Exhibit 251. Germany wind development forecast
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(40)
(20)
0
20
40
60
80
100
120
(%) Germany annual wind installations
Growth
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(40)
(20)
0
20
40
60
80
100
120
(%) Germany annual wind installations
Growth

Source: BTM Consult, GWEC, EER and Nomura research
Exhibit 252. Germany solar development forecast
0
1,000
2,000
3,000
4,000
5,000
6,000
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
2
0
0
9
2
0
1
1
F
2
0
1
3
F
2
0
1
5
F
(MW)
(50)
0
50
100
150
200
250
(%) Germany annual solar installations
Growth
0
1,000
2,000
3,000
4,000
5,000
6,000
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
2
0
0
9
2
0
1
1
F
2
0
1
3
F
2
0
1
5
F
(MW)
(50)
0
50
100
150
200
250
(%) Germany annual solar installations
Growth
Source: EPIA, Photon and Nomura research

Wind
While Germany is one of the largest markets, it is becoming saturated onshore. We
continue to see onshore development, however, as medium-sized developers and
municipalities continue to build in order to capture returns and diversify their electricity
mix. Germany could become one of the major offshore centres, but development has
so far been slow because of feed-in tariffs not providing sufficient incentive and large
turbines being of limited availability. We think turbine availability will improve, and the

speedy bonus for offshore commissioning before 2015 will bring the tariff more in line
with other countries, at 50/MWh.
Solar
Following a record year with 3.8GW of new installations in 2009, 2010 should be
another strong year of demand, in our view, as price elasticity has firmly kicked in. We
now estimate IRRs around the 10% level. Given that financing is available at 90% or
more from 2.5-5%, this keeps returns attractive even after the upcoming tariff reduction
in order to support a strong market. Installations were above 2GW in 1H ahead of the
July one-off tariff reduction, and we expect another run up ahead of the January 2011
reduction to lead to a strong 4Q. Our recent feedback from manufacturers and
installers has suggested demand is holding up very strongly, inventories in the channel
are very low and manufacturers have reported to be sold out for the year. We also see
firm pricing, albeit with an erosion of premium pricing at the high end.
The recent news that the German Upper House has not approved the proposed tariff
reduction but invoked the Conciliation Committee in order to agree on a lower level of
reduction is unlikely to change industry behaviour materially, as most industry
participants expect the final outcome to be 16% rather than a lower percentage
reduction. However, a 12% or more tariff reduction for January 2011, in our view, is
highly likely, given that this will be extrapolated from June-September demand. For
each 1,000MW above the governments targeted 350MMW demand that is
extrapolated from those months for the whole of 2010, feed-in tariffs will be reduced by
an additional 1%, we estimate. Given that the market will likely be around 5GW, an
expectation of higher feed-in tariff reductions seems reasonable to us. We believe this
will again drive demand in a circular manner. Beyond that, we expect discussions over
measures towards driving the market back towards the unofficially targeted growth rate
around 3-3.5GW.
Key names
Enercon is the most important turbine supplier, followed by Vestas. Siemens might
gain market share. RePower has a strong presence in offshore. Development is
dominated by the major utilities, in particular RWE (RWE GR, NEUTRAL, PT: 71)
and E.ON (EOAN GR, BUY, PT: 35), which aim to increase their renewables
exposure as part of decarbonising their generation mix. We also expect them to take
on a major role in offshore.
Wacker (WCH GR, BUY, PT: 145) is the market leading poly manufacturer with not
only German, but also global market leadership. Solarworld (SWV GR, REDUCE, PT:
9) is the dominant high-end integrated solar name with very strong channel
penetration. While predominantly focused on cells, Q-Cells (QCE GR, REDUCE, PT:
6) also has exposure to solar park development in Germany through its project
business. Yingli (YGE US, BUY, PT: US$23) has been growing its market share in
modules. SMA (S92 GR, BUY, PT: 125) is the market leading inverter manufacturer.
Conergy (CGY GR, REDUCE, PT: 0.5) is a name with a strong downstream
presence through its system integration and project development business.
Centrotherm (CTN GR, BUY, PT: 40) and Roth & Rau (R8R GR, NEUTRAL, PT:
27) are leaders in the equipment market.

France
Strong potential for wind capacity growth, albeit with some risk from local
resistance.
Very strong initial evidence of growth in the solar market, with more to come in
2011.
Stable and transparent wind feed-in tariff framework in line with European averages.
Solar tariffs are amongst the highest in Europe, even after the upcoming reduction
in 2012.

Exhibit 253. France wind development forecast
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(100)
0
100
200
300
400
500
600
700
800
900
(%)
France annual wind installations
Growth
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(100)
0
100
200
300
400
500
600
700
800
900
(%)
France annual wind installations
Growth
Exhibit 254. France solar development forecast
0
500
1,000
1,500
2,000
2,500
3,000
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
2
0
0
9
2
0
1
1
F
2
0
1
3
F
2
0
1
5
F
(MW)
0
50
100
150
200
250
300
350
(%)
France annual solar installations
Growth
0
500
1,000
1,500
2,000
2,500
3,000
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
2
0
0
9
2
0
1
1
F
2
0
1
3
F
2
0
1
5
F
(MW)
0
50
100
150
200
250
300
350
(%)
France annual solar installations
Growth

Wind
France has the clearest growth case, with a stable and transparent feed-in tariff of
86/MWh (onshore) and a low degree of wind penetration within the energy mix. We
expect the French market to reach the size of Germanys on an annual basis from this
year, which would make it the strongest onshore growth market within the large
European economies. Current capacity is heavily concentrated in the north, but the
level of wind resource in the south is also favourable to further development. There is
some risk from increasing local resistance to projects, which seems to be affecting
planning and permitting, and could lead to higher execution risk for projects and
growth potentially coming in below expectations. Thus, this could put at risk the
governments 25GW target by 2020, according to our forecast, by a small amount.
Solar
Of the new growth markets, anecdotal evidence points to strong momentum of
installations in France, in particular in the BIPV segment, where France offers one of
the highest feed-in tariffs globally, with up to 0.55/kWh. Feed-in tariffs for rooftop
installations will be reduced from 2012 from 0.55/kWh to 0.42/kWh. Even with the
announced reduction, we think that the market should be very strong. The new level is
still above the current level in Germany of 0.39/kWh, and some of the southern
regions in France have considerably higher irradiation levels, which makes for very
attractive returns. France should be the strongest incremental growth market in
percentage terms this year, we expect. Anecdotal evidence seems to support this; as
one indication, EDF has received 3,000 applications daily in November 2009. This is
from a low sub 100MW level though. But we think that France can reach proportions of
the German market size given the similar market sizes but better sun irradiation in
France, particularly in the south. We forecast France to reach the 1GW by 2012.

Key names
EDF EN (EEN FP, NEUTRAL, PT: 39.00) is the most important wind and solar
developer. GDF Suez (GSZ FP, BUY, PT: 35.00) and Iberdrola Renovables (IBR
SM, REDUCE, PT: 3.60) are also stepping up development. Enercon (not rated)
has the largest turbine market share, due to its relationship with EDF EN.
Spain
Wind capacity growth target of 5-5.5GW by 2012 vs 4GW already far advanced in
the pipeline.
Solar capacity growth capped at 500MW pa (PV).
Overhang from uncertainty over new tariff regime for renewables; potential move
from premium system for wind to feed-in tariffs, sizeable PV tariff reductions and
retroactive reductions for renewables under discussion.
Policy frozen following government decision for energy review.
The Spanish government has surprisingly decided to review the entire energy sector.
With this, it has put all decisions on the renewables regime on hold. We expect that it
will take until about January 2011 for decisions and adjustments to the framework.

Exhibit 255. Spain wind development forecast
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(100)
(50)
0
50
100
150
200
(%)
Spain annual wind installations
Growth
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(100)
(50)
0
50
100
150
200
(%)
Spain annual wind installations
Growth
Source: BTM Consult, GWEC, EER, and Nomura research
Exhibit 256. Spain solar development forecast
0
500
1,000
1,500
2,000
2,500
3,000
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
2
0
0
9
2
0
1
1
F
2
0
1
3
F
2
0
1
5
F
(MW)
(200)
(100)
0
100
200
300
400
500
600
(%) Spain annual solar installations
Growth
0
500
1,000
1,500
2,000
2,500
3,000
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
2
0
0
9
2
0
1
1
F
2
0
1
3
F
2
0
1
5
F
(MW)
(200)
(100)
0
100
200
300
400
500
600
(%) Spain annual solar installations
Growth

Wind
Spain is still the largest market as far as current annual installations are concerned,
but uncertainty over regulation remains an overhang. Market growth in Spain appears
to have stalled recently because of uncertainty over the amount of capacity currently at
project stage that is eligible for the current feed-in tariff regime in 2010. The pre-
register for all projects in Spain that was created for capacity to be commissioned in
2010 in order to plan the last 15% of capacity build towards the countrys 20GW target
was closed at the end of June 2009 with over 3,000MW of projects registered. The
total number of projects registered exceeds the build requirement for the 20MW target;
as a result, there is uncertainty over approvals for the projects on the register.
Meanwhile, the government has yet to draw up a follow-on regime for wind post 2010.
We think it is likely that the current system of a premium to the wholesale electricity
price will be maintained, but that the band for the cap and floor will be narrowed. This
could lead to some further reduction of project IRRs, which currently stand at about
7.5%. As is typical for periods of revision of regulatory schemes, we think activity will
be very low until the details of the new regime are fully ironed out.

Solar
We forecast the PV market at the annual cap level of 500MW. A removal of the cap
has been suggested in various discussions but we think this is still highly uncertain. In
addition, the potential and in our view very high risk of retroactive feed-in tariff
reductions is an overhang for the PV sector. Feed-in tariffs are currently under
discussion and could be reduced by 30% according to our take. This is within an
ongoing broader revision of renewables tariffs and targets.
Solar thermal is a very important other segment of growth in Spain; in fact, Spain is
one of the markets with the strongest near-term growth globally. Regulation has
provided clarity on the capacity cap through the pre-register and has established a
270/MWh feed-in tariff; we think that this will lead to growth in the Spanish market this
year. However, solar thermal is not spared from regulatory overhang. We think that
there is risk of the government scaling back the pre-register and, thus, not all projects
post 2010 might end up getting under way. Furthermore, there is risk of retroactive
tariff adjustment.
Key names
Iberdrola Renovables (IBR SM, REDUCE, PT: 3.60) is the largest developer. EDP
Renovaveis (EDPR PL, NEUTRAL, PT: 7.85) and Acciona (ANA SM, BUY, PT:
145) are also sizeable developers. Abengoa (ABG SM, NEUTRAL, PT: 25) has
over 500MW of solar thermal capacity in the relevant pre-register and is the largest
solar thermal developer and operator. Gamesa (GAM SM, BUY, PT: 13) is the
largest turbine supplier, followed by Vestas (VWS DC, BUY, PT: DKK390).
Italy
Wind offers the highest remuneration globally; likely revision in 2011.
Attractive solar characteristics; remuneration one of the highest in Europe

Exhibit 257. Italy wind development forecast
0
200
400
600
800
1,000
1,200
1,400
1,600
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(100)
(50)
0
50
100
150
200
250
(%)
Italy wind annual installations
Growth
0
200
400
600
800
1,000
1,200
1,400
1,600
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(100)
(50)
0
50
100
150
200
250
(%)
Italy wind annual installations
Growth
Exhibit 258. Italy solar development forecast
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
2
0
0
9
2
0
1
1
F
2
0
1
3
F
2
0
1
5
F
(MW)
0
100
200
300
400
500
600
(%)
Italy annual solar installations
Growth
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
2
0
0
9
2
0
1
1
F
2
0
1
3
F
2
0
1
5
F
(MW)
0
100
200
300
400
500
600
(%)
Italy annual solar installations
Growth

Wind
Italy is a very attractive market given that it offers the highest remuneration globally for
wind projects with a current reference price for total compensation of 180/MWh,
reasonable wind potential and the low penetration of wind capacity within the energy
mix. However, we believe the wind remuneration scheme could be revised in 2011, by
which time we expect capacity to be close to target levels.

Solar
Italy is another potential high growth market that we expect to reach the 1GW mark by
2012. But growth has been somewhat slower than expected. Ground mounted
systems are the predominant segment at this stage, and tight financing conditions as
well as slow permitting have been the main reasons for slower growth. A highly
complex remuneration system is in place that, while providing one of the highest levels
of remuneration, also has many different tariffs.
Systems totalling 165MW were registered under the first Conto Energia program, and
so far, 1GW has been registered with the current program, Nuovo Conto Energia,
taking the total to 1.17GW. It is likely that Nuovo Conto Energias flexible cap of
1.2GW will be surpassed once all of the currently installed systems are registered.
Official government targets are set within the framework of legislation currently in force
(Nuovo Conto Energia Ministerial Decree dated 19/02/2007): 3,000MW by 2016.
However, during the discussions for the 20-20-20 EU Directive, the government
presented a position paper of its own in which the PV market was addressed with
regard to a potential of 8,500MW: 7,500MW roof-mounted and 1,000MW ground-
mounted. This could thus imply annual growth above 1GW from 2010, in line with our
forecast for somewhat above 1GW in 2010.
The current feed-in tariff scheme will end on 31 December, 2010, and a new regime
will be in place from 2011. The latest draft for a follow-up regime, which was released
in early February, contains 42 different tariffs, depending on system type and power
classification. It also includes three tariff-reduction stages staggered over the course of
2011, after which point cuts of 6% will take effect in 2012 and 2013. Moreover, the
draft law contains regulations that foresee solar electricity production tariffs combined
with other local subsidy programs to provide a lump sum that would make investments
in PV systems more attractive.
Furthermore, there are plans for a special tariff for CSP systems of 32 euro cents per
kWh for installations with up to 200kW and 28 euro cents for all other systems, which
is about the same as the subsidies paid for equivalently sized ground-mounted
systems. The annual degression rate for CSP is proposed at 2% in 2012 and 2013.
Key names
Enel Green Power (ENEL IM, REDUCE, PT: 4.60) and EDF EN (EEN FP, NEUTRAL,
PT: 39) through its Greentech (GES DC, not rated) option are leading wind
developers, along with Fri-El. Vestas is market leader in turbine supply, followed by
Nordex. Q-Cells (QCE GR, REDUCE, PT: 6) has very limited exposure through its
solar park project business.

UK
Offshore wind is the key growth area following 32GW of licences awarded in round
3 in 2010, dominated by large developers.
Potential for a nascent solar market following the introduction of a domestic feed-in
tariff scheme.

Exhibit 259. UK wind development forecast
0
500
1,000
1,500
2,000
2,500
3,000
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(50)
0%
50
100
150
200
250
300
350
(%) UK wind annual installations
Growth
0
500
1,000
1,500
2,000
2,500
3,000
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(50)
0
50
100
150
200
250
300
350
Growth
0
500
1,000
1,500
2,000
2,500
3,000
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(50)
0%
50
100
150
200
250
300
350
Growth
0
500
1,000
1,500
2,000
2,500
3,000
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(50)
0
50
100
150
200
250
300
350
Growth
Source: BTM Consult, GWEC, EER, EPIA, Photon and Nomura research
Exhibit 260. UK offshore development
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
F
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
2
0
1
5
F
2
0
1
6
F
2
0
1
7
F
2
0
1
8
F
2
0
1
9
F
2
0
2
0
F
Onshore Offshore
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
F
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
2
0
1
5
F
2
0
1
6
F
2
0
1
7
F
2
0
1
8
F
2
0
1
9
F
2
0
2
0
F
Onshore Offshore
Source: BTM Consult, EER, GWEC, EER, EPIA, Photon and Nomura research

Wind
The UK is one of the big potential offshore development hotspots owing to its strong
wind conditions, and we see growth as dominated by offshore. While the government
is targeting onshore growth, the bulk of the overall wind target will likely be achieved
through offshore. We currently forecast 5.6GW of offshore capacity by 2013 and
15GW by 2020. It is worth noting that while our 2020 forecast is above that of DECC
(12GW), it is materially below the 33GW envisaged by Ofgem. It appears to us that
momentum of developers is stronger for offshore ambitions, while planning and
permitting is still a major bottleneck for onshore projects, and government and
regulatory backing seems to work in favour of speeding up the process of offshore
build.
Solar
We have so far not considered the UK as a solar market, given its low levels of
irradiation and absence of supportive regulation. However, recently introduced feed-in
tariff, mainly aimed at residential roof top installations, could bring new demand into
the market. Considering only the GBp41/kWh tariff, we estimate c10% return. But the
benefit might be higher as there is a provision for households not feeding into the grid
and rather consuming electricity produced and only feeding back excess production.
For the latter proportion, there is an additional export tariff of GBp3/kWh. Further, as
returns are tax-free, solar might become an attractive investment product for high-
bracket taxpayers. All of this could boost the base return. We, thus, think that such a
market will develop, although awareness is extremely low, the local industry is not very
developed and financing is sparse. As there will not be any reduction of the new tariff
in 2011, but a revision in 2012, we would expect the market to gather pace from 2011.
Key names
Utilities and large developers dominate offshore wind E.ON (EOAN GR, BUY, PT:
36.00), RWE (RWEG GR, NEUTRAL, PT: 71.00) and Iberdrola Renovables (IBR
SM, REDUCE, PT: 3.60). Siemens (SIE GR, NEUTRAL, PT: 72.00 ) has a strong
position in offshore, but we think that Vestas (VWS DC, BUY, PT: DKK390) stands
good chances to capture market share.

CEE, others
Attractive wind characteristics throughout and good solar irradiation in the southern
part of the region and ambitious renewables targets.
Wind and solar incentives provide an attractive background, but financing is still
tight; grid and planning/permitting bottlenecks.

Exhibit 261. CEE wind development forecast
0
500
1,000
1,500
2,000
2,500
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(500)
0%
500
1,000
1,500
2,000
2,500
(%)
CEE annual installations Growth
0
500
1,000
1,500
2,000
2,500
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(500)
0
500
1,000
1,500
2,000
2,500
(%)
0
500
1,000
1,500
2,000
2,500
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(500)
0%
500
1,000
1,500
2,000
2,500
(%)
0
500
1,000
1,500
2,000
2,500
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
F
2
0
1
2
F
2
0
1
4
F
2
0
1
6
F
2
0
1
8
F
2
0
2
0
F
(MW)
(500)
0
500
1,000
1,500
2,000
2,500
(%)

Source: BTM Consult, GWEC, EER and Nomura

Wind
Beyond the large Western markets, we believe Eastern Europe could become a very
attractive growth region for wind. The entire region offers significant growth potential
based on the EU 20-20-20 targets, which would imply renewables capacity (ie, wind
as the dominant source) to multiply close to fivefold by 2020 in some areas before any
material recovery in energy demand growth. Our long-term view of a material increase
in CO
2
prices, along with the very heavy coal weight of the energy mix in almost all
countries, also supports strong wind build potential. Namely, Bulgaria, Romania,
Hungary and Poland have good wind resource potential. Feed-in tariffs, in the 80-
100/MWh range and market-based regimes in excess of 105/MWh at current prices
further provide an attractive backdrop. However, while we expect momentum to gather
pace, system and administrative bottlenecks, along with emerging market risk and
higher difficulty for financing there, will curtail demand over the short term. Turkey is
also gathering pace as a new growth region.
Solar
We think that the southern regions of Eastern Europe could become long-term
attractive solar markets with high solar irradiation. Bulgaria and the Czech Republic
have very attractive feed-in tariffs, at 380-480/MWh. At the moment, financing is still
the main bottleneck. Wind seems to be taking a role as the leading renewables source,
but we expect solar to catch on eventually as well.
Key names
Iberdrola Renovables (IBR SM, REDUCE, PT: 3.60) has stepped up development
in the region. EDF EN (EEN FP, NEUTRAL, PT: 39) also has exposure chiefly in
wind. Vestas (VWS DC, BUY, PT: DKK390) could be a beneficiary.

Europe
Gl obal nucl ear r enai ssanc e Eur ope
Nucl ear
Mar t i n Young +44 20 710 21536 / mar t i n.young@nomur a.com
The global nuclear renaissance is being driven by capacity needs, political, cost
and environmental concerns.
Russia, the UK and the US are set to lead the non-Asian charge for new nuclear
capacity
with seven suppliers set to dominate the global market ex-Asia, although there
are question marks over the economic returns that new builds will generate.
Nuclear-exposed stocks in the utilities space include EDF (BUY), E.ON (BUY),
GDF Suez (BUY), RWE (NEUTRAL) and Fortum (REDUCE)
Nuclear power is enjoying a true renaissance across the globe. As many as 56
reactors, with a combined capacity of 51GW, are under construction, with
China/Taiwan leading the way with 19 reactors under construction. However, big build
programmes are also underway in Russia, while a number of western European
nations and the US have pushed nuclear up the agenda; we expect significant new
builds to commence in the next decade. This is likely to have major implications for
both operators and suppliers to the value chain.
Nuclear renaissance driven by political, cost and environmental
concerns
Public acceptance of nuclear power plummeted following the accidents at Three Mile
Island and Chernobyl, with construction programmes halted, lifetimes curtailed and in
some instances, plants closed. However, in a world where security of supply, cost and
environmental concerns and price stability are high on everybodys agenda, nuclear
power is enjoying a significant renaissance. We have developed a global nuclear
model that suggests 180GW of new builds by 2024F, of which slightly more than half
will be in Asia. It may well be that our estimates turn out to be conservative.

Exhibit 262. Global nuclear additions
(MW, 2009F-24F)
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2
0
0
9
F
2
0
1
1
F
2
0
1
3
F
2
0
1
5
F
2
0
1
7
F
2
0
1
9
F
2
0
2
1
F
2
0
2
3
F
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2
0
0
9
F
2
0
1
1
F
2
0
1
3
F
2
0
1
5
F
2
0
1
7
F
2
0
1
9
F
2
0
2
1
F
2
0
2
3
F
Exhibit 263. Global nuclear additions geographic
split (2009F-24F)
Middle East
2%
Africa
2%
Americas
11%
Asia
57%
Europe
28%

56 reactors with a combined
capacity of 51GW are under
construction across the world
we envisage 180GW of new
nuclear capacity by 2024,
50%-plus in Asia

Russia, US and UK set to lead the non-Asian charge
New build in Asia is set to be dominated by China, India, Japan and Korea, while that
in the rest of the world is likely to be more widely spread. However, ex-Asia, three
countries stand out as having significant new build aspirations over the next 15 years.
These are Russia, where we see 16GW of capacity additions, the US with 12GW and
the with UK 10GW in the next 15 years.
Russia is firmly embracing the nuclear renaissance, although given the recession
and demand declines it lowered its budget in July 2009. Of the 37GW capacity that
has been proposed as part of achieving a 25-30% contribution for nuclear power in
electricity supply by 2030, we believe that projects without a construction start date
may well be delayed or not come to fruition. That said, Russia already has 7.5GW
of new capacity under construction and a further 8.2GW with planned construction
start dates. We include this capacity within our global nuclear model.
The UK is set to lead the way in terms of new nuclear builds in western Europe.
The government is firmly behind new nuclear builds and in January 2008 published
a white paper setting out such a preference. This support is driven by a need to
replace the coal capacity that will be shut down at the end of 2015 and the British
Energy capacity that will reach the end of its operational life. Although the
government has no specific targets for new nuclear, most major European utilities
are interested in building new nuclear plants in the UK. In our global nuclear model,
we take a conservative approach and suggest that only 10GW will be built by
2022F.
There is strong support in the US for new nuclear builds and a number of policy
instruments have been developed to facilitate the growth of nuclear energy,
including federal loan guarantees and tax credits. Proposals have been tabled for
over 46GW of new capacity, of which 1,180MW is under construction, and
11,000MW is planned with engineering, procurement and construction contracts
(EPCs) in place. With the exception of one project, all are on the shortlist for a
federal loan guarantee. Our global nuclear model assumes that only the latter
capacity will enter service in the next 15 years.
Power prices not high enough to set incentives for new builds
The required power price to remunerate new nuclear depends on a number of key
variables including the investment cost, the operating life, the decommissioning cost,
fuel cost and the required rate of return. For an investment cost of 2.8m/MW, a
required real post tax return of 7% and cost to decommission the plant based on 15%
of investment cost, we estimate that a new nuclear power station will require a power
price of 58/MWh in real terms.
With the 2012 forward prices in France at 57.8/MWh, in the UK at 50.6/MWh and
the US (PJM) at US$54.25/MWh, it is clear that the economics of new build nuclear at
this juncture are far from compelling. In Europe, the level of power prices are not
helped by low CO
2
pricing and an emissions trading scheme that does not provide the
right incentives, in our view.
How to participate utilities
We believe nuclear is set to be a major factor in energy policy over the first half of this
century but, from an investment perspective, how can one participate? A number of
European utilities are active in nuclear, and we have divided these into three
subgroups.

Russia, the US and the UK appear
to have the most realistic non-
Asian aspirations
Economics of new build far from
compelling at current power
prices

The big investor, EDF. EDF is Europes largest nuclear operator and any investor
looking for exposure to nuclear via a utility name should consider it. EDFs nuclear
exposure can be summarised as follows:
Power price sensitivity: power prices in France are still largely driven by political
pressures. With its low cost nuclear and hydro fleet based in France, EDF is
exposed to power price movements. Taking France alone, we estimate that
each additional 1/MWh is worth an additional value of 1.2/share.
Lifetime extension: EDF believes that it can extend the operating life of its
reactors for 20 years for c. 0.67mn/MW. We estimate that this is worth an
additional value of 8.2/share (we have not assumed a benefit share given
Frances lower price environment).
New nuclear: EDF has expressed an interest in investing in new nuclear in
many countries, although in our financial model, we only include investments in
France (Flamanville and Penly), the US (Calvert Cliffs and one other EPR) and
the UK (two EPRs) in the period to 2020. In addition, EDF is a 30% equity
investor in two EPRs being built at Taishan in China. The chart below shows our
estimate for cashflow from this new nuclear build. As can be seen, we see new
nuclear as cashflow negative through to 2021F. Furthermore, we do not
consider power prices in France, the UK and the US high enough at present to
remunerate the cost of investment in new nuclear. As a consequence, we view
EDFs planned investment in new nuclear as value destructive to the tune of 1-
2/share.

Exhibit 264. EDF new nuclear cashflow (mn)
(5,000)
(4,000)
(3,000)
(2,000)
(1,000)
0
1,000
2,000
3,000
4,000
2
0
0
9
F
2
0
1
0
F
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
2
0
1
5
F
2
0
1
6
F
2
0
1
7
F
2
0
1
8
F
2
0
1
9
F
2
0
2
0
F
2
0
2
1
F
2
0
2
2
F
2
0
2
3
F
2
0
2
4
F
2
0
2
5
F
(30,000)
(25,000)
(20,000)
(15,000)
(10,000)
(5,000)
0
5,000
10,000
15,000
20,000
Net new nuclear financing (LHS)
Cumulative new nuclear cash flow (RHS)
(5,000)
(4,000)
(3,000)
(2,000)
(1,000)
0
1,000
2,000
3,000
4,000
2
0
0
9
F
2
0
1
0
F
2
0
1
1
F
2
0
1
2
F
2
0
1
3
F
2
0
1
4
F
2
0
1
5
F
2
0
1
6
F
2
0
1
7
F
2
0
1
8
F
2
0
1
9
F
2
0
2
0
F
2
0
2
1
F
2
0
2
2
F
2
0
2
3
F
2
0
2
4
F
2
0
2
5
F
(30,000)
(25,000)
(20,000)
(15,000)
(10,000)
(5,000)
0
5,000
10,000
15,000
20,000
Net new nuclear financing (LHS)
Cumulative new nuclear cash flow (RHS)


That said, we firmly believe that EDF will extend the operating life of its French
nuclear fleet, and that the upside optionality arising from this outweighs the
negatives of the new investments, given that the latter is already included in our
53 valuation that offers 51% potential upside. We are buyers of EDF.
The lifetime extenders, E.ON, GDF Suez and RWE. The lifetime of existing
nuclear plants can be extended at a fraction of the cost of new builds. Recent
evidence from both EDF and GDF Suez suggests that lifetime extensions can be
delivered for c. 0.45mn/MW, securing 20 years of additional life in the case of EDF,
and 10 years in the case of GDF Suez. Earlier, we estimated that the Belgian
governments decision to award a 10-year life extension to the countrys three
oldest reactors is worth 500mn (0.2/share) to GDF Suez for its 1.3GW equity
share of the 1.8GW capacity of the three units in question. A simple calculation
would suggest that if Germany grants extensions on a similar basis, it would be
worth 3.2bn (1.7/share) to E.ON and 2.4bn (4.6/share) to RWE.
Despite challenging new build
economics, we are buyers of
EDF
with E.ON and RWE, the best
way to get exposure to nuclear
life extensions

We have also undertaken a more detailed approach to estimating the value of
lifetime extension to German plants. Assuming an investment cost of 0.45mn/MW
to secure a lifetime extension, invested evenly across a two-year period prior to
scheduled decommissioning and positive NPV benefits from the push-back in
decommissioning, we have estimated the benefit to E.ON and RWE for a range of
extension timeframes and benefit shares. Using a 10-year extension as a central
case, with a 50% share of the benefit, we suggest value enhancement of
2.2/share to E.ON and 6/share to RWE. Our preferred stock is GDF Suez
(BUY, PT 35).

Exhibit 265. E.ON nuclear life extension (/share)
0
1
2
3
4
5
6
7
8
5 10 15 20
100% retention
75% retention
50% retention
25% retention
Exhibit 266. RWE nuclear life extension (/share)
0
5
10
15
20
25
5 10 15 20
100% retention
75% retention
50% retention
25% retention

The green option, Fortum. Fortum operates 3.2GW of nuclear capacity and
together with 4.7GW of hydro capacity, it represents the green option for investors.
A consequence of this low variable cost base is that Fortum is significantly exposed
to power price variations; we estimate an additional value of 0.5/share for each
additional 1/MWh. However, we see better value elsewhere in the sector and
maintain a REDUCE rating on Fortum, with a 19.5 price target.
What is driving the nuclear renaissance?
High profile accidents turned many nations against nuclear power; construction was
halted and early shutdowns followed.
2009 is a markedly different world and concerns over the security of supply, cost
and the environment are driving a nuclear renaissance.
Our global nuclear model suggests new build of 180GW, which is possibly a
conservative assumption.
Post the accidents at Three Mile Island and Chernobyl, nuclear power fell out of favour
in many countries around the world, with construction programmes halted, operating
lifetimes curtailed and units shut down. The past few years have seen a seismic shift
towards nuclear, and now lifetimes are being extended, suspended construction
programmes restarted and new builds planned. This shift in opinion and appetite is
being driven by:
Fuel exposure and security of supply. Very few countries have sufficient
indigenous resources of oil and gas to meet their energy requirements, and
importing countries are exposed to political instability in exporting nations. Uranium
is plentiful and available from countries with a history of greater political stability.
Cost. Our estimates of the cost of new builds position nuclear as the most
economic form of new build for large-scale generation capacity, although its relative
merits are dependent on the price of CO
2
.
Fortum is the green option, but
we see little value and have a
REDUCE rating
High profile accidents saw
nuclear fall out of favour
but supply security, cost and
environmental concerns are
driving a major renaissance

Exhibit 267. New entrant power costs (/MWh)
0
20
40
60
80
100
120
CCGT - EUR Coal Clean Coal Nuclear Wind - On Wind - Off Market CCGT Market Coal
Return Decommissioning O&M costs Carbon costs Fuel costs
(EUR/MWh)
Nomura long term price
assumption of 65/MWh
66/MWh 67/MWh
86/MWh
58/MWh 63/MWh
107/MWh
50/MWh
56/MWh

Price stability. Cost estimates for new nuclear vary greatly and have clearly
increased from the initial estimates of the capital cost of a new EPR. However,
nuclear is a low variable cost form of generation and hence offers the possibility of
long-term stable price contracts, particularly to those that have base load
requirements.
Environmental concerns. Tightening CO
2
targets mean a push towards low and
zero CO
2
forms of generation. Nuclear energy provides a base load output and with
old coal stations being retired and clean coal still someway off, nuclear has a role
not only in replacing existing nuclear capacity, but also in lowering the carbon
footprint of electricity generation worldwide.
Global nuclear model suggests 180GW new build
Such is the enthusiasm for new nuclear that if we add the new build targets (planned
and proposed) of countries with aspirations to build new nuclear capacity, it would total
500GW of new nuclear plant capacity, including the 51GW now under construction.
For many reasons, we believe that not all of this will be built, particularly within a
reasonable timeframe of 15-20 years. Our approach to building a growth model for
new nuclear around the world involves a country-by-country analysis and applying a
pragmatic and conservative approach to the plans of each country. In particular,
recession-driven demand destruction is likely to prompt reassessment of plans, as will
a trend towards lifetime extensions. Finance is also a concern and may derail many
new build plans. As a consequence, our global nuclear model suggests a 180GW
increase in capacity by 2024F, which is possibly conservative, but still indicates a 48%
increase from existing global nuclear capacity. Of this, Asia (China, India and Japan) is
likely to account for more than half. (Growth models that include communicated
plans/ambitions from countries will naturally result in a higher growth profile. China is
one such region, where significant plant capacity (95GW-plus) has been proposed, but
we do not include this in our model. Our Asian utilities team includes planned nuclear
reactors in China in their forecasts and expects 70GW in operation by 2020F (this is
included in our global model.)

We have built a model that
suggests 180GW of new build by
2024


0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2
0
0
9
2
0
1
1
2
0
1
3
2
0
1
5
2
0
1
7
2
0
1
9
2
0
2
1
2
0
2
3
split (2009F-24F)
Middle East
2%
Africa
2%
Americas
11%
Asia
57%
Europe
28%
Is this volume of new build achievable?
Of the 180GW of new nuclear capacity that our model suggests will be built by 2024F,
51GW is already under construction. The question we pose is whether the remaining
volume of new build is achievable? Our belief is that it is.
Firstly, as we have indicated, we have adopted a conservative, but hopefully
realistic, view on the plans of individual countries given the potential issues in the
planning process, cost and access to finance, and the reduced immediate need
given the recession-driven fall in demand.
Secondly, history suggests that this level of expansion should be achievable from a
technical perspective because in the 1980s 218 reactors with an aggregate
capacity of 201GW were commissioned. Hence, we believe with bigger reactors,
our new build expectation should be achievable.
Cost overruns are an issue
Capital cost estimates for new nuclear vary significantly from technology to technology,
and from country to country. Latest estimates point to new build costs of 2,500-
3,100/kW, somewhat higher than the 2,065/kW first suggested by EDF for the
Flamanville 3 plant. Cost overruns have been an ongoing issue in the nuclear industry,
and the trend continues with the two Generation III+ plants under construction in
Europe.
1. Olkiluoto 3 (TVO/Areva). Construction on this project started with TVOs
excavation work in 2004 and the construction site was handed over to the plant
supplier (Areva) in 2005. Commercial operation is likely in 2012 versus an original
schedule of 2009, while the estimated construction costs are now 5.5bn (as of
August 2009) versus the 2.5bn originally planned.
2. Flamanville 3 (EDF/Areva). Construction for this project started in 2006 and
commercial operation is likely in 2013 versus an original schedule of 2012F, while
the estimated construction costs are now 4.0bn (as of August 2009) versus the
3.3bn originally planned.

we view this as achievable and
believe our estimate is probably a
little conservative
Costs have been rising and
overruns are an issue

The required power price for new nuclear is heavily dependent on
capex cost
The power price required to remunerate new nuclear depends on a number of key
variables, including the investment cost, the operating life, the decommissioning cost,
fuel cost and the required rate of return. Our 58/MWh required price set out above in
our new entrant analysis is based on an investment of 2.8m/MW and a required real
post-tax return of 7%. Assuming that there is little variation in fuel costs across
different technologies and the cost to decommission the plant is based on 15% of the
investment cost of the plant, it is easy to estimate a required power price for a variety
of returns and investment costs.
Our analysis is shown in the chart below; it suggests that to deliver a 7% post-tax real
return, a generation price of 49.6/MWh in real terms would be required at a capex
cost of 2.5m/MW, while 66.5/MWh in real terms would be required at a capex cost of
3.5m/MW.

Exhibit 270. Required nuclear price (/MWh) for different required returns
(%)
40
50
60
70
80
90
100
110
120
2,000 2,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800 4,000
7.0% 7.5% 8.0% 8.5%
9.0% 9.5% 10.0%

Note: The X axis denotes capex cost of mn/MW and the Y axis denotes a generation price of /MWh to be achieved
given post-tax returns.
Refurbishing units and extending operating lives offers short-term fix
New capacity should absorb the majority of nuclear capex over the next 15-20 years,
but the economically sensible solution of extending nuclear lifetimes should not be
ignored. Most plants were designed and licensed for 30-40 year operations, but in a
number of countries, notably Finland, Sweden and the US, lifetimes have now been
extended to as much as 60 years and, in many cases, capacity uprated as plant
components were replaced. In addition, Belgium, Canada, Germany (details still to be
agreed), the Netherlands and the UK have all embraced lifetime extensions, and we
believe others, notably France, will follow.
The costs of extending nuclear operating life vary given the length of the extension, the
safety standards imposed and capacity increases, if any, but ignoring the outliers, and
focusing on recent data points, analysis suggests a cost of 400-700/kW for 10-20
years of additional operation, an attractive proposition versus the 2,500-3,100/kW
cost of new build.

Refurbishing existing capacity
and extending operating life is a
very attractive proposition versus
new build

Exhibit 271. Cost to extend nuclear life
Company Country Notes
British Energy UK 90mn for a five-year extension of Hinkley Point B and Hunterston B, with combined capacity of 1.2GW.
Equivalent to 84/kW, although arguably of less relevance given the short extension.
Bruce Power Canada A 20-year extension for each of the 750MW Bruce A1 and A2 units is set to cost C$3.1-3.4bn, equivalent to
1,300-1,400/kW.
EDF France EDF suggests 600mn to extend the lifetime of a 900MW unit by 10 years, equivalent to 666/kW.
EPZ Netherlands 250mn donation for sustainable energy projects.
E.ON Sweden E.ON invested 700/kW for capacity uprate and lifetime extension to 60 years at its Oskarshamn plant in
Sweden.
GDF Suez Belgium GDF Suez has stated that the investment required to extend the life of the three oldest reactors in Belgium
(1.8GW) is 800mn, equivalent to 447/kW.
New
Brunswick
Power
Canada Cost to extend the operating life of the Point Lepreau1 reactor to 60 years and up-rate by 25MW estimated
whose estimates at C$1.4bn, equivalent to 1,333/kW, although the project is running over-budget.
Ontario Power
Generation
Canada A 20-year extension of unit A1 at the Pickering plant cost US$1,600/kW (1,066/kW), well above the initial
estimate.
TVO Finland 130mn to extend the lifetime of the two unit 1.7GW Olkiluoto BWR by 10 years, equivalent to 75/kW.
Source: Company reports, Nomura estimates
Nuclear issues and policies, by country
The western world dominates global nuclear capacity, but Asia is expanding fast.
In the west, Russia, the UK and the US have plausible large-scale plans, while Italy
and the UAE have made high profile entries to the race.
Lifetime extensions are also on the agenda and Belgium, Canada, Finland,
Germany, the Netherlands, Sweden, the UK and the US have gone down this route.
Seven suppliers AECL, Areva, Atomstroyexport, GE Hitachi, Mitsubishi Heavy
Industries, Toshiba and KEPCO are competing for ex-China new build.
The western world (including Russia) has dominated the nuclear power industry for
many years, although the most significant capacity additions in the past decade have
been in Asia, notably China, Korea and Japan.

Exhibit 272. Global nuclear capacity (1980-2008, MW)
Growth (%) CAGR (%)
1980 1985 1990 1995 2000 2005 2007 2008 2008 v 2000 2000-08
Belgium 1,670 5,464 5,501 5,631 5,712 5,801 5,824 5,824 2.0 0.2
Brazil 626 626 626 1,976 1,901 1,795 1,766 (10.6) (1.4)
Canada 5,172 9,741 13,993 14,902 9,998 12,584 12,610 12,577 25.8 2.9
Czech Republic 391 1,632 1,782 2,611 3,373 3,619 3,634 39.2 4.2
Finland 2,208 2,300 2,310 2,310 2,656 2,676 2,696 2,696 1.5 0.2
France 14,388 37,478 55,808 58,573 63,080 63,260 63,260 63,260 0.3 0.0
Italy 1,112 1,273 n/a n/a
Germany 10,323 18,110 21,250 20,972 21,283 20,339 20,430 20,470 (3.8) (0.5)
Russia 8,596 15,841 18,898 19,848 19,848 21,743 21,743 21,743 9.5 1.1
South Africa 1,840 1,840 1,840 1,840 1,800 1,800 1,800 (2.2) (0.3)
Spain 1,073 5,608 7,099 7,097 7,468 7,591 7,450 7,450 (0.2) 0.0
Sweden 5,515 9,450 9,919 10,058 9,417 8,916 9,034 8,996 (4.5) (0.6)
UK 8,686 12,485 13,496 13,718 13,059 11,852 10,222 10,097 (22.7) (3.2)
Ukraine 2,286 8,324 13,020 13,045 11,195 13,107 13,107 13,107 17.1 2.0
US 50,881 74,401 96,228 98,068 96,297 98,145 100,266 100,683 4.6 0.6

Other Europe (incl former USSR) 5,393 10,441 12,923 13,881 15,625 13,461 13,003 12,705 (18.7) (2.6)
Asia 17,647 33,362 44,364 57,683 66,257 79,292 82,604 82,519 24.5 2.8
Other Americas 335 935 1,575 2,191 2,268 2,295 2,295 2,235 (1.5) (0.2)

World 135,285 248,070 320,482 342,225 350,590 368,136 371,758 371,562 6.0 0.7
% covered by identified countries 82.7 82.0 81.6 78.4 76.0 74.2 73.7 73.8

Source: IAEA PRIS

Western world dominates, but
Asia is mounting a charge

This trend is set to continue over the next few years as China, India, Japan and Korea
are responsible for 60% of the 51GW of nuclear capacity currently under construction.
Europe and the Americas should not be ignored, however, and outside the four
countries mentioned above, nuclear power is very much on the political and energy
industry agendas, whether it be new build or lifetime extensions for existing facilities.

Exhibit 273. Nuclear capacity under construction (MW, December 2009)
0
2
,
0
0
0
4
,
0
0
0
6
,
0
0
0
8
,
0
0
0
1
0
,
0
0
0
1
2
,
0
0
0
1
4
,
0
0
0
1
6
,
0
0
0
1
8
,
0
0
0
2
0
,
0
0
0
Pakistan
Argentina
Slovak Republic
Iran
United States Of America
Finland
France
Ukraine
Bulgaria
Japan
Taiwan
India
Korea
Russian Federation
China
0
2
,
0
0
0
4
,
0
0
0
6
,
0
0
0
8
,
0
0
0
1
0
,
0
0
0
1
2
,
0
0
0
1
4
,
0
0
0
1
6
,
0
0
0
1
8
,
0
0
0
2
0
,
0
0
0
Pakistan
Argentina
Slovak Republic
Iran
United States Of America
Finland
France
Ukraine
Bulgaria
Japan
Taiwan
India
Korea
Russian Federation
China

Source: IAEA PRIS

Countries can be split into a number of categories the true believers (France,
Russia, the UK and the US), the maintainers (Finland and Sweden), the extenders
(Belgium and Germany), the agnostics (Spain) and the newcomers (Italy and UAE).
Russia, the UK and the US to lead the non-Asian charge for new build we
forecast that Asia will account for more than half of the new nuclear capacity built
over the next 15 years, but that there will be also be significant new build in other
parts of the world. Russia, the UK and the US have the most plausible expansion
plans, although countries such as Italy and the UAE have also embraced new build
enthusiastically.
Lifetime extensions extending operating lifetimes is more cost effective than
new build, and Belgium, Finland, Germany, the Netherlands, Sweden, the UK and
the US have all gone down this route, and we expect others, such as France, to
follow.
Seven suppliers appear to be competing for new build we identify AECL
(Canada, although up for sale), Areva (France), Atomstroyexport (Russia), GE
Hitachi (US Japan), Mitsubishi Heavy Industries (Japan), and Toshiba (US Japan)
as the companies competing for reactor design and build. We acknowledge that
KEPCO (Korea) may participate and be successful in non-Asian tenders, but
assume that Chinese providers will stay largely domestically focused for now.

Russia, the UK and the US lead
the charge for non-Asian new
build
while other countries are
embracing lifetime extension,
most recently Belgium and
Germany


0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2
0
0
9
2
0
1
1
2
0
1
3
2
0
1
5
2
0
1
7
2
0
1
9
2
0
2
1
2
0
2
3
split (2009-24F)
Middle East
2%
Africa
2%
Americas
11%
Asia
57%
Europe
28%
France nuclear issues and policies
France is the worlds leading nuclear nation, at the forefront in both operation and
build.
More than three-quarters of the electricity generated in France is from nuclear
energy and the fleet is relatively young.
France is embracing new build one EPR is under construction and the
construction of a second is scheduled to commence in 2012.
Nuclear industry development
The first commercial generation of electricity from nuclear energy in France took place
in 1963, but there was significant expansion of the fleet in the late 1960s and the
1970s, with the construction of 58 PWR units on 19 sites. The average age of Frances
nuclear plants is 23 years. With 63GW of nuclear capacity, France is the world leader
in nuclear power generation and nuclear power accounts for over 75% of the electricity
generated in the country, which is the highest penetration in the world.

Exhibit 276. France nuclear capacity (MW)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS
Exhibit 277. France nuclear output (TWh)
0
50
100
150
200
250
300
350
400
450
500
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS

France is arguably the most pro-
nuclear nation on the planet

Exhibit 278. France nuclears share of electricity
(%)
0
10
20
30
40
50
60
70
80
90
1985 1990 1995 2000 2005 2007 2008

Source: IAEA PRIS
Exhibit 279. France nuclear load factor (%)

0
10
20
30
40
50
60
70
80
90
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS
Key participants
EDF is the sole operator of nuclear power plants in France, although GDF Suez owns
minority stakes in Chooz and Tricastin, while E.ON has 800MW of nuclear drawing
rights. Enel has a 12.5% stake in the Flamanville 3 unit currently under construction.

Exhibit 280. France nuclear capacity
Power plant Commissioned Capacity (MW)
Bugey 2-5 1979-80 2*910, 2*880
Fessenheim 1-2 1978 2*880
Blayais 1-4 1981-83 4*910
Dampiere 1-4 1980-81 4*890
Gravelines 1-6 1980-85 6*910
Tricastin 1-4 1980-81 4*915
Chinon B 1-4 1984-88 4*905
Cruas 1-4 1984-85 4*915
St Laurent 1-2 1983 2*915
Flamanville 1-2 1986-87 2*1330
Paluel 1-4 1985-86 4*1330
St Alban 1-2 1986-87 2*1335
Belleville 1-2 1988-89 2*1310
Cattenom 1-4 1987-92 4*1300
Golfech 1-2 1991-94 2*1310
Nogent 1-2 1988-89 2*1310
Penly 1-2 1990-92 2*1330
Chooz B 1-2 2000 2*1500
Civaux 1-2 2002 2*1495
Total 63,130
Source: Company reports, Nomura estimates
Technology
Frances nuclear fleet are all PWRs of three standard types designed by Framatome
(now Areva), these being the 900MW series, the 1,300MW series and the 1,450MW
N4 series. The differences to the standard size shown in the above table are owing to
cooling requirements and capacity uprates in the N4 reactors. EDF plans to uprate five
of its 900MW reactors by 3% over 2008-10F and its 20 1,300MW reactors by 7% from
2015. Areva is an active developer of nuclear around the world and has exported its
technology to a number of countries.

and EDF is the worlds largest
nuclear operator

Appetite for development
Unsurprisingly, for a country where nuclear power is a key pillar of industrial policy and
the cornerstone of electricity generation, France favours nuclear new build. A
1,600MW Areva EPR is under construction at Flamanville and is due for completion in
2012F, although delays in construction may push this back to 2013F; Enel has a
12.5% stake in this EPR. A second Areva 1,600MW EPR is to be built by EDF at Penly
(GDF Suez will have a 25% stake, Total 8.3% and Enel has a right to take 12.5%.
E.ON has also expressed interest), with construction likely to start in 2012F, and
commissioning in 2017F. A third EPR, this time led by GDF Suez, is also likely, as are
lifetime extensions beyond 40 years to the existing fleet.
Germany nuclear issues and policies
Germany is one of the worlds pre-eminent nuclear nations, behind only France,
Japan, Russia and the US in global rankings.
Early phase-outs have been revisited and lifetime extensions have been agreed
upon by the government.
However, new build is not on the agenda.
Germany is one of Europes pre-eminent nuclear nations, with 20GW of capacity
providing around 28% of the electricity generated in the country. The oldest of the 17
operating reactors entered service in 1975, although Germanys nuclear heritage pre-
dates this time. The Soviet designed reactors in East Germany were closed down post
German reunification. Ownership of the countrys 17 reactors is split between the four
big utilities (E.ON, RWE, Vattenfall and EnBW) although GDF Suez has recently
acquired drawing rights from E.ON.

Exhibit 281. Germany nuclear capacity (MW)
0
5,000
10,000
15,000
20,000
25,000
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS
Exhibit 282. Germany nuclear output (TWh)
0
20
40
60
80
100
120
140
160
180
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS

New build is on the agenda, with
one plant under construction and
another planned
A pre-eminent nuclear nation,
with ownership split between the
four main utilities

Exhibit 283. Germany nuclears share of electricity (%)
0
5
10
15
20
25
30
35
1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS
Exhibit 284. Germany nuclear load factor (%)
0
10
20
30
40
50
60
70
80
90
100
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS
Key participants
Ownership and operation of the German nuclear fleet sits mainly in the hands of the
four main utilities E.ON, RWE, Vattenfall and EnBW. In some instances, ownership
of the plants is shared and can involve some minority stakeholders. GDF Suez has
recently acquired 700MW of drawing rights from E.ON and EnBW/EDF acquired
800MW of drawing rights.

Exhibit 285. Germany nuclear capacity
Reactor Ownership Type Capacity (MW) Operation
Biblis-A RWE PWR 1,167 2/1975
Neckarwestheim-1 EnBW: 99.8% / Deutsche Bahn: 0.2% PWR 785 12/1976
Brunsbttel Vattenfall: 66.7% / EON: 33.3% BWR 771 2/1977
Biblis-B RWE PWR 1,240 1/1977
Unterweser E.ON PWR 1,345 3/1979
Isar-1 E.ON BWR 878 9/1979
Phillipsburg-1 EnBW: 99.8% / Deutsche Bahn: 0.2% BWR 890 3/1980
Grafenrheinfeld E.ON PWR 1,275 6/1982
Krmmel Vattenfall: 50% / EON: 50% BWR 1,260 3/1984
Gundremmingen-B RWE: 75% / EON: 25% BWR 1,284 4/1984
Gundremmingen-C RWE: 75% / EON: 25% BWR 1,288 1/1985
Grhnde EON: 83.3% / SW Bielefeld: 16.7% PWR 1,360 2/1985
Phillipsburg-2 EnBW: 99.8% / Deutsche Bahn: 0.2% PWR 1,392 4/1985
Brokdorf EON: 80% / Vattenfall: 20% PWR 1,370 12/1986
Isar-2 EON: 75% / SW Mnchen: 25% PWR 1,400 4/1988
Emsland RWE: 87.5% / EON: 12.5% PWR 1,329 6/1988
Neckarwestheim-2 EnBW: 99.8% / Deutsche Bahn: 0.2% PWR 1,305 4/1989
Total 20,339
Technology
Germany has two types of reactors. There are six BWRs and 11 PWRs. All were built
by Siemens-KWU and, as mentioned previously, all the Soviet-designed reactors in
East Germany were shut down post reunification.
Nuclear power is a topical issue in Germany. The Chernobyl accident saw a previous
SPD/Green coalition government push for a gradual phasing-out of nuclear power, and
in June 2000, a compromise was reached under which Germanys 19 nuclear reactors
would be able to operate for an aggregate lifetime total of 2,623 TWh, this being
equivalent to 32 years of continuous operation. The agreement also included a
Anti-nuclear feeling resulted in an
early phase-out being adopted

commitment not to introduce any one-sided economic or taxation measures. The
compromise agreement was signed in June 2001 and is known as the nuclear
consensus. However, in June 2010, the government announced that it was imposing
a 2.3bn pa tax on enriched nuclear fuel from 2011-14F.

Exhibit 286. German nuclear phase-out by plant
(MW)
Stade
Obrigheim
Biblis A
Neckarwestheim-1
Biblis B
Brunsbttel
Isar-1
Unterweser
Phillippsburg-1
Grafenrheinfeld
Krmmel
Gundremmingen B
Gundremmingen C
Phillippsburg-2
Grohnde
Brokdorf
Isar-2
Emsland
Neckarwestheim-2
2010 2020 2015

Exhibit 287. German nuclear capacity development
(MW)
0
5,000
10,000
15,000
20,000
25,000
J
a
n
-
1
0
J
u
l
-
1
0
J
a
n
-
1
1
J
u
l
-
1
1
J
a
n
-
1
2
J
u
l
-
1
2
J
a
n
-
1
3
J
u
l
-
1
3
J
a
n
-
1
4
J
u
l
-
1
4
J
a
n
-
1
5
J
u
l
-
1
5
J
a
n
-
1
6
J
u
l
-
1
6
J
a
n
-
1
7
J
u
l
-
1
7
J
a
n
-
1
8
J
u
l
-
1
8
J
a
n
-
1
9
J
u
l
-
1
9
J
a
n
-
2
0
J
u
l
-
2
0
J
a
n
-
2
1
J
u
l
-
2
1
J
a
n
-
2
2
J
u
l
-
2
2
J
a
n
-
2
3
J
u
l
-
2
3


Since then, however, public support for nuclear energy has increased given concerns
around security of supply, higher and increasingly volatile commodity costs and the
absence of CO
2
emission in nuclear generation. Faced with a declining reserve margin,
and hence a looming capacity shortage, Germanys tough CO
2
targets and the
commercial viability of Carbon Capture and Storage (CCS) technology still unproven,
the extension of nuclear lifetime was a key policy item for both the CDU/CSU and FPD
parties in last Septembers elections. With these parties forming a coalition
government, it is likely that the life of Germanys nuclear fleet will be extended,
although exact terms and benefit-sharing arrangements are yet to be worked out.
There are, however, no plans to build new nuclear capacity.
but lifetime extensions are now
being discussed

Russia nuclear issues and policies
Russia was an early pioneer in nuclear power generation; however,
Chernobyl/technical problems plunged the industry into crisis.
Load factors are now increasing and a very large expansion plan has been
proposed.
Russia is also aiming to export its technology.
In 1954, Russia was the first country in the world to produce nuclear electricity, with
commercial scale production starting in the 1960s. The 1970s saw further expansion
and 25 nuclear reactors were in operation by the mid 1980s. However, construction
problems and the Chernobyl accident plunged the industry into crisis, and only one
reactor was commissioned in 10 years. The collapse of the Soviet Union starved the
industry of funds, and it was not until 2000 that construction was revived. Ownership
and operation of the Russian nuclear power sector rests with the state holding
company AtomEnergoProm.

Exhibit 288. Russia nuclear capacity (MW)
0
5,000
10,000
15,000
20,000
25,000
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS
Exhibit 289. Russia nuclear output (TWh)
0
20
40
60
80
100
120
140
160
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS

Exhibit 290. Russia nuclears share of electricity
(%)
0
2
4
6
8
10
12
14
16
18
1995 2000 2005 2007 2008
Source: IAEA PRIS
Exhibit 291. Russia nuclear load factor (%)

0
10
20
30
40
50
60
70
80
90
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS

The first nation to produce
nuclear electricity, Chernobyl and
the collapse of the Soviet Union
plunged the industry into crisis

Key participants
The ownership and operation of the Russian nuclear fleet is in the hands of
Energoatom (formerly Rosenergoatom), which is an entity within AtomEnergoProm.
Other entities are responsible for new build design, construction, maintenance and
upgrading.

Exhibit 292. Russia nuclear capacity
Reactor Type Capacity (MW/unit)
Commercial
operation
Scheduled
close
Balakovo 1-2 V-320 950 5/86, 1/88 2015, 2017
Balakovo 3-4 V-320 950 4/89, 12/93 2018, 2023
Beloyarsk 3 BN600 FBR 560 11/81 2010
Bilibino 1-4 LWGR EGP-6 11 4/74-1/77 2009, 09, 11, 12
Kalinin 1-2 V-338 950 6/85, 3/87 2014, 2016
Kalinin 3 V-320 950 12/04 2034
Kola 1-2 V-230 411 12/73, 2/75 2018, 2019
Kola 3-4 V-213 411 12/82, 12/84 2011, 2014
Kursk 1-2 RBMK 925 10/77, 8/79 2021, 2024
Kursk 3-4 RBMK 925 3/84, 2/86 2013, 2015
Leningrad 1-2 RBMK 925 11/74, 2/76 2019, 2022
Leningrad 3-4 RBMK 925 6/80, 8/81 2009, 2011, +20 yr
Novovoronezh 3-4 V-179 385 6/72, 3/73 2016, 2017
Novovoronezh 5 V-187 950 2/81 2035 after upgrade
Smolensk 1-3 RBMK 925 9/83, 7/85,1/90 2013, 2020
Rostov 1 V-320 950 3/01 2030
Total 21,743
Note: V=PWR, Source: WNA, Nomura estimates
Technology
Russia has one of the most diverse nuclear fleets in the world, including some
technology unique to Russia and Lithuania. There are 15 PWRs spanning three
generations, 11 RBMK light water graphite reactors (unique to Russia/Lithuania), four
small BWR reactors in eastern Siberia and one BN-600 fast-breeder reactor. A number
of the RBMK reactors are of concern to the western world, and the EC set early
closure of Lithuanias Ignalia plant as a condition for Lithuanias membership of the EU.
Load factors that were low by western standards have improved markedly over the
past five years and extensions are being considered to the existing 30-year life, with
the V-200 series and RBMK getting 15-year life extensions and the V-300 series
getting 25 years.
Russia is firmly embracing the nuclear renaissance, although given the recession and
demand declines, it lowered its budget in July 2009. Of the 37GW capacity that has
been proposed as part of achieving a 25-30% contribution for nuclear power in
electricity supply by 2030, we believe that projects without a construction start date
may well be delayed or not come to fruition. That said, Russia already has 7.5GW of
new capacity under construction and a further 8.2GW with planned construction start
dates. We include this capacity within our global nuclear model. Capacity under
construction or with planned construction start dates is of the existing 950MW second
generation type, or the 1,170MW VVER-1200 (AES-2006) third generation type. Both
models are Atomstroyexport PWRs, and it appears that foreign involvement in reactor
supply is limited to providing parts of the assembly.

Ownership and operation of the
nuclear fleet is in the hands of
Energoatom
Technology is diverse, but the
RBMK type reactors are of
concern to the western world
Russia has significant ambitions
for new nuclear, but we believe
some reactors may not be
delayed or not built

UK nuclear issues and policies
Although a nuclear pioneer, nuclear slipped off UKs radar in the 1980s and 1990s.
The large combustion plants directive (LCPD) and the pending closure of existing
nuclear plants has resulted in the government fully supporting new nuclear; the UK
is likely to lead the way in western Europe.
EDF, E.ON, GDF Suez, Iberdrola, RWE and SSE are all set to participate.
Although Russia was the first to generate nuclear power, UKs Calder Hall reactor was
the first to deliver electricity in commercial volumes. A raft of small Magnox power
stations were built, followed by 14 advanced gas-cooled reactors (AGRs) over 1976-89.
Government support for nuclear oscillated; although four PWRs were planned, only
one was built. The majority of the fleet is in the hands of British Energy, which was
privatised in 1996, taken back into government ownership in 2003 following financial
difficulties, re-listed in 2005 and then bought by EDF in 2009. About 20% of UKs
electricity comes from nuclear energy.

Exhibit 293. UK nuclear capacity (MW)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS
Exhibit 294. UK nuclear output (TWh)
0
10
20
30
40
50
60
70
80
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS

Exhibit 295. UK nuclears share of electricity (%)
0
5
10
15
20
25
30
1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS
Exhibit 296. UK nuclear load factor (%)
0
10
20
30
40
50
60
70
80
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS

A nuclear pioneer, about 20% of
UKs electricity needs are met by
nuclear

Key participants
Ownership of the existing fleet is in the hands of two entities. The government-owned
Nuclear Decommissioning Authority (NDA) owns and operates the two remaining
Magnox stations, but these are set to close next year, while EDF (through British
Energy) owns the remainder. Centrica owns a 20% stake in British Energy, and a
number of Europes large integrated utilities have expressed an interest in building
new nuclear plants in the UK. The country is set to be at the forefront of the nuclear
renaissance in western Europe.

Exhibit 297. UK nuclear capacity
Reactor Type Ownership
Capacity per
unit (MW) Operation
Expected
shutdown
Oldbury 1 & 2 Magnox NDA 217 1968 Dec 2010
Wylfa 1 & 2 Magnox NDA 490 1971-72 Dec 2010
Dungeness B 1 & 2 AGR British Energy 545 1985-86 2018
Hartlepool 1 & 2 AGR British Energy 595 1984-85 2014 (2019?)
Heysham 1 & 2 AGR British Energy 615 1985-86 2014 (2019?)
Heysham 3 & 4 AGR British Energy 615 1988-89 2023
Hinkley Point B 1 & 2 AGR British Energy 620 & 600 1976-78 2016
Hunterston B 1 & 2 AGR British Energy 610 & 605 1976-77 2016
Torness 1 & 2 AGR British Energy 625 1988-89 2023
Sizewell B PWR British Energy 1,196 1995 2035
Total 11,035
Technology
Unlike other countries where standardisation of technology is generally the norm, the
UKs approach to nuclear was somewhat haphazard. AGR technology is exclusive to
the UK, and each pair is a unique design. This means that, if a problem occurs,
individual solutions need to be found, a situation that was most marked in British
Energys last years as an independent company. Despite these problems, lifetime
extensions have been granted (Dungeness, Hinkley Point B and Hunterston B) and
others are likely. Our own model for EDF assumes operating lifetimes five years longer
than those in the above table for all, bar Dungeness and Sizewell B, on the basis that
we believe it is technically possible, and that Dungeness was granted a 10-year
extension. The UKs only PWR is a Westinghouse design.
Although we would argue that France is the most pro-nuclear nation in western Europe,
it is the UK that is set to lead the way in terms of new nuclear build in western Europe.
The government is firmly behind new nuclear builds and in January 2008 published a
white paper setting out such a preference. This support is driven by a need to replace
the coal capacity that will be shut down at the end of 2015 and the British Energy
capacity that will reach the end of its operational life.
Although the government has no specific targets for new nuclear, most major
European utilities are interested in building new nuclear plants in the UK. EDF owns
British Energy (Centrica owns 20%), and has augmented the grid connection
agreements held by British Energy with additional agreements at Wylfa and Hinkley
Point, although EDF has to dispose of land at either Dungeness or Heysham, and one
of the grid connections at Hinkley Point. E.ON and RWE have formed a JV and have
secured land and grid connections at Wylfa and Oldbury, while the alliance between
GDF Suez, Iberdrola and SSE has secured an option on land at Sellafield. Vattenfall
has expressed an interest in UK new build, but has yet to declare its hand.

EDF-owned British Energy
dominates the UK nuclear
landscape
but the technology is far from
standarised
UK set to lead the new build
charge in western Europe
EDF, E.ON/RWE and GDF
Suez/Iberdrola/SSE all have
advancing plans

Exhibit 298. UK grid connection agreements
Promoter Site Capacity (MW) Time
British Energy (EDF) Sizewell C 3,300 2016, 21
British Energy (EDF) Hinkley Point C 3,300 2016
British Energy (EDF) Dugeness C 1,650 2016
British Energy (EDF) Bradwell C 1,650 2016
EDF Wylfa B 1,670 2017
EDF Hinkley Point 1,670 2019
E.ON/RWE Oldbury B 1,600 2020
E.ON/RWE Wylfa C 3,600 2020, 21,22
Total 18,440

Unsurprisingly, each of the utilities above have large ambitions in terms of new build,
although in our global nuclear model, we take a more conservative approach and
suggest that 10GW will be built by 2022. Underpinning this view is the fact that the
economics are still far from certain, particularly with a low carbon price, structural
changes in demand have eased the pressure for new build and reactor designs are
still to be approved. The generic design assessment (GDA) is ongoing in the UK, and
of the four suppliers who submitted designs, AECL and GE-Hitachi have withdrawn,
leaving Areva and Westinghouse as the only technologies under consideration.
Despite a number of concerns being raised by the UKs Health & Safety Executive
(HSE) about each design, the HSE remains confident the GDA will be completed by
June 2011.

US nuclear issues and policies
The US is the global nuclear leader, but has seen very little development over the
past 30 years.
It has a very fragmented ownership structure 20 utilities account for 85% of
capacity.
There is strong support for new nuclear and policy instruments are in place.
The US is the worlds largest producer of nuclear power with 27% of global installed
capacity and 31% of power produced in 2008. However, as a consequence of the
Three Mile Island accident and a preference for gas, no new build has been started
since 1977, although construction delays mean that the youngest plant is only 13
years old. Major performance gains have been made over the years, and the US
nuclear fleet has some of the highest load factors in the world.

Exhibit 299. US nuclear capacity (MW)
0
20,000
40,000
60,000
80,000
100,000
120,000
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS
Exhibit 300. US nuclear output (TWh)
0
100
200
300
400
500
600
700
800
900
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS

Exhibit 301. US nuclears share of electricity (%)
0
5
10
15
20
25
1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS
Exhibit 302. US nuclear load factor (%)
0
10
20
30
40
50
60
70
80
90
100
1980 1985 1990 1995 2000 2005 2007 2008
Source: IAEA PRIS
Key participants
Unlike other countries where nuclear ownership tends to be concentrated in the hands
of a few, in the US, it is very fragmented, and despite industry consolidation, there are
still 26 operators, and many more owners, although 65% of capacity is spread
between 10 utilities and 85% between 20 utilities.
The US is the worlds largest
producer of power from nuclear
energy, but enthusiasm waned
post the Three Mile Island
accident
Unlike other countries, the US
nuclear industry is fragmented

Exhibit 303. US nuclear capacity
Owner Capacity (MW) % share Cumulati ve %
Exelon Corp. 16,712 16.7 16.7
Entergy Corp. 10,086 10.1 26.7
Tennessee Valley Authority 6,671 6.7 33.4
Dominion Resources, Inc. 5,698 5.7 39.1
FPL Group 5,470 5.5 44.5
Duke Energy Corp. 5,173 5.2 49.7
FirstEnergy Corp. 3,862 3.9 53.5
Constellation Energy Group 3,789 3.8 57.3
Progress Energy, Inc. 3,765 3.8 61.1
Southern Co. 3,614 3.6 64.7
Public Service Enterprise Group, Inc. 3,496 3.5 68.2
Luminant Holdco 2,300 2.3 70.4
PG&E Corp. 2,240 2.2 72.7
Edison International 2,225 2.2 74.9
American Electric Power Co. Inc. 2,069 2.1 77.0
PPL Corp. 2,060 2.1 79.0
North Carolina Municipal Power Agency No. 1 2,030 2.0 81.0
Xcel Energy, Inc. 1,668 1.7 82.7
Oglethorpe Power Corp. 1,199 1.2 83.9
Ameren Corp. 1,190 1.2 85.1
Others 14,950 14.9 100.0
Total 100,265
Source: NEI
Technology
The oldest nuclear plant began commercial operation in 1969, and there are currently
104 reactors on 65 sites. Of these, 35 are BWRs and 69 are PWRs. GE and
Westinghouse dominate the nuclear fleet, although some reactors are Combustion
Engineering or Babcock & Wilcox. Despite limited new build over the past 30 years,
there have been 5,700MW of capacity uprates since 1977 and more are planned.
Operating lifetimes have also been extended to 60 years in many cases.
As in many countries, the US has geopolitical concerns, and the significant rise in gas-
fired capacity has exposed it to oil and gas price variations not previously encountered.
As a result, there is strong support for new nuclear build and a number of policy
instruments have been developed to facilitate the growth of nuclear energy, including
federal loan guarantees and tax credits. Proposals have been tabled for over 46GW of
new capacity, of which 1,180MW are under construction, and 11,000MW are planned
with EPCs in place. With the exception of one project, all are on the shortlist for a
federal loan guarantee, with one project having already been granted a guarantee. Our
global nuclear model assumes that only the latter capacity will enter service in the next
15 years. Five technologies are present in the planned new build: Arevas EPR, GE-
Hitachis ABWR and ESBWR, Toshibas AP-1000 and MHIs APWR. Of these, the GE
Hitachi ABWR and the Toshiba AP-1000 already have design certification, but design
modifications to the AP-1000 mean that a final safety evaluation is needed, which is
likely in December 2010.

Lifetime extensions have been
embraced
and new build is firmly on the
political agenda federal loan
guarantees are on offer

North America
Nor t h Amer i c a r enewabl es
North America could be one of the most important growth regions for renewables
globally. It has been characterised by stop-and-go growth in the past, mostly due to
policy, legislation and regulation.
Investment themes and picks
Growth in the US is, by a distance, the most important theme, even though we see
momentum picking up in Canada, as well. Over the medium term, we see the recovery
theme as the most important investment topic. Some important support schemes such
as the investment tax credit and production tax credit have been renewed, or in the
case of the renewable fuel standard, amended in 2008/09, and those are supportive of
growth in the sector. But the impact of the recession has been profound, and a
recovery from the dents into growth is the key topic.
Beyond this, yet also intricately connected and almost more important over the short
and long term, are policy, legislation and regulation as sector drivers. While the
Obama administration has brought about very important change in energy policy and
the outlook for renewable energy, legislation is not in place firmly enough, in our view.
From those overarching themes, we see several sector drivers.
Recovery and new growth, principally of the solar and wind market
Competition within the manufacturing sector to capture growth
We see European and Asian names exposed to these themes.
Aside from large US developers, European wind developers are exposed to short-term
weakness in the US PPA market, while the US market is a long-term growth driver. For
them, the US accounts for over 50% of growth potential over the next five years. FPL
(FPL US N/R) is the most important name. Iberdrola Renovables (IBR SM
Reduce, TP: Eur 3.60), EDP Renovaveis (EDPR PL Neutral, TP: Eur 7.85) and EDF
EN (EEN FP Neutral, TP: Eur 39) are all exposed.
Within wind turbine manufacturers, the European names have the largest exposure to
the US, given their relationships with developers as well as the existing and growing
manufacturing base. A recovery in order flow from the US is, in our view, one of the
most important share price drivers for European wind turbine names, but less so for
Asian names. GE (GE US N/R) has high levels of exposure. Vestas (VWS DC
Buy, TP: DKK 390) should be a prime beneficiary of order recovery, we believe.
Within solar, we see the potential market growth from the US as a positive driver
across the sector. Our thesis that the global Tier 1 poly manufacturers have a
sustainable competitive advantage holds for this market as well. MEMC (WFR US
N/R), Tokuyama (4043 JP - Neutral, TP: JPY 500) and Wacker Chemie (WCH GR
Buy, TP: Eur 145) are likely beneficiaries, in our view.
We also expect the wafer, cell and module segment to benefit from new growth, but
anticipate very intense competition among US, Asian and European manufacturers.
First Solar (FSLR US N/R) should continue to benefit from utility scale solar build.
Other beneficiaries are inverter manufacturers, Satcon (SATC US N/R) and SMA
(S92 GR Buy, TP Eur 125) as well as manufacturing equipment manufacturers, in
our view.
Long-term growth market; a weak
year in 2010 with path to recovery
in 2011. Legislation is paramount

Drivers of renewables build
We see the drivers that will prevail for growth in renewable energy as follows
Regulation and policy imposing renewables obligations (State level RPSs) as a
driver of base demand, as well as special stimulus packages as additional return
drivers, eg the cash grant scheme.
Speculative demand from generators with the aim of diversifying their fuel mix away
from an uncertain future of potentially high fossil fuel input costs may, in our view,
only return over a longer-term horizon. A sizeable recovery in gas prices would be
required to revive this renewable capacity merchant build as a demand driver.
The prospect of a carbon-constrained generation market over the long term. While
legislation and timing are uncertain, it is reasonably likely, in our view, that
carbon will eventually become a cost factor that generators will consider.
Return and economic consideration in high-priced electricity markets as long-term
drivers.
Views on technologies
Wind and solar will remain dominant technologies over the near and medium term.
Marine technology seems on the backburner despite large-scale development in
earlier decades. We see growth in biofuels on the basis of the renewable fuel
standards, but estimate the market to be in a situation of short-term overcapacity.
Wind
Within wind, onshore will likely prevail over at least the medium term. Potential is vast
and the degree of market saturation low, with wind accounting for just 1.8% of energy
produced in 2009. But we have also seen some momentum in the offshore market with
the first sizeable projects reaching permitting milestones. While the sector is slow in
the US over the short term, Canada is picking up momentum onshore and offshore
with an ambitious capacity target and attractive feed-in tariffs in Ontario.
Solar
Utility scale solar pv and solar thermal currently dominate the solar segment, and we
expect this to be the case over the short term. Considering the regulatory context for
solar thermal in Spain as one of the first markets, we think that solar thermal could
gain short-term momentum as developers shift their effort to the US market. Over the
long term, the US solar thermal market might become one of the most important in the
world, we believe, given the Southwestern deserts with some of the highest levels of
irradiation globally and a vast space for large parks. We also expect growing adoption
of commercial and residential rooftop solar pv over the medium term. Economic
recovery will be an important driver.
Other technologies
Marine technology was taken to pre-commercial stages for some projects a few
decades ago, but we perceive it to now be on the backburner when compared to other
technologies. We see some growth for biofuels, driven by increasing renewable fuel
standards, but estimate that the market is still in a situation of overcapacity.

Exhibit 304. North American energy mix 2006-30
0
200
400
600
800
1,000
1,200
1,400
1,600
2006 2015 2020 2025 2030
(GW)
Coal Oil
Gas Nuclear
Hydro Biomass and Waste
Wind Geothermal
Solar Tide and Wave
Source: IEA
Exhibit 305. US energy mix 2006-30
0
200
400
600
800
1,000
1,200
1,400
2006 2015 2020 2025 2030
(GW)
Coal Oil
Gas Nuclear
Hydro Biomass and Waste
Wind Geothermal
Solar Tide and Wave
Source: IEA
Developments and policies
State level RPSs are the most important growth driver for renewables, in our view.
Weakness of electricity demand dilutes over the short term in some States.
Passage of energy and climate change legislation looks challenging.
2010 is a weak year for renewables with growth picking up from 2011; order
momentum expected later in 2010
Ontario feed-in tariffs should drive wind and solar capacity growth in Canada

Exhibit 306. US wind development forecast
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1
9
9
8
A
2
0
0
0
A
2
0
0
2
A
2
0
0
4
A
2
0
0
6
A
2
0
0
8
A
2
0
1
0
E
2
0
1
2
E
2
0
1
4
E
2
0
1
6
E
2
0
1
8
E
2
0
2
0
E
(MW)
(200)
0
200
400
600
800
1,000
(%) US Annual Wind Installations
%growth

Source: BTM Consult, GWEC, EER, EPIA, Photon and Nomura research
Exhibit 307. US solar development forecast
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
E
2
0
1
1
E
2
0
1
2
E
2
0
1
3
E
2
0
1
4
E
2
0
1
5
E
(MW)
0
10
20
30
40
50
60
70
80
(%) USA Annual Solar Installations
% growth

Source: BTM Consult, EER, GWEC, EER, EPIA, Photon and Nomura research

We expect 2010 to be a weak and very back-end loaded year for renewables, but the
strong long-term prospects should prop up interest and expectations of a 2011 pick-up.
We see the following factors driving the market:
Most important, the timing and magnitude of electricity demand from the recession-
induced demand destruction in the US to levels that imply new build requirement
for utilities under their state RPS obligation. We think this could begin to come into
play from late 2010. We look for consistent announcements of new PPAs by utilities
and developers as the first indications. We think that this could also lead to a
revival of wind turbine orders around the third or fourth quarters.
Energy legislation will be a share price and sentiment driver. If passed, it could lead
to demand and order activity in our view from 2011, with wind being the most
important beneficiary.

Economic recovery leading to housing activity will likely drive solar rooftop demand
growth from 2011.
A recovery of commodity prices, ie gas, that would incite a revival of the merchant
market for renewables build seems a much longer-term topic that we have not
factored into our current expectations to a major extent.
Despite its having no direct production subsidies, the US market as the most important
within North America, could be one of the most important renewables growth markets
in the world, in our view. But growth over the near term depends strongly on policies
and regulation.
In the broad absence of national regulation, state-level regulation and policy will in our
view be the most important drivers of renewable energy. The most critical measures
are renewables obligations (RPS) or goals for them, which are in place in 35 states.
Most of them encompass renewables globally, but increasingly, they have carve-outs
by technologies. As a result, they have so far been met mostly by wind, but as solar-
carve-outs are increasing, we think that solar will increasingly take a share of RPS
induced renewables build. We expect them be a growth driver not only as electricity
demand grows, but also as the levels of RPS obligations are likely to increase over
time according to our expectation. Short term, however, demand destruction resulting
from the recession has been such that many utilities currently do not require new
renewables capacity in order to comply with their RPS obligation for 2010. In some
areas, this is also the case for 2011. We estimate that this is particularly evident in the
Mid West, which has been hit hard by recession. Other strong RPS states around the
East and West Coasts still seem to see capacity demand on the basis of RPS
obligations. We estimate a demand recovery will eventually lead to new capacity build
even in the states that are impacted more strongly, but this could take some time, into
2011.

Exhibit 308. US RPSs
Source: DSIRE

Beyond this, the cash grant scheme where developers can receive a 30% tax credit on
their investment and convert this into a cash grant 60 days after commissioning of
capacity, has sustained capacity build to a degree. We think that this will come into
play more in the third and fourth quarters, as under the current programme, 5% will
have to be invested by end-2010 for any project to be eligible before the scheme
expires at the end of this year. An extension of the cash grant scheme could push
things back, but if any, we would expect it to come very late in the year.

One of the most important topics in the North American market is energy and climate
change legislation in the US. The long-expected energy bill was due to be passed in
2009 before Copenhagen and is one of the measures that should in particular drive
wind demand growth on the basis of a national RPS and a carbon trading scheme. On
our estimates, that would deliver incremental renewables demand in the States that do
not have a state-level RPS. There could be a potential build requirement of 30-60GW
over the long term, depending on the actual level of the RPS and to which extent it
would have to be satisfied through new build or efficiencies and others. Beyond that,
the prospect of a carbon-constrained world becoming reality, in our view, would lead to
utilities building out renewable energy. We think that wind would be the prime
beneficiary, due to its being scalable and competitive vs other renewable sources. But
we would also expect large-scale solar to pick up as well.
The bill having slipped is one of the reasons behind the depressed wind turbine orders
in the US, in our view, despite high levels of indicated interest as reported by the
manufacturers. With other big legislative topics, healthcare and finances, now being
largely out of the way, energy could be next on the agenda. But the contents of energy
legislation are controversial, and mid-term elections are coming up in 4Q10. Thus, we
perceive ambitions for passage of some legislation before the summer break or at
least before the elections. Given the controversy around the various proposals,
however, any bill may be heavily watered down. If a watered down bill does not come
through either, an energy/climate change bill might slip into 2011 or later.
At the moment, two bills are active: The Waxman bill, which contains a national RPS of
20%, has passed the House, but seems to have little support in the Senate. The
Kerry/Lieberman bill, which is currently in the Senate, does not contain an RPS and
also encounters opposition on the proposed cap-and-trading scheme. We think that
lack of support for the bills in their current form makes passage unlikely, also
considering that reconciliation between the House and Senate bill would be required.
This seems very difficult, in our view, given that we believe c 15 votes of the required
60 are not secured.

Exhibit 309. US energy legislation
Bill Chamber RPS Passed Notes
The Waxman Markey Bill - The American
Clean Energy and Security Act
House of
Representatives
Approved by the House on June 26, 2009 and is still in
consideration in the Senate
The Kerry Lieberman Bill - The American
Power Act
Senate Introduced in Senate. Includes a 17% reduction in CO2
emissions by 2020 from 2005 levels.
Source: US Senate sources and Nomura

Beyond this, we expect momentum in Canada to pick up on the basis of its good wind
characteristics and attractive onshore and offshore as well as solar feed-in tariffs.
Ontario is the most important province of development with a target of 4000MW of
wind capacity by 2020, but Quebec (4600MW by 2016) and Alberta (2700MW over the
next years) are also new growth spots.

Exhibit 310. Canada renewables targets and incentives
Solar Target Solar Incenti ves Wind Target Wind Incenti ves
Canada n/a Feed-in tariffs pay up to C$0.71/kWh over
20 years for roof-mounted solar PV
systems, with lower payments for ground-
mounted solar and other renewable
energy technologies. Domestic content
requirements of 50% for solar projects to
be produced in Ontario
Provincial targets at to
12,000MW by 2014,
CanWEA targets 55,000MW
by 2025
Feed-in tariff (FiT) of C$1c/kWh for the first
10 years of production. Enacted in January
2007 and scheduled to run until March
2011.
Ontario n/a Feed-in tariffs range from C$0.802/kWh
for residential rooftop projects <=10kW to
a lowest of C$44.3/kWh for ground
mounted systems >10kW. Duration: 20
years
4,000MW by 2020 Announced the ecoEnergy Renewable
Power program in January 2007 to support
the deployment of 4GW of renewable
energy between 2007 and 2011.
Government also has target for 90% of
electricity to be generated from clean
sources by 2020.
Onshore FiT: C$0.135/kWh for any size;
Offshore FiT: C$0.19/kWh for any size.
The program has been extremely
successful and all funding was fully
allocated by early 2010, one year ahead of
schedule. The government has been
encouraged to extend the program as part
of its 2010 Budget.
Source: GWEC

Alternative Energy | Global Global Utilities and Renewables Research Team
2 July 2010 Nomura 204
Japan
Japan alternative energy
Shigeki Matsumoto +81 3 5255 1605 / shigeki.matsumoto@nomura.com
Promoting nuclear power and renewable energy
1) Periodic review of the basic energy plan
In June 2002, the Basic Law on Energy Policy came into force, based on the tenets of
ensuring stable supply, meeting environmental requirements, and using market
principles. Under the Basic Law on Energy Policy, the government draws up a basic
energy plan that lays out long-term, comprehensive, and systematic policies for energy
supply. The first basic energy plan was drawn up in October 2003. The law requires
the basic energy plan to be revised as necessary at least every three years, and the
first such revision took place in March 2007. Under the second and latest revision, the
government has highlighted three main areas based on the legislation: 1) ensuring
energy security; 2) tackling the global warming problem; and 3) looking to the energy
and environment field as a key driver of economic growth.
The basic energy plan has to take into account both measures to prevent global
warming (draft basic legislation on counteracting global warming was approved by the
Cabinet in March 2010) and growth strategies. In December 2009, the Cabinet
decided on a new basic growth policy, which is currently under discussion by the
growth strategy planning committee of the National Policy Unit.
The plenary session and basic policy drafting session of the natural resources and
energy committee were held on 19 April, with discussion on draft proposals to revise
natural resource and energy policies as part of moves to revise the basic energy plan.
On 27 May, a draft basic energy plan based on the content of this debate was put
forward for public comment. Under the proposals, the energy supply targets for 2030
are twofold: 1) double energy self-sufficiency from the current 18% (4% from domestic
sources of energy plus 14% from nuclear power) and the proportion of fossil fuels
derived from Japanese-owned development interests from the current 26% (thereby
raising the overall level of Japanese energy self-sufficiency from 38% to 70%, in line
with the OECD average) and 2) increase the percentage of power generated from
zero-emission power sources (nuclear power and renewables including hydroelectric
power) to 70% (from 34% currently).
2) Raising energy self-sufficiency
Looking at the breakdown of Japan's primary energy supply, we can see that despite a
decline in the percentage of oil in the wake of the 1973 oil shock, oil is still the energy
source with the largest share, at 42% in FY08 (Exhibit below). As a result, energy
prices in Japan tend to be at the mercy of fluctuations in the price of crude oil. Amid
increasingly volatile crude oil prices, raising the proportion of energy supplied from
sources besides oil, particularly from nuclear power, is likely to result in more stable
domestic energy prices.

Revised policy puts emphasis on
stable supply, tackling global
warming and economic growth
Supply targets seek to raise
energy self-sufficiency and power
generated from zero-emission
sources
Oil dependency still high

Exhibit 311. Breakdown of Japan's primary energy supply
0
10
20
30
40
50
60
70
80
90
100
73 79 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
(FY)
(%)
Oil Coal Natural gas Nuclear Hydroelectric Other

Note: (1) Calculation method changed from FY90 onward. (2) In FY73 and FY79 hydroelectric is included under the
other category. (3) The other category includes renewable energy, etc.
Source: Annual Energy Report, Agency for Natural Resources and Energy

Japan imports almost all its fossil fuel (oil, natural gas, coal) requirements. In order to
improve the stability of its energy supply, Japan needs to increase its independently
developed energy interests while lowering its dependence on fossil fuels. By 2030, the
government plans to increase its independently developed interests to more than 40%
(from around 20% currently) for oil, over 60% (versus around 40% now) for coal, and over
50% (as against 26% currently) for fossil fuels. Trade from Japan's independently
developed oil interests as a percentage of its total oil import volume is on an upward trend
versus its 1973 level of 8%, but was still languishing at 16% in FY08 (Exhibit below).

Exhibit 312. Japan's independently developed oil interests
0
10,000
20,000
30,000
40,000
50,000
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 (FY)
('000kl)
0
2
4
6
8
10
12
14
16
18
20
(%)
Volume of trade from independently developed crude oil interests (lhs)
Percentage of independently developed oil interests (rhs)

Note: Figures from FY00 onward refer not to Japan's independently developed oil import volume as a percentage of
total crude oil import volume but volume of trade from Japans independently developed oil interests as a percentage
of total crude oil import volume.
Source: Agency for Natural Resources and Energy

Japan's energy self-sufficiency (excluding nuclear power but including hydroelectric
power and the like) has dropped to 4% (FY07), which is well below the figures for other
countries (Exhibits below). Almost all the uranium used as fuel in nuclear power is
imported. However, once uranium has been imported it can be used for a long time,
and as such, nuclear power can be regarded as quasi-domestic. Even including
nuclear power, though, Japan's energy self-sufficiency is low by global standards. Note
that energy self-sufficiency refers to the proportion of primary energy demand that can
be secured domestically.

Toward expansion of
independently developed fuel
interests
Japan's energy self sufficiency
low by global standards

Exhibit 313. Japan's energy self-sufficiency ratio
(6)
(12)
(15)
(14) (15) (14)
57
14
6
5 4 4 4 4
0
10
20
30
40
50
60
1960 70 80 90 2000 05 06 07(CY)
(%)
12
18
19
18
19
17

Note: Self-sufficiency figures shown are for the likes of hydroelectric power, geothermal power, and domestically
produced coal and natural gas. Figures for nuclear power are shown in parentheses
Source: Energy Balances of OECD Countries 20042005, IEA

Exhibit 314. International comparison of energy self-sufficiency ratios
15
30
8
62
75 76
91
144
177
4 2
15
18 19
41
51
71
76
83
92
153
183
0
20
40
60
80
100
120
140
160
180
200
I
t
a
l
y
J
a
p
a
n
K
o
r
e
a
G
e
r
m
a
n
y
F
r
a
n
c
e
U
S
I
n
d
i
a
U
K
C
h
i
n
a
C
a
n
a
d
a
R
u
s
s
i
a
(%)
Energy self-sufficiency (counting nuclear power as imported energy)
Energy self-sufficiency (counting nuclear power as domestic energy source)
+

Note: (1) Electric power imports/exports are counted as primary energy. (2) Amounts over 100% indicate exports.
Source: Energy Balances of OECD/Non-OECD Countries, 2006/07 (2009 Edition), IEA
3) Raising power generation from zero-emission sources
Zero-emission power sources accounted for 34% of Japan's total power generation in
FY08, of which nuclear power accounted for 25.5% and hydroelectric and other 8.7%
(hydroelectric 7.6%, new energy 1.1%) (Exhibit below). New energy includes wind
power, solar power, biomass, waste material, and geothermal.

Zero-emission power generation
reached 34% in FY08

Exhibit 315. Breakdown of power generation by power source in Japan
9 9 10
26
29
41
0
10
20
30
40
50
60
70
80
90
100
1973 79 90 95 2000 01 02 03 04 05 06 07 08 09 10E 14E 19E
(FY)
(%)
Hydroelectric, etc Nuclear LNG Coal Oil, etc

Note: Hydroelectric, etc = hydro + pumped storage + new energy.
Source: Energy in Japan 2010, The Electric Power Supply Plan, Agency for Natural Resources and Energy

In order to raise zero-emission power generation to 70%, the Japanese government
plans to build new nuclear power facilities, increase deployment of existing facilities,
and expand renewable energy (solar photovoltaic, wind power, geothermal power,
hydroelectric power, biomass, heat pumps and other forms of aerothermal energy,
solar thermal). As the term suggests, zero-emission power sources produce zero CO2
emissions from fuel combustion (Exhibit below). At the same time as helping to bring
about a low-carbon economy, these power sources contribute to energy security.

Exhibit 316. CO2 emissions per unit of energy by power source
Life cycle CO2 emissions (g-CO2/kWh (transmission end))
111
130
38
88
408
478
704
887
11
15
2225
29
53
0 200 400 600 800 1,000
Hydroelectric
Geothermal
Nuclear
Wind
Solar
LNG combined
Thermal (LNG)
Thermal (oil)
Thermal (coal)
Indirect emissions (during other life cycle phases)
Direct emissions (from combustion)
975
742
608
519

Note: 1) Indirect emissions occur during extraction of raw materials, construction of facilities, fuel transportation, etc.
2) nuclear power includes domestic reprocessing of spent fuel currently being planned, "pluthermal" use (assuming
plutonium is recycled once), and highly radioactive waste disposal.
Source: Evaluation of Nuclear Power Generation Technology based on Life Cycle CO2 Emissions (August 2001) and
Evaluation of Power Generation Technologies based on Life Cycle CO2 Emissions (March 2000), Central Research
Institute of Electric Power Industry

Looking to raise power generation
from zero-emission sources to
70%

Promoting nuclear power
1) Fourteen nuclear power plants are currently slated for construction
in Japan
Nuclear power has been positioned as a core energy source that fulfils the energy
policy targets of supply stability, meeting environmental requirements, and economic
efficiency, and we think the government will strive hard to promote it.
The current target is to build nine new nuclear power plants (there were 54 in
operation as of March 2010) and achieve a nuclear capacity factor of 85% (65.5% in
FY09) by 2020F, and to build at least 14 new nuclear power plants (including the nine
previously mentioned) and achieve a nuclear capacity factor of 90% by 2030F.
According to supply plans released by electric power companies in March 2010, 14
nuclear power plants are slated for construction in Japan. Chugoku Electric Power's
Shimane No. 3 reactor (1.37mn kW advanced boiling water reactor [ABWR]), which
has a scheduled commissioning date of December 2011, was 84.4% complete at end-
April 2010, while Electric Power Development's Oma plant (1.38mn kW, ABWR), due
to be commissioned in November 2014, was 13.4% complete. Construction of Japan
Atomic Power's Tsuruga No. 3 reactor had yet to get under way as of end-May 2010.

Exhibit 317. Nuclear power plant construction plans
Plant Location Capacity Start of
Power company name (prefecture) Type 000kW construction Startup
Chugoku Shimane Unit 3 Shimane ABWR 1,373 Dec 2005 Dec 2011
Electric Power Development Oma Aomori ABWR 1,383 May 2008 Nov 2014
Japan Atomic Power Tsuruga Unit 3 Fukui APWR 1,538 Oct 2010 Mar 2016
Tokyo Fukushima Daiichi Unit 7 Fukushima ABWR 1,380 Apr 2011 Oct 2016
Tokyo Higashidori Unit 1 Aomori ABWR 1,385 Dec 2010 Mar 2017
Japan Atomic Power Tsuruga Unit 4 Fukui APWR 1,538 Oct 2010 Mar 2017
Tokyo Fukushima Daiichi Unit 8 Fukushima ABWR 1,380 Apr 2012 Oct 2017
Chugoku Kaminoseki Unit 1 Yamaguchi ABWR 1,373 Jun 2012 Mar 2018
Chubu Hamaoka Unit 6 Shizuoka ABWR 1,400 class FY15 FY1822
Kyushu Sendai Unit 3 Kagoshima APWR 1,590 FY13 FY19
Tokyo Higashidori Unit 2 Aomori ABWR 1,385 FY14 or later FY20 or later
Tohoku Namie Kodaka Fukushima BWR 825 FY16 FY21
Tohoku Higashidori Unit 2 Aomori ABWR 1,385 FY16 or later FY21 or later
Chugoku Kaminoseki Unit 2 Yamaguchi ABWR 1,373 FY17 FY22

Source: Nomura, based on company data

As shown in the Exhibit above, of the 14 planned nuclear power plants, 11 are boiling
water reactors (BWRs) produced by Hitachi and Toshiba, which will have a total
capacity of 14.64mn kW. The other three (4.67mn kW) are pressurised water reactors
(PWRs), which are made by Mitsubishi Heavy Industries. In Japan, both BWRs and
PWRs are in widespread use. Of the nine major power companies, Tokyo Electric
Power, Chubu Electric Power, Tohoku Electric Power, Hokuriku Electric Power, and
Chugoku Electric Power use BWRs, while Kansai Electric Power, Shikoku Electric
Power, Kyushu Electric Power, and Hokkaido Electric Power use PWRs. Japan Atomic
Power has both types of reactor.
The Toshiba group has a strong history of winning orders from Tokyo Electric Power,
Chubu Electric Power, and Tohoku Electric Power for the construction of nuclear
power plants (Exhibit below). These three electric power companies are due to build
seven of the planned 14 reactors. Considering that the Toshiba group has already
received the order for Electric Power Development's Oma plant, there is a possibility
that Toshiba could win orders for up to eight reactors in the long term.

Importance of nuclear power
Target is to build 14 new plants
and achieve nuclear capacity
factor of 90% by 2030
Construction of two new plants
has already begun
76% of new capacity due to be
BWRs
Toshiba group could win lion's
share of orders

Exhibit 318. Nuclear power plant construction history
Capacity Capacity
Company Plant name MW Commissioned Primary contractor Company Plant name MW Commissioned Primary contractor
Tokai (closed) 166 Jul 1966 GEC/SC
Hamaoka 1
(closed)
540 Mar 1976 Toshiba
Tokai 2 1,100 Nov 1978 GE/Hitachi/Shimizu
Hamaoka 2
(closed)
840 Nov 1978 Toshiba/Hitachi
Tsuruga 1 357 Mar 1970 GE Hamaoka 3 1,100 Aug 1987 Toshiba/Hitachi
Japan Atomic
Power
Tsuruga 2 1,160 Feb 1987
Mitsubishi Heavy
Industries
Hamaoka 4 1,137 Sep 1993 Toshiba/Hitachi
Tomari 1 579 Jun 1989
Mitsubishi Heavy
Industries
Chubu
Hamaoka 5 1,380 Jan 2005 Toshiba/Hitachi
Hokkaido
Tomari 2 579 Apr 1991
Mitsubishi Heavy
Industries
Shika 1 540 Jul 1993 Hitachi
Onagawa 1 524 Jun 1984 Toshiba
Hokuriku
Shika 2 1,358 Mar 2006 Hitachi
Onagawa 2 825 Jul 1995 Toshiba Mihama 1 340 Nov 1970
WH/MHI (nuclear power
division)
Onagawa 3 825 Jan 2002 Toshiba/Hitachi Mihama 2 500 Jul 1972
MHI (nuclear power
division)
Tohoku
Higashidori 1 1,100 Dec 2005 Toshiba Mihama 3 826 Dec 1976 Mitsubishi Corp
Fukushima Daiichi 1 460 Mar 1971 GE Takahama 1 826 Nov 1974 WH/Mitsubishi Corp
Fukushima Daiichi 2 784 Jul 1974 GE/Toshiba Takahama 2 826 Nov 1975 Mitsubishi Corp
Fukushima Daiichi 3 784 Mar 1976 Toshiba Takahama 3 870 Jan 1985 Mitsubishi Corp
Fukushima Daiichi 4 784 Oct 1978 Hitachi Takahama 4 870 Jun 1985 Mitsubishi Corp
Fukushima Daiichi 5 784 Apr 1978 Toshiba Oi 1 1,175 Mar 1979 WH/Mitsubishi Corp
Fukushima Daiichi 6 1,100 Oct 1979 GE/Toshiba Oi 2 1,175 Dec 1979 WH/Mitsubishi Corp
Fukushima Daini 1 1,100 Apr 1982 Toshiba Oi 3 1,180 Dec 1991 Mitsubishi Heavy Industries
Fukushima Daini 2 1,100 Feb 1984 Hitachi
Kansai
Oi 4 1,180 Feb 1993 Mitsubishi Heavy Industries
Fukushima Daini 3 1,100 Jun 1985 Toshiba Shimane 1 460 Mar 1984 Hitachi
Fukushima Daini 4 1,100 Aug 1987 Hitachi
Chugoku
Shimane 2 820 Feb 1989 Hitachi
Kashiwazaki-Kariwa 1 1,100 Sep 1985 Toshiba Ikata 1 566 Sep 1977 Mitsubishi Heavy Industries
Kashiwazaki-Kariwa 2 1,100 Sep 1990 Toshiba Ikata 2 566 Mar 1982 Mitsubishi Heavy Industries
Kashiwazaki-Kariwa 3 1,100 Aug 1993 Toshiba
Shikoku
Ikata 3 890 Dec 1994 Mitsubishi Heavy Industries
Kashiwazaki-Kariwa 4 1,100 Aug 1994 Hitachi Genkai 1 559 Oct 1975 Mitsubishi Heavy Industries
Kashiwazaki-Kariwa 5 1,100 Apr 1990 Hitachi Genkai 2 559 Mar 1981 Mitsubishi Heavy Industries
Kashiwazaki-Kariwa 6 1,356 Nov 1996 Toshiba/GE/Hitachi Genkai 3 1,180 Mar 1994 Mitsubishi Heavy Industries
Kashiwazaki-Kariwa 7 1,356 Jul 1997 Toshiba/GE/Hitachi Genkai 4 1,180 Jul 1997 Mitsubishi Heavy Industries
Kawachi 1 890 Jul 1984 Mitsubishi Heavy Industries
Tokyo

Kyushu
Kawachi 2 890 Nov 1985 Mitsubishi Heavy Industries
Source: Nomura, based on Nuclear Power Pocket Book, 2009 edition
2) Demand for construction of new plants likely to increase
Hokkaido Electric Power completed its Tomari No. 3 reactor (0.912mn kW capacity) in
10/3. No new nuclear power plants are scheduled for completion in 11/3, but the total
output of nuclear power plants due to come on stream is 1.37mn kW in 12/3, zero in
13/3 and 14/3, 1.38mn kW in 15/3, 1.54mn kW in 16/3, 4.3mn kW in 17/3, 2.75mn kW
in 18/3, 1.4mn kW in 19/3, 1.59mn kW in 20/3, 1.385mn kW in 21/3, 2.21mn kW in
22/3, and 1.37mn kW in 23/3 (Exhibit below). While construction plans vary
considerably from year to year, construction plans for some years exceed the recent
peak years of 06/3, 98/3, and 94/3, when 2.46mn kW, 2.54mn kW and 3.96mn kW of
nuclear capacity, respectively, were completed.

Plant completions in some years
likely to exceed recent highs

Exhibit 319. Nuclear power plant capacity completed each fiscal year
Est
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
70/3 75/3 80/3 85/3 90/3 95/3 00/3 05/3 10/3 15/3E 20/3E
(yy/m)
(MW)

Source: March 2010 supply plans

By FY22F, when the abovementioned 14 nuclear power plants should all have started
commercial operation, nuclear power generating capacity should have risen by
19.6GW (40%) from 48.8GW at end-10/3 to 68.4GW (Exhibit below).

Exhibit 320. Nuclear power capacity in Japan should increase to 68.4GW by
FY22F
Est
0
10
20
30
40
50
60
70
70/3 75/3 80/3 85/3 90/3 95/3 00/3 05/3 10/3 15/3E 20/3E
(yy/m)
(GW)
7

Source: March 2010 supply plans

Due to percentage-of-completion-basis accounting, we think companies such as
Toshiba Plant Systems & Services, which handle on-site construction (installation, in
many cases involving subcontracting), book nuclear power plant construction orders
as sales over around three years. The Exhibit below shows sales where sales (nuclear
power plant output) are booked equally from three years previously, including the year
of completion. We expect sales in the plant sector to switch to growth from 14/3 and
peak in 16/3. We think majors (prime contractors) such as Mitsubishi Heavy Industries
book sales over around five years.

Nuclear capacity in 2022F should
be 40% higher than at end-March
2010
Plant manufacturers sales
volume should also increase

Exhibit 321. Sales volume at plant companies (1)
Est
0
200
400
600
800
1,000
1,200
68/3 73/3 78/3 83/3 88/3 93/3 98/3 03/3 08/3 13/3E 18/3E 23/3E
(yy/m)
(MW)

Note: 68/3 figures are output of nuclear power plants completed in FY6769 3.
Source: Nomura

Exhibit 322. Sales volume at plant companies (2)
Est
0
50
100
150
200
250
300
350
400
450
500
66/3 71/3 76/3 81/3 86/3 91/3 96/3 01/3 06/3 11/3E 16/3E 21/3E
(yy/m)
(MW)

Note: 66/3 figures are output of nuclear power plants completed in FY6569 5.
Source: Nomura
3) Capacity factor improvement measures: lengthening operating
cycles and shortening scheduled inspections
Japan's nuclear capacity factor has been lower than that of the US since 1999 (Exhibit
below). This partly reflects extended shutdowns due to earthquake-proofing and
equipment trouble. But under Japan's current system, the ceiling for the capacity factor
is 80-85%, even with plants operating smoothly short of the more-than-90%
recorded in the US.

Nuclear capacity factor lower in
Japan than US

Exhibit 323. Nuclear capacity factor lower in Japan than in the US
Nuclear capacity factor
0
10
20
30
40
50
60
70
80
90
100
70 75 80 85 90 95 00 05
(US: CY, Japan: FY)
(%)
US
Japan

Source: Nomura, based on NEI data, etc

With the aim of bringing the nuclear capacity factor into line with the US level, the
Japanese government is seeking to extend the average operating cycle of nuclear
plants to at least 18 months by 2030F (versus a maximum of 13 months at present)
and to keep plant shutdowns caused by scheduled inspections to within an average of
around two months. In theory, uninterrupted operation of 18 months followed by a two-
month shutdown would bring the capacity factor to 90% (= 18 months (18 months + 2
months).
Japan introduced a new inspection regime in January 2009 with the aim of conducting
more detailed inspections of individual plants in accordance with their age and the type
of facilities and equipment, instead of performing uniform inspections for all nuclear
plants. Under the current system, nuclear reactors are shut down every 13 months for
inspection, but electricity companies will be able to extend this to 18 or 24 months if
they deem such intervals between inspections to be appropriate. A prerequisite for
gaining approval from local citizens and governments is stable operation of the nuclear
plant for at least the current 13-month average.
To support activities aimed at improving understanding of the new inspection regime,
the central government will pay a subsidy of 20mn per year over five years to local
government jurisdictions in which nuclear plants are located, provided electricity
companies seek approval to amend their security regulations relating to the extension
of nuclear reactor shutdowns before end-FY13F.
In connection with these subsidies paid to local governments, the central government
is considering measures that would promote new capacity expansion and equipment
replacement at nuclear plants. The subsidy scheme was established to facilitate at the
local level the installation of new facilities. At the same time, its aim is to ensure
smooth plant operation, as stipulated in the Law on the Development of Areas
Adjacent to Electric Power Generating Facilities. Accordingly, the basic concept is that
more subsidy payments are made to the governments of regions where the most
power is produced, with the result that plants that generate high volumes of power gain
more understanding from the regions in which they are located. While subsidy
payments are calculated based on production capacity and the volume of power
generated, the government is looking to place a greater weight on the latter (equivalent
to the nuclear capacity factor).
The nuclear capacity factor in the US was less than 60% in the 1980s. It rose to 66%
in 1990, 77% in 1995 and 90% in 2002. We believe this increase reflected efforts to
lengthen the operating cycle of plants and shorten scheduled inspections. The average
operating cycle used to be around 12 months for reasons of fuel design. Fuel (some or
all) was replaced each time a plant was shut down for a scheduled inspection, while
fuel was also repositioned inside reactors to raise combustion efficiency. As a result of
Key goals are to lengthen
operating cycles and shorten
scheduled inspections
Possibility of a maximum
operating cycle of 24 months in
long term
Subsidy scheme supports new
inspection regime
Strengthening correlation
between subsidy payments to
local governments and volume of
electricity generated
Process by which capacity factor
improved in the US

improved fuel performance since then, nuclear plants are able to operate uninterrupted
for 18 months, and in some cases as long as 30 months (Exhibit below).

Exhibit 324. Country regulations government nuclear plant operation
US France Finland Korea Japan
Regulations on intervals
between nuclear reactor
shutdowns
Maximum of 30
months
Generic Letter 91-
04
rules that maximum
interval can be
extended to 30
months
Nothing stipulated
by law
Determined by
approval of fuel
management plan
after fuel
replacement
12-month and 18-
month management
methods allowed at
present
Nothing stipulated by
law
Maintenance
required once every
2 years
12-month operation
chosen for economic
reasons
Maximum of 20
months
Governed by Article
19 of Enforcement
Regulations
Maximum 13 months
Governed by Article 54 of
Electricity Business Law
and Article 91 of
Enforcement Regulations
Max 26 months 23 months 13 months 17 months 16 months Shutdown intervals
Avg 18.8 months 12.8 months 12 months 15.1 months 13.6 months
Measures to extend intervals
between shutdowns
No particular plans Interval for
1,300MWe reactors
changed from 18
months to 1521
months
Proposed change
for N4 reactors from
12 to 17 months
currently under
discussion
24 months planned
for EPRs to be newly
introduced
No particular plans

Plans being discussed
based on September 2006
document on improving
the inspection regime for
nuclear reactor facilities
Average operating cycle /
inspection period
18.1 months / 44 days 14.1 months / 43 days 11.9 months / 12 days 11.5 months / 79 days 11.5 months / 98 days
Note: Interval between shutdowns is for period from 2002 to 2004 (from IAEA's PRIS database).
Source: Nuclear and Industrial Safety Subcommittee (24 August 2007), Federation of Electric Power Companies of Japan (28 September 2007)

The duration of scheduled inspections averaged 79 days in the 1990s (range of 40-
106 days) but this was reduced to 39 days (range of 33-44 days) in the 2000s (Exhibit
below). The main reason is that some tests conducted during shutdowns were
replaced by online maintenance during plant operation.

Exhibit 325. Comparison of durations for nuclear plant shutdowns in Japan
and US
0
50
100
150
200
250
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 (FY)
(No. of days)
US Japan

Note: 1) Data for Japan are for the period from start to end of regular inspections (general load performance
inspections). 2) Mihama No. 2 reactor excluded from FY94 data, Fukushima No. 1 reactor from FY05 data, and
Mihama No. 3 reactor from FY06 data. 3) Japanese data for FY09 are currently being collated. 4) US data represent
the average length of refueling outages for nuclear plants.
Source: US Nuclear Generating Statistics, Japan Nuclear Energy Safety Organization

The Agency for Natural Resources and Energy estimates that Japan's nuclear capacity
factor would improve from 70% to 77% if the average operating cycle were to be
increased from 13 months to 19 months as in the US, and from 70% to 87% if the
duration of scheduled inspections were to be shortened from 143 days to 38 as in the
US (Exhibit below). Reducing the average number of days a reactor is closed due to
Shortening scheduled inspections
Capacity factor in Japan could
exceed 90% if same standards as
US were adopted

an operational incident from 34 in Japan to 4.7 as in the US would, according to the
agency, improve the capacity factor further from 87% to 93%. Extending the operating
cycle to 24 months could increase the capacity factor to as high as 95%. The above
Japanese data mainly relates to the operating cycle in which most plants underwent
scheduled inspections in 2007-08 (with the exception of Chubu Electric Power's
Hamaoka No. 1 and No. 2 reactors, which were scrapped after long-term shutdowns,
and plants that faced long-term shutdowns as a result of the Niigata-Chuetsu
earthquake).

Exhibit 326. Capacity factor calculation assuming similar standards to US were adopted in Japan

No. of
Average
operating cycle
Average
inspection
duration
No. of shutdown
days Capacity factor
reactors months/reactor days/reactor days/reactor (%)
US 103 About 19 About 38 About 4.7 About 93
Japan 53 About 13 About 143 About 34 About 70
Assuming operating cycle extended to match US (a) 53 19 143 34 About 77
Assuming inspection days reduced to match US (b) 53 13 38 34 About 87
Assuming (a), (b) and same no. of shutdown days
caused by operational problems as in US
53 19 38 4.7 About 93
Assuming extension of operating cycle to 24 months 53 24 38 4.7 About 95

Note: 1) Capacity factor = (average operating cycle for one reactor average days of shutdown) (average operating cycle for one reactor + average days of
shutdown). 2) Operating cycle is the period from the startup of a nuclear reactor for trial operation during inspection until shutdown for the next inspection. 3) Data
exclude inspections of the Hamaoka No. 1 and No. 2 reactors that were scrapped after long-term shutdowns. Plants closed for long periods due to the Niigata-Chuetsu
earthquake also excluded. 4) Data for each plant relate to the operating cycle in which most plants underwent scheduled inspections in 20072008.
Source: 22nd Nuclear Energy Subcommittee (5 March 2010)

Like the US, the operating cycle is longer in Korea than in Japan while the duration of
scheduled inspections is shorter. Operating cycles average about 12 months in
Finland and France, similar to Japan, but scheduled inspections are shorter. France
implements load follow operations (cutting power output when demand is declining), so
its capacity factor appears lower.
4) Boost to profits from improvement in nuclear capacity factor
The greater their reliance on nuclear power, the bigger the impact on electric power
companies when the nuclear capacity factor rises. In the long term (ie, according to
our 20/3 forecast), we think Kansai Electric Power and Tokyo Electric Power will
depend heavily on nuclear power, with respective exposures of 50% and 48% (Exhibit
below). Although it depends on fuel prices and the mix of alternative fuels, we estimate
that a 1pp improvement in the nuclear capacity factor would reduce fuel costs by
7.1bn at Kansai Electric Power and by 12.0bn at Tokyo Electric Power).

Exhibit 327. Long-term reliance on nuclear power
50
48
44
40 40 40
38
30
28
0
10
20
30
40
50
60
Kansai Shikoku Hokkaido Kyushu Chubu
(%)

Note: 20/3 estimates.
Source: Nomura
Comparison with other countries
The greater the reliance on
nuclear power, the bigger the
impact of improvements in the
capacity factor

Exhibit 328. Impact of change in nuclear capacity factor on profits
0
2
4
6
8
10
12
14
Tokyo Kansai Hokuriku Shikoku Hokkaido
(bn)

Note: 1) Adjusted for power interchanges with other utility companies. 2) Figure for Hokkaido Electric Power includes
Tomari No. 3 unit. 3) Assumes crude oil price of US$85/bbl and yen/dollar rate of US$1/90. 4) Coal included as an
alternative fuel.
Source: Nomura

Assuming a nuclear capacity factor of 81% (five-year average of industry as a whole
through 02/3), we estimate adjusted recurring profits (excluding factors likely to drop
out over the medium term, such as gains/losses under the fuel cost adjustment
system) for 11/3 of 456.3bn at Tokyo Electric Power and 215.0bn at Kansai Electric
Power (Exhibit below). If we were to raise our capacity factor assumption to 90% and
assume sensitivity as shown in the Exhibit at the top of the following page, then we
would need to revise up our adjusted recurring profit estimates by 24% for Tokyo
Electric Power and by 30% for Kansai Electric Power.
The profit sensitivity in the first Exhibit on the next page is that for when the nuclear
capacity factor is raised above the normal 81%, while that in the second Exhibit is for
when the capacity factor returns to normal. The mix of substitute fuels used differs in
each case.

Exhibit 329. Adjusted EPS estimates
[9501] [9502] [9503] [9506] [9508]
Tokyo
Electric Power
Chubu
Electric Power
Kansai
Electric Power
Tohoku
Electric Power
Kyushu
Electric Power
Recurring profits (11/3E) A 208.1 118.1 156.0 41.1 55.7
Nuclear power capacity factor (11/3E, %) B 63 73 76 71 80
Normal (%) C 81 81 81 81 81
Sensitivity D 11.6 2.8 7.6 0.9 4.1
Fuel cost reductions ((C-B)*D) E 213.5 22.7 39.4 9.0 5.7
Fuel cost adjustment, actuarial differences,
depreciation, other
F 141.6 71.5 22.5 35.9 35.7
Other G (106.9) (26.4) (2.9) 18.7 (0.5)
Adjusted recurring profits (A+E+F+G) 456.3 185.9 215.0 104.8 96.6
Adjusted EPS () 205 139 148 117 120

Note: 1) Normal nuclear power plant capacity factor is average for FY9701. 2) Decrease in fuel costs is based on crude oil price of $85/bbl and exchange rate of
$1/90. 3) Sensitivity refers to Nomura estimate of impact on annual fuel costs of every 1ppt fluctuation in nuclear capacity factor. (4) We reversed amortization of
residual book value stemming from 08/3 revisions to tax law. 5) For Tokyo Electric Power, other (i) includes the partial reversal of the sudden reduction in costs arising
from the closure of the Kashiwazaki-Kariwa nuclear power plant; and (ii) excludes the proportion of the reduction in fuel costs corresponding to electricity sold to
Tohoku Electric Power. 6) For Chubu Electric Power, other refers to emission credit costs arising from the closure of the Hamaoka No. 1 and No. 2 reactors. 7) For
Kansai Electric Power, other refers to fuel cost reductions due to new power supplies and net CO2 emission credit costs. 8) For Tohoku Electric Power, other assumes
that one-time increases in costs will decline over the medium term. 9) For Kyushu Electric Power, other assumes a normal capacity factor of 83% (because companys
nuclear power capacity factor is the most stable in the sector) and the net value for fixed cost reactionary growth risk.
Source: Nomura

We define fuel cost savings as decline in fuel consumption volume average fuel price.
As such, the higher fuel prices rise and the weaker the yen becomes, the greater the
fuel cost savings. Assuming a $10/bbl rise in the price of crude oil, we estimate that
Tokyo Electric Power's sensitivity (change in recurring profits with each 1pp shift in
Profits assuming achievement of
90% nuclear capacity factor
Capacity factor determines the
mix of substitute fuels used
The higher fuel prices are, the
greater the impact of
improvements in nuclear capacity
factor

nuclear capacity factor) would increase from 12.0bn to 13.4bn, while a 5
weakening in the value of the yen against the dollar would increase it from 12.0bn to
12.8bn (Exhibit below).

Exhibit 330. Rise in crude oil prices, yen depreciation enhances impact of improvement in nuclear power
capacity factor
Change in sensitivity with each
$10/bbl rise in crude oil price
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
T
o
k
y
o
C
h
u
b
u
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s
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r
i
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o
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u
S
h
i
k
o
k
u
K
y
u
s
h
u
H
o
k
k
a
i
d
o
(bn)

Change in sensitivity with each 5
depreciation against the dollar
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
T
o
k
y
o
C
h
u
b
u
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a
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s
a
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k
u
r
i
k
u
T
o
h
o
k
u
S
h
i
k
o
k
u
K
y
u
s
h
u
H
o
k
k
a
i
d
o
(bn)

Note: 1) Adjusted for power interchanges with other utility companies. 2) Figure for Hokkaido Electric Power includes Tomari No. 3 unit. 3) Change relative to base
assumptions of US$85/bbl for crude oil price and US$1/90 for yen/dollar rate. 4) Coal included as an alternative fuel.
Source: Nomura
5) Increasing rated output at nuclear power plants
Increasing power generation at nuclear power plants is possible via uprates (increases
in rated output) as well as by improving nuclear capacity factors. Uprates totaling
5,726MW were approved in the US in 1977-2014, of which 5,696MW has been
implemented (Exhibit below). This equates to the same amount of electricity
generation as building five new 1MW power plants. Uprates of 2,629MW are planned
for 2010-14F.
In Japan, there are plans to carry out uprate work during the scheduled inspection of
Japan Atomic Power's Tokai No.2 unit in FY12.

Exhibit 331. Uprates in US
Cumulative RHS)
0
200
400
600
800
1,000
1,200
7
7
7
8
7
9
8
0
8
1
8
2
8
3
8
4
8
5
8
6
8
7
8
8
8
9
9
0
9
1
9
2
9
3
9
4
9
5
9
6
9
7
9
8
9
9
0
0
0
1
0
2
0
3
0
4
0
5
0
6
0
7
0
8
0
9
(CY)
(MWe)
0
1,000
2,000
3,000
4,000
5,000
6,000
(MWe)

Source: Nuclear Regulatory Commission
6) Improvement in capacity factor can also impact on overseas
orders
Low nuclear capacity factors in Japan are cited as one reason for Japanese
companies missing out on the order for constructing a nuclear power plant in the
United Arab Emirates (UAE). We think countries introducing new nuclear power
facilities use capacity factors as one indicator to assess the reliability of equipment.
US has strong track record in
uprates
Uprates in Japan
Low nuclear capacity factor a
reason for Japanese companies
missing UAE order?

According to the Agency for Natural Resources and Energy, the lesson to be learned
from the UAE nuclear project is that Korean companies were successful because a
state-run electricity company was leading the team (Exhibit below). The Korean
consortium moreover agreed to a long-term (60-year) contract to run and maintain the
facilities (we estimate this is worth around US$20bn in addition to the plant
construction order) and to provide comprehensive support, including training staff. In
addition, the Koreans were able to take quick decisions in response to various and
abrupt changes in requirements and orders by the UAE side.

Exhibit 332. Order setup for UAE project

US-Japan team
SPC
(CEO Hitachi)
Hitachi, JGC,
Kajima, Marubeni
Exelon
(TEPCO)
General Electric
Plant construction Operational support Fuel provision
Korean team
Korea Electric Power
Doosan Heavy Industries,
Hyundai Engineering and
Construction, etc
Korea Electric Power
Korea Electric
Power
French team
SPC
(leader changed from Areva to EDF during bid)
Areva
(public nuclear
power company)
EDF
(public electricity company),
GDF Suez
Areva

Source: 23rd meeting of Nuclear Power Subcommittee (29 March 2010)
By contrast, the US-Japan team centred on a manufacturer (Hitachi). This was a one-
off consortium of private companies, so adjustment costs among those involved were
also substantial. Support for running the facility was to be provided by a US electric
power company.
The French team apparently changed the lead company from a manufacturer (Areva)
to EDF, the French publicly-owned electricity company, on the directions on President
Sarkozy, but still failed to win the order.
We estimate the contracted amount to construct the facilities (four reactors for around
US$20bn) was more than 20% lower than the bids submitted by the French and US-
Japan teams. We think that the state-run company at the lead of the Korean bid has
taken on the risk of private companies being unable to cope with unexpected cost
increases or damages from works being delayed.
The following Exhibit shows the issues the Agency for Natural Resources and Energy
sees for Japan in pursuing orders from countries introducing new nuclear power
facilities.

Having state-run company in the
lead one factor behind successful
Korean bid
Manufacturer at core of US-Japan
team
French bid also initially centred
on manufacturer
Having state-run company as
leader means greater risk
tolerance
Lessons learned

Exhibit 333. Issues for Japan when bidding on overseas nuclear power projects

Source: 23rd meeting of Nuclear Power Subcommittee (29 March 2010)

At the end of April, Tokyo Electric Power, Kansai Electric Power, Chubu Electric Power,
Toshiba, Hitachi, and Mitsubishi Heavy Industries agreed to establish a joint venture to
work to win orders for nuclear power facilities overseas. We think the government will
provide support so that private companies will not have to shoulder damages from
delays on their own. The aim is to secure orders based on a public-private partnership,
learning from the experience of losing out to the Korean bid for the UAE project. The
near-term target appears to be the second phase of Vietnams nuclear energy project
in Ninh Thuan Province.

Establishing consortium with
view to winning orders for second
phase of Vietnams nuclear
energy project
Korea built unified structure whereby
team was led by state-run Korea Electric
Power and work subcontracted to
manufacturers.
Manufacturers in Russian and French
teams are themselves state-run.
Unified structure in all these cases
means major risk-taking is possible
Under previous system centring on manufacturer, ability to make
decisions was insufficient, making it impossible to respond quickly
to various needs of customers.
Need for a unified structure centering around electric power company.
Scope for risk-taking was limited under previous system.
Need for risk dispersal among companies involved and review of scope
for risk-taking by public institutions.
Also need to improve price competitiveness of companies involved.
Overall measures need to be strengthened, including for
supporting industries.
Need to train staff in countries introducing new facilities as in Japan.
Also pressing need to train staff in Japan able to develop business overseas.
Need to conclude nuclear power agreements with countries introducing
new nuclear facilities, such as Vietnam.
Prompt consideration for creation of international framework for
compensation for nuclear damage via the CSC (Convention on
Supplementary Compensation for Nuclear Damage).
Need for ability and system to provide packages meeting needs of partner
countries, including provision of infrastructure and new technology.
Countries such as US, France, Russia
and Korea have already concluded
nuclear power agreements with many of
the major countries looking to introduce
new nuclear power facilities.
In UAE project, Korea cooperating on
staff training, renewable energy, etc.
Russia selling submarines to Vietnam.
1. Order setup
2. Price/risk-taking ability
3. Staff training, structural development
4. Ability to provide packages meeting needs of partner countries

Maintenance, heavy machinery companies poised to benefit
1) Fourteen nuclear power plants are currently slated for construction
in Japan
Increased capital spending by electric power utilities benefits the sales and operating
profits of shipbuilding/heavy machinery companies that build thermal and nuclear
power plants, other capital goods companies, and electric power plant maintenance
companies. We expect a boost to earnings at valve manufacturers and plant
maintenance companies with a high weighting of sales to electric power companies.
We are focusing on two valve manufacturers that also provide maintenance services,
Okano Valve Mfg. and Toa Valve Engineering, and two plant maintenance companies,
Toshiba Plant Systems & Services and Tokyo Energy & Systems. These companies
generate more than half of their total sales from electric power companies (10/3
estimates) (Exhibit below).
The two valve manufacturers Okano Valve Mfg. and Toa Valve Engineering
derive more than 60% of their sales from electric power companies with nuclear plants.
The two do not provide a break up of margins by product application, thermal versus
nuclear power, but we think the margins on nuclear plant valves, which have stringent
safety and reliability requirements, are higher than those on thermal and wind power
plant valves. The two main types of nuclear power reactors are boiling water reactors
(BWR) and pressurized water reactors (PWR). Equipment suppliers generally
specialise in one type or the other (Exhibit on next page).

Exhibit 334. Weighting of sales to electric utilities at capital goods companies
(10/3 estimates): valve suppliers, maintenance companies lead the pack
0 20 40 60 80 100 120
[6501] Hitachi
[5631] Japan Steel Works
[6502] Toshiba
[7011] Mitsubishi Heavy Industries
[1983] Toshiba Plant Systems & Services
[1968] Taihei Dengyo
[1945] Tokyo Energy & Systems
[6466] Toa Valve Engineering
[6492] Okano Valve Mfg
(%)
Nuclear power
Thermal power, other types

Source: Nomura, based on company data (ranked according to sales exposure to nuclear power)

Beneficiaries of investment
growth
Toshiba Plant Systems & Services
Valve manufacturers with high
proportions of sales to nuclear
power industry

Exhibit 335. Division of work related to Japan's PWR and BWR nuclear power plants
Electric power Main Parts and Secondary Temperature Damage Pressure
Plant type company contractor processing work Cooling Valves control devices inspection vessels
PWR Kansai, Hokkaido,
Shikoku, Kyushu,
Japan Atomic Power
Mitsubishi Heavy
Industries [7011]
Mitsubishi
Heavy
Industries
[7011]
Taihei Dengyo
[1968]
Shinryo
(unlisted)
Toa Valve
Engineering
[6466]
Okazaki Mfg
(unlisted)
Hihakaikensa
(unlisted)
Tokyo, Chubu, Chugoku,
Hokuriku, Tohoku,
Japan Atomic Power
Hitachi [6501] Hitachi [6501] Hitachi Plant
Technologies
(unlisted)
Hitachi Plant
Technologies
(unlisted)
Kourin
(unlisted)
BWR
Tokyo, Tohoku, Chubu,
Japan Atomic Power
Toshiba [6502] IHI [7013] Toshiba Plant
Systems &
Services [1983]
Shin Nippon Air
Technologies
[1952]
Okano
Valve Mfg
[6492]
Sukegawa
Electric [7711]

Japan Steel
Works
[5631]

Note: Corporate relationships shown are not necessarily applicable to all nuclear power equipment in Japan.
Source: Nomura

Okano Valve, Toa Valve, and Teikoku Electric Mfg. (an equipment supplier) benefit in
terms of new sales when nuclear power plants are built and from maintenance
demand afterward. They are also likely to generate sales to overseas nuclear power
plants over the medium term.
Okano Valve is a leading Japanese manufacturer of BWR valves, while Toa Valve is a
leading Japanese manufacturer of PWR valves.
Teikoku Electric, one of the worlds leading canned motor pump manufacturers, has a
track record of supplying pumps for nuclear power plants and has a higher share of the
US market. The construction of new nuclear plants in China and other countries should
be a longer term boon.
As new nuclear plants are built in Japan over the medium term, power plant
maintenance companies are likely to increase their plant project revenues as well as
maintenance revenues. A number of companies are considering working on new
nuclear plants overseas, and Toshiba Plant is considering hiring more engineers and
forming a US subsidiary.
Mitsubishi Heavy Industries and IHI generate only 519% of their sales from Japanese
electric power companies, less than the valve manufacturers do, but these two
companies still stand to benefit from increased capital spending by the electric power
industry.
Mitsubishi Heavy supplies Japanese electric power companies with nuclear plant and
equipment, gas turbines, steam turbines and boilers. Sales to Japanese electric power
companies in 10/3 totaled an estimated 500bn (17% of total sales), of which we
estimate 200bn was for nuclear power generation, mainly service.
Mitsubishi Heavy has very strong technologies for large gas turbines. It is one of the
worlds leading manufacturers of the turbines, along with GE, Siemens, and Alstom. A
pickup in spending on large gas turbines for power generation by Japanese electric
power companies would benefit Mitsubishi Heavys sales.
IHI supplies Japanese electric power utilities with boilers and nuclear power equipment
(eg, pressure containers). Japans electric power industry accounted for about 8% of
the companys 10/3 sales.
IHI supplies Toshiba with pressure containers for nuclear power plants. Since Toshiba
manufactures BWRs, Tokyo Electric Powers Nos. 7 and 8 Fukushima and Nos. 1 and
2 Higashidori nuclear plants, which all use BWRs, might use IHIs pressure containers.
Other suppliers of nuclear plant equipment are shown in the Exhibit below. Japan
Steel Works is very competitive globally in the market for pressure container materials.
Worldwide oil and natural gas plant-related orders have been slow to rebound because
of the yens strength against the euro, but the company is likely to benefit from
increased capital investment in nuclear power by power companies in Japan as well as
China and other countries.
Okano Valve benefits from new
construction, maintenance
Nuclear plant valve manufacturers
Manufacturer of canned motor
pumps for nuclear plants
Maintenance companies also
likely to get new business
Mitsubishi Heavy stands to
benefit from increased capital
spending by the electric power
industry
17% of Mitsubishi Heavys sales
from Japanese electric power
industry
Gas turbines constitute an area of
strength
IHI supplies boilers and nuclear
power equipment
Sales of nuclear plant equipment
to Toshiba
Nuclear plant equipment
suppliers also likely to benefit

Exhibit 336. Leading companies electric and nuclear power-related sales
(10/3 estimates)
% of sales

Market cap
(6 Apr)
Electric
power cos
Nuclear
plants
Code Company Rating (bn) (%) (%)
6492 Okano Valve Mfg Buy 16.6 97 63
6466 Toa Valve Holding Buy 6.4 98 60
1945 Tokyo Energy & Systems No rating 24.7 85 37
7711 Sukegawa Electric No rating 4.1 36 36
1983 Toshiba Plant Systems & Services Buy 103.5 57 25
1968 Taihei Dengyo No rating 36.4 75 24
6378 Kimura Chemical Plants No rating 18.1 17 17
6356 Nippon Gear No rating 5.7 18 15
6365 DMW No rating 7.9 15 12
1952 Shin Nippon Air Technologies No rating 16.1 9 9
6502 Toshiba Buy 2,093.4 20 9
7011 Mitsubishi Heavy Industries Neutral 1,319.1 36 9
5631 Japan Steel Works Neutral 399.3 16 7
6368 Organo No rating 37.0 11 5
7013 IHI Neutral 245.0 12 4
1976 Meisei Industrial No rating 16.1 5 4
1963 JGC Buy 439.9 6 3
6361 Ebara Neutral 210.1 2 2
6486 Eagle Industry No rating 34.1 3 2
6333 Teikoku Electric Mfg Neutral 18.7 9 2
6501 Hitachi Buy 1,660.8 8 2
6247 Hisaka Works Buy 30.6 3 1
6370 Kurita Water Industries Buy 353.9 1 1
5480 Nippon Yakin Kogyo No rating 45.1 6 1
5333 NGK Insulators Neutral 633.9 32 0

Source: Nomura (includes estimates by Nomura)

Measures to expand renewable energy
Renewable energy has cost and supply stability issues, but its usage has been
encouraged because: 1) its environmental impact is low; 2) for the most part it can be
procured domestically; and 3) it can create jobs and new markets.
1) Limited scope for expansion of wind power
Japans installed wind power generating capacity was 1,900MW as of end-2008,
ranking it 13th in the world. Japan has less land than Europe or the US and its
geography is more challenging for wind power installations, on top of systemic limits at
electric power companies (Exhibits below).

Exhibit 337. Japans installed wind power generating capacity
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
89 91 93 95 97 99 01 03 05 07 (FY)
(MW)
0
200
400
600
800
1,000
1,200
1,400
1,600
(Stations)
Installed capacity (lhs)
Installed stations (rhs)
End-FY08
1,854MW
1,517 stations

Source: Nomura, based on New Energy and Industrial Technology Development Organization (NEDO) data

Exhibit 338. International comparison of installed wind power generating
capacity as of end-2008
Global 1,208GW
(end-Dec 08)
25.2
23.9
16.8
12.2
9.6
3.7
3.4 3.2 3.2 2.9
2.4 2.2
1.9
0
5
10
15
20
25
30
U
S
G
e
r
m
a
n
y
S
p
a
i
n
C
h
i
n
a
I
n
d
i
a
I
t
a
l
y
F
r
a
n
c
e
U
K
D
e
n
m
a
r
k
P
o
r
t
u
g
a
l
C
a
n
a
d
a
N
e
t
h
e
r
l
a
n
d
s
J
a
p
a
n
(GW)
Japan is 13th with
1.9GW installed
(1.6% share)

Source: Nomura, based on World Wind Energy Association data

The current administration has not disclosed clear targets for wind power expansion,
but in August 2009 the total energy survey committees supply and demand task force
at METI projected that over the long term, wind power generating capacity could
expand to around 5GW, or 5x the level in 2005. It stated that 6.4GW was the
maximum potential for land-based wind power generation in Japan.
Wind power and other kinds of renewable energy are technologically feasible and the
scope for cost reductions via greater installation is narrower than for solar power
(Exhibit below).

Position of renewable energy
Limited areas are suitable for
wind power
Is 5-6GW the ceiling?
Limited room for cost reductions
with wind

Exhibit 339. Scope for cost reductions: less room with wind power than with solar power
2010 2020 2030 2050
50/kWh
30/kWh
10/kWh
Cost reductions via larger scale
(smart meter technology)
Technological improvements in
f loating and wind mill
integration engineering
Emergence of ultraefficient (40%)
solar power based on new
technological principles and systems
Solar power PV2030+ (NEDO)
Establishment of mass production systems f or
polysilicon, thin-film silicon CIS, etc
and perf ormance improvements
Innovative wind power technologies
(double-layer vanes, high-speed rotation,
superconducting generators, etc)
Land and mar ine wind power (NEDO)
Technological development in new
materials, etc to increase performance
14
7 or less
7 or less
7 or less
23
1014/kWh or less
7
710
7
Land-based wind power
Mar ine wind power (AIST)

Note: NEDO = New Energy and Industrial Technology Development Organization; AIST = National Institute of Advanced Industrial Science and Technology
Source: Nomura, based on data from third meeting of METI project team on feed-in tariffs for renewable energy, held on 3 March 2010
2) Solar power: renewable energy with the largest potential
The Exhibit on the following page shows projections for the solar power market on an
installed capacity basis. Data through 2009 in the Exhibit are based on statistics from
the European Photovoltaic Industry Association. In 2009, despite initial projections for
a major decline, the European market for solar power grew considerably, especially in
Germany, as a result of the economic rebound, financial markets quickly recovering
from tumultuous times, and a gradual resumption of financing for solar power projects
from the summer.
In Japan, a resumption of subsidies for solar power installations and the start of a
purchasing system for surplus electricity generated helped lift demand for solar power
from the household sector, spurring strong market growth.
India and the US are markets that did not grow much despite great expectations. The
US market was the biggest disappointment in 2009. Under current economic
conditions, economic policies linked to job creation policies are needed. In India, the
Moser Bear thin-film solar panel production line launch was not that successful,
contrary to the expectations of government officials. In the US, the solar power
industry was undermined by Republican policies that favoured the auto and oil
industries and claims that the economic impact would not be significant even if an
effort were made to introduce solar power. We think that attention needs to be paid to
such protectionist moves and their impact on the solar panel industry.

Solar power market grew again in
2009
Expansion of Japans market
US was great disappointment in
2009

Exhibit 340. Our projections for the solar power market
(MW) 08 09 10F 11F 12F
World (main scenario) 6,283 7,216 10,760 11,370 13,485
US (main scenario) 342 477 900 1,500 1,800
Europe total 5,252 5,618 7,290 6,170 6,595
Germany 2,002 3,800 4,000 3,500 3,500
Spain 2,605 69 600 500 550
Italy 338 730 900 950 1,000
Greece 10 36 100 125 145
Czech Republic 51 411 900 100 130
Belgium 50 292 140 160 200
France 46 185 500 500 540
Portugal 50 32 70 75 80
Other 100 63 80 260 450
Asia 645 985 2,120 3,050 4,240
Japan 230 484 700 900 1,000
China 45 160 1,000 1,510 2,280
Korea 278 168 70 80 100
India 40 30 60 120 200
Other 52 143 290 440 660
Rest of world 43 136 450 650 850

Source: Nomura, based on European Photovoltaic Industry Association data for 200809 figures

In 2010, we look for the solar power market to expand considerably owing to: 1) a rush
in demand before Germany lowers electricity purchase rates midyear; 2) growth in the
Italian and French markets; 3) slow expansion of the US market; 4) continued growth
of the Japanese market; and 5) the introduction of a solar power subsidy system in
China, which has become the worlds largest producer of solar panels, to provide a
stimulus to its domestic solar cell makers.
For 2011F and beyond, we expect the solar power market in Germany to contract, but
the German government does not intend to shrink the market like Spain did, which
severely damaged the solar power industry.
Eyeing a market size of 2.5-4.0GW annually, the German government aims to regulate
its solar panel market by increasing subsidies when growth looks to be weaker than
this target and decreasing subsidies when growth looks to exceed this target. We think
that the US and China will become growth drivers in place of Germany and look for the
overall market to expand steadily over the medium term while repeating inventory and
equipment cycles.
In Japan, we think that solar power has the greatest growth potential among
renewable energy sources. Under the aforementioned long-term energy outlook, METI
projects that solar power capacity will increase to 20x the 2005 level (1.4GW with 80%
at households) by 2020F, reaching 28GW (with 70% at households) (next Exhibit).

Expecting strong market growth
in 2010F
Outlook for 2011F and beyond
US and China should drive
expansion
Market could grow to 28GW by
2020F

Exhibit 341. Japans installed solar power capacity and system cost per kW
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 (CY)
( '000/kW)
0.0
0.5
1.0
1.5
2.0
2.5
(GW)
System cost per kW (LHS)
Cumulative installed base (total) (RHS)
Cumulative installed base (households) (RHS)
2.1
1.7
710

Source: Nomura, based on Japan Photovoltaic Energy Association data

In FY05, subsidies were discontinued for household solar power installation in Japan
and domestic shipments of solar cell modules by Japanese makers declined y-y in
FY06 and FY07. Subsidies were resumed in January 2009, however, leading to y-y
growth again from FY08 (Exhibits below).

Exhibit 342. Subsidies for solar power in Japan
0
100
200
300
400
500
600
700
800
900
1,000
9
4
9
5
9
6
9
7
9
8
9
9
0
0
0
1
0
0
0
2
0
0
0
3
0
1
0
2
0
3
0
4
0
5
0
6
0
7
0
8
0
9
1
0
(FY)
( '000/kW)

Note: 2000 is split into three periods
Source: Nomura, based on data from and interviews with METI, Agency for Natural Resources and Energy, Energy
Conservation Dept, New Energy Dept, and New Energy Policy Dept

Exhibit 343. Japanese shipments of solar cell modules
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
81 86 91 96 01 06 (FY)
(MW)
Overseas
Domestic

Source: Nomura, based on Japan Photovoltaic Energy Association data
Solar power subsidies resumed in
Japan in January 2009

In FY08 Q4, the overall subsidy budget was 9bn (envisioning about 35,000 projects),
providing subsidies of 70,000/kW (around 10% of the purchase price) for installations
with less than 10kW peak capacity and a total system cost of less than 700,000/kW
(excluding tax). The budget for FY09 amounted to 20.05bn (envisioning 84,000
projects) with the same conditions for subsidies as in FY08. The budget for FY10 is
41.15bn (150,000 projects), but with a change in conditions for system cost to be less
than 650,000/kW (excluding tax). The subsidy of 70,000/kW will not change.
In November 2008, a system was started for purchasing surplus electricity (the portion
not consumed by the owner) generated by solar power. Until FY10, the purchase price
for surplus electricity is 48/kWh generated by households (39/kWh for overlap with
other power generators on the owners premise) and 24/kWh for nonhouseholds
(20/kWh). The price of 48/kWh is about twice the price that electric power
companies pay voluntarily. The Japanese government plans to lower the purchase
price in stages, starting with a cut to about 42/kWh in FY11 (officially it has not yet
been decided), with the aim of halving the system cost for solar power generation in
three to five years. Investment in solar power should thus be recovered in 10-15 years.
The surplus electricity purchase system will continue for 10 years at a fixed price; it
excludes facilities for the power generation business (above 500kW) and includes
equipment already installed when the system started. All consumers of electricity will
bear the burden of the purchase costs.
The surplus electricity purchase price of 48/kWh is generally in line with the current
cost of solar power generation. The solar power generating cost is much higher than
the cost with other forms of power generation, but such costs are expected to decline
with advances in technology and mass production in the future (Exhibit below).

Exhibit 344. Cost comparison by power generation type
0
10
20
30
40
50
60
Solar power
(household)
Solar power Wind Biomass Hydro Micro hydro Geothermal
(/kWh)
46
37
55
49
26
11
41
12
13
8
(48)
24
12
(nonhousehold)

Note: (1) Wind and water exclude small-scale installations. (2) Micro hydro is defined as installations with capacity of
less than 1,000MW.
Source: Nomura, based on data from fourth meeting of METI project team on feed-in tariffs for renewable energy,
held on 24 March 2010
3) Cost to citizens could be a drag on growth
The Japanese government has been considering a feed-in tariff system for electricity
generated by renewable resources, primarily solar power. The following Exhibit shows
the four options that have been proposed, each a different combination of which
generators are paid, how much they are paid, and for how long they are paid. The
government is considering adding the purchase cost either to electricity rates or to
taxes. The annual per-capita cost of the scheme in its 10th year (the launch is as yet
unscheduled) has been calculated at 3,852-13,403, though this does not necessarily
represent the direct impact on households because the cost will also be borne by
nonresidential users.
Subsidies of 70,000/kW
Start of surplus electricity
purchasing system in November
2008
Purchase price of 48/kWh is
about in line with generating cost
Renewable energy feed-in tariffs
are being considered, but burden
on citizens is heavy

On top of this, there will also be costs to improve the stability of the electric power grid.
These costs will depend on the capacity of the storage batteries used and are
estimated at 218.5-1,976.4bn annually (1,821-16,470 per capita) in 2020. In addition
to this public cost burden, there are also other limits as to how far the use of renewable
energy can expand given the existence of households where it is difficult to install solar
panels (raising the problem of fairness among households) and the likelihood that such
a scheme would dent the international competitiveness of Japanese companies by
driving up electricity rates.
The following Exhibits show estimates for the cost of grid stabilisation if 28GW and
35GW of solar power generation capacity is installed, though a breakdown of these
costs is not provided. Storage batteries account for the bulk of the costs. Storage
batteries store surplus energy not used by households. Grid stabilisation costs could
be held down by controlling output and thus keeping surplus energy in check.

Exhibit 345. Options for renewable energy feed-in tariffs (calculations for 10th year under scheme)
Burden Grid stabilisation cost

Tariff coverage Purchase price
Purchase
period
Generating
capacity
added
Power
generated
CO
2
reduction
CO
2
reduction
cost
Purchase
cost
Standard
household Per capita Cost
Per
standard
household
/kWh years MW TWh '000t /t bn/year /month /year bn/year /month
Case 1 Purchasing all power
from all forms of
renewable energy,
new + existing facilities
Solar: household 42 (35)
Nonsolar: 20
20 37,730 +
(34,740 +
)
51.3 +
(48.1 + )
30,750 +
(28,870 +
)
52,297 -
(52,000 -
)
1,608.3 +
(1,501.1 +
)
522 +
(486 + )
13,403 +
(12,509 +
)
Nonsolar: 20
20 37,730
(34,740)
51.3
(48.1)
30,750
(28,870)
28,854
(27,025)
887.3
(780.1)
288
(252)
7,394
(6,501)
Case 2 Purchasing all power
from commercial
renewable energy forms,
new facilities only
Nonsolar: 20
15 34,540
(31,550)
42.8
(39.7)
25,700
(23,820)
28,025
(25,743)
720.3
(613.1)
234
(198)
6,003
(5,109)
259.91,976.4
(218.5
1,777.2)
74561
(62504)
Solar: household 42
Nonsolar: 20
20 34,740 48.1 28,870 21,798 629.2 204 5,243 Case 3 Purchasing surplus
household solar power,
etc from commercial
new facilities only
Solar: household 42
Nonsolar: 20
15 31,550 39.7 23,820 19,407 462.2 150 3,852
Solar: household 42
Wind: 12

Small hydro: 22 15 31,020 39.7 23,820 20,596 490.6 159 4,088
Case 4 Purchasing surplus
household solar power,
etc from commercial
new facilities only
Geothermal: 17
Biomass: 15

218.51,777.2 62504
Reference: current system
Surplus solar power, new Solar: household 48 10 25,230 26.5 15,910 19,594 311.8 102 2,598 205.11,645.3 58467
Note: 1) Tariffs for purchasing electric power generated by household solar power generation and other sources to last for 10 years under all options. 2) Purchase cost
is only for generating capacity added and power generated. 3) Figures assume average of 600g of CO
2
/kWh for thermal electric power, but we calculate that emissions
are roughly half (330g) when all power sources are considered. 4) CO
2
reduction cost does not include grid stabilisation cost. 5) Purchase cost calculated as total
purchases minus discretionary costs (fuel costs, etc). 6) Standard household burden assumes 300kWh used per month. 7) Per capita cost calculated by dividing
purchase cost by 120mn. 8) Grid stabilisation cost is assumed as effect of reducing output for at least 1430 days during period of low electric power demand (which
results in lower storage battery costs), extrapolated to 2020. 9) Purchasing all refers to large-scale hydroelectric power, existing biomass power, and power sources still
at R&D stage as well as commercially viable renewable energy. 10) Figures assume household solar power generation results in 60% surplus power. 11) Purchase
price for household solar power generation is to be lowered in stages from initial amount and figures in parentheses show impact of purchase price of 35. 12)
Household solar power generation includes existing facilities in all cases.
Source: Nomura, based on data from fourth meeting of METI project team on feed-in tariffs for renewable energy, held on 24 March 2010

Overlap with grid stabilisation
costs
High storage battery costs

Exhibit 346. Grid stabilisation cost through 2020 assuming 28GW of solar power generating capacity
(calculated at future value, trn)
Scenario
Power
distribution
measures
(note 1)
Installation of
storage batteries
(note 2)
Creation of
control
system
Output
controllable
PCS (note 3)
Demand
creation/
utilization
Storage
battery/water
pumping loss,
etc (note 4)
Thermal
power
adjustment
operation Total Remarks
1) No output control
(storage batteries on
grid side)
0.32 15.1 0.30 - - 0.35 0.15 16.2
customer side)
- 45.456.7 (note 5) 0.30 - - 0.05 0.15 45.957.2
2) Control output on
special days (note 8)
0.32 2.80 (note 6) 0.30 0.02 - 0.08 0.15 3.67 Solar power output
reduced by
730GWh/year
3) Control output by half
on special days
0.32 7.56 0.30 0.02 - 0.19 0.15 8.54 Solar power output
reduced by
360GWh/year
special days and
downtimes (note 9)
0.32 0.55 (note 6) 0.30 0.02 - 0.02 0.15 1.36 Solar power output
reduced by
1,560GWh/year
special days and
downtimes and create
demand
0.32 0.55 (note 6) 0.30 0.02 0.09 (note 7) 0.02 0.15 1.45 Solar power output
reduced by
960GWh/year

Note: 1) We assume one voltage regulator (such as static VAR compensator; average price of 15mn) for every battery bank and one pole-top transformer (average
price of 200,000) for every 58 homes. 2) Cost is only for storage battery system and does not include cost of renting land to install storage battery. Cost for NaS
battery system is estimated at 40,000/kWh and that for LiB battery system is estimated at 100,000/kWh. 3) For solar power generating capacity of more than 10GW
(= 18GW), we assume installation of output controllable PCS (boosting PCS costs by 5,000). 4) Includes electricity consumption needed to keep NaS battery warm. 5)
If storage batteries are not being properly operated on customer side, they may be needed on grid side. 6) If installed base of solar power exceeds certain level,
surplus power generated on weekend and unused during week will be carried over to next week, boosting amount of surplus power that needs to be dealt with and
increasing marginal cost of storage battery installation measures. Cost of storage batteries needed to secure load frequency control capacity is included. Calculation
assumes smart interfaces that control solar power generation and HP/EV are installed in about 3mn homes (about 60% of homes with solar panels; 30,000 per
interface). 8) Golden Week holiday and period around New Year (about two weeks a year). 9) Weekends (Saturday or Sunday) during seasons (spring/autumn) when
electricity demand is low: about 16 days/year. While it is not additional cost, increased consumption by households resulting from installation of solar power systems
boosts fixed-cost burden per kWh for existing facilities.
Source: Nomura, based on data from third meeting of METI project team on feed-in tariffs for renewable energy, held on 3 March, 2010

Exhibit 347. Grid stabilisation cost through 2020 assuming 35GW of solar power generating capacity
(calculated at future value, trn)
Scenario
Power
distribution
measures
Installation of
storage
batteries
Creation of
control
system
Output
controllabl
e PCS
Demand
creation/
utilization
Storage
battery/water
pumping loss, etc
Thermal power
adjustment
operation Total Remarks
(storage batteries on grid
side)
0.40 22.70 0.38 - 0.03 0.55 0.18 24.20
customer side)
- 68.085.1 0.38 - - 0.06 0.18 68.785.7
special days
0.40 7.28 0.38 0.03 - 0.14 0.18 8.41 Solar power output reduced by
1,010GWh/year
3) Control output by half
on special days
500GWh/year
special days and
downtimes
2,160GWh/year
special days and
downtimes and create
demand
0.40 0.90 0.38 0.03 0.11 0.02 0.18 2.03 Solar power output reduced by
1,410GWh/year

Note: 1) If installed base of solar power exceeds certain level, surplus power generated on weekend and unused during week will be carried over to next week,
boosting amount of surplus power that needs to be dealt with and increasing marginal cost of storage battery installation measures. 2) Aside from storage battery
installation costs, our estimates are expanded based on figures for 28GW in 2020
Source: Nomura, based on data from third meeting of METI project team on feed-in tariffs for renewable energy, held on 3 March, 2010

The government has not disclosed the assumptions behind the four options, but if the
feed-in tariff were applied to solar power generating facilities for commercial purposes,
which are not part of the current version of the surplus electricity scheme, the
government estimates that solar power capacity of 15.23GW would be installed in the
first five years of the scheme, 29.98GW in the first 10 years, and 44.73GW in the first
15 years. Assuming that the purchase price at the start of the feed-in tariff scheme is
the same as for the surplus electricity scheme (and assuming that electricity is bought
from facilities for commercial purposes), the government estimates that 18.21GW of
capacity would be installed in the first five years, 32.97GW in the first 10 years, and
47.72GW in the first 15 years.
Growth potential of solar power
generation

Subsidies and facility prices will determine whether solar power generating capacity
grows to projected levels, but for now we do not expect capacity to exceed 10GW,
which is how much electric power companies say they can handle without causing
problems with grid stability. Electric power companies say 5GW is the limit for wind
power generation.
In 2009, the solar cell production equipment market grew about 18% to 728bn.
Orders were weak, but deliveries of high-priced system projects ordered in 2008, such
as for thin-film turnkey equipment, went well.
We look for the solar cell production equipment market to grow only 4% in 2010,
reflecting when the economy and the solar cell market started recovering. One or two
of the European and US thin-film equipment makers are likely to see sales drop
substantially.
The Exhibit below shows the market shares of production equipment makers in 2008.
European makers have the largest market share. Their share is particularly large in
Asian markets. US makers appear to have a large share of the market, but most of
Applied Materials' [AMAT US] solar cell production equipment is made in Europe and
Japan, so the share held by US-made equipment is not that high. We think that
Japanese makers will have an opportunity to increase their market share because
Chinese and Taiwanese companies are looking to buy production equipment not made
in Europe and the Japanese producers are known for their generous service and
support.

Exhibit 348. Solar cell production equipment market outlook
20GW production capacity based
on 3trn cumulative investment
100
870
760
728 616
240
0
1,000
2,000
3,000
4,000
06 07 08 09 10E 11E
(CY)
(bn)
Scenario 1: equipment technology
becomes more important
Scenario 2: as with SPE,
high growth continues
Scenario 4: prolonged slump owing
to lack of equipment innovation
Early 20s
Scenario 3: market limited to
latecomers

Source: Nomura

10GW is likely to be limit for now
Outlook for solar cell production
equipment market
Market growth is likely to slow in
2010
European makers are strong, but
we expect Japanese makers to
increase market share

Exhibit 349. Market shares of solar cell production equipment manufacturers
in 2008
Schmid
8.3%
Meyer Burger
6.3%
Centrotherm
8.1%
GT Solar
8.7%
Roth & Rau
6.1%
Oerlikon
9.0%
Showa Shinku
0.3%
Tokyo Rope Mfg
1.0%
Nisshinbo Holdings
1.3%
Shimadzu
1.0%
Kuroda Electric
0.2%
Tokki
0.1%
Ferrotec
1.8%
Ishii Hyoki
1.9%
NPC
2.3%
Asian makers,
other
1.3%
Ulvac
6.5%
Yamaichi
Electronics
0.1%
Shibaura
Mechatronics
0.1%
Applied
Materials
12.9%
Von Ardene
3.4%
Manz Automation
4.6%
Eur ope
55%
US
26%
Japan
18%
Source: Nomura
4) Impact on CO
2
emissions of nuclear power and solar power
Renewable energy is more expensive than nuclear power, so the government must
promote improvements in the utilisation ratio of existing nuclear plants to achieve
targets for reducing CO
2
emissions, in our view. Upping the utilization ratio by 1ppt at
all existing nuclear power plants (combined output: about 48.8GW) would reduce CO
2

emissions by between 1.9mn tpy (average CO
2
emissions per unit of electricity
generated from all power sources) and 2.62mn tpy (average CO
2
emissions per unit of
electricity generated from thermal power sources). Improving the nuclear power
utilisation ratio would only entail loosening up regulations for practically no additional
cost. Obtaining an identical impact on CO
2
emissions would require investing 2.5-
2.9trn (US$28-32bn at $1/90) in building 4.1GW worth of solar plants (see below).

Exhibit 350. Cost-benefit analysis for reducing CO
2
emissions: nuclear
power versus solar power

Note: 1) Utilisation ratios: nuclear power 80%, solar power 12%. 2) Solar power construction cost is 600,000
700,000/kW. 3) CO
2
emission reduction impact is calculated as 0.444kg of CO
2
/kWh for units of electricity generated
from all power sources and 0.612kg of CO
2
/kWh for units of electricity generated from thermal power (09/3). 4) Grid
stabilisation cost assumes 53.21mn kW of solar power generating capacity (about 40x FY05 level) is installed by
2030. 5) Total output of nuclear power in Japan was 48.8mn kW in March 2010.
Source: Nomura, based on METI data
Solar power is more expensive
than nuclear power
Reduces CO
2
emissions
by 4.295.91mn tonnes
Reduces CO
2
emissions
by 1.92.62mn tonnes
Nuclear
power
Solar power
1.38mn kW / plant 9.2mn kW
48.8mn kW
x
1ppt
New facilities
400500bn
Improvement in
utilisation ratio
5.56.4trn
2.52.9trn
510trn
No change in regulations
Grid stabilisation cost
4.1mn kW
+

Building a new nuclear power plant with output of 1.38mn kW would reduce CO
2

emissions by 4.295.91mn tonnes annually, assuming a utilization ratio of 80%, at an
estimated construction cost of 400-500bn ($4.4-5.6bn at $1/90). In order to realize
the same reduction in CO
2
emissions, 9.2GW of solar power facilities would be
necessary at an estimated construction cost of 5.5-6.4trn ($61-71bn at $1/90).
If the installed capacity for solar power exceeds 10GW, electric power companies will
have to invest in stabilizing their distribution systems. Based on estimates from the
Agency for Natural Resources and Energy, grid stabilisation costs (mainly for storage
batteries) would amount to 4.6-6.7trn ($54-74bn at $1/90) if 53GW (40x the FY05
level) of solar power generating capacity were installed by FY30. If demand for
electricity were to decline more than assumed in the above estimate, the cost would
exceed 10trn ($111bn at $1/90). We think that it would be politically untenable to
pass the full cost of expanding renewable energy generation along to electricity and
other energy prices.
Of the four options outlined above, the scenario with the greatest reduction in CO
2

emissions achieves a cut of 30.75mn tonnes. This figure is only 2.4% of the 1,286mn
tonnes of greenhouse gases emitted in Japan in FY08, when such emissions were
lower due to the weak economy. The cost of lowering emissions in this scenario is
about 52,300/t of CO
2
(purchase cost only; excludes grid stabilisation cost), which is
far higher than the recent price of emission credits, at 1,500/t. This cost assumes an
average of 0.6kg of CO
2
/kWh for thermal power generation and would be roughly twice
as high if based on the average of 0.33kg of CO
2
/kWh for all power sources, which
would be a conservative assumption.

Initial construction cost is more
than 10x as large for solar
Grid stabilisation costs are also
incurred
CO
2
reduction cost is 30x price of
emission credits

Appendix: Current status of renewable energy
Cur r ent snapshot of r enewabl e ener gy
Despite current difficult financial conditions around the world, we believe government
support towards clean energy technologies is much stronger now. Countries in Europe
remain committed towards their targets to reach a 20% share of energy from
renewable sources by 2020 and a 10% share of renewable energy specifically in the
transport sector. Besides Europe, we note that many governments prioritise clean
energy in the Economic Recovery Funding, of which the majority is focused on
innovators, businesses and installers in 2010 and 2011, which should help to bring
down the cost of clean energy technologies.
We note that G-20 countries account for more than 90% of clean energy investment,
which has grown more than five times over the past five years. We believe that the
national portfolio standard plays a significant role in promoting renewable energy,
sustaining its growth and attracting investment. We also believe countries that have
strong national policies, such as China and Germany, have a higher possibility of
emerging as technology leaders in terms of clean energy technology. Despite the huge
potential of clean energy resources, we note that the US has lagged behind in the
clean energy technology sector. In our opinion, a strong national renewable standard
programme can help the US recover lost ground.
According to the Renewable Energy Policy Network for the 21
st
Century (REN21), the
clean energy policy target exists in more than 73 countries and at least 64 countries
have policies to promote renewable power generation. Several countries have adopted
policy targets over the past few years (from 2006 to 2009). For example, Australia,
China, Japan, Luxembourg and the Netherlands have adopted new solar PV
programmes. Developing countries such as Brazil, Chile, Egypt, Mexico, the
Philippines, South Africa, Syria and Uganda have also become active in promoting
renewable energy through the passing of laws supporting renewable energy; new
blending mandates for bio-fuels appeared in 11 countries. We expect support for
renewables to continue to grow worldwide with more countries focusing on renewable
energy to meet their energy needs.

Exhibit 351. Top 10 countries by renewable energy
capacity 2009 (GW)
0
10
20
30
40
50
60
U
n
i
t
e
d

S
t
a
t
e
s
C
h
i
n
a
G
e
r
m
a
n
y
S
p
a
i
n
I
n
d
i
a
J
a
p
a
n
R
e
s
t

o
f

E
U
-
2
7
I
t
a
l
y
F
r
a
n
c
e
B
r
a
z
i
l
(GW)
0
10
20
30
40
50
60
U
n
i
t
e
d

S
t
a
t
e
s
C
h
i
n
a
G
e
r
m
a
n
y
S
p
a
i
n
I
n
d
i
a
J
a
p
a
n
R
e
s
t

o
f

E
U
-
2
7
I
t
a
l
y
F
r
a
n
c
e
B
r
a
z
i
l
(GW)
Exhibit 352. Top 10 countries by renewable installed
capacity growth (2005-09)
0
50
100
150
200
250
300
S
o
u
t
h

K
o
r
e
a
C
h
i
n
a
A
u
s
t
r
a
l
i
a
F
r
a
n
c
e
I
n
d
i
a
U
n
i
t
e
d

K
i
n
g
d
o
m
T
u
r
k
e
y
U
n
i
t
e
d

S
t
a
t
e
s
C
a
n
a
d
a
R
e
s
t

o
f

E
U
-
2
7
(%)

Exhibit 353. Renewable energy installed capacity as of 2008 (GW)
Technology
World
total
Developing
countries EU-27 China United Germany Spain India Japan
Wind power 121 24 65 12 25 24 17 10 2
Small hydropower 85 65 12 60 3 2 2 2 4
Biomass power 52 25 15 4 8 3 0 2 >0.1
Solar photovoltaic-grid 13 >0.1 10 >0.1 1 5 3 ~0 2
Geothermal power 10 5 1 ~0 3 0 0 0 1
Solar thermal powerCSP 1 0 0 0 0 0 0 0 0
Ocean (tidal) power 0 0 0 0 0 0 0 0 0
Total renewable power capacity
(excluding large hydro)
282 119 103 76 40 34 22 13 8
Source: REN21, Nomura research

Exhibit 354. Top five countries by capacity added in 2008
Ranking
New capacity
investment
Wind power
added
Solar PV added
(grid-connected)
Solar hot
water/heat added
Ethanol
production
Biodiesel
production
First United States United States Spain China United States Germany
Second Spain China Germany Turkey Brazil United States
Third China India United States Germany China France
Fourth Germany Germany South Korea Brazil France Argentina
Fifth Brazil Spain Italy France Canada Brazil

Exhibit 355. Top five countries by installed capacity
Ranking Small hydro Wind power Biomass power
Geothermal
power
Solar PV (grid-
connected)
Solar hot
water/heat4
First China China United States United States Germany China
Second United States Japan Brazil Philippines Spain Turkey
Third Germany United States Philippines Indonesia Japan Germany
Fourth Spain Italy Germany/Sweden/FinlandMexico United States Japan
Fifth India Brazil Italy South Korea Israel

Exhibit 356. Global electricity capacity breakdown 2008
Wind power
1.72%
Conventional
sources
77%
Solar
0.13%
Hydropower
20%
Biomass
1.05% Other renewables
0.23%

Source: Global Wind Energy Council (GWEC), Nomura research

Exhibit 357. EU targets share of energy from renewable sources by 2020
0 10 20 30 40 50 60
Belgium
Bulgaria
Czech Republic
Denmark
Germany
Estonia
Ireland
Greece
Spain
France
Italy
Cyprus
Latvia
Lithuania
Luxembourg
Hungary
Malta
Netherlands
Austria
Poland
Portugal
Romania
Slovenia
Slovak Republic
Finland
Sweden
United Kingdom
(%)
Source: EC.EUROPA.EU, Nomura research

Exhibit 358. Country ranking according to E&Y all renewable index as on May 2010
Rank Country
All
renewables
Wind
index
Onshore
wind
Offshore
wind
Solar
index
Solar
PV
Solar
CSP
Biomass/
other Geothermal Infrastructure
1 US 69 70 75 57 73 72 75 63 67 65
1 China 69 74 77 66 59 66 40 57 51 74
3 Germany 64 65 64 70 59 72 23 64 55 63
4 India 63 64 72 42 66 67 63 57 44 63
5 Italy 61 61 64 53 64 66 59 56 65 66
5 UK 61 67 64 75 38 51 0 58 38 69
7 France 58 60 61 55 53 63 24 58 29 61
8 Spain 57 58 63 43 64 64 67 50 33 55
9 Canada 53 60 65 46 32 44 0 49 34 62
10 Portugal 51 54 58 42 48 57 22 45 32 56
10 Ireland 51 58 58 57 26 36 0 47 28 61
12 Greece 49 51 55 40 54 59 41 40 32 50
12 Australia 49 49 53 40 53 56 45 45 58 50
12 Sweden 49 53 53 53 32 43 0 55 34 51
15 Netherlands 48 53 52 58 35 47 0 41 22 44
16 Poland 45 50 53 42 31 43 0 41 22 46
16 Belgium 45 52 50 57 28 38 0 37 28 52
16 Brazil 45 46 50 34 40 44 29 47 21 43
19 Denmark 44 47 44 56 29 40 0 45 32 51
19 Norway 44 45 48 39 22 52 25 35 40 49
21 Japan 43 48 49 45 45 30 0 44 30 49
22 New Zealand 41 46 50 35 23 31 0 33 49 41
22 Turkey 41 43 45 35 39 43 28 36 43 44
24 South Africa 40 43 46 34 37 34 44 34 31 41
25 Austria 37 34 46 0 40 54 0 49 34 52
26 Czech 34 33 44 0 40 54 0 38 31 43
26 Finland 34 35 34 37 19 26 0 49 23 37
Note: The Ernst & Young country attractiveness indices provide scores for national renewable energy markets, renewable energy infrastructures and their suitability for
individual technologies. The indices provide scores out of 100 and are updated on a regular basis. Combines with each set of technology factors to produce the
individual technology indices
Source: Ernst & Young, Nomura research
Wind: Asia emerges as the new regional leader
We believe that wind, among all renewable energy technologies, remains the most
preferred technology by investors. Scalability, cost competiveness and quick
installation are key advantages that give wind an edge over others. Wind power can be
installed in a few months and wind farms can start to generate electricity even before
completion. A single turbine connected to the grid can start to generate income for the
wind farm developer. Even large offshore wind farms, which require a greater level of
infrastructure and grid network connection, can be installed from start to finish in less
than two years.
Despite the economic and financial crisis in late-2008/2009, which was expected to hit
the sector hard, we note that cumulative wind capacity in 2009 increased to 160GW,
implying growth of 31% y-y. Asia was the market leader amongst all regions, as it
added 14.9GW of capacity in 2009. This was mainly due to China, the largest market
in 2009, which added more than 13GW of capacity to almost 26GW in the year. The
rapid growth rate of the Chinese wind market has helped domestic wind turbine
suppliers to break into the global league, in our view. Sinovel, Goldwind and Dongfang
are among the top-10 wind turbine suppliers and have gained global market share at
the expense of their global peers.

Exhibit 359. Wind cumulative installed capacity
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0
5
10
15
20
25
30
35
40
Wind installed capacity (LHS)
Growth y-y (RHS)
(MW) (%)

Source: BTM Consult, Nomura research

Exhibit 360. Top 10 countries by newly installed capacity (2009)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
C
h
i
n
a
U
S
S
p
a
i
n
G
e
r
m
a
n
y
I
n
d
i
a
I
t
a
l
y
F
r
a
n
c
e
U
K
C
a
n
a
d
a
P
o
r
t
u
g
a
l
R
O
W
(MW)

Solar: Demand from a more diversified country base
Europe remains the market leader in solar PV
Despite the economic crisis, total global solar PV installed capacity increased 48% y-y
to 22.3GW in 2009. Europe remained the market leader with 16GW of installed
capacity in 2009, representing about 70% of the worlds cumulative PV power installed
at the end of 2009. Germany maintained its market leadership and with new capacity
additions of 3.8GW, its cumulative installed capacity for solar PV increased to almost
9GW in 2009, representing a global market share of 40%.
Besides Germany, other countries are also making progresses. Italy installed 711 MW
of capacity in 2009, enabling it to have the second-largest global market share. Czech
Republic and Belgium made impressive progresses in 2009, with 411 MW and 292
MW of capacity installed, respectively. Major developments were seen in France with
285 MW installed, 185 MW of which were already connected. In Southern Europe, we
believe that Portugal and Greece are the two promising markets with huge potential.
The solar PV market also developed significantly outside of Europe with 484 MW of
installed capacity in Japan and 477 MW (including 40 MW of off-grid applications) of
installed capacity in the US. China made its entry into the top-10 list and we expect it
to become a major player in the coming years. Canada and Australia are emerging,
whereas South Korea failed to repeat its strong performance of 2008.

Exhibit 361. Solar PV cumulative installed capacity
0
5,000
10,000
15,000
20,000
25,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0
10
20
30
40
50
60
70
Solar PV cumulative installed capacity (LHS)
Growth y-y (RHS)
(MW) (%)

Source: European PhotoVoltaic Industry Association (EPIA), Nomura research

Exhibit 362. Solar PV cumulative installed capacity by country
0
5,000
10,000
15,000
20,000
25,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
USA ROW Japan EU China (MW)


Exhibit 363. Solar PV annual capacity addition by country (2009)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
I
N
D
I
A
G
R
E
E
C
E
S
P
A
I
N
C
H
I
N
A
S
O
U
T
H
K
O
R
E
A
F
R
A
N
C
E
O
t
h
e
r
s
U
S
J
A
P
A
N
I
T
A
L
Y
R
O
E
G
E
R
M
A
N
Y
(MW)

Nuclear power
Nuclear power accounted for 14% of the worlds total electricity generation in 2007,
according to the IEA. It is the third-largest source of generation after coal (41%) and
hydro (16%). There are 435 nuclear power reactors in operation worldwide (as of
December 2009) with total net installed capacity of 372GW. The US is the largest

nuclear power user globally, generating 32% of the worlds nuclear energy in 2008,
followed by France (16%) and Japan (9%).
Nuclear power was first put into commercial use in the 1950s and saw rapid growth in
capacity build-out during the 1960s and 1970s. However, development has slowed
significantly since the late 1980s (with capacity slowing to a CAGR of 0.8% during the
1990s from 9.1% in the 1980s) after the Three Mile Island accident in 1979 and the
Chernobyl accident in 1986, which severely soured sentiment towards nuclear power
in the West and undermined the reputation of the nuclear power industry.

Exhibit 364. World nuclear energy consumption (Terawatt-hours)
0
500
1,000
1,500
2,000
2,500
3,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
North America S.&Cent. America Europe & Eurasia
Africa Asia Pacific
(TWh)

Source: BP Statistical review of Word Energy 2010, Nomura research

Exhibit 365. Nuclear generation by country as a percentage of world total,
2008
U.S.
32%
France
16%
Russia
6%
South Korea
6%
Germany
5%
Canada
3%
Others
15%
Japan
9%
Ukraine
3%
China
3%
Sweden
2%

Source: Nuclear Energy Institute (NEI)
Other renewable technologies
Concentrated solar power
A concentrating solar power (CSP) system produces heat or electricity using hundreds
of mirrors to concentrate the suns rays to a temperature typically between 400 C and
1,000C. We note that there are a variety of mirror shapes, sun-tracking methods and
ways to provide useful energy, but they all work under the same principle. Individual
CSP plants are typically sized between 50 MW and 280 MW, but could be larger. A
CSP system can be specifically integrated with storage or in hybrid operation with
fossil fuels, offering firm capacity and dispatchable power on demand. It is suitable for
peak loads and base-loads, and power is typically fed into the electricity grid.

A range of technologies can be used to concentrate and collect sunlight, turning it into
medium to high temperature heat. This heat is then used to create electricity in a
conventional way, for example, using a steam or gas turbine or a Stirling engine. Solar
heat collected during the day can also be stored in liquid or solid media, such as
molten salts, ceramics; concrete or phase-changing salt mixtures. At night, it can be
extracted from the storage medium to keep the turbine running. Solar thermal power
plants with solar-only generation work well to supply the summer noon peak loads in
wealthy regions with significant cooling demands, such as Spain and California. With
thermal energy storage systems, they operate longer and even provide base-load
power.

Exhibit 366. Comparison of main technology type for CSP
Parabolic trough Central recei ver Parabolic dish Fresnel linear reflector
Grid-connected plants, mid
to high-process heat
Grid-connected plants, high
temperature process heat
Stand-alone, small off-grid
power systems clustered to
larger grid connected dish
parks
Grid connected plants, or
steam generation to be used
in conventional thermal
power plants.
Applications
(Highest single unit solar
capacity to date: 80 MW.
Total capacity built: over 500
MW and more than 10GW
under construction or
proposed)
capacity to date: 20 MW
under construction, Total
capacity ~50 MW with at
least 100MW under
development)
capacity to date: 100 kW,
Proposals for 100 MW and
500 MW in Australia and US)
capacity to date is 5 MW in
US, with 177 MW installation
under development)

Commercially available
over 16 billion kWh of
operational experience;
operating temperature
potential up to 500C (400C
commercially proven)
Good mid-term prospects
for high conversion
efficiencies, operating
temperature potential
beyond 1,000C (565C
proven at 10 MW scale)
Very high conversion
efficiencies peak solar to
net electric conversion over
30%
Readily available
Commercially proven
annual net plant efficiency of
14% (solar radiation to net
electric output)
Storage at high
temperatures
Modularity Flat mirrors can be
purchased and bent on site,
lower manufacturing costs
Commercially proven
investment and operating
costs
Hybrid operation possible Most effectively integrate
thermal storage
Hybrid operation possible
Modularity Better suited for dry cooling
concepts than troughs and
Fresnel
Operational experience of
first demonstration projects
Very high space efficiency
around solar noon.
Good land-use factor Better options to use non-
flat sites
Easily manufactured and
mass-produced from
available parts

Lowest materials demand No water requirements for
cooling the cycle

Hybrid concept proven
Advantages
Storage capability

The use of oil-based heat
transfer media restricts
operating temperatures
today to 400C, resulting in
only moderate steam quality
Projected annual
performance values,
investment and operating
costs need wider scale proof
in commercial operations
No large-scale commercial
examples
Recent market entrant, only
small projects operating
Projected cost goals of
mass production still to be
proven

Lower dispatchability
potential for grid integration

Disadvantages
Hybrid receivers still an
R&D goal

Source: Solarpaces, Estela, Greenpeace, Nomura research

Geothermal
With an installed capacity of 10.7GW, geothermal energy generated 67,246GWh of
electricity in 2009. We note that with more than 3GW of installed capacity, the US is
the global leader in geothermal energy. The Philippines, which generates 18% of its
electricity from geothermal energy, is the worlds second-biggest producer. Indonesia,
Mexico, Italy, El Salvador, Kenya, Nicaragua, Papua New Guinea and Turkey are
some of the other key markets.
We estimate that geothermal will witness a CAGR of 20% over 2005-10F, but
countries with projects under development are growing at a much faster pace. We
believe that there is increased interest in geothermal energy across the world, given
that 70 countries have projects under development or are actively considering
geothermal energy in 2010, a 52% increase since 2007, when there were only 46
countries considering geothermal power development, according to the Geothermal
Energy Association (GEA).
In addition to large power generation, geothermal energy is also used directly for a
variety of purposes, such as for space and greenhouse heating, agricultural drying,
industrial, space heating, snow melting, aquaculture and greenhouse production.
Geothermal heat pumps accounted for an estimated 30GW of installed capacity by the
end of 2008, with other direct uses of geothermal heat reaching an estimated 15GW.
At least 76 countries use direct geothermal energy in some form.

Exhibit 367. Breakdown of global geothermal technology by country (2009)
Iceland 5%
New Zealand 6%
Italy 8%
Mexico 9%
Indonesia 11%
Philippines 18%
US 29%
Others 9%
Japan 5%

Source: BP Statistical review of Word Energy 2010, Nomura research, Nomura research

Exhibit 368. Growth of global geothermal industry
0
2,000
4,000
6,000
8,000
10,000
12,000
1990 1995 2000 2003 2004 2005 2006 2007 2008 2009
ROW Italy Mexico Indonesia Philippines US
(MW)


Biomass
Key reasons for the rapid growth of global biomass production are increased prices of
fossil fuels, growing environmental concerns, and considerations regarding security
and diversification of energy supply. Currently, biomass meets nearly 10% of global
energy consumption needs, which is mainly used for cooking and heating. We note
that forestry, agricultural and municipal residues, and wastes are the main feedstock
used for electricity generation and heat from biomass. Contributions for feedstock
supply from sugar, grain and vegetable oil crops are much smaller.
Biomass is largely used as fuel wood in developing countries for heating and cooking.
It contributes a significant amount of energy, which according to estimates by the IEA,
accounts for 22% of total primary energy mix in developing countries. The use of
biomass is expected to increase, in view of these countries rising population.
However, in developed countries, biomass contribution to the total primary energy mix
is declining significantly, to around 3%, as it is restricted to use in heat and power
applications.
Different technologies exist or are being developed to produce electricity from biomass.
Co-combustion (also called co-firing) in coal-based power plants is the most cost-
effective use of biomass for power generation. Dedicated biomass combustion plants,
including municipal solid waste (MSW) combustion plants, are also used in successful
commercial operations, and many are industrial or district heating combined heat and
power (CHP) facilities. For liquids and wet organic materials, anaerobic digestion is
currently the best-suited option for producing electricity and/or heat from biomass,
although its economic case relies heavily on the availability of low cost feedstock. All
these technologies are well established and commercially available.
There are few examples of commercial gasification plants, and the deployment of this
technology is affected by its complexity and cost. In the longer term, if reliable and
cost-effective operation can be more widely demonstrated, gasification promises
greater efficiency, better economics at both small and large scale, and lower emissions
compared with other biomass-based power generation options. Other technologies
(such as Organic Rankine Cycle and Stirling engines) are currently in the
demonstration stage and could prove to be economically viable in a range of small-
scale applications, especially for CHP.

Exhibit 369. Development status of the main technologies to upgrade
biomass and/or to convert it into heat and/or power

Bio-fuel
In 2008, global bio-fuel production reached about 83bn litres, a more than four-fold
increase compared with that in 2000. This amount currently contributes about 1.5% of
global transport fuel consumption, with demand projected to rise steadily over the
coming decades. We note that over the last decade, global bio-fuel production
increased rapidly; in 2008, about 68bn litres of bio-ethanol and 15bn litres of bio-diesel
were produced globally. First-generation bio-fuel, which was mainly in the form of
ethanol from sugar cane and corn, contributed almost all of it.
The US is currently the largest bio-fuel producer, followed by Brazil and the European
Union. While corn-based ethanol is dominating domestic production in the US, Brazil
produces ethanol mainly from sugar cane. In the European Union, bio-diesel accounts
for the major share of total bio-fuel production and is mainly derived from oil crops
(canola and sunflower) as feedstock. While the US and the European Union are
amongst the largest producers of bio-fuel, emerging and developing countries
increased their share to about 40% of total global production. Brazil, China and
Thailand are currently the largest producers outside the OECD region.

Exhibit 370. Ethanol production by region
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Africa Asia Pacific
(TTOE)

Note: TTOE = Thousand tonnes of oil equivalent

Exhibit 371. Type of bio-fuels
Type Definition
1st generation
bio-fuels
1st generation bio-fuels include mature technologies for the production of bio-ethanol from sugar and starch crops, biodiesel and
renewable diesel from oil crops and animal fats, and bio-methane from the anaerobic digestion of wet biomass.
2nd generation
bio-fuels
2nd generation bio-fuels are novel bio-fuels or bio-fuels based on novel feedstocks. They generally use biochemical and
thermochemical routes that are at the demonstration stage, and convert lignocellulosic biomass (non-food fibrous biomass such
as straw, wood, and grass) to bio-fuels (e.g. ethanol, butanol, syndiesel).
3rd generation
bio-fuels
3rd generation bio-fuels generally include advanced bio-fuels production routes, which are at the early stage of research and
development or are significantly further from commercialisation (e.g. bio-fuels from algae, hydrogen from biomass).
Source: IEA
Hydropower
Hydroelectric power is the most widely used renewable energy technology worldwide
and in 2009 it supplied more than 3,200 TWh of electricity. Renewable energy
(including large Hydropower) contributes nearly 20%of total global electricity
generation, of which hydropowers share is 90%. The theoretical potential of worldwide
hydropower is around 2,800GW, of which around 30% has been exploited up until now.
Even though not all hydropower potential can be exploited, due to environmental and
economic limitations, there is still a huge potential that is to be exploited. Developing
countries mainly based in Asia, African and South America have a lot of potential to
exploit hydropower.

Hydropower energy is normally applied to peak load demand, because it is readily
stopped and started. It also provides a high-capacity, low-cost means of energy
storage, known as pumped storage. We note that hydropower enjoys an edge over
other renewable technologies as it offers the best conversion rate of 90%, due to direct
conversion hydraulic forces electricity and consequently has the highest payback ratio.
In addition, hydroelectric plants have longer life span, offer higher operating hours per
year and take the least time to start. Once a hydroelectric complex is constructed, the
project produces no direct waste, and has a considerably lower output level of the
greenhouse gas carbon dioxide (CO2) than fossil fuel-powered energy plants. Of the
total installed capacity, Asia accounts for nearly one-third of the total hydropower
installed capacity. Europe and North America are also significant contributors.

Exhibit 372. Global hydroelectric generation by region by region
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Middle East Africa Asia Pacific
(TWh)


Exhibit 373. Energy payback ratio of energy options
0
50
100
150
200
250
300
F
u
e
l

c
e
l
l
N
a
t
u
r
a
l
g
a
s

C
o
a
l

B
i
o
m
a
s
s

S
o
l
a
r

P
V
C
o
a
l
N
u
c
l
e
a
r
B
i
o
m
a
s
s

W
i
n
d
H
y
d
r
o
(
r
e
s
e
r
v
o
i
r
)
H
y
d
r
o
(
r
u
n
-
o
f
-
r
i
v
e
r
)
(%)

Source: Hydropower, Nomura research


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Asian companies

Energy Development Corp EDC PM
POWER & UTI LI TI ES | PHI LI PPI NES
Dani el Raat s +852 2252 2197 dani el.raats@nomura.com
Ivan Lee, CFA +852 2252 6213 ivan.l ee@nomura.com

Our t op pi c k i n SEA
M&A-driven earnings growth
While utilisation will likely remain low and EDCs FY10-12F capex
burden will likely increase by some US$200mn given extensive
rehabilitation requirements, we believe EDCs successful 5 May bid
for the 150MW Bacman geothermal power plant will be meaningfully
earnings accretive post FY11F, given: 1) we expect EDC to sell
electricity at near NPC grid rates (more than double the current steam
sales tariffs) and; 2) we estimate the group stands to realise EBITDA
margin expansion on its vertically integrated production process of
around 20% relative to steam-only production.
Strong organic growth potential
As a market leader in geothermal energy, with expertise across the
entire geothermal value chain, a competitive cost structure, and
presence in resource-rich markets with attractive pro-renewable
government incentives, we believe EDC is well placed for sustained
medium-term organic capacity expansion, likely beyond our current
management-guided assumption of 280-300MW by 2020F. The
Philippines RE Act (2008), which sharply cuts government royalty
payments and corporate income taxes (from 30% to 10%) for EDC,
not only creates value for EDCs existing operations but also
enhances the feasibility of its future project pipeline, in our view.
Reaffirming EDC as our top pick in SEA
EDC trades at an undemanding-looking 10.1x FY11F P/E, which we
believe fails to reflect the Groups steady organic growth profile and
potential upside through M&A. Reiterating BUY on the stock and price
target of PHP6.40/share.

Key financials & valuat ions
31 Dec (PHPmn) FY09 FY10F FY11F FY12F
Revenue 22,067 26,723 28,026 32,288
Reported net profit 3,315 10,378 8,680 10,724
Normal ised net profit 7,381 8,347 8,732 10,724
Normal ised EPS (PHP) 0.39 0.45 0.47 0.57
Norm. EPS growth (%) 26.2 13.1 4.6 22.8
Norm. P/E (x) 11.9 10.6 10.1 8.2
EV/EBITDA (x) 11.8 7.7 7.5 6.5
Pri ce/book (x) 3.1 2.3 2.0 1.7
Di vidend yi el d (%) 2.1 2.4 3.0 3.7
ROE (%) 11.9 31.3 21.4 22.6
Net debt/equi ty (%) 125.8 81.7 69.8 54.8
Earni ngs revi si ons
Previ ous norm. net profit 8,347 8,732 10,724
Change from previous (%) - - -
Previ ous norm. EPS (PHP) 0.45 0.47 0.57
Source: Company, Nomura estimates
Share price relative to MSCI Philippines
1m 3m 6m
(2.1) (3.1) 2.2
(1.2) (4.1) 3.1
(7.6) (7.7) (4.0)
Hard
1,912
50.0
5.60/3.04
4.37
Absolute (PHP)
Absolute (US$)
Rel ati ve to Index
Estimated free float (%)
Market cap (US$mn)
7.2
Major shareholders (%)
Red Vulcan 50.0
52-week range (PHP)
3-mth avg daily turnover (US$mn)
Capital Internati onal
Stock borrowabi lity
2.7
3.2
3.7
4.2
4.7
5.2
5.7
6.2
J
u
n
0
9
J
u
l
0
9
A
u
g
0
9
S
e
p
0
9
O
c
t
0
9
N
o
v
0
9
D
e
c
0
9
J
a
n
1
0
F
e
b
1
0
M
a
r
1
0
A
p
r
1
0
M
a
y
1
0
90
100
110
120
130
140
150
Pri ce
Rel MSCI Philippines
(PHP)
Cl osing price on 23 Jun PHP4.70
Price target PHP6.40
(set on 17 May 10)
Upside/downside 36.2%
Di fference from consensus 0.6%
FY11F net profit (PHPmn) 8,680
Source: Nomura
Cl osing price on 23 Jun PHP4.70
Price target PHP6.40
(set on 17 May 10)
FY11F net profit (PHPmn) 8,680
Source: Nomura
Nomur a v s . c ons ens us
We believe our relatively weak
FY11F EPS estimate stems from the
fact that we have accounted for a
pullback in near-term utilisation
related to the Bacman rehabilitation.
Maintained
BUY
Ac t i on
Being a market leader in geothermal energy production with expertise across the
entire geothermal value chain and a competitive cost structure, EDC looks well
placed to benefit from what we believe will be significant growth in geothermal
energy utilisation. Sweetened by potential near-term upside through M&A,
reiterating BUY call on EDC and PT of PHP6.40/share.
Cat al y s t s
Strong demand growth, coupled with a constrained supply outlook, underpins
favourable sector fundamentals. The continued privatisation drive creates
opportunities for inorganic growth.

Anc hor t hemes

Leading indicators are showing signs of improvement, while rises in commodity
prices, alongside relaxed monetary policy, are improving risk appetite, prompting a
more positive stance toward utilities geared to the recovery.

Energy Development Corp Daniel Raats
Valuation methodology and risks
Valuation. We value EDC using a FCFF methodology, assuming a WACC of 9.9%
and terminal growth of 2.0%.
Downside risks to our view. Over the near term, we see significant discontinuities
in the regulatory environment as the key downside risk for the sector and EDC,
although our checks with industry participants gencos, DUs and the DOE
suggest that this is highly unlikely. On a firm-specific level, while our price target is
by no means predicated on success in bidding for a portion of the 559MW Unified
Leyte contracted capacity, EDCs share price may be adversely affected by a
sentiment-related sell-down should its bids fail or should competitive forces prompt
the company to over-pay. Risks associated with EDCs Miyazawa II bullet
repayment due in FY10F have been mitigated through hedging.

Anticipated forex gain on
Miyazawa II loan due in
FY10F
Robust and sustainable
earnings growth prospects
Fi nanc i al st at ement s

Income statement (PHPmn)
Year-end 31 Dec FY08 FY09 FY10F FY11F FY12F
Revenue 20,527 22,067 26,723 28,026 32,288
Cost of goods sold (5,404) (6,287) (5,938) (5,646) (6,007)
Gross profit 15,123 15,780 20,785 22,380 26,281
SG&A (3,940) (6,395) (8,713) (10,092) (11,861)
Employee share expense
Operating profit 11,183 9,385 12,072 12,289 14,420
EBITDA 11,859 10,584 15,348 15,742 17,988
Depreciation (298) (868) (3,180) (3,357) (3,471)
Amortisation (378) (331) (96) (96) (96)
EBIT 11,183 9,385 12,072 12,289 14,420
Net interest expense (1,820) (2,484) (2,510) (2,528) (2,438)
Associates & JCEs
Other income (297) 1,478 - - -
Earni ngs before tax 9,067 8,379 9,562 9,761 11,983
Income tax (3,188) (945) (1,159) (971) (1,198)
Net profi t after tax 5,878 7,434 8,403 8,790 10,784
Minority interests (37) (46) (48) (50) (53)
Other items
Preferred dividends (6) (8) (8) (8) (8)
Normal ised NPAT 5,835 7,381 8,347 8,732 10,724
Extraordinary items (4,496) (4,066) 2,031 (52) -
Reported NPAT 1,339 3,315 10,378 8,680 10,724
Dividends (5,303) (1,869) (2,087) (2,620) (3,217)
Transfer to reserves (3,964) 1,446 8,292 6,060 7,507
Valuati on and rati o anal ysi s
FD normalised P/E (x) 15.1 11.9 10.6 10.1 8.2
FD normalised P/E at price target (x) 20.5 16.3 14.4 13.7 11.2
Reported P/E (x) 65.7 26.6 8.5 10.2 8.2
Dividend yield (%) 6.0 2.1 2.4 3.0 3.7
Price/cashflow (x) 9.8 9.1 7.7 7.8 7.5
Price/book (x) 3.2 3.1 2.3 2.0 1.7
EV/EBITDA (x) 10.2 11.8 7.7 7.5 6.5
EV/EBIT (x) 10.9 13.3 9.8 9.7 8.1
Gross margin (%) 73.7 71.5 77.8 79.9 81.4
EBITDA margin (%) 57.8 48.0 57.4 56.2 55.7
EBIT margin (%) 54.5 42.5 45.2 43.8 44.7
Net margin (%) 6.5 15.0 38.8 31.0 33.2
Effective tax rate (%) 35.2 11.3 12.1 9.9 10.0
Dividend payout (%) 396.0 56.4 20.1 30.2 30.0
Capex to sales (%) 10.9 56.4 23.3 29.8 18.8
Capex to depreciation (x) 7.5 14.3 2.0 2.5 1.7
ROE (%) 4.6 11.9 31.3 21.4 22.6
ROA (pretax %) 16.2 13.2 16.1 15.4 16.9
Growth (%)
Revenue 8.0 7.5 21.1 4.9 15.2
EBITDA 14.9 (10.8) 45.0 2.6 14.3
EBIT 11.4 (16.1) 28.6 1.8 17.3
Normalised EPS (6.7) 26.2 13.1 4.6 22.8
Normalised FDEPS (6.7) 26.2 13.1 4.6 22.8
Per share
Reported EPS (PHP) 0.07 0.18 0.55 0.46 0.57
Norm EPS (PHP) 0.31 0.39 0.45 0.47 0.57
Fully diluted norm EPS (PHP) 0.31 0.39 0.45 0.47 0.57
Book value per share (PHP) 1.45 1.54 2.01 2.33 2.73
DPS (PHP) 0.28 0.10 0.11 0.14 0.17

Healthy return metrics

Gearing is not a concern
Miyazawa II bullet repayment
Change in accounting
treatment for geothermal
steam and power facilities

Cashflow (PHPmn)
EBITDA 11,859 10,584 15,348 15,742 17,988
Change in working capital (4,529) 4,713 78 (976) (2,631)
Other operating cashflow 1,619 (5,563) (3,965) (3,516) (3,678)
Cashflow from operati ons 8,949 9,734 11,461 11,250 11,679
Capital expenditure (2,243) (12,436) (6,223) (8,358) (6,072)
Free cashfl ow 6,706 (2,702) 5,238 2,892 5,607
Reduction in investments 503 (60) - - -
Net acquisitions (4,115) - - - -
Reduction in other LT assets
Addition in other LT liabilities
Adjustments 1,539 (416) 296 17 42
Cashflow after investing acts 4,634 (3,178) 5,534 2,909 5,649
Cash dividends (5,303) (1,869) (2,087) (2,620) (3,217)
Equity issue (404) - - - -
Debt issue (528) 14,296 (14,052) (841) (882)
Convertible debt issue
Others 162 1,015 (0) (0) -
Cashflow from financi al acts (6,073) 13,442 (16,139) (3,461) (4,100)
Net cashfl ow (1,439) 10,264 (10,605) (551) 1,549
Beginning cash 2,397 957 11,221 616 64
Ending cash 957 11,221 616 64 1,613
Ending net debt 33,272 36,244 30,766 30,528 28,096
Balance sheet (PHPmn)
As at 31 Dec FY08 FY09 FY10F FY11F FY12F
Cash & equivalents 957 11,221 616 64 1,613
Marketable securities 674 735 735 735 735
Accounts receivable 5,412 5,487 5,345 6,166 8,395
Inventories 1,563 1,554 1,795 1,928 2,189
Other current assets 5,117 141 171 179 452
Total current assets 13,724 19,138 8,661 9,072 13,384
LT investments
Fixed assets 5,280 59,877 62,921 67,921 70,522
Goodwill 293 293 293 293 293
Other intangible assets 45,237 3,142 3,046 2,950 2,854
Other LT assets 4,811 2,324 2,324 2,324 2,324
Total assets 69,346 84,775 77,246 82,561 89,378
Short-term debt 10,672 16,931 836 882 882
Accounts payable 2,980 3,985 4,542 4,879 5,360
Other current liabilities 2,050 848 498 148 (202)
Total current l iabi liti es 15,703 21,764 5,876 5,909 6,040
Long-term debt 23,557 30,534 30,545 29,710 28,827
Convertible debt
Other LT liabilities 1,351 2,146 1,579 1,579 1,579
Total l iabi li ti es 40,610 54,443 38,000 37,198 36,447
Minority interest 1,484 1,530 1,578 1,628 1,681
Preferred stock 75 94 94 94 94
Common stock 15,000 18,750 18,750 18,750 18,750
Retained earnings 9,978 7,681 15,980 22,048 29,563
Proposed dividends
Other equity and reserves 2,198 2,277 2,844 2,844 2,844
Total sharehol ders' equity 27,251 28,802 37,668 43,736 51,250
Total equity & li abil ities 69,346 84,775 77,246 82,561 89,378
Liquidity (x)
Current ratio 0.87 0.88 1.47 1.54 2.22
Interest cover 6.1 3.8 4.8 4.9 5.9
Leverage
Net debt/EBITDA (x) 2.81 3.42 2.00 1.94 1.56
Net debt/equity (%) 122.1 125.8 81.7 69.8 54.8
Activi ty (days)
Days receivable 94.0 90.1 74.0 75.0 82.5
Days inventory 91.6 90.5 102.9 120.3 125.4
Days payable 229.8 202.2 262.1 304.5 311.9
Cash cycle (44.3) (21.6) (85.2) (109.2) (104.0)

KEPCO 015760 KS
POWER & UTI LI TI ES | SOUTH KOREA

Kei t h Nam +82 2 3783 2304 kei th.nam@nomura.com

20-year w ai t near i ng an end?
20-year wait for a more guaranteed tariff scheme
Politics have had some major negative ramifications for KEPCOs
tariff adjustments throughout its post-IPO history (IPO: 1989). As a
result, CPI inflation since 1990 has totalled 120%, compared to only a
60% gain in KEPCOs tariffs. With the June regional elections over, a
tariff hike could be brought forward to bring up KEPCOs rate-of-return
(ROR) to the minimum target (6%), before implementing a proposed
fuel cost escalation scheme by July 2011. KEPCOs ROR formula,
heretofore a loose guideline for determining tariffs, has seen only a
4% average ROR on net power plant in service since the Asian crisis
years (1997-98), with RORs meeting the minimum 6% target only in
two of the 12 years since the Asian crisis.
Hurt by a volatile Korean currency, post-North Korea
The W:US$ rate has risen almost 10% since the naval incident with
North Korea. Every 1% won depreciation versus the US dollar results
in an estimated 3% earnings decrease, as won-translated fuel costs
rise. Essentially all of KEPCOs earnings are denominated in won,
while almost all of its fuel costs are in US dollars, exposing earnings
to the volatility of forex markets. Implementation of a fuel cost
escalation scheme could smooth out such forex-linked earnings
volatility after two consecutive years of earnings losses (FY08-09).
Looking to get out of the 0.4-0.5x P/BV bottom range
KEPCO is by far the cheapest valued major Asian power utility. We
believe the low valuation stems from: 1) a loose tariff scheme
influenced by the governments political and economic agenda, and;
2) KEPCOs defencelessness against volatile W:US$ currency
movements. A tighter tariff scheme would re-rate KEPCOs valuations,
in our view.

Key fi nanci al s & val uations
31 Dec (Wbn) FY08 FY09 FY10F FY11F
Revenue 31, 302 33,661 39, 479 46,257
Report ed net prof it (2,981) (107) 1, 706 2,365
Normalised net profit (2,981) (107) 1, 706 2,365
Normalised EPS (W) (4,647) (167) 2, 658 3,687
Norm. EPS growt h (%) (296.6) na na 38. 7
Norm. P/ E (x) na na 13.1 9. 4
EV/EBI TDA (x) 20.7 8. 0 6.1 5. 7
Price/book (x) 0.5 0. 5 0.4 0. 4
Dividend yield (%) 0.0 0. 0 2.4 3. 3
ROE (%) (7.0) (0. 3) 3.7 4. 5
Net debt/ equit y (%) 66.8 78. 9 71.8 71. 3
Previous norm. net profit (107) 1, 706 2,365
Change f rom previous (%) - - -
Previous norm. EPS (W) (167) 2, 658 3,687
Source: Company, Nomura esti mates
Share price relative to MSCI Korea
1m 3m 6m
3. 7 (9.3) 4. 8
6. 2 (13.8) 3. 7
(4. 2) (11.5) 1. 5
Hard
18,235
46. 0
41,600/ 28,000
65. 2
Absolut e (W)
Absolut e (US$)
Relative t o Index
Est imat ed f ree f loat (%)
Market cap (US$mn)
24. 1
Korea Development Bank 30. 0
52-week range (W)
Korean Government
Stock borrowability
26, 000
31, 000
36, 000
41, 000
46, 000
6
0
9
7
0
9
8
0
9
9
0
9
1
0
0
9
1
1
0
9
1
2
0
9
1
1
0
2
1
0
3
1
0
4
1
0
5
1
0
80
85
90
95
100
105
110
115
120
Price
Rel MSCI Korea
(W)
Closing price on 23 Jun W34,000
Price target W43,000
(set on 14 Jun 10)
Difference from consensus -3.5%
FY10F net profit (Wbn) 1,706
Source: Nomura
Nomur a v s c ons ens us
Nomuras price target is below
consensus. Our EV/capacity (MW)
valuation method considers debt and
MW expansion trends.
Maintained
BUY
Ac t i on
While long in the making, the government is proposing a fuel cost escalation
scheme for tariffs to be implemented in July 2011, which would link electricity rates
to fuel input prices on a regular basis. A tighter tariff scheme should move valuation
up from the current low ranges of 0.4-0.5x P/BV. We reaffirm our BUY call and PT
of W43,000.
Cat al y s t s
Catalysts that would move KEPCO stock towards our PT: 1) a tighter tariff scheme
linked to fuel prices and currency, and; 2) longer term, won currency strength.

Anc hor t hemes

Earnings are affected by movements in the won-to-US dollar rates, international
fuel commodity prices, CPI and interest rates. Also, KEPCO leads Koreas
consortia that bid for various nuclear power projects overseas.

NOMURA F I NA NCI A L I NVE ST MENT
( K ORE A ) CO L T D

KEPCO Keith Nam
Valuation methodology and investment risks
Our price target of W43,000 is based on an EV/MW target of US$820,000, the median
of KEPCOs post-IPO 20-year EV/MW capacity range. Risks: 1) essentially all of
KEPCOs earnings are denominated in won, while almost all of its fuel costs are in US
dollars, exposing earnings to the volatility of the forex and energy markets and
2) changes in the governments electricity tariff policy and the macro backdrop can
also have a large impact on KEPCOs earnings. Further, earnings are highly leveraged
to revenue growth, which poses a direct risk if the street cuts sales forecasts.

KEPCO Keith Nam

Sharp improvement in
EBITDA from FY08 bottom,
but free cashflow deficit
persists
Income statement (Wbn)
Year-end 31 Dec FY07 FY08 FY09 FY10F FY11F
Revenue 29,010 31,302 33,661 39,479 46,257
Cost of goods sold (24,705) (32,618) (30,734) (34,040) (39,420)
Gross prof it 4,305 (1,316) 2,927 5,439 6,837
SG&A (1,848) (2,040) (1,903) (1,729) (1,936)
Employee share expense
Operati ng prof it 2,457 (3,356) 1,024 3,709 4,900
EBITDA 7,590 2,088 6,571 9,244 10,555
Depreciati on (5,133) (5,444) (5,547) (5,535) (5,655)
Amortisation - - - - -
EBIT 2,457 (3,356) 1,024 3,709 4,900
Net interest expense (616) (942) (1,534) (1,825) (2,138)
Associates & JCEs 120 287 257 260 319
Other income 491 28 462 637 752
Earni ngs before tax 2,452 (3,983) 208 2,782 3,834
Income tax (895) 1,030 (286) (1,043) (1,438)
Net profi t aft er tax 1,557 (2,953) (78) 1,739 2,396
Minority i nterests (41) (29) (30) (33) (30)
Other items - - - - -
Preferred di vi dends - - - - -
Normali sed NPAT 1,516 (2,981) (107) 1,706 2,365
Extraordi nary items - - - - -
Reported NPAT 1,516 (2,981) (107) 1,706 2,365
Dividends (467) - - (521) (719)
Transfer to reserves 1,049 (2,981) (107) 1,184 1,647
Valuati on and rati o anal ysis
FD normali sed P/E (x) 14.7 na na 13.1 9.4
FD normali sed P/E at pri ce target (x) 18.6 na na 16.6 11.9
Reported P/E (x) 14.4 na na 12.8 9.2
Dividend yield (%) 2.2 - - 2.4 3.3
Pri ce/cashflow (x) 3.1 12.5 3.5 2.5 2.2
Pri ce/book (x) 0.5 0.5 0.5 0.4 0.4
EV/EBITDA (x) 5.2 20.7 8.0 6.1 5.7
EV/EBIT (x) 15.6 na 42.4 14.6 11.8
Gross margin (%) 14.8 (4.2) 8.7 13.8 14.8
EBITDA margin (%) 26.2 6.7 19.5 23.4 22.8
EBIT margin (%) 8.5 (10.7) 3.0 9.4 10.6
Net margin (%) 5.2 (9.5) (0.3) 4.3 5.1
Effective tax rate (%) 36.5 na 137.3 37.5 37.5
Dividend payout (%) 30.8 na na 30.6 30.4
Capex to sales (%) 29.5 32.0 37.2 32.0 29.8
Capex to depreciati on (x) 1.7 1.8 2.3 2.3 2.4
ROE (%) 3.5 (7.0) (0.3) 3.7 4.5
ROA (pretax %) 3.3 (3.7) 1.4 4.1 4.8
Growth (%)
Revenue 7.1 7.9 7.5 17.3 17.2
EBITDA (4.0) (72.5) 214.7 40.7 14.2
EBIT (15.3) (236.6) na 262.4 32.1
Normalised EPS (26.4) (296.6) na na 38.7
Normalised FDEPS (26.0) (296.6) na na 38.7
Per share
Reported EPS (W) 2,363 (4,647) (167) 2,658 3,687
Norm EPS (W) 2,363 (4,647) (167) 2,658 3,687
Fully di luted norm EPS (W) 2,307 (4,536) (163) 2,595 3,599
Book value per share (W) 68,633 63,847 64,170 78,099 87,185
DPS (W) 750 - - 813 1,120
Source: Nomura estimat es

KEPCO Keith Nam

Cashf low (Wbn)
EBITDA 7,590 2,088 6,571 9,244 10,555
Change i n working capital 872 (4,786) (1,072) (2,129) (958)
Other operati ng cashflow (1,478) 4,444 805 1,529 358
Cashf low from operati ons 6,984 1,746 6,303 8,644 9,955
Capi tal expenditure (8,545) (10,021) (12,519) (12,622) (13,800)
Free cashfl ow (1,561) (8,275) (6,216) (3,977) (3,845)
Reduction i n investments (689) (3,905) (342) (402) (483)
Net acquisitions (396) (465) (575) (547) (474)
Reduction i n other LT assets (179) 1,984 - (1,745) (70)
Addition in other LT l iabilities 1,279 (134) 131 2,343 1
Adjustments (22) 30 - - -
Cashf low af ter i nvesti ng act s (1,568) (10,765) (7,002) (4,328) (4,870)
Cash dividends (467) - - (521) (719)
Equity issue 63 11 36 0 36
Debt issue 1,494 7,502 5,198 3,520 3,944
Convertible debt i ssue 271 467 - (521) (197)
Others 353 1,393 1,838 1,883 1,839
Cashf low from fi nanci al acts 1,714 9,373 7,072 4,361 4,903
Net cashfl ow 146 (1,393) 71 33 33
Beginning cash 3,021 3,168 1,775 1,845 1,878
Ending cash 3,168 1,775 1,845 1,878 1,911
Ending net debt 18,452 27,346 32,474 35,961 39,872
Bal ance sheet (Wbn)
As at 31 Dec FY07 FY08 FY09 FY10F FY11F
Cash & equivalents 3,168 1,775 1,845 1,878 1,911
Marketable securities 21 15 10 - -
Inventories 2,633 4,272 3,895 4,313 4,800
Other current assets 474 723 697 611 650
Tot al current assets 9,335 10,339 11,029 11,530 12,262
LT investments 3,206 7,117 7,463 7,875 8,358
Fixed assets 67,563 69,795 74,033 84,438 92,583
Goodwi ll - - - - -
Other intangi ble assets 841 947 682 770 856
Other LT assets 1,984 - - 1,745 1,815
Tot al assets 82,929 88,199 93,208 106,357 115,874
Short-term debt 5,499 5,802 6,463 7,581 5,926
Accounts payabl e 2,751 3,570 2,864 2,880 2,993
Other current liabil ities 1,088 1,163 1,420 (246) (618)
Tot al current l i abi l it ies 9,338 10,536 10,748 10,215 8,301
Long-term debt 16,121 23,319 27,856 30,259 35,857
Convertible debt - - - - -
Other LT liabil ities 13,203 13,069 13,201 15,544 15,545
Tot al li abil i ti es 38,662 46,924 51,804 56,017 59,704
Minority i nterest 234 313 234 234 235
Preferred stock - - - - -
Common stock 3,208 3,208 3,208 3,208 3,208
Proposed dividends (467) - - (521) (719)
Tot al shareholders' equit y 44,032 40,962 41,169 50,106 55,935
Tot al equi ty & li abil i ti es 82,929 88,199 93,208 106,357 115,874
Liqui di ty (x)
Current ratio 1.00 0.98 1.03 1.13 1.48
Interest cover 4.0 (3.6) 0.7 2.0 2.3
Leverage
Net debt/EBITDA (x) 2.43 13.10 4.94 3.89 3.78
Net debt/equity (%) 41.9 66.8 78.9 71.8 71.3
Acti vi ty (days)
Days receivabl e 36.6 38.5 44.1 43.0 38.0
Days inventory 35.0 38.7 48.5 44.0 42.2
Days payable 42.0 35.5 38.2 30.8 27.2
Cash cycle 29.6 41.8 54.4 56.2 53.0
Capex increases as KEPCO
builds more nuclear capacity

JA Solar JASO US
SOL AR | CHI NA

Weat her t he l oomi ng st or m
Strength continues into 2Q10F; upside to guidance
We expect JA Solars business to remain solid in 2Q10F, thanks to
rush demand ahead of subsidy cuts in Germany and tight cell capacity
supply. We see upside to managements margin guidance, given the
companys ability to pass on rising wafer costs to customers.
Immune to euro depreciation over near term
We believe that JA Solar will remain fairly immune to euro
depreciation, given that we estimate only 15% of its 2Q10F revenue
will be euro-denominated. Despite JA Solars overseas expansion,
management noted it will cautiously hedge the companys euro
exposure should the euro remain weak in 2H10F.
Well positioned for 2H10F
In our view, JA Solar is well positioned for a potential industry
slowdown in 2H10F, given its progress in module OEM, growing
customer base and cost leadership. Based on its capacity plan, we
deem FY10F shipment guidance of 1GW-plus conservative.
Brighter earnings outlook for FY10F
In our 20 May, 2010, report, we raised our FY10F earnings estimate
by 83%, mainly to reflect a faster-than-expected capacity increase, a
stronger ASP in 1H10F and a brighter margin outlook.
Attractive valuation
JA Solar trades at an attractive 33% discount to peers. We apply the
peer average P/E of 9x to FY10F earnings to derive our US$8.00 PT,
which implies 68% upside. Reiterating BUY. Risks include uncertainty
regarding government policies on solar energy, execution of R&D
initiatives and progress in signing up overseas business partners.
Key financi al s & val uations
31 Dec (US$mn) FY08 FY09 FY10F FY11F
Revenue 796 554 1,246 1, 598
Reported net profit (56. 7) (13.2) 141. 4 170.1
Normalised net profit 69.3 (13.2) 141. 4 170.1
Normalised EPS (US$) 0.41 (0.12) 0.86 1.04
Norm. EPS growth (%) 5.4 (129.3) na 21.4
Norm. P/E (x) 11.6 na 5. 5 4.6
EV/EBITDA (x) 6.9 19. 5 4. 0 2.5
Price/ book (x) 1.1 0. 8 0. 9 0.8
Dividend yield (%) 0.0 0. 0 0. 0 0.0
ROE (%) (9. 0) (1.9) 18. 6 18.5
Net debt/equity (%) 2.0 net cash 16. 0 net cash
Earnings r evisions
Previous norm. net profit (13.2) 141. 4 170.1
Previous norm. EPS (US$) (0.12) 0.86 1.04
Share pri ce relative to MSCI China
1m 3m 6m
(5.4) 1. 7 (21.7)
(5.4) 1. 7 (21.7)
(14.3) 1. 8 (21.0)
Hard
773
63.2
6. 92/3.37
54.8
Absolute (US$)
Absolute (US$)
Relative to Index
Market cap (US$mn)
15.0
Jinglong Group 24.7
52-week range (US$)
Fidelit y
Stock borrowability
3.0
4.0
5.0
6.0
7.0
8.0
J
u
n
0
9
A
u
g
0
9
O
c
t
0
9
D
e
c
0
9
F
e
b
1
0
A
p
r
1
0
50
70
90
110
130
150
Price
Rel MSCI Chi na
(US$)
Closing pri ce on 23 Jun US$4.77
Price target US$8.00
(set on 20 May 10)
Difference from consensus 6.7%
FY10F net profi t (US$mn) 141.4
Source: Nomura
Closing pri ce on 23 Jun US$4.77
(set on 20 May 10)
FY10F net profi t (US$mn) 141.4
Source: Nomura
We are more positive than
consensus on JA Solars ability to
pass on higher material costs in
2Q10F and improve its customer mix
to maintain volume growth in 2H10F.
Maintained
BUY
Ac t i on
We believe that JA Solars business remains solid in 2Q10F and look for upside to
margin guidance. In our view, JA Solar is immune to euro depreciation over the
near term. For 2H10F, we are confident that it can enhance its customer portfolio
by acquiring more module OEM business from established European players.
Reaffirm BUY with PT of US$8.00.
Cat al y s t s
Execution of share repurchase programme, announcement of new overseas
customers/partners, progress on R&D and strong financial results.

Anc hor t hemes

As the solar photovoltaic cell industry turns into a buyers market, we expect firms
with scale, cost leadership, brand equity, strong distribution channels and quality/
technology differentiation to stand out. We also prefer more vertically integrated
players to standalone players.

JA Solar Clarisse Pan
We forecast top-line growth of
128% y-y in FY10F, backed
by strong demand visibility
and the launch of module
OEM business
Gross margin to improve
significantly in FY10F owing
to much higher utilisation and
resilient ASP in 1H10F
Income statement (US$mn)
Revenue 362 796 554 1,246 1,598
Cost of goods sol d (281) (652) (483) (996) (1,311)
Gross profi t 81 145 70 250 287
SG&A (21) (44) (57) (61) (80)
Employee share expense - - - - -
Operating profi t 60 101 13 189 207
EBITDA 64 114 40 224 259
Depreciation (5) (13) (26) (35) (52)
EBIT 60 101 13 189 207
Net i nterest expense 7 (16) (26) (23) (18)
Associates & JCEs - - - - -
Other i ncome (14) (13) 0 (8) -
Earni ngs before tax 53 73 (12) 159 189
Income tax 1 (3) (1) (18) (19)
Net prof it after tax 54 69 (13) 141 170
Minority interests - - - - -
Other i tems - - - - -
Preferred dividends (0) - - - -
Normal i sed NPAT 53 69 (13) 141 170
Extraordinary i tems - (126) - - -
Reported NPAT 53 (57) (13) 141 170
Divi dends - - - - -
Transfer to reserves 53 (57) (13) 141 170
Val uat ion and rati o anal ysi s
FD normalised P/E (x) 12.3 11.6 na 5.5 4.6
FD normalised P/E at price target (x) 20.6 19.5 na 9.3 7.7
Reported P/E (x) 12.3 na na 5.5 4.6
Divi dend yield (%) - - - - -
Price/cashflow (x) na na 3.2 8.5 1.7
Price/book (x) 1.1 1.1 0.8 0.9 0.8
EV/EBITDA (x) 10.0 6.9 19.5 4.0 2.5
EV/EBIT (x) 10.8 7.8 57.4 4.8 3.1
Gross margi n (%) 22.3 18.2 12.7 20.1 18.0
EBITDA margin (%) 17.8 14.3 7.2 18.0 16.2
EBIT margin (%) 16.5 12.7 2.4 15.2 13.0
Net margin (%) 14.7 (7.1) (2.4) 11.3 10.6
Effective tax rate (%) (1.4) 4.8 na 11.1 10.0
Divi dend payout (%) - na na - -
Capex to sales (%) 16.0 14.8 16.2 18.3 12.5
ROE (%) 18.0 (9.0) (1.9) 18.6 18.5
ROA (pretax %) 23.0 16.1 1.7 19.5 19.0
Growt h (%)
Revenue 305.3 120.1 (30.5) 125.1 28.2
EBITDA 252.9 76.7 (65.2) 466.1 15.6
EBIT 255.2 68.9 (86.7) 1,308.8 9.6
Normalised EPS 181.9 5.4 (129.3) na 21.4
Normalised FDEPS 181.9 5.4 (129.3) na 21.4
Per share
Reported EPS (US$) 0.39 (0.34) (0.12) 0.86 1.04
Norm EPS (US$) 0.39 0.41 (0.12) 0.86 1.04
Fully diluted norm EPS (US$) 0.39 0.41 (0.12) 0.86 1.04
Book value per share (US$) 4.22 4.46 6.00 5.07 6.17
DPS (US$) - - - - -
Source: Nomura est imat es

Big FX losses unlikely given
low euro exposure

JA Solar Clarisse Pan
Management recently raised
capex guidance to US$220-
250mn for FY10F given
faster-than-expected capacity
expansion

Cashfl ow (US$mn)
EBITDA 64 114 40 224 259
Change in working capital (152) (33) 41 (168) 200
Other operating cashflow (69) (270) 85 36 (7)
Cashfl ow f rom operati ons (157) (189) 165 92 452
Capital expenditure (58) (118) (89) (228) (200)
Free cashfl ow (215) (307) 76 (136) 252
Reduction in investments (110) 100 10 - -
Net acqui si ti ons - - - - -
Reduction in other LT assets (74) (229) 16 84 35
Addition i n other LT l iabi lities 0 18 6 (1) -
Adj ustments 73 168 (24) (82) (35)
Cashfl ow after i nvesti ng acts (326) (250) 84 (134) 252
Cash dividends - - - - -
Equity issue 458 - - - -
Debt issue 7 43 29 116 -
Convertible debt issue - 370 (67) 3 -
Others 6 (37) (55) - 5
Cashfl ow f rom fi nanci al act s 471 376 (93) 119 5
Net cashfl ow 145 126 (9) (15) 257
Beginning cash 12 157 283 274 259
Ending cash 157 283 274 259 516
Ending net debt (130) 14 (1) 133 (124)
Bal ance sheet (US$mn)
Cash & equival ents 157 283 274 259 516
Marketable securities 110 10 - - -
Accounts receivable 7 52 50 169 111
Inventori es 22 87 94 179 36
Total current assets 479 561 536 745 802
LT investments - - - - -
Fixed assets 73 201 253 445 593
Goodwill - - - - -
Other i ntangible assets 1 2 2 - -
Other LT assets 74 303 287 203 167
Total assets 627 1,067 1,078 1,393 1,563
Short-term debt 27 72 1 - -
Accounts payable 1 17 54 55 88
Other current li abi lities 31 39 37 91 58
Total current l i abi l it ies 59 128 92 146 146
Long-term debt - - 100 217 217
Convertible debt - 225 172 175 175
Other LT liabilities 0 18 23 23 23
Total l i abi l it ies 60 370 387 561 560
Minority interest - - - - -
Common stock 0 0 0 0 0
Retained earnings 57 117 92 233 403
Proposed dividends - - - - -
Other equity and reserves 510 580 599 599 599
Total sharehol ders' equi ty 567 697 691 832 1,002
Total equity & l iabil i ti es 627 1,067 1,078 1,393 1,563
Liqui di ty (x)
Current ratio 8.06 4.40 5.82 5.10 5.50
Interest cover na 6.5 0.5 8.4 11.2
Leverage
Net debt/EBITDA (x) net cash 0.12 net cash 0.59 net cash
Net debt/equity (%) net cash 2.0 net cash 16.0 net cash
Act ivit y (days)
Days receivable 6.8 13.6 33.6 32.0 32.0
Days inventory 26.9 30.4 68.2 50.0 30.0
Days payabl e 1.1 5.2 26.9 20.0 20.0
Cash cycle 32.6 38.8 74.9 62.0 42.0
One of the best balance
sheets among listed solar
companies


Yingli Green Energy YGE US
SOL AR | CHI NA


Long-t er m f undament al s i nt ac t
Strong 1H10F operating results expected
Yinglis 1H10F operating results could beat consensus estimates on
better gross margins as a result of higher ASPs and lower-than-
expected polysilicon costs. We believe that Yingli, like other Chinese
solar companies, is running at full capacity in 1H10F, which should
further strengthen its non-silicon cost competitiveness.
Near-term headwind from weak euro
We expect Yinglis earnings to be hit hard in 1H10F by a depreciating
euro, given that 50-70% of its revenue is euro-denominated, vs only
0-20% of its COGS. We are reviewing our estimates on consideration
of euro forex forecast revisions, but we still see a long-term buying
opportunity post 1Q10F results despite recent weak sentiment, given
the company's strong long-term competitiveness.
In-house poly and PANDA could provide +ve surprises
While the market appears concerned about Yinglis in-house
polysilicon project, which embeds execution risks and pushes blended
silicon costs higher than peers in 2H10F, we remain confident about
Yinglis abilities to ramp production and to lower non-silicon costs to
maintain overall cost leadership. The market also has not factored in
much contribution from the PANDA modules, the launch of which we
believe is on track and could provide upside surprises later this year.
Reiterating BUY
Our PT is based on FY10F earnings and a P/E of 22x. We apply a
premium to peers as we remain positive on Yinglis long-term
prospects, given its brand equity and cost leadership. Risks include
uncertainty over solar energy policy, execution risk, progress on
disruptive technology R&D and slow capacity expansion.
31 Dec (RMBmn) FY08 FY09F FY10F FY11F
Revenue 7,553 7,153 10,050 11, 004
Reported net profit 667 (266) 1,029 1, 143
Normalised net profit 667 (266) 1,029 1, 143
Normalised EPS (RMB) 5.23 (2.32) 6.94 7.70
Norm. EPS growth (%) 34.7 (144.3) na 11.0
Norm. P/E (x) 14.2 na 10. 3 9.0
EV/EBITDA (x) 10.0 14. 3 5. 3 4.7
Price/ book (x) 1.9 1. 3 1. 4 1.2
Dividend yield (%) 0.0 0. 0 0. 0 0.0
ROE (%) 15.2 (4.9) 15. 4 14.7
Net debt/equity (%) 57.5 50. 8 41. 0 34.0
Earnings r evisions
Previous norm. net profit (266) 1,029 1, 143
Previous norm. EPS (RMB) (2.32) 6.94 7.70
1m 3m 6m
9. 8 (16.1) (36.1)
9. 8 (16.1) (36.1)
0. 9 (16.1) (35.4)
Hard
1, 559
63.2
18. 94/8.41
51.4
Absolute (US$)
Absolute (US$)
Relative to Index
Market cap (US$mn)
Mr. Liansheng Miao (Chairman) 36.8
52-week range (US$)
Stock borrowability
7
9
11
13
15
17
19
21
J
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110
120
Pri ce
Rel MSCI Chi na
(US$)
Closing price on 23 Jun US$10.51
(set on 13 Jan 10)
FY10F net profit (RMBmn) 1,029
Source: Nomura
Closing price on 23 Jun US$10.51
(set on 13 Jan 10)
Source: Nomura
We see downside to our estimates
amid a weaker euro outlook.
Nonetheless, we expect Yinglis
FY10F operating results to beat
consensus estimates.
Maintained
BUY
Ac t i on
We believe Yinglis capacity expansion plans reflect its confidence in strong
demand throughout FY10F. More resilient ASPs in 1H10F should also boost
margins to beat consensus estimates. Although the depreciating euro and weaker
European economy are potential concerns, Yinglis long-term fundamentals remain
solid, in our view, underpinned by brand equity and cost leadership. Maintain BUY.
Cat al y s t s
Announcement of new sales contracts, smooth ramp up of in-house polysilicon
production, launch of PANDA module, and attainment of long-term debt financing.

Anc hor t hemes

As the solar PV industry turns into a buyers market, we expect companies with
scale, cost leadership, brand equity, strong distribution channels and quality/

Yingli Green Energy Clarisse Pan

Expected gross margin
expansion in FY10F is a
function of more resilient ASP
in 1H10F, higher utilisation
rates and declining raw
material costs
We recently raised our FY10F
shipment estimate by 25%
We factor in depreciation from
the in-house polysilicon facility
starting in December 2009
Income statement (RMBmn)
Revenue 4,059 7,553 7,153 10,050 11,004
Cost of goods sol d (3,102) (5,923) (5,756) (7,347) (8,094)
Gross profi t 957 1,630 1,397 2,703 2,911
SG&A (277) (476) (759) (895) (891)
Operating profi t 680 1,153 638 1,809 2,019
EBITDA 814 1,368 965 2,487 2,742
Depreciation (91) (159) (274) (626) (670)
Amortisation (43) (56) (53) (53) (53)
EBIT 680 1,153 638 1,809 2,019
Net i nterest expense (51) (136) (348) (401) (379)
Associates & JCEs (1) - - - -
Other i ncome (33) (62) (381) - -
Earni ngs before tax 595 954 (91) 1,408 1,640
Income tax (13) 6 (61) (211) (246)
Net prof it after tax 582 960 (151) 1,197 1,394
Minority interests (193) (293) (114) (168) (251)
Preferred dividends (11) - - - -
Normal i sed NPAT 378 667 (266) 1,029 1,143
Extraordinary i tems - - - - -
Reported NPAT 378 667 (266) 1,029 1,143
Transfer to reserves 378 667 (266) 1,029 1,143
Reported P/E (x) 20.6 14.0 na 9.9 8.7
Price/cashflow (x) na 9.8 23.2 3.7 4.2
Price/book (x) 1.9 1.9 1.3 1.4 1.2
EV/EBITDA (x) 16.6 10.0 14.3 5.3 4.7
EV/EBIT (x) 19.9 11.9 21.6 7.3 6.3
Gross margi n (%) 23.6 21.6 19.5 26.9 26.4
EBITDA margin (%) 20.0 18.1 13.5 24.7 24.9
EBIT margin (%) 16.7 15.3 8.9 18.0 18.3
Net margin (%) 9.3 8.8 (3.7) 10.2 10.4
Effective tax rate (%) 2.2 (0.6) na 15.0 15.0
Divi dend payout (%) - - na - -
Capex to sales (%) 24.3 26.8 33.2 24.9 20.3
ROE (%) 18.6 15.2 (4.9) 15.4 14.7
ROA (pretax %) 14.4 13.9 5.8 14.1 14.3
Growt h (%)
Revenue 147.7 86.1 (5.3) 40.5 9.5
EBITDA 100.8 68.2 (29.5) 157.7 10.2
EBIT 85.2 69.7 (44.7) 183.5 11.6
Normalised EPS 44.8 34.7 (144.3) na 11.0
Normalised FDEPS 44.8 37.6 (146.2) na 11.0
Per share
Reported EPS (RMB) 3.9 5.2 (2.3) 6.9 7.7
Norm EPS (RMB) 3.9 5.2 (2.3) 6.9 7.7
Fully diluted norm EPS (RMB) 3.7 5.2 (2.4) 6.7 7.4
Book value per share (RMB) 41.1 37.3 53.7 48.4 56.1
DPS (RMB) - - - - -

Yingli Green Energy Clarisse Pan

We factor in a higher
percentage of long-term debt
going forward
We expect Yingli to continue
expanding module capacity in
FY10F
Cashfl ow (RMBmn)
EBITDA 814 1,368 965 2,487 2,742
Change in working capital (2,567) (245) 56 614 123
Other operating cashflow (325) (166) (668) (368) (461)
Cashfl ow f rom operati ons (2,078) 958 354 2,733 2,404
Capital expenditure (987) (2,027) (2,373) (2,501) (2,237)
Free cashfl ow (3,065) (1,069) (2,019) 232 167
Reduction in investments (8) (172) 171 - -
Reduction in other LT assets (444) (29) 130 200 150
Addition i n other LT l iabi lities (593) 110 (8) 43 14
Adj ustments 843 (94) (338) (296) (217)
Cashfl ow after i nvesti ng acts (3,267) (1,255) (2,065) 179 114
Equity issue 3,591 - 1,680 - -
Debt issue 994 1,487 1,543 1,250 (900)
Convertible debt issue 1,263 - 58 (960) -
Others (1,698) 24 (11) - -
Cashfl ow f rom fi nanci al act s 4,149 1,512 3,270 290 (900)
Net cashfl ow 883 257 1,206 469 (786)
Beginning cash 78 961 1,218 2,424 2,893
Ending cash 961 1,218 2,424 2,893 2,107
Ending net debt 1,563 2,731 3,127 2,947 2,833
Bal ance sheet (RMBmn)
As at 31 Dec FY07 FY08 FY09F FY10F FY11F
Cash & equival ents 961 1,218 2,424 2,893 2,107
Marketable securities - - - - -
Inventori es 1,261 2,041 2,208 2,415 2,217
Other current assets 1,622 1,338 908 758 758
LT investments 21 193 21 21 21
Fixed assets 1,480 3,386 5,484 7,360 8,927
Goodwill 359 666 626 626 626
Other i ntangible assets 55 63 268 268 268
Other LT assets 670 699 569 369 219
Total assets 7,674 11,069 14,664 16,362 16,952
Short-term debt 1,261 2,044 3,143 2,000 1,500
Total current l i abi l it ies 1,576 2,829 4,412 3,438 3,020
Long-term debt - 663 1,108 3,500 3,100
Convertible debt 1,263 1,242 1,300 340 340
Total l i abi l it ies 2,917 4,923 7,000 7,501 6,698
Minority interest 755 1,395 1,509 1,677 1,928
Retained earnings 359 1,026 760 1,790 2,933
Total sharehol ders' equi ty 4,002 4,751 6,154 7,184 8,327
Total equity & l iabil i ti es 7,674 11,069 14,664 16,362 16,952
Liqui di ty (x)
Current ratio 3.23 2.14 1.74 2.25 2.28
Interest cover 13.3 8.5 1.8 4.5 5.3
Leverage
Net debt/EBITDA (x) 1.92 2.00 3.24 1.18 1.03
Net debt/equity (%) 39.1 57.5 50.8 41.0 34.0
Act ivit y (days)
Days receivable 68.6 65.7 92.4 69.1 57.4
Days inventory 121.9 102.0 134.7 114.8 104.5
Days payabl e 16.5 24.3 39.9 35.7 38.2
Cash cycle 174.0 143.4 187.1 148.3 123.7


LDK Solar LDK US
SOL AR | CHI NA

Sol i d 1H but 2H r emai ns unc l ear
1Q10 operating results beat consensus by 80%
LDKs 1Q10 operating results exceeded consensus estimates by 80%,
driven by solid gross margin and better-than-expected revenue. We
believe the better gross margin was mainly attributable to a higher
wafer OEM contribution and lower-than-expected polysilicon costs.
Guidance implies strength will continue into 2Q10F
Based on company guidance, we believe that LDKs fundamentals will
remain strong in 2Q10F, with rising shipments, ASP and gross margin.
Guidance for 2Q10F revenue is about 23% higher than consensus.
But growing uncertainty beyond 2Q10F
LDK expects 3Q10F wafer and module ASPs to remain stable on a
sequential basis. We see this as an aggressive assumption,
considering the weak euro, subsidy cuts in Germany and major wafer
makers capacity expansion plans in 2H10F.
Cash remains tight dilution risk from equity offering
We expect LDKs cash position to remain tight (net debt/equity at
156%) without any further divestments and equity fund raising in
FY10F. We believe the company has the incentive to undertake an
equity offering, which could present earnings dilution risk.
Fairly valued; maintain NEUTRAL and PT of US$8.00
Our PT of US$8.00 is based on our FY10F EPS forecast and the
average FY10F P/E of Chinese solar companies (13x). Investment
risks include progress on in-house polysilicon production, expansion
strategy into the downstream, up/downside surprises from policy
changes, earnings dilution risks from potential equity financing and
whether LDK can continue to improve its balance sheet quality.
31 Dec (US$mn) FY08 FY09 FY10F FY11F
Revenue 1,643 1,098 1,701 1, 879
Reported net profit 70.2 (221.6) 82. 3 91.1
Normalised net profit 70.2 (221.6) 82. 3 91.1
Normalised EPS (US$) 0.67 (1.71) 0.63 0.69
Norm. EPS growth (%) (55. 3) (354.9) na 10.6
Norm. P/E (x) 8.4 na 9. 0 8.2
EV/EBITDA (x) 37.8 na 9. 9 10.9
Price/ book (x) 0.8 0. 8 0. 8 0.7
Dividend yield (%) 0.0 0. 0 0. 0 0.0
ROE (%) 9.6 (26.6) 8. 9 9.0
Net debt/equity (%) 124.4 157. 1 155. 9 188.4
Earnings r evisions
Previous norm. net profit (221.6) 82. 3 91.1
Previous norm. EPS (US$) (1.71) 0.63 0.69
1m 3m 6m
(1.4) (17.7) (17.9)
(1.4) (17.7) (17.9)
(10.3) (17.7) (17.1)
Hard
52-week range (US$)
Stock borrowability
Xiaofeng Peng 70.7
Absolute (US$)
Absolute (US$)
Relative to Index
Market cap (US$mn) 735
29.0
11. 99/5.00
23.05
4.3
6.3
8.3
10.3
12.3
14.3
J
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40
50
60
70
80
90
100
110
Pri ce
Rel MSCI Chi na
(US$)
Closi ng price on 23 Jun US$5.66
(set on 27 Nov 09)
FY10F net profit (US$mn) 82.3
Source: Nomura
Closi ng price on 23 Jun US$5.66
(set on 27 Nov 09)
FY10F net profit (US$mn) 82.3
Source: Nomura
We believe that consensus has yet
to factor in LDK Solars 2Q10F
results and thus we expect upside to
current consensus numbers.
Note: price target under review
Maintained
NEUTRAL
Ac t i on
LDK reported strong 1Q10 numbers, with its operating profit beating market
expectations by 80%. While we expect near-term share price strength on: 1) robust
2Q10F guidance, which is 23% above consensus; and 2) low exposure to euro
depreciation, we remain NEUTRAL, on a stretched balance sheet, potential dilution
risk from fund raising and a hazy outlook beyond 2Q10F.
Cat al y s t s
Further enhancement of balance sheet quality, smooth ramp-up of poly production
and progress on integration into the module business.

Anc hor t hemes

As the solar PV industry turns into a buyers market, we expect companies with
scale, cost leadership, brand equity, strong distribution channels and quality/

LDK Solar Clarisse Pan

We expect the effective tax
rate will reach a normal level
of 15% by FY11F
Management has not
provided guidance for FY11F
capacity expansion, but we
expect LDK to expand wafer
capacity by 45% in FY11F,
faster than the industry
average
Income statement (US$mn)
Revenue 524 1,643 1,098 1,701 1,879
Cost of goods sol d (354) (1,555) (1,212) (1,418) (1,585)
Gross profi t 170 88 (114) 282 294
SG&A (23) (79) (104) (116) (109)
Operating profi t 147 9 (218) 166 185
EBITDA 162 45 (162) 226 252
Depreciation (15) (36) (55) (60) (67)
EBIT 147 9 (218) 166 185
Other i ncome 2 95 23 11 16
Earni ngs before tax 143 75 (241) 95 107
Income tax 1 (5) 19 (14) (16)
Net prof it after tax 144 70 (221) 82 91
Minority interests (5) - (0) 1 -
Preferred dividends - - - - -
Normal i sed NPAT 139 70 (222) 82 91
Reported NPAT 139 70 (222) 82 91
Transfer to reserves 139 70 (222) 82 91
Reported P/E (x) 3.8 8.4 na 9.0 8.2
Price/cashflow (x) na 1.8 6.4 4.2 na
Price/book (x) 0.8 0.8 0.8 0.8 0.7
EV/EBITDA (x) 5.8 37.8 na 9.9 10.9
EV/EBIT (x) 6.4 189.0 na 13.5 14.8
Gross margi n (%) 32.5 5.4 (10.3) 16.6 15.6
EBITDA margin (%) 30.9 2.7 (14.8) 13.3 13.4
EBIT margin (%) 28.0 0.5 (19.8) 9.8 9.8
Net margin (%) 26.6 4.3 (20.2) 4.8 4.8
Effective tax rate (%) (0.5) 6.8 na 14.3 15.0
Divi dend payout (%) - - na - -
Capex to sales (%) 58.2 68.5 69.8 17.2 20.6
ROE (%) 37.1 9.6 (26.6) 8.9 9.0
ROA (pretax %) 19.7 0.4 (6.1) 4.0 4.3
Growt h (%)
Revenue 396.8 213.7 (33.2) 54.9 10.5
EBITDA 305.6 (72.2) (460.4) na 11.2
EBIT 295.2 (93.9) (2,519.4) na 11.2
Normalised EPS 328.6 (55.3) (354.9) na 10.6
Normalised FDEPS 328.6 (55.3) (354.9) na 10.6
Per share
Reported EPS (US$) 1.50 0.67 (1.71) 0.63 0.69
Norm EPS (US$) 1.50 0.67 (1.71) 0.63 0.69
Fully diluted norm EPS (US$) 1.50 0.67 (1.71) 0.63 0.69
Book value per share (US$) 7.47 7.40 6.84 7.38 8.07
DPS (US$) - - - - -

LDK Solar Clarisse Pan

Gearing remains high and we
see potential dilution risks
from equity financing in the
near term
Management guides for capex
to fall by US$200-300mn in
FY10F, based on current
capacity expansion plans
Cashfl ow (US$mn)
EBITDA 162 45 (162) 226 252
Change in working capital (319) 263 364 (37) (8)
Other operating cashflow 76 25 (87) (12) (344)
Cashfl ow f rom operati ons (81) 333 115 177 (100)
Capital expenditure (305) (1,126) (766) (293) (387)
Free cashfl ow (386) (793) (651) (116) (487)
Reduction in investments - - - - -
Reduction in other LT assets (212) (207) 50 - -
Addition i n other LT l iabi lities 70 463 (45) 72 (250)
Adj ustments 119 (377) (84) (72) 250
Cashfl ow after i nvesti ng acts (409) (914) (731) (116) (487)
Equity issue 369 6 300 - -
Debt issue 97 641 568 293 387
Convertible debt issue - 389 - - -
Others (4) 50 (8) - -
Cashfl ow f rom fi nanci al act s 462 1,086 860 293 387
Net cashfl ow 53 172 129 177 (100)
Beginning cash 30 83 256 385 562
Ending cash 83 256 385 562 462
Ending net debt 206 965 1,395 1,511 1,998
Bal ance sheet (US$mn)
Cash & equival ents 83 256 385 562 462
Accounts receivable 4 95 214 140 129
Inventori es 350 617 432 500 281
Total current assets 742 1,238 1,397 1,568 1,238
LT investments - - - - -
Fixed assets 337 1,697 2,609 2,842 3,161
Goodwill - - - - -
Other LT assets 230 438 388 388 388
Total assets 1,310 3,374 4,395 4,799 4,788
Short-term debt 264 666 980 980 980
Other current li abi lities 240 721 1,048 1,099 849
Total current l i abi l it ies 522 1,511 2,220 2,177 1,938
Long-term debt 25 154 408 701 1,088
Convertible debt - 400 392 392 392
Total l i abi l it ies 617 2,598 3,507 3,830 3,728
Minority interest - - - - -
Retained earnings 146 205 (22) 60 151
Other equity and reserves 536 559 897 897 897
Total sharehol ders' equi ty 693 776 888 970 1,061
Liqui di ty (x)
Current ratio 1.42 0.82 0.63 0.72 0.64
Interest cover 27.6 0.3 (4.7) 2.0 2.0
Leverage
Net debt/EBITDA (x) 1.27 21.45 na 6.68 7.94
Net debt/equity (%) 29.7 124.4 157.1 155.9 188.4
Act ivit y (days)
Days receivable 1.8 11.0 51.3 38.0 26.1
Days inventory 229.5 113.8 158.0 120.0 90.0
Days payabl e 12.5 16.7 47.5 37.1 23.7
Cash cycle 218.9 108.0 161.9 120.9 92.4


China Longyuan Power 916 HK
POWER & UTI LI TI ES/ AL TERNATI VE ENERGY | CHI NA

An ex pensi ve gr ow t h st or y
FY09 results: 13% below our expectations
CLYPs FY09 results were 13% below our estimates and 11% below
market consensus. The worse-than-expected results were mainly
driven by increased operating expenses (23% higher than expected),
caused by higher material costs, repair and maintenance expenses,
and administration outlays.
FY10F and FY11F estimates
We recently trimmed our earnings estimates by 7% and 11% for
FY10F and FY11F, respectively, to factor in rising operating expenses.
Although our FY10F net profit forecast is ~20% below consensus, we
regard our assumptions as quite generous compared with guidance,
particularly for wind operating hours (up 2.5% h-h vs flattish), wind
electricity generation (11,967GWh vs 10,000GWh+), and wind power
tariff (up 1.2% h-h vs 0.1%+ y-y).
Challenging environment for wind operators in China
Although wind power is the most promoted renewable energy source
by the Chinese government, which provides top-line growth visibility,
we believe that the profitability outlook remains challenging for wind
operators in China, due to: 1) an unattractive tariff scheme that allows
an ROE of 8-10%; 2) grid connection bottlenecks, and; 3) the threat of
interest rate hikes.
Demanding valuation; REDUCE reaffirmed
Our PT is based on DCF, with a WACC of 11.8% and terminal growth
of 1% after FY19F. Nonetheless, the shares look demanding, at 91%
above the average of peer wind operators. Reiterating REDUCE. PT
risks: CER VER registration risks, resolution of grid connection
bottleneck in China, uncertainties from wind subsidies.
31 Dec (RMBmn) FY08 FY09 FY10F FY11F
Revenue 8,555 9,744 13,085 16, 397
Reported net profit 337 894 1,464 2, 351
Normalised net profit 337 894 1,464 2, 351
Normalised EPS (RMB) 0.07 0.15 0.20 0.31
Norm. EPS growth (%) 56.9 119. 1 32. 6 60.6
Norm. P/E (x) 105.8 46. 1 33. 6 20.5
EV/EBITDA (x) 34.6 17. 1 13. 8 11.5
Price/ book (x) 8.9 1. 9 2. 1 1.9
Dividend yield (%) 0.0 0. 0 0. 0 0.0
ROE (%) 10.0 6. 9 6. 5 9.6
Net debt/equity (%) 542.6 76. 7 128. 9 189.5
Earnings r evisions
Previous norm. net profit 894 1,464 2, 351
Previous norm. EPS (RMB) 0.15 0.20 0.31
1m 3m 6m
10. 3 (16.5) (21.6)
10. 7 (16.7) (21.9)
1. 3 (16.4) (20.8)
Hard
52-week range (HK$)
China I nvest ment Corp
Stock borrowability
12.0
Guodian 67.0
Absolute (HK$)
Absolute (US$)
Relative to Index
Market cap (US$mn) 7, 513
81.8
10. 90/6.72
27.59
6
7
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10. 000
30. 000
50. 000
70. 000
90. 000
110.000
130.000
Pri ce
Rel MSCI Chi na
(HK$)
Closing pri ce on 23 Jun HK$7.83
Price target HK$8.50
(set on 1 Apr 10)
FY10F net profi t (RMBmn) 1,464
Source: Nomura
Closing pri ce on 23 Jun HK$7.83
(set on 1 Apr 10)
FY10F net profi t (RMBmn) 1,464
Source: Nomura
We are less positive about the outlook
for wind tariffs in China as well as the
resolution of grid connection issues
over the near term.

Maintained
REDUCE
Ac t i on
CLYPs FY09 results were 13% below our expectations mainly due to higher
operating expenses, which led us to trim our earnings estimates by 7% for FY10F
and 11% for FY11F. We recognise CLYPs scarcity value as Asias largest wind
operator, but view the current valuation of 33.6x FY10F P/E as demanding, given
the unattractive returns from its wind operations in China. Reiterating REDUCE.
Cat al y s t s
Interest rate increases, rising raw material (steel and coal) prices, listing of wind
subsidiaries of other state-owned power companies, may lead to de-rating.

Anc hor t hemes

We see wind as the best investment option, as it is the worlds most commercial
green energy. Its low costs and stable output should underpin installed capacity
growth of around 30% per annum globally over the next five to ten years. We
expect better growth opportunities down the value chain in Asia.

China Longyuan Power Clarisse Pan

We expect minority interests
as a percentage of PAT to
trend downwards, as the
company targets to fully own
all of its upcoming wind
projects
Revenue 6,963 8,555 9,744 13,085 16,397
Fuel costs (2,347) (3,128) (2,290) (2,823) (2,813)
Repairs & Maintenance (105) (87) (108) (184) (234)
Personnel expenses (384) (384) (540) (737) (936)
SG&A (101) (107) (148) (197) (234)
Other operating expenses (2,299) (2,735) (2,783) (3,503) (3,919)
EBITDA 1,728 2,114 3,875 5,641 8,261
Depreciation (778) (1,083) (1,590) (2,420) (3,393)
EBIT 950 1,031 2,285 3,221 4,868
Net i nterest expense (364) (858) (1,020) (1,711) (2,442)
Associates & JCEs 18 53 105 153 153
Other i ncome 169 390 574 785 1,071
Earni ngs before tax 773 616 1,944 2,448 3,650
Income tax (60) (2) (296) (196) (292)
Net prof it after tax 712 614 1,647 2,252 3,358
Minority interests (497) (277) (753) (788) (1,007)
Normal i sed NPAT 215 337 894 1,464 2,351
Extraordinary i tems
Reported NPAT 215 337 894 1,464 2,351
Divi dends
Transfer to reserves 215 337 894 1,464 2,351
Reported P/E (x) 177.5 105.8 46.1 33.6 20.5
Price/cashflow (x) 64.5 12.6 9.4 5.3 26.9
Price/book (x) 12.8 8.9 1.9 2.1 1.9
EV/EBITDA (x) 40.5 34.6 17.1 13.8 11.5
EV/EBIT (x) 73.1 69.3 28.4 23.8 19.3
EV per MW (RMB) na na na na na
EBITDA margin (%) 24.8 24.7 39.8 43.1 50.4
EBIT margin (%) 13.6 12.0 23.4 24.6 29.7
Net margin (%) 3.1 3.9 9.2 11.2 14.3
Divi dend payout (%) - - - - -
Capex to sales (%) 102.9 135.6 149.9 166.7 116.8
ROE (%) 8.9 10.0 6.9 6.5 9.6
ROA (pretax %) 5.2 3.8 5.5 5.4 6.1
Growt h (%)
Revenue 27.9 22.9 13.9 34.3 25.3
EBITDA 16.8 22.3 83.3 45.6 46.5
EBIT 9.2 8.5 121.7 41.0 51.1
Normalised EPS 43.6 56.9 119.1 32.6 60.6
Normalised FDEPS 43.6 56.9 119.1 32.6 60.6
Per share
Reported EPS (RMB) 0.04 0.07 0.15 0.20 0.31
Norm EPS (RMB) 0.04 0.07 0.15 0.20 0.31
Fully diluted norm EPS (RMB) 0.04 0.07 0.15 0.20 0.31
DPS (RMB) - - - - -

We recently raised our
revenue forecasts after
factoring in a significant
contribution from coal sales,
which started in 2H09

China Longyuan Power Clarisse Pan

Management guides that
given the current expansion
plan, the company will not
resort to equity financing
before mid- FY12F
We have factored in declining
wind farm construction costs
(~10% y-y), and capacity
expansion by 2GW per
annum
Cashfl ow (RMBmn)
EBITDA 1,728 2,114 3,875 5,641 8,261
Change in working capital (863) (221) 1,893 3,819 (6,213)
Other operating cashflow (274) 947 (1,365) (166) (262)
Cashfl ow f rom operati ons 591 2,840 4,402 9,294 1,786
Capital expenditure (7,162) (11,603) (14,605) (21,812) (19,147)
Free cashfl ow (6,570) (8,764) (10,202) (12,518) (17,360)
Reduction in investments (249) 153 (233) - -
Net acqui si ti ons (706) (726) (2,136) 153 153
Reduction in other LT assets - - - - -
Addition i n other LT l iabi lities - - - - -
Adj ustments 752 1,090 922 996 1,198
Cashfl ow after i nvesti ng acts (6,774) (8,246) (11,649) (11,369) (16,010)
Equity issue 994 1,951 4,301 - -
Debt issue 6,970 6,803 10,204 2,411 16,548
Convertible debt issue - - - - -
Others (483) (315) 12,645 - -
Cashfl ow f rom fi nanci al act s 7,480 8,439 27,150 2,411 16,548
Net cashfl ow 706 193 15,501 (8,959) 539
Beginning cash 102 809 1,002 16,503 7,544
Ending cash 809 1,002 16,503 7,544 8,083
Ending net debt 13,192 21,029 16,803 30,125 48,733
Cash & equival ents 809 1,002 16,503 7,544 8,083
Accounts receivable 866 1,241 2,181 2,480 3,360
Inventori es 205 279 333 963 557
Other current assets 1,210 2,358 1,350 3,114 3,776
LT investments 851 698 932 932 932
Fixed assets 14,937 24,290 37,305 56,696 72,450
Goodwill - - - - -
Other i ntangible assets 2,997 5,083 6,086 6,086 6,086
Other LT assets 1,450 1,097 3,264 3,264 3,264
Total assets 23,325 36,049 67,954 81,079 98,509
Short-term debt 6,156 4,686 17,087 17,087 17,087
Other current li abi lities 1,570 1,998 4,662 6,419 4,604
Long-term debt 7,845 17,345 16,219 20,582 39,728
Other LT liabilities 446 2,219 2,363 2,363 2,363
Common stock 1,663 3,163 7,464 7,464 7,464
Retained earnings 1,202 712 14,436 15,899 18,250
Other equity and reserves - - - - -
Liqui di ty (x)
Current ratio 0.33 0.52 0.86 0.47 0.63
Interest cover 2.6 1.2 2.2 1.9 2.0
Leverage
Net debt/EBITDA (x) 7.64 9.95 4.34 5.34 5.90
Net debt/equity (%) 460.4 542.6 76.7 128.9 189.5
Act ivit y (days)
Days receivable 37.5 45.1 64.1 65.0 65.0
Days inventory 26.2 28.3 48.8 83.8 98.6
Days payabl e 304.5 256.6 355.5 524.3 607.1
Cash cycle (240.9) (183.2) (242.7) (375.5) (443.4)


Suzlon Energy SUEL I N
POWER & UTI LI TI ES | I NDI A

Smal l er -t han-ex pec t ed boost
Divestment in Hansen to strengthen balance sheet
Suzlon announced the placement of 236mn shares in Hansen,
representing 35.2% of Hansen's issued share capital, at a price of
GBp95 per share in 3Q09. The total proceeds before commission and
expenses are US$370mn. According to Suzlon, it will not dispose its
remaining stake in Hansen (26%) within the next 180 days.
Incrementally positive, but gearing remains high
We believe the divestment will be incrementally positive for Suzlon, as
it should relieve cashflow pressure in the near term. As of end-
September 2009, Suzlon had net debt of INR125bn at the parent level,
and we estimate that Suzlon can eliminate 14% of its debt with the
proceeds. However, since the placement is smaller than we expected,
we expect Suzlons gearing to remain high in FY10F and FY11F.
Bottom in sight, but likely to miss FY10F guidance again
We believe Suzlon is likely to miss the lower end of its FY10F
shipment guidance (1,900MW), based on the companys new
international order intake, post its 1H FY10 results announcement.
Suzlons subsidiary REpower won a significant new order worth
954MW, reflecting improving fundamentals, but we expect the
benefits to accrue only in FY12-16F.
Price target under review; keep NEUTRAL
Post the Hansen divestment, clarity on consolidated balance sheet
and cashflows is lacking. Our Rs88.8 PT is under review pending
details, likely after FY10 results at end-May. Downside risks:
uncertainty from policy supports, failure in migrating technology
forward, higher-than-expected product liability provisions. Upside
risks: earlier than expected recovery in the US wind turbine market.
31 Mar (Rsmn) FY09 FY10F FY11F FY12F
Revenue 260,817 213,666 243,698 298, 262
Reported net profit 2,365 2,025 8,868 15, 850
Normalised net profit 11,328 2,025 8,868 15, 850
Normalised EPS (Rs) 7.67 1.33 5.70 10.18
Norm. EPS growth (%) (15. 6) (82.7) 329. 6 78.7
Norm. P/E (x) 7.9 45. 8 10. 5 5.9
EV/EBITDA (x) 6.4 9. 3 7. 7 6.1
Price/ book (x) 1.0 1. 0 0. 9 0.8
Dividend yield (%) 0.0 0. 0 0. 0 0.0
ROE (%) 2.8 2. 3 9. 5 14.9
Net debt/equity (%) 137.2 105. 4 112. 9 98.1
Earnings r evisions
Previous norm. net profit 2,025 8,868 15, 850
Previous norm. EPS (Rs) 1.33 5.70 10.18
Share pri ce relative to MSCI Indi a
1m 3m 6m
(1.9) (21.6) (34.8)
(0.4) (22.6) (33.8)
(10.1) (22.4) (38.3)
Hard
52-week range (Rs)
Stock borrowability
Promoter and Promoter Group 53.0
Absolute (Rs)
Absolute (US$)
Relative to Index
42.0
123.5/53.5
28.35
46
66
86
106
126
146
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Price
Rel MSCI Indi a
(Rs)
Cl osing price on 23 Jun Rs57.6
Price target Rs88.8
(set on 3 Dec 09)
FY11F net profit (Rsmn) 8,868
Source: Nomura
Cl osing price on 23 Jun Rs57.6
Price target Rs88.8
(set on 3 Dec 09)
FY11F net profit (Rsmn) 8,868
Source: Nomura
Nomur a v s . c ons ens us
We believe that consensus estimates
have not been adjusted post the
divestment, owing to inadequate
financial statements disclosure.
Maintained
NEUTRAL
Ac t i on
Suzlon has been enhancing its cash position through divestment and debt
restructuring since 2009. We believe these moves are incrementally positive but
estimate Suzlons gearing will remain high, at 105% in FY10F. We also expect
Suzlon to likely miss its FY10F shipment guidance. Pending further progress on
order inflows and balance sheet clean-up, reiterating NEUTRAL.
Cat al y s t s
We would turn more positive on Suzlon in the event of more significant
enhancement in balance sheet quality or more aggressive order intake.

Anc hor t hemes

We see wind as the best investment option, as it is the worlds most commercial
green energy. Its low costs and stable output should underpin installed capacity
growth of around 30% per annum globally over the next five to ten years. We
expect better growth opportunities down the value chain in Asia.

Suzlon Energy Clarisse Pan

We have factored in Hansen
disposal gain of INR3bn for
FY10F

Income statement (Rsmn)
Year-end 31 Mar FY08 FY09 FY10F FY11F FY12F
Revenue 136,794 260,817 213,666 243,698 298,262
Gross profi t 48,093 92,249 62,046 73,983 90,081
SG&A (27,451) (65,576) (46,745) (52,483) (61,858)
Operating profi t 20,641 26,673 15,301 21,501 28,224
EBITDA 23,535 32,405 19,849 26,180 32,936
Depreciation (2,894) (5,731) (4,548) (4,679) (4,713)
EBIT 20,641 26,673 15,301 21,501 28,224
Net i nterest expense (5,969) (10,539) (11,374) (11,425) (10,335)
Other i ncome (15) (1) - - -
Earni ngs before tax 14,657 16,133 3,927 10,075 17,889
Income tax (1,633) (2,881) (1,454) (1,713) (3,041)
Net prof it after tax 13,024 13,252 2,473 8,363 14,848
Minority interests (428) (1,947) (550) (373) (460)
Other i tems 558 23 103 879 1,462
Normal i sed NPAT 13,153 11,328 2,025 8,868 15,850
Extraordinary i tems (2,852) (8,963) - - -
Reported NPAT 10,301 2,365 2,025 8,868 15,850
Divi dends (1,497) - - - -
Transfer to reserves 8,804 2,365 2,025 8,868 15,850
Reported P/E (x) 8.1 36.0 43.4 10.1 5.7
Divi dend yield (%) 1.8 - - - -
Price/cashflow (x) 6.9 na 5.2 na 7.3
Price/book (x) 1.0 1.0 1.0 0.9 0.8
EV/EBITDA (x) 5.1 6.4 9.3 7.7 6.1
EV/EBIT (x) 5.8 7.8 12.0 9.3 7.1
Gross margi n (%) 35.2 35.4 29.0 30.4 30.2
EBITDA margin (%) 17.2 12.4 9.3 10.7 11.0
EBIT margin (%) 15.1 10.2 7.2 8.8 9.5
Net margin (%) 7.5 0.9 0.9 3.6 5.3
Divi dend payout (%) 14.5 - - - -
Capex to sales (%) 15.5 12.7 (16.1) 3.3 1.9
Capex to depreciation (x) 7.3 5.8 (7.6) 1.7 1.2
ROE (%) 17.7 2.8 2.3 9.5 14.9
ROA (pretax %) 13.4 9.8 4.9 7.2 8.4
Growt h (%)
Revenue 71.3 90.7 (18.1) 14.1 22.4
EBITDA 66.0 37.7 (38.7) 31.9 25.8
EBIT 65.6 29.2 (42.6) 40.5 31.3
Normalised EPS 47.5 (15.6) (82.7) 329.6 78.7
Normalised FDEPS 46.7 (17.1) (82.8) 337.9 78.7
Per share
Reported EPS (Rs) 7.1 1.6 1.3 5.7 10.2
Norm EPS (Rs) 9.1 7.7 1.3 5.7 10.2
Fully diluted norm EPS (Rs) 8.8 7.3 1.3 5.5 9.8
Book value per share (Rs) 55.7 57.6 57.4 63.1 73.3
DPS (Rs) 1.0 - - - -
Note: PT basis: one-year forward P/E multiple of 16x FY11F earnings.

Suzlon Energy Clarisse Pan

We expect gearing to remain
high in FY10F and FY11F
Cashfl ow (Rsmn)
Year-end 31 Mar FY08 FY09 FY10F FY11F FY12F
EBITDA 23,535 32,405 19,849 26,180 32,936
Change in working capital (2,408) (39,806) 8,562 (21,859) (14,951)
Other operating cashflow (9,084) (4,836) (11,578) (5,490) (5,639)
Cashfl ow f rom operati ons 12,043 (12,238) 16,834 (1,170) 12,347
Capital expenditure (21,205) (33,167) 34,406 (7,954) (5,551)
Free cashfl ow (9,162) (45,404) 51,240 (9,124) 6,796
Reduction in investments (31,262) 31,367 (9,988) (879) (1,462)
Net acqui si ti ons - (41,776) - - -
Reduction in other LT assets (393) (4,689) 89 - -
Addition i n other LT l iabi lities 434 2,359 (2,248) - -
Adj ustments 6,058 (27,313) 10,227 4,656 4,060
Cashfl ow after i nvesti ng acts (34,324) (85,456) 49,320 (5,347) 9,394
Cash dividends (9) (1,514) - - -
Equity issue 21,887 1,019 1,025 - -
Debt issue 25,393 40,086 (5,742) 7,047 (35,000)
Convertible debt issue 20,099 - - - -
Others 21,173 6,961 (26,062) (11,425) (10,335)
Cashfl ow f rom fi nanci al act s 88,543 46,552 (30,779) (4,379) (45,335)
Net cashfl ow 54,219 (38,904) 18,541 (9,725) (35,941)
Beginning cash 15,383 69,602 30,698 49,240 39,514
Ending cash 69,602 30,698 49,240 39,514 3,573
Ending net debt 30,034 118,436 94,153 110,925 111,866
Bal ance sheet (Rsmn)
As at 31 Mar FY08 FY09 FY10F FY11F FY12F
Cash & equival ents 69,602 30,698 49,240 39,514 3,573
Inventori es 40,848 71,737 56,978 77,143 94,627
Other current assets 33,143 62,466 53,278 53,278 53,278
LT investments 31,418 51 10,039 10,918 12,380
Fixed assets 56,877 152,654 113,700 116,975 117,813
Goodwill - - - - -
Other i ntangible assets - - - - -
Other LT assets 1,841 6,529 6,440 6,440 6,440
Total assets 265,742 378,063 325,510 360,942 357,474
Short-term debt 290 439 439 439 439
Other current li abi lities 42,330 55,123 39,062 44,181 46,582
Long-term debt 99,346 148,696 142,953 150,000 115,000
Other LT liabilities 2,059 4,417 2,170 2,170 2,170
Preferred stock 25 25 - - -
Common stock 2,994 2,997 2,997 2,997 2,997
Other equity and reserves 102 1,054 2,104 2,104 2,104
Liqui di ty (x)
Current ratio 2.40 1.89 2.38 2.24 1.90
Interest cover 3.5 2.5 1.3 1.9 2.7
Leverage
Net debt/EBITDA (x) 1.28 3.65 4.74 4.24 3.40
Net debt/equity (%) 37.1 137.2 105.4 112.9 98.1
Act ivit y (days)
Days receivable 72.7 60.1 76.7 69.3 77.3
Days inventory 149.0 121.9 154.9 144.2 151.0
Days payabl e 95.9 97.9 123.4 106.6 110.7
Cash cycle 125.8 84.2 108.2 106.9 117.6

GCL Poly Energy 3800 HK
SOL AR | CHI NA

Ex ec ut i on w i l l be k ey
Poly surplus to persist despite surging demand
While we have witnessed tight supply in the ingot/wafer and cell
segments, driven by surging demand before the German subsidy cut,
we note that polysilicon supply seems ample since late 3Q09. Going
into 2H10, we believe that polysilicon supply surplus will continue,
given the expansion plans announced by major players.
High execution risks from in-house wafer ramp
GCL Poly announced its expansion into the wafer business for FY10,
ramping up wafer capacity from 0MW at the beginning of FY10 to
2GW by year-end. It expects its wafer production to reach 1.3GW in
FY10. We consider this aggressive, given that wafer shipment
guidance implies the new lines would constantly run at full utilisation,
compared with the industry norm of two to three months ramp time.
FY10F EPS reflect wafer ramp; BVPS restated
We recently raised our FY10F earnings by 49%, mainly to factor in the
updated wafer expansion plan. We view guidance for 1.3GW
shipment as aggressive and factor in a shipment of 1.2GW, assuming
GCL would internally produce 775MW and fulfil the rest through a
third-party processing service, which implies lower margins than
management guidance. We lowered our FY10F BVPS from RMB1.60
to RMB0.80 post a major accounting restatement, which lowered our
book value for FY08 and FY09 from RMB2.4bn and RMB23bn to
negative RMB1bn and RMB11bn, respectively.
NEUTRAL rating and price target maintained
Our price target of HK$1.30 is based on earnings estimates and 1.4x
FY10F book, in line with the current peer group average. We maintain
our NEUTRAL rating on GCL Poly.

Key financi al s & valuati ons
Revenue 3,521 4,356 14, 203 14,803
Reported net profit 1,923 (176) 2,149 2, 102
Normalised net profit 1,923 (176) 2,149 2, 102
Normalised EPS (RMB) 0.41 (0.02) 0.14 0. 14
Norm. EPS growt h (%) na (103. 9) na (2.2)
Norm. P/E (x) 4.8 na 9. 8 9. 8
EV/EBITDA (x) 11. 8 17. 6 6. 6 6. 8
Price/book (x) na 1.5 1. 7 1. 4
Dividend yield (%) 0.0 0.0 0. 0 0. 0
ROE (%) na (3. 8) 19.0 15. 7
Net debt /equity (%) (234. 5) 28. 1 14. 7 20. 5
Earn ings revisions
Previous norm. EPS (RMB) (0.016) 0.139 0. 136
Share pri ce relati ve to MSCI Chi na
1m 3m 6m
22.7 (13. 8) (24.3)
23.2 (14. 0) (24.5)
13.8 (13. 7) (23.5)
Hard
3, 222
47. 5
3. 67/1.24
7. 77
Absolut e (HK$)
Absolut e (US$)
Relative t o Index
Market cap (US$mn)
20. 1
Asia Pacific Energy Fund (Chairman) 32. 4
52-week range (HK$)
3-mt h avg daily t urnover (US$mn)
CIC
Stock borrowability
0.9
1.4
1.9
2.4
2.9
3.4
3.9
J
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9
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90
110
130
Pr ice
Rel MSCI China
(HK$)
Key financi al s & valuati ons
Revenue 3,521 4,356 14, 203 14,803
Reported net profit 1,923 (176) 2,149 2, 102
Normalised net profit 1,923 (176) 2,149 2, 102
Normalised EPS (RMB) 0.41 (0.02) 0.14 0. 14
Norm. EPS growt h (%) na (103. 9) na (2.2)
Norm. P/E (x) 4.8 na 9. 8 9. 8
EV/EBITDA (x) 11. 8 17. 6 6. 6 6. 8
Price/book (x) na 1.5 1. 7 1. 4
Dividend yield (%) 0.0 0.0 0. 0 0. 0
ROE (%) na (3. 8) 19.0 15. 7
Net debt /equity (%) (234. 5) 28. 1 14. 7 20. 5
Earn ings revisions
Previous norm. EPS (RMB) (0.016) 0.139 0. 136
Share pri ce relati ve to MSCI Chi na
1m 3m 6m
22.7 (13. 8) (24.3)
23.2 (14. 0) (24.5)
13.8 (13. 7) (23.5)
Hard
3, 222
47. 5
3. 67/1.24
7. 77
Absolut e (HK$)
Absolut e (US$)
Relative t o Index
Market cap (US$mn)
20. 1
Asia Pacific Energy Fund (Chairman) 32. 4
52-week range (HK$)
3-mt h avg daily t urnover (US$mn)
CIC
Stock borrowability
0.9
1.4
1.9
2.4
2.9
3.4
3.9
J
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130
Pr ice
Rel MSCI China
(HK$)
Cl osing price on 23 Jun HK$1.62
(set on 24 May 10)
Upside/downside -19.8%
Di fference from consensus -23.5%
Source: Nomura
Cl osing price on 23 Jun HK$1.62
(set on 24 May 10)
Di fference from consensus -23.5%
Source: Nomura
We are more positive on
assumptions for the wafer business
although our numbers remain lower
than management guidance.
Maintained
NEUTRAL

Ac t i on
Despite the surge in solar demand since late 3Q09, we observe that polysilicon
supply has remained in surplus due to aggressive capacity expansion by players
since FY07. In our view, GCLs guidance for its newly launched wafer business
seems aggressive and has high execution risks. We maintain NEUTRAL and a PT of
HK$1.30, based on recently revised earnings estimates and FY10F peer group P/B.
Cat al y s t s
We would turn more positive on: attainment of solar PV projects overseas, smooth
ramp-up of wafer production, lowered electricity tariffs for its poly production plant.

Anc hor t hemes

As the supply surplus of solar PV continues in 2010, we expect companies with
scale, cost leadership, brand equity, strong distribution channels and
quality/technology differentiation to stand out among peers. We also prefer more
vertically integrated players to standalone players.

GCL Pol y Energy Clarisse Pan

Revenue 3,521 4,356 14,203 14,803
Cost of goods sol d (967) (3,042) (10,764) (11,412)
Gross profi t - 2,555 1,313 3,439 3,391
SG&A (214) (381) (582) (607)
Employee share expense - - - -
Operating profi t - 2,341 933 2,857 2,784
EBITDA - 2,423 1,374 3,445 3,446
Depreciation (80) (347) (690) (765)
Amortisation (3) (94) 103 103
EBIT - 2,341 933 2,857 2,784
Net i nterest expense (72) (307) (364) (350)
Associates & JCEs - 9 20 20
Other i ncome 39 (684) 149 149
Earni ngs before tax - 2,307 (50) 2,662 2,603
Income tax (143) (82) (133) (130)
Net prof it after tax - 2,164 (132) 2,529 2,473
Minority interests (242) (44) (379) (371)
Other i tems - - - -
Preferred dividends - - - -
Normal i sed NPAT - 1,923 (176) 2,149 2,102
Extraordinary i tems - - - -
Reported NPAT - 1,923 (176) 2,149 2,102
Divi dends - - -
Transfer to reserves - 1,923 (176) 2,149 2,102
FD normalised P/E (x) na 4.8 na 9.8 9.8
FD normalised P/E at price target (x) na 3.9 na 7.9 7.9
Reported P/E (x) na 4.2 na 9.8 9.8
Divi dend yield (%) na - - - -
Price/cashflow (x) na 1.4 50.3 4.8 40.1
Price/book (x) na na 1.5 1.7 1.4
EV/EBITDA (x) na 11.8 17.6 6.6 6.8
EV/EBIT (x) na 12.2 25.9 8.0 8.4
Gross margi n (%) na 72.5 30.2 24.2 22.9
EBITDA margin (%) na 68.8 31.5 24.3 23.3
EBIT margin (%) na 66.5 21.4 20.1 18.8
Net margin (%) na 54.6 (4.0) 15.1 14.2
Effective tax rate (%) na 6.2 na 5.0 5.0
Divi dend payout (%) na - na - -
Capex to sales (%) na 102.1 48.7 20.1 12.9
Capex to depreciation (x) na 44.9 6.1 4.1 2.5
ROE (%) na na (3.8) 19.0 15.7
ROA (pretax %) na 65.2 7.4 13.7 12.1
Growt h (%)
Revenue na 23.7 226.1 4.2
EBITDA na (43.3) 150.7 0.0
EBIT na (60.2) 206.3 (2.5)
Normalised EPS na (103.9) na (2.2)
Normalised FDEPS na (104.4) na (2.2)
Per share
Reported EPS (RMB) na 0.41 (0.02) 0.14 0.14
Norm EPS (RMB) na 0.41 (0.02) 0.14 0.14
Fully diluted norm EPS (RMB) na 0.36 (0.02) 0.14 0.14
Book value per share (RMB) na (0.18) 0.91 0.80 0.94
DPS (RMB) na - - - -
Note: Investment risks include execution of in-house wafer production ramp up, attainment of approval to procure
electricity directly from power producers, potential change in technology platform, and uncertainties from solar
subsidies and policies.

We expect revenue growth in
FY10F to come from 1) the
consolidation of conventional
power business; and 2) the
launch of the wafer business
We expect the margin to
continue trending lower due
mainly to a rising contribution
from lower-margin wafer
business

GCL Pol y Energy Clarisse Pan

Cashfl ow (RMBmn)
EBITDA - 2,423 1,374 3,445 3,446
Change in working capital 3,340 (3,457) 2,279 (2,062)
Other operating cashflow (19) 2,394 (1,363) (872)
Cashfl ow f rom operati ons 5,744 310 4,361 513
Capital expenditure (3,595) (2,123) (2,855) (1,904)
Free cashfl ow 2,149 (1,812) 1,505 (1,392)
Reduction in investments - (210) (714) (20)
Net acqui si ti ons (135) 735 (694) -
Reduction in other LT assets - (90) - -
Addition i n other LT l iabi lities - 69 (879) (400)
Adj ustments - 243 1,816 643
Cashfl ow after i nvesti ng acts 2,013 (1,065) 1,034 (1,169)
Cash dividends - - - -
Equity issue - 8,006 - -
Debt issue 2,319 (2,105) (912) (350)
Convertible debt issue - (512) - -
Others (47) (1,392) 379 371
Cashfl ow f rom fi nanci al act s 2,271 3,996 (532) 21
Net cashfl ow - 4,285 2,931 501 (1,148)
Beginning cash - 1,746 4,677 5,178
Ending cash - 4,285 4,677 5,178 4,030
Ending net debt 1,981 2,871 1,822 2,970
Cash & equival ents 1,746 4,677 5,178 4,030
Marketable securities - - - -
Accounts receivable 102 1,382 2,509 1,546
Inventori es 67 640 1,863 791
Other current assets 577 809 809 809
Total current assets - 2,492 7,507 10,358 7,175
LT investments - 210 924 944
Fixed assets 5,053 13,712 15,877 17,017
Goodwill - 480 480 480
Other i ntangible assets 5 36 36 36
Other LT assets 1,380 1,104 1,104 1,104
Total assets - 8,930 23,050 28,780 26,757
Short-term debt 1,479 4,431 3,000 3,000
Accounts payable 652 2,109 6,738 2,642
Other current li abi lities 3,433 604 604 604
Total current l i abi l it ies - 5,565 7,145 10,342 6,246
Long-term debt 2,076 3,117 4,000 4,000
Convertible debt 171 - - -
Other LT liabilities 1,962 2,031 1,152 752
Total l i abi l it ies - 9,775 12,292 15,494 10,998
Minority interest - 531 910 1,281
Preferred stock - - - -
Common stock 0 1,371 1,371 1,371
Retained earnings 8,856 11,005 13,108
Proposed dividends (845) - - -
Total sharehol ders' equi ty - (845) 10,227 12,376 14,478
Total equity & l iabil i ti es - 8,930 23,050 28,780 26,757
Liqui di ty (x)
Current ratio na 0.45 1.05 1.00 1.15
Interest cover na 32.4 3.0 7.9 8.0
Leverage
Net debt/EBITDA (x) na 0.82 2.09 0.53 0.86
Net debt/equity (%) na (234.5) 28.1 14.7 20.5
Act ivit y (days)
Days receivable 5.3 62.2 50.0 50.0
Days inventory 12.7 42.4 42.4 42.4
Days payabl e 123.5 165.7 150.0 150.0
Cash cycle - (105.5) (61.0) (57.6) (57.6)
Capex for FY10F is mostly
related to wafer expansion
Leverage has improved since
the cash injection from China
Investment Corporation (CIC)
in FY09


China High Speed Transmission
658 HK
POWER & UTI LI TI ES/ AL TERNATI VE ENERGY | CHI NA

Demonst r at i on of pr of i t abi l i t y
FY09 results beat expectations by 16%
FY09 results were 16% above our estimates and market consensus,
reflecting higher revenue (6% above expectations), better control in
operating expenses (as percentage of sales fell from 13% in FY08 to
9% in FY09) and a higher gross margin (33% vs our 31% estimate).
Robust margin outlook despite rising spot steel prices
While the FY09 gross margin of 33% was a positive surprise to us,
management was confident of maintaining a flat y-y gross margin in
FY10. Despite the recent rise in steel prices in China, we are positive
on CHSTs ability to maintain a stable margin, given its cost-control
measures and better wind revenue mix in FY10F.
Solid earnings visibility for FY10F
CHST guided that its capacity has been fully booked and estimated
that shipment of its wind gearbox would reach 9GW in FY10F, up
from 6.35GW in FY09. We believe that this guidance seems
conservative given its capacity expansion to 10GW by end-FY10.
Top pick in China wind sector given its ability to export
CHST is one of the few Chinese wind companies that has the ability
to tap into international wind markets in FY10F, which is particularly
positive as we see growth slowing in the China market. We expect
CHST to expand its overseas revenue contribution to 25%, while
maintaining its 50% market share in China in FY10F.
Maintain BUY and price target of HK$23.50
Our price target of HK$23.50 is based on DCF valuation. We believe
that valuations are attractive at 13.6x FY10F earnings, given CHSTs
earnings CAGR of 38% in FY09-11F.
Revenue 3,439 5,647 7,449 9, 822
Reported net profit 692 966 1,402 1, 829
Normalised net profit 692 966 1,402 1, 829
Normalised EPS (RMB) 0.56 0.78 1.13 1.47
Norm. EPS growth (%) 93.3 39. 6 45. 0 30.5
Norm. P/E (x) 30.5 19. 8 13. 6 10.4
EV/EBITDA (x) 30.2 14. 4 10. 1 8.2
Price/ book (x) 5.2 4. 3 3. 3 2.2
Dividend yield (%) 1.4 1. 7 2. 3 3.0
ROE (%) 20.3 23. 7 28. 3 26.6
Net debt/equity (%) 43.2 78. 4 31. 8 29.0
Earnings r evisions
Previous norm. net profit 966 1,402 1, 829
Previous norm. EPS (RMB) 0.78 1.13 1.47
1m 3m 6m
6. 8 6. 4 (5.2)
7. 2 6. 2 (5.5)
(2.2) 6. 5 (4.4)
Easy
52-week range (HK$)
JP Morgan Chase
Stock borrowability
8.1
Fortune Apex (Management Shareholders) 21.6
Absolute (HK$)
Absolute (US$)
Relative to Index
78.0
20.20/ 14.64
15.64
14
15
16
17
18
19
20
21
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Pri ce
Rel MSCI Chi na
(HK$)
Closing price on 23 Jun HK$17.60
(set on 20 Apr 10)
Source: Nomura
Closing price on 23 Jun HK$17.60
(set on 20 Apr 10)
Source: Nomura
We are more positive on CHSTs
potential in overseas markets. We
also believe that the current
consensus does not reflect CHSTs
strong margin profile shown in FY09.
Maintained
BUY
Ac t i on
CHST is our top pick in the Asian alternative energy sector. We are positive on
CHSTs margin outlook, for its cost-control capability and continued product mix
improvement. We recently raised our FY10F earnings by 15% after the company
reported very strong FY09 results, which beat expectations by 16%. CHST is best
positioned among the Chinese wind companies due to its ability to tap into the
international markets, in our view. We reiterate BUY.
Cat al y s t s
Launch of higher-end wind products, attainment of new sales contracts to overseas
customers, Chinese governments support on offshore wind development.

Anc hor t hemes

We see wind as the best investment option, as its the worlds most commercial
green energy. Given its low cost and stable output, we expect installed capacity
growth of around 30% per annum globally over the next five to ten years.

China High Speed Transmission Clarisse Pan

We recently raised our gross
margin forecasts on benefits
from better product mix and
cost improvement
demonstrated in FY09 results
Despite the slowing China
wind market, we believe
CHST will be able to ramp up
overseas revenue to deliver
32% y-y top-line growth in
FY10F
Revenue 1,905 3,439 5,647 7,449 9,822
Gross profi t 553 992 1,861 2,422 3,155
SG&A (384) (447) (528) (741) (1,026)
Operating profi t 169 545 1,334 1,681 2,129
EBITDA 262 706 1,550 1,975 2,473
Depreciation (84) (145) (193) (259) (299)
Amortisation (9) (16) (23) (35) (46)
EBIT 169 545 1,334 1,681 2,129
Associates & JCEs (4) 10 16 21 27
Other i ncome 192 238 (83) 123 230
Earni ngs before tax 324 764 1,166 1,649 2,151
Income tax (18) (72) (200) (247) (323)
Net prof it after tax 306 693 966 1,402 1,829
Minority interests 0 (0) 1 - -
Normal i sed NPAT 307 692 966 1,402 1,829
Reported NPAT 307 692 966 1,402 1,829
Divi dends (88) (274) (329) (420) (549)
Transfer to reserves 219 419 638 981 1,280
Reported P/E (x) 59.6 28.9 19.7 13.2 9.9
Divi dend yield (%) 0.4 1.4 1.7 2.3 3.0
Price/cashflow (x) 88.1 133.9 na 5.4 na
Price/book (x) 6.6 5.2 4.3 3.3 2.2
EV/EBITDA (x) 78.6 30.2 14.4 10.1 8.2
EV/EBIT (x) 123.0 39.0 16.7 11.9 9.5
Gross margi n (%) 29.0 28.8 33.0 32.5 32.1
EBITDA margin (%) 13.8 20.5 27.4 26.5 25.2
EBIT margin (%) 8.9 15.9 23.6 22.6 21.7
Net margin (%) 16.1 20.1 17.1 18.8 18.6
Divi dend payout (%) 28.6 39.6 34.0 30.0 30.0
Capex to sales (%) 35.1 32.5 28.5 11.9 9.5
ROE (%) 16.9 20.3 23.7 28.3 26.6
ROA (pretax %) 6.2 10.0 15.4 16.6 17.3
Growt h (%)
Revenue 60.8 80.6 64.2 31.9 31.8
EBITDA 35.4 169.5 119.5 27.4 25.2
EBIT 26.9 223.3 144.5 26.0 26.6
Normalised EPS 258.1 93.3 39.6 45.0 30.5
Normalised FDEPS 258.1 82.7 46.8 41.3 27.2
Per share
Reported EPS (RMB) 0.29 0.56 0.78 1.13 1.47
Norm EPS (RMB) 0.29 0.56 0.78 1.13 1.47
Fully diluted norm EPS (RMB) 0.29 0.53 0.77 1.09 1.39
DPS (RMB) 0.07 0.22 0.26 0.34 0.44
Note: PT risks uncertainty of government policies for wind power; tightening global credit market; development of
direct-drive wind turbine technology; the company's failure to improve technology to compete with foreign competitors;
severe shortage of raw materials; delay in capacity expansion.

China High Speed Transmission Clarisse Pan

According to management,
rising A/R days in FY09 were
related mainly to receivables
from state-owned customers
including Sinovel and
Dongfang and the condition
has already improved in
1Q10F
We assume that the
remaining convertible bonds
will be converted into equity
upon maturity in FY11F
CHST has improved its debt
structure by obtaining more
long-term bank loans in FY09.
We expect this trend to
continue
We expect capex to become
lighter as major expansion of
wind capacity (involving
construction of a new facility)
was carried out in FY08 and
FY09
Cashfl ow (RMBmn)
EBITDA 262 706 1,550 1,975 2,473
Change in working capital (23) (1,752) (778) 1,464 (2,535)
Other operating cashflow (32) 1,195 (1,471) (35) (136)
Cashfl ow f rom operati ons 208 149 (699) 3,404 (198)
Capital expenditure (669) (1,119) (1,607) (884) (936)
Free cashfl ow (461) (970) (2,305) 2,520 (1,134)
Reduction in investments (39) (558) 5 (41) (54)
Net acqui si ti ons (0) (561) (0) (21) (27)
Reduction in other LT assets (238) (323) (24) (129) (170)
Addition i n other LT l iabi lities 10 336 (233) 16 20
Adj ustments 251 (945) 1,076 (121) 1
Cashfl ow after i nvesti ng acts (477) (3,019) (1,482) 2,224 (1,364)
Cash dividends (35) (88) (274) (329) (420)
Equity issue 2,294 - - - -
Debt issue (403) 867 1,208 1,901 441
Convertible debt issue - 1,434 437 - -
Others (58) (29) (100) (176) (235)
Cashfl ow f rom fi nanci al act s 1,797 2,185 1,271 1,397 (214)
Net cashfl ow 1,320 (835) (210) 3,620 (1,577)
Beginning cash 196 1,516 682 471 4,091
Ending cash 1,516 682 471 4,091 2,514
Ending net debt (1,022) 1,610 3,466 1,747 2,397
Cash & equival ents 1,516 682 471 4,091 2,514
Accounts receivable 638 1,294 2,613 2,285 4,173
Inventori es 646 1,336 1,313 1,653 2,192
Other current assets 191 1,529 640 796 849
LT investments 8 588 604 645 699
Fixed assets 1,405 2,362 3,845 4,470 5,107
Goodwill - - - - -
Other LT assets 283 606 630 759 929
Total assets 4,786 8,478 10,235 14,856 16,672
Short-term debt 421 1,292 1,556 1,788 1,964
Long-term debt 73 68 1,012 2,682 2,947
Convertible debt - 932 1,369 1,369 -
Minority interest 3 4 29 29 29
Common stock 95 95 95 95 100
Liqui di ty (x)
Current ratio 1.91 1.43 1.53 1.71 1.84
Interest cover 5.1 19.0 13.4 9.6 9.1
Leverage
Net debt/EBITDA (x) net cash 2.28 2.24 0.88 0.97
Net debt/equity (%) net cash 43.2 78.4 31.8 29.0
Act ivit y (days)
Days receivable 112.0 102.8 126.3 120.0 120.0
Days inventory 134.1 148.2 127.7 107.7 105.2
Days payabl e 261.0 239.7 174.3 174.0 174.0
Cash cycle (14.9) 11.4 79.7 53.7 51.2




European companies

Electricite De France EDF FP
UTI LI TI ES | FRANCE

Mar t i n Young +44 207 102 1536 martin.young@nomura.com

Vi si bi l i t y t he t r i gger f or val ue
The worlds leading nuclear operator
EDF is the worlds largest nuclear operator and has substantial new
build aspirations in a wide range of countries, including France, Italy,
the UK, the US and China. It also offers significant exposure to higher
power prices and the benefits of lifetime extension. For investors
seeking exposure to the nuclear theme, EDF merits a look, we believe.
Quality asset base, but short-term issues
Based on our in-depth analysis of the generation portfolios of each of
the European utility companies, we believe EDF is well placed to face
the challenges of a changing generation world in Europe, with a well
positioned flexible portfolio, low CO2 intensity, critical mass, a retail
hedge, and a strong trading platform. However, there are short-term
operational issues with the fleet in France, and current availability is
sub-optimal. EDF aims to fully resolve these by FY15F.
Considerable upside, triggers possible in 2H
Short-term issues are dogging the stock, with the nuclear availability
issue and the lack of clarity regarding the NOME law resulting in weak
performance of late. We think indications that these are being
resolved a key catalyst in realising some of the considerable
upside implied by our PT of 53 may emerge in 2H. Extending the
life of its existing fleet in France represents a further source of value,
in our view, though discussions on this topic may not begin in earnest
for some time.
Valuation and risks
We value EDF using a variety of methods, based on a sum-of-the-
parts approach, which we use to capture the drivers of each
component of EDFs diverse business mix. The value of generation in
France is based on DCF, assuming a 7.2% discount rate and our
Key financials & valuations
(mn) FY09 FY10F FY11F FY12F
Revenue 66,336 69,742 70,649 73,637
Normal ised EPS () 2.15 1.94 2.49 2.82
Norm. EPS growth (%) (10.6) (9.7) 28.3 13.0
Norm. P/E (x) 13.4 13.5 11.6 11.2
EV/EBITDA (x) 9.6 9.7 9.0 8.7
Pri ce/book (x) 2.0 1.9 1.7 1.6
Di vidend yi el d (%) 3.3 3.3 3.6 4.0
ROE (%) 14.0 12.0 14.1 14.6
Net debt/equi ty (%) 60.1 59.6 57.8 55.2
Earni ngs r evi sions
Previ ous norm. net profi t 3,593 4,609 5,206
Change from previ ous (%) - - -
Previ ous norm. EPS () 1.94 2.49 2.82
Share price relative to MSCI France
1m 3m 6m
2.1 (8.8) (14.1)
(0.0) (17.5) (26.3)
(3.9) (1.9) (7.8)
52-week range ()
3-mth avg daily turnover 52.1
Maj or sharehol ders (%)
42.14/30.83
79,414
Absolute ()
Absolute (US$)
Rel ati ve to Index
Market cap (US$mn)
French State 83
29
31
33
35
37
39
41
43
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Price
Rel MSCI France
()
Closing price on 23 Jun 35.1
Price target 53.0
FY10F net profit (mn) 3,593
Source: Nomura
Price target 53.0
Source: Nomura
We are below consensus for FY10F,
but in line for FY11-12F. We suspect
that some have yet to factor in the
TarTam extension.
Maintained
BUY
NOMURA I NT E RNA T I ONA L PL C
Ac t i on
We maintain our BUY rating on EDF, as we see significant unrealised value in its
asset base. Steps to realising this value will include finalisation of the NOME law
discussions, improved operation of the nuclear fleet, a new equity story and
ultimately extension of the life of existing nuclear plants. Our price target is 53.
Cat al y s t s
EDF has seen continued uncertainty over the NOME law discussions. Although
expectations of the starting nuclear price appear to have been trimmed, we believe
the clarity that would result from a decision has value.

Anc hor t hemes

As the worlds largest nuclear operator, EDF is a name that merits consideration by
investors looking for nuclear exposure. It offers significant exposure to higher
power prices, plus the benefits of lifetime extensions and new build aspirations in
France, China, Italy, the UK, the US and elsewhere.

Electricite De France Martin Young
long-run generation price, which reaches 50/MWh by FY15F. The benchmark index
for this stock is the Dow Jones STOXX 600 Utilities.
Risks. EDF faces a number of risks across its businesses. In France, these include
government involvement in the tariff-setting process and low returns for regulated
activities. Elsewhere, EDF is exposed to volume, commodity and price risks in its
generation activities, and regulatory risk in respect of its infrastructure risks. Re-
investment risk should also not be ignored.


OPERATING FORECASTS
Year-end 31st December [UNIT] 2008A 2009A 2010E 2011E 2012E 2013E 2014E
France [EURm] 34,264 34,004 35,718 36,588 38,040 39,792 41,425
Europe (UK, Germany and Italy) [EURm] 21,321 23,108 23,515 23,233 24,478 25,809 26,723
- UK [EURm] 8,244 7,728 8,510 8,303 8,943 9,358 9,919
- British Energy - existing [EURm] 0 3,308 3,117 2,839 2,934 3,123 3,276
- Germany [EURm] 7,467 7,195 6,853 6,777 6,885 7,059 7,368
- Italy [EURm] 5,610 4,877 5,035 5,314 5,716 6,270 6,160
Other activities [EURm] 5,218 5,787 5,633 5,789 5,952 6,119 6,292
Other international [EURm] 3,044 3,437 4,876 5,039 5,167 5,295 5,433
GROUP TURNOVER [EURm] 63,847 66,336 69,742 70,649 73,637 77,015 79,873
France [EURm] 9,009 9,434 10,160 11,563 12,235 13,297 14,120
- generation & supply [EURm] 4,968 5,825 6,336 7,511 7,951 8,778 9,371
- transmission [EURm] 1,340 1,220 1,274 1,344 1,422 1,509 1,593
- distribution [EURm] 2,701 2,389 2,551 2,708 2,861 3,010 3,155
- UK [EURm] 943 1,334 1,164 1,448 1,637 1,598 1,667
- British Energy - existing [EURm] 0 1,728 1,509 1,320 1,427 1,567 1,678
- Germany [EURm] 1,114 1,193 1,223 1,077 958 824 930
- Italy [EURm] 911 801 764 744 850 906 688
Other international [EURm] 505 686 1,121 1,197 1,250 1,296 1,354
GROUP EBITDA [EURm] 14,240 17,466 17,933 19,672 20,739 21,935 22,946
France [EURm] 4,589 5,143 5,418 6,686 7,234 8,175 8,874
- generation & supply [EURm] 3,404 4,468 4,608 5,742 6,157 6,959 7,527
- transmission [EURm] 770 623 654 690 729 777 823
- distribution [EURm] 415 52 155 254 348 438 524
- UK [EURm] 499 957 741 978 1,121 1,036 1,058
- British Energy - existing [EURm] 747 510 311 404 530 626
- Germany [EURm] 557 796 825 661 523 381 478
- Italy [EURm] 416 300 286 247 334 378 148
Other international [EURm] 399 287 727 795 841 879 929
GROUP EBIT [EURm] 7,910 10,107 10,008 11,431 12,189 13,154 13,932
P & L SUMMARY
Sales [EURm] 63,847 66,336 69,742 70,649 73,637 77,015 79,873
EBITDA [EURm] 14,240 17,466 17,933 19,672 20,739 21,935 22,946
EBIT [EURm] 7,910 10,107 10,008 11,431 12,189 13,154 13,932
Associates and income from investments [EURm] 367 120 172 181 190 199 209
Exceptional items [EURm] 0 0 0 0 0 0 0
GROUP PBIT [EURm] 8,277 10,227 10,180 11,612 12,379 13,353 14,142
Financial charges [EURm] (3,050) (4,525) (4,767) (4,788) (4,683) (4,670) (4,615)
GROUP PBT [EURm] 5,227 5,702 5,413 6,824 7,697 8,683 9,526
Net taxation [EURm] (1,599) (1,614) (1,624) (2,047) (2,309) (2,605) (2,858)
PAT [EURm] 3,628 4,088 3,789 4,777 5,388 6,078 6,668
Minorities [EURm] (144) (183) (196) (168) (181) (199) (213)
Profi t for year (ex exceptionals) [EURm] 4,392 3,923 3,593 4,609 5,206 5,879 6,455
Profi t for year (reported) [EURm] 3,484 3,905 3,593 4,609 5,206 5,879 6,455
Profi t for year (adj - pre Exc and Def tax) [EURm] 4,392 3,923 3,593 4,609 5,206 5,879 6,455
Dividends [EURm] (2,339) (2,126) (2,120) (2,304) (2,593) (2,957) (3,228)
Retai ned Profit [EURm] 1,145 1,779 1,473 2,304 2,614 2,922 3,228
EPS - basi c [EUR/sh] 1.91 2.14 1.94 2.49 2.82 3.18 3.49
Growth [%] -38.0% 12.1% -9.3% 28.3% 13.0% 12.9% 9.8%
EPS - adj usted (Nomura) [EUR/sh] 2.41 2.15 1.94 2.49 2.82 3.18 3.49
Growth [%] -6.0% -10.6% -9.7% 28.3% 13.0% 12.9% 9.8%
DPS [EUR/sh] 1.28 1.15 1.15 1.25 1.40 1.60 1.75
Growth [%] 0.0% -10.4% -0.3% 8.7% 12.5% 14.0% 9.1%
Payout Ratio [%] 53.3% 53.4% 59.0% 50.0% 49.8% 50.3% 50.0%

CASH FLOW SUMMARY
Operating cashflow after Wcap [EURm] 10,360 14,745 17,311 19,065 19,566 20,619 21,749
Dividend income [EURm] 110 143 172 181 190 199 209
Interest [EURm] (1,068) (1,408) (1,327) (1,269) (1,082) (985) (846)
Tax [EURm] (1,720) (963) (1,624) (2,047) (2,309) (2,605) (2,858)
Capex and acquistions [EURm] (16,879) (25,196) (14,857) (14,836) (13,857) (14,028) (14,090)
Disposals [EURm] 214 252 0 0 0 0 0
Group dividends [EURm] (2,528) (1,311) (2,126) (2,120) (2,304) (2,593) (2,957)
Management of liquid resources and other [EURm] 27,056 45,449 467 467 467 467 467
Change in net debt [EURm] 15,545 31,711 (1,983) (559) 671 1,074 1,674
BALANCE SHEET SUMMARY
Fixed assets [EURm] 141,336 180,435 187,367 193,962 199,269 204,515 209,591
Stock [EURm] 9,290 12,662 12,662 12,459 12,928 13,461 13,913
Debtors [EURm] 27,674 27,744 28,174 28,435 29,294 30,266 31,088
Financial assets [EURm] 14,265 14,821 14,821 14,821 14,821 14,821 14,821
Short-term liabilities [EURm] (58,217) (58,628) (58,758) (58,727) (59,515) (60,447) (61,198)
Concession grantors rights [EURm] (38,516) (39,884) (39,884) (39,884) (39,884) (39,884) (39,884)
Nuclear provisions [EURm] (28,572) (37,534) (38,553) (39,617) (40,724) (41,851) (43,009)
Employee provisons [EURm] (12,890) (13,412) (15,505) (17,627) (19,777) (21,955) (24,162)
Other provisions for contingencies and liabilities [EURm] (1,953) (1,188) (1,188) (1,188) (1,188) (1,188) (1,188)
Deferred tax [EURm] (4,134) (7,652) (7,652) (7,652) (7,652) (7,652) (7,652)
Loans and other financial liabilities [EURm] (25,584) (44,755) (46,738) (47,297) (46,626) (45,552) (43,878)
Other Liabilities [EURm] (5,628) (6,136) (6,136) (6,136) (6,136) (6,136) (6,136)
Net assets [EURm] 17,071 26,473 28,609 31,549 34,811 38,399 42,307
Minority interests [EURm] 1,801 4,773 4,969 5,137 5,318 5,518 5,731
Capital Stock [EURm] 911 924 924 924 924 924 924
P&L reserve [EURm] 22,286 27,028 28,501 30,806 33,419 36,341 39,569
Total Shareholders funds [EURm] 23,197 27,952 29,425 31,730 34,343 37,265 40,493
Net debt [EURm] (24,499) (42,124) (44,107) (44,666) (43,995) (42,921) (41,247)
NET ECONOMIC DEBT
Year-end 31st December UNIT 2008A 2009A 2010E 2011E 2012E 2013E 2014E
Net debt [EURm] (24,499) (42,124) (44,107) (44,666) (43,995) (42,921) (41,247)
Nuclear provisions [EURm] (28,572) (37,534) (38,553) (39,617) (40,724) (41,851) (43,009)
Employee liabilities [EURm] (12,890) (13,412) (15,505) (17,627) (19,777) (21,955) (24,162)
Dedicated assets [EURm] 8,604 8,270 9,770 11,270 12,770 14,270 15,770
Net Economic debt [EURm] (57,357) (84,800) (88,395) (90,640) (91,726) (92,457) (92,647)

Fortum Oyj FUM1V FH
UTI LI TI ES | FI NL AND

Mar t i n Young +44 207 102 1536 martin.young@nomura.com

Good asset s, but f ul l y val ued
A green option in the European utility space
Fortum operates 3.2GW of nuclear capacity and 4.7GW of hydro
capacity, making it the green option for investors in the European
utility space. A consequence of this low variable cost base is that
Fortum is significantly exposed to power price variations we
estimate an additional 0.5/share for each additional 1/MWh. Such
leverage is greater than the peer group and thus Fortum looks well
placed should power prices rise.
Quality asset base in Nordic region
Our in-depth analysis of the generation portfolios of each of the
European utility companies leads us to believe that Fortum is well
placed to face the challenges of a changing generation world in
Europe, with a well positioned and flexible portfolio, low CO2 intensity,
critical mass, a retail hedge and a solid trading platform. Russia, on
the other hand, remains more of an unknown.
Fully valued; REDUCE
Despite the aforementioned quality of its assets, and a strong balance
sheet relative to its peer group, Fortum trades at a premium to both
the generator and integrated subgroup on FY11F P/E. Although we
recognise that some investors may be attracted to the greater visibility
on offer, we believe that the stock is fully valued. The mooted windfall
tax remains an additional uncertainty.
Valuation and risks
We take a sum-of-the-parts approach in valuing Fortum to capture the
drivers of each component of the business mix. We value Nordic
generation using DCF, assuming a 7.6% discount rate and deducting
debt held at associates. In the absence of a published RAB
(Regulated Asset Base) we benchmark the Nordic regulated business
to similar assets across Europe. TGC-10 is valued using a WACC of
(mn) FY09 FY10F FY11F FY12F
Revenue 5,435 6,098 6,131 6,405
Normal ised EPS () 1.48 1.47 1.31 1.48
Norm. EPS growth (%) (0.2) (11.1) 12.8 9.1
Norm. P/E (x) 12.8 12.8 14.4 12.8
EV/EBITDA (x) 10.5 10.3 10.5 10.0
Pri ce/book (x) 2.0 1.9 1.8 1.7
Di vidend yi el d (%) 5.3 5.3 5.3 5.6
ROE (%) 16.0 15.9 13.5 14.7
Net debt/equi ty (%) 70.3 70.4 70.2 66.6
Share price relative to MSCI Fi nland
1m 3m 6m
6.0 (2.8) 2.3
3.7 (12.1) (12.2)
4.8 11.1 2.3
52-week range ()
19.80/15.03
20,495
Absolute ()
Absolute (US$)
Rel ati ve to Index
Market cap (US$mn)
Fi nnish State 51
14
15
16
17
18
19
20
21
J
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9
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9
A
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9
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80
85
90
95
100
105
110
115
120
Price
Rel MSCI Finland
()
Price target
19.50
Source: Nomura
Closing price on 23 Jun
Price target
19.50
Source: Nomura
Price target
19.50
Source: Nomura
Closing price on 23 Jun
Price target
19.50
Source: Nomura
Our estimates are below consensus
for FY10-12F. We believe that this is
a function of the continued strength
of the NordPool price, where there is
upside risk to our assumptions.
Maintained
REDUCE
Ac t i on
We reaffirm our REDUCE call on Fortum, though we recognise the quality of its
assets, strength of its balance sheet and solidity of its yield. Our stance is relative,
and predicated on our view that the stock is fully valued. Moreover, with a power
curve that is in backwardation, we believe current support will wane as Fortum
starts contracting at lower 2012F forward power prices.
Cat al y s t s
We see potential catalysts in a colder-than-usual winter in 2010/11F and continued
support for power prices.

Anc hor t hemes

Fortum is one way to play the nuclear theme in the European utility space. Its
generation portfolio is dominated by nuclear and hydro generation, making it one of
Europes greenest options, and giving rise to significant power price exposure. In
our opinion, other utilities offer better value.

Fortum Oyj Martin Young
15.5%. Other assets and businesses are valued using ratios, DCF and book/market
values. The benchmark index for this stock is the Dow Jones STOXX 600 Utilities.
Risks. Fortum is exposed to a number of risks both in the Nordic region and abroad. In
the Nordic area, the key risks include generation prices and regulation. Outside the
Nordic region, amongst other things, Fortum is exposed to political risk, namely in
Poland and Russia.

Fortum Oyj Martin Young

P & L SUMMARY
Year -end 31 Dec ember [UNIT] 2008A 2009A 2010E 2011E 2012E 2013E 2014E
TOTAL GROUP SALES [EUR m] 5,636 5,435 6,098 6,131 6,405 6,921 7,712
EBITDA - adjusted [EUR m] 2,478 2,292 2,371 2,345 2,460 2,637 3,118
EBITDA Margin [%] 44.0% 42.2% 38.9% 38.2% 38.4% 38.1% 40.4%
%age growth/(decline) [%] 7.8% -7.5% 3.5% -1.1% 4.9% 7.2% 18.2%
COMPARABLE OPERATING RESULT
Power Generation [EUR m] 1,528 1,469 1,333 1,168 1,182 1,243 1,607
Heat [EUR m] 250 227 254 233 231 240 265
Distribution [EUR m] 248 262 271 281 292 304 315
Markets [EUR m] (33) 22 22 22 25 25 24
Russia [EUR m] (92) (26) 44 160 230 314 384
Other [EUR m] (56) (66) (67) (69) (70) (71) (73)
TOTAL [EUR m] 1,845 1,888 1,856 1,796 1,891 2,054 2,522
Other [EUR m] 118 (106) 0 0 0 0 0
GROUP OPERATING INCOME [EUR m] 1,963 1,782 1,856 1,796 1,891 2,054 2,522
Share of profit of associates and jv [EUR m] 126 21 43 45 47 50 52
Net financial expenses [EUR m] (239) (167) (212) ( 223) (244) (258) (246)
PBT [EUR m] 1,850 1,636 1,687 1,619 1,694 1,846 2,329
Income tax [EUR m] (254) (285) (337) ( 324) (339) (369) (466)
Windfall tax [EUR m] 0 0 0 (90) (90) (90) (90)
Non operating resul t [EUR m] 0 0 0 0 0 0 0
PAT [EUR m] 1,596 1,351 1,350 1,205 1,355 1,477 1,863
Minor ity Interest [EUR m] (54) (39) (40) (41) (43) (44) (45)
Net i ncome - reported [EUR m] 1,542 1,312 1,309 1,163 1,313 1,433 1,818
Net i ncome - rec ur ri ng [EUR m] 1,356 1,312 1,309 1,163 1,313 1,433 1,818
KEY PER SHARE DATA
EPS - Reported [EUR/sh] 1.74 1.48 1.47 1.31 1.48 1.61 2.05
EPS - Nomur a [EUR/sh] 1.53 1.48 1.47 1.31 1.48 1.61 2.05
DPS - recurring [EUR/sh] 1.00 1.00 1.00 1.00 1.06 1.11 1.16
DPS - special [EUR/sh] 0.00 0.00 0.00 0.00 0.00 0.00 0.00
DPS - total [EUR/sh] 1.00 1.00 1.00 1.00 1.06 1.11 1.16
Dividend cover [x] 1.7x 1.5x 1.5x 1.3x 1.4x 1.5x 1.8x
Interest cover [x] 7.3x 5.7x 5.0x 5.0x 5.0x 5.0x 5.0x
BALANCE SHEET SUMMARY
Year -end 31 Dec ember UNIT 2008A 2009A 2010E 2011E 2012E 2013E 2014E
FIXED ASSETS [EUR m] 16,517 17,292 17,933 18,428 18,855 19,272 19,628
Inventories [EUR m] 444 447 530 538 561 609 653
Other short term assets [EUR m] 1,996 1,212 1,403 1,423 1,475 1,586 1,688
Cash and cash equivalents [EUR m] 1,321 890 558 357 372 430 952
CURRENT ASSETS [EUR m] 3,761 2,549 2,491 2,318 2,408 2,625 3,293
TOTAL ASSETS [EUR m] 20,278 19,841 20,424 20,746 21,263 21,897 22,921
STOCKHOLDERS EQUITY [EUR m] 7,954 8,034 8,455 8,730 9,154 9,649 10,482
Minor ity Interest [EUR m] 457 457 497 539 581 625 670
TOTAL EQUITY [EUR m] 8,411 8,491 8,952 9,268 9,735 10,274 11,152
LIABILITIES
Interest bearing liabilities [EUR m] 7,500 6,859 6,859 6,859 6,859 6,859 6,859
Other liabilities [EUR m] 1,700 1,939 2,061 2,067 2,117 2,212 2,358
Nuclear provisions [EUR m] 566 570 570 570 570 570 570
Pension provisions [EUR m] 51 23 23 23 23 23 23
Other provisions [EUR m] 199 209 209 209 209 209 209
Deferred tax [EUR m] 1,851 1,750 1,750 1,750 1,750 1,750 1,750
TOTAL LIABILITIES [EUR m] 11,867 11,350 11,472 11,478 11,528 11,623 11,769
TOTAL LIABILITIES & SCH EQUITY [EUR m] 20,278 19,841 20,424 20,746 21,263 21,897 22,921
NET DEBT - Nomur a [EUR m] 6,179 5,969 6,301 6,502 6,487 6,429 5,907
KEY FINANCIAL DATA
BVPS [EUR/sh] 9.48 9.56 10.08 10.43 10.96 11.56 12.55
ROCE - Unadj usted Reported [%] 15.0% 12.1% 10.7% 9.8% 10.1% 10.7% 12.9%
ROCE - Nomura [%] 11.8% 11.1% 10.7% 9.8% 10.1% 10.7% 12.9%
ROE - Nomura [%] 18.7% 16.0% 15.9% 13.5% 14.7% 15.2% 18.1%
CASH FLOW SUMMARY
Year -end 31 Dec ember UNIT 2008A 2009A 2010E 2011E 2012E 2013E 2014E
NET INCOME [EUR m] 1,596 1,351 1,350 1,205 1,355 1,477 1,863
Depr eciation [EUR m] 515 510 515 549 570 583 595
Working Capital [EUR m] (102) 19 (152) (22) (24) (64) (0)
Other adjustments [EUR m] 119 466 0 0 0 0 0
OPERATING CF [EUR m] 2,002 2,346 1,670 1,687 1,854 1,945 2,405
Disposals [EUR m] 115 62 0 0 0 0 0
Acquisi tions [EUR m] (1,243) (87) 0 0 0 0 0
Capex [EUR m] (1,018) (845) (1,113) ( 999) (949) (949) (899)
Other adjustments [EUR m] (136) (104) 0 0 0 0 0
TOTAL INVESTING CF [EUR m] (2,282) (974) (1,113) ( 999) (949) (949) (899)
TOTAL PRE-FINANCING CF [EUR m] (280) 1,372 557 687 905 996 1,506
Financi ng CF [EUR m] 1,320 (1,671) (888) ( 889) (889) (938) (985)
Increase/(decrease) in CF [EUR m] 1,040 (299) (332) ( 202) 16 58 522
KEY FINANCIAL DATA
FCFPS [EUR/sh] 1.11 1.69 0.63 0.77 1.02 1.12 1.70
Gearing (debt/debt+equity) [%] 42.4% 41.3% 41.3% 41.2% 40.0% 38.5% 34.6%
Gearing (debt/equity) [%] 73.5% 70.3% 70.4% 70.2% 66.6% 62.6% 53.0%
Net Debt/EBITDA - Reported [x] 2.5x 2.6x 2.7x 2.8x 2.6x 2.4x 1.9x
Net Debt/EBITDA - Recurring - Nomura [x] 2.5x 2.6x 2.7x 2.8x 2.6x 2.4x 1.9x

Gamesa Corp Tecnologica Sa GAM SM
RENEABLE ENERGY | EUROPE

Cat har i na Saponar , CFA +44 20 7102 1231 cathari na.saponar@nomura.com

Spani sh mac r o vs gl obal gr ow t h
Exposure to the largest developers
Gamesas business model of multi-year framework agreements gives
it visibility on growth through FY11-12F. Other than Iberdrola
Renovables as one of the largest global developers with heavy US
exposure, this includes major utilities, but also Asian developers such
as Long Yuan and Datang who are large customers for Gamesa.
Increasing exposure to new markets and clients
The companys new strategy of increasing its manufacturing base in
China and India should position it well to deliver increasing order
momentum in the region. Beyond that, the new focus on small- and
medium-sized customers should also result in market share gains and
increase volume breadth.
US weakness
Gamesa, like other wind turbine manufacturers exposed to US market
weakness, saw only 50% capacity utilisation in 1Q10. We see some
risk of the weak PPA situation spilling over into Iberdrola
Renovabless project development and potentially pushing out
volumes. That said, we still expect a recovery in late-2010F to sustain
the companys delivery trajectory.
Spanish overhang
Gamesa shares have been hit hard by the Spanish macro overhang
and beyond that the lack of clarity over Spanish renewables regulation
and tariffs. However, we expect the latter to clear soon.
Valuation reflects pessimism
Gamesa shares are closing back in on trough levels, trading on a P/E
of 12.4x FY11F, versus a four-year average of 12.7x, a FY09 trough
of 6.5x and a FY08 peak of 14x. Our DCF-based price target is
13.00.
(mn) FY08 FY09 FY10F FY11F
Revenue 3,646 3,229 2,920 3,668
Reported net profit 324 115 89 160
Normal ised net profit 324 115 89 160
Normal ised EPS () 1.32 0.47 0.37 0.66
Norm. EPS growth (%) 0.5 (0.6) (0.2) 0.8
Norm. P/E (x) 6.1 17.2 22.3 12.4
EV/EBITDA (x) 3.9 5.7 8.2 5.8
Pri ce/book (x) 1.3 1.3 1.2 1.1
Di vidend yi el d (%) 0.0 0.0 0.0 0.0
ROE (%) 0.1 0.1 0.1 0.1
Net debt/equi ty (%) 0.0 0.2 0.2 0.2
Previ ous norm. net profi t 89 160
Change from previ ous (%) - -
Previ ous norm. EPS (
?
) 0.37 0.66
Share price relative to MSCI Spain
1m 3m 6m
1.1 (16.6) (29.0)
(1.0) (24.6) (39.1)
(3.9) (6.2) (9.1)
Easy
Iberdrola 14.1
Casa Grande carta
5.0
Absolute ()
Absolute (US$)
Rel ati ve to Index
52-week range ()
Market cap (US$mn) 2,421
16.45/7.14
6
8
10
12
14
16
18
J
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70
80
90
100
110
Price
Rel MSCI Spain
()
Price target 13
FY10F net profit (mn) 89
Source: Nomura
Price target 13
Source: Nomura
We see Spanish macro concerns as
a share overhang. Meanwhile, the
company stands to benefit from a
strong position in recovering wind
markets, in our view.
Maintained
BUY
Ac t i on
We expect Gamesa to be a beneficiary of a global pick-up in wind demand in
2010F and 2011F. The company also appears to be well equipped for growth in
Asia through its recent plant expansion. Our DCF-based price target is 13.00. We
maintain our BUY call.
Cat al y s t s
As the company executes on its strategy to diversify its geographical spread and
client base, it should deliver order flow as a share price driver.

Anc hor t hemes

Growth in the wind sector is a key theme within the global climate change and new
energy theme. We believe that poly manufacturers are direct beneficiaries.

Gamesa Corp Tecnologica Sa Catharina Saponar, CFA
Risks. Gamesa may suffer a worse-than-expected price decline or order cancellations.
The supply chain may not be able to meet projected growth and the company may be
unable to launch new turbines in line with expectations. It may experience problems
with its capacity expansion.


P&L
Year-end Dec [unit] 2008A 2009A 2010E 2011E 2012E 2013E 2014E
Sales [EUR m] 3646 3229 2920 3668 4137 4869 5231
%age growth % 27.2% -11.4% -9.6% 25.6% 12.8% 17.7% 7.4%
Gross Profit [EUR m] 1,026 974 817 1,027 1,241 1,461 1,569
%age growth % 37.7% -5.1% -16.1% 25.6% 20.8% 17.7% 7.4%
Gross margin % 28.1% 30.2% 28.0% 28.0% 30.0% 30.0% 30.0%
EBITDA [EUR m] 495 395 289 405 469 559 616
%age growth % 40.2% -20.3% -26.9% 40.3% 15.8% 19.2% 10.2%
EBITDA margin % 13.6% 12.2% 9.9% 11.0% 11.3% 11.5% 11.8%
Depreciation [EUR m] (288) (99) (93) (102) (112) (129) (138)
Operating Profit [EUR m] 208 177 168 269 322 392 436
%age growth % 56.51% -14.64% -5.17% 60.04% 19.90% 21.62% 11.24%
Operating Margin % 5.7% 5.5% 5.8% 7.3% 7.8% 8.1% 8.3%
Net financial Result [EUR m] (41) (47) (48) (52) (56) (61) (66)
PBT [EUR m] 159 122 122 219 268 333 372
%age growth % 64.4% -23.2% -0.4% 79.8% 22.5% 24.3% 11.7%
PBT Margin % 4.4% 3.8% 4.2% 6.0% 6.5% 6.8% 7.1%
Equity Income [EUR m] 2 2 2 2 2 2 2
Income Tax [EUR m] (2) (7) (33) (59) (72) (90) (100)
Tax rate [EUR m] 1.4% 5.7% 27.0% 27.0% 27.0% 27.0% 27.0%
Net Income [EUR m] 157 115 89 160 196 243 272
%age growth % 28.35% -26.60% -22.90% 79.75% 22.53% 24.26% 11.68%
Minority Interests [EUR m] 1.9 0.0 0.0 0.0 0.0 0.0 0.0
Net earnings [EUR m] 324 115 89 160 196 243 272
%age growth % 43.5% -64.5% -22.9% 79.8% 22.5% 24.3% 11.7%
Net Profit Margin % 8.9% 3.6% 3.0% 4.4% 4.7% 5.0% 5.2%
KEY SHARE DATA [unit] 2008A 2009A 2010E 2011E 2012E 2013E 2014E
Number of Shares [in m] 243.3 243.3 243.3 243.3 243.3 243.3 243.3
EPS [EUR /sh] 1.32 0.47 0.37 0.66 0.80 1.00 1.12
EPS (Cont. Operations) [EUR/sh ] 1.32 0.47 0.37 0.66 0.80 1.00 1.12
DPS [EUR /sh] 0.29 0.21 0.09 0.16 0.20 0.25 0.28
BPS
[EUR/sh ]
6.199 6.476 6.750 7.242 7.845 8.595 9.432


BALANCE SHEET
Intangible assets [EUR m] 447 540 584 639 701 749 802
Tangible assets [EUR m] 331 417 470 552 647 689 707
Financial assets [EUR m] 192 141 143 145 147 149 151
Total fixed assets [EUR m] 971 1,098 1,197 1,335 1,495 1,587 1,660
Inventories [EUR m] 828 784 817 880 952 1,071 1,098
Receivables [EUR m] 1,378 2,035 1,898 2,201 2,275 2,435 2,615
Payables [EUR m] 2,049 1,657 1,460 1,834 2,069 2,435 2,615
Working capital [EUR m] 157 1,162 1,255 1,247 1,158 1,071 1,098
Other assets [EUR m] 913 0 0 0 0 0 0
Total assets [EUR m] 2,199 2,454 2,645 2,776 2,846 2,851 2,951
Share capital [EUR m] 197 197 197 197 197 197 197
Retained Earnings [EUR m] 320 115 181 301 448 630 834
Shareholders' funds [EUR m] 1,508 1,576 1,642 1,762 1,909 2,091 2,295
Minorities [EUR m] 7 5 5 5 5 5 5
Provisions [EUR m] 253 223 250 285 320 357 399
Long term liabilities [EUR m] 255 396 396 396 396 396 396
Short term liabilities [EUR m] 211 688 757 832 916 1,007 1,108
Cash & cash equivalent [EUR m] -530 -801 -481 -433 -389 -351 -1,619
Net debt [EUR m] -64 283 380 357 246 30 -114
Other liabilities [EUR m] 443 286 286 286 286 286 286
Total liabilities [EUR m] 189 506 1,003 1,014 937 760 657
Total shareholders' funds & liabilities [EUR m] 2,197 2,454 2,645 2,776 2,846 2,851 2,951

CASH FLOW
EBIT [EUR m] 208 177 168 269 322 392 436
Depreciation & Amortization [EUR m] 287 217 93 102 112 129 138
Change in Provisions [EUR m] 50 -30 27 34 35 38 41
Change in Working capital [EUR m] 524 -1,005 -93 8 89 87 -27
Tax [EUR m] -2 -7 -33 -59 -72 -90 -100
Other movements [EUR m] 0 0 0 0 0 0 0
Operating cash flow [EUR m] 1,067 -648 163 354 485 556 488
Capex [EUR m] -158 -129 -190 -238 -269 -219 -209
Disposals [EUR m] 0 0 0 0 0 0 0
Cash flow from investing activities [EUR m] -158 -129 -190 -238 -269 -219 -209
New project finance [EUR m] 0 0 0 0 0 0 0
Interest [EUR m] -41 -47 -48 -52 -56 -61 -66
Dividends [EUR m] -71 -50 -22 -40 -49 -61 -68
Minority dividends [EUR m] 0 0 0 0 0 0 0
Dividends received [EUR m] 0 0 0 0 0 0 0
Cash flow from financing activities [EUR m] -113 -97 -70 -92 -105 -122 -134
Net change in cash/debt [EUR m] 796 -874 -97 24 111 215 145

Vestas Wind Systems A/S VWS DC
RENEWABLE ENERGY | EUROPE


A l eader c omi ng out of t he t r ough
Global market leader
Vestas position as the market leading global turbine manufacturer
makes it a prime play on long-term global wind market growth. The
company has manufacturing facilities in Europe, Asia and the
Americas and its geographical breadth gives it an advantage of
flexibility and exposure to the most important demand zones. The
companys scale also gives it a profitability advantage vs its peers.
2010 the trough year with view to pick up
We see 2010F being a trough year for Vestas, with flat earnings vs
2009 as spillovers from 2009 have meant a very weak start to the
year, with a Q1 loss as the companys activity levels were extremely
low. But we expect order intake to pick up during 2010F, which should
provide investors with the prospect of a strong pick-up in activity and
earnings in 2011F.
Asia brings order momentum while the US remains slow
Vestas has been impacted by weakness in the US wind market which
has led to an absence of new US orders in 2009. A recovery in the US
market should be a very important order driver, even though we think
that a full recovery might only come through in late 2010F and in
2011F. We believe that given the extent of recession-induced
electricity demand destruction, many utilities are already compliant
with their renewables obligations for at least 2010F. The expiration of
the cash grant scheme, which requires 5% of a project to be invested
before year-end, should lead to order momentum, we believe. But
most importantly, we think that demand recovery will lead to a return
of strong activity from 2011F. There was some order intake, 250MW
in Q1/2 this year, but we expect more in late 2010F.
Meanwhile, Asia has been making up for this, with stronger-than-
expected order intake so far in 2010F. We see this as a reflection of: 1)
very strong market growth; and 2) the market opening to Western
Revenue 6,035 6,636 6,718 8,293
Normal ised EPS () 2.76 2.91 2.14 3.31
Norm. EPS growth (%) 0.8 0.1 (0.3) 0.5
Norm. P/E (x) 15.4 13.6 18.0 11.6
EV/EBITDA (x) 9.7 7.2 9.5 5.9
Pri ce/book (x) 3.7 2.3 2.1 1.8
Di vidend yi el d (%) 0.0 0.0 0.0 0.0
ROE (%) 0.3 0.2 0.1 0.2
Net debt/equi ty (%) 0.0 0.0 0.0 (0.1)
Previ ous norm. EPS () 2.14 3.31
Share price relative to MSCI Denmark
1m 3m 6m
(1.6) (0.6) (4.7)
(3.7) (10.0) (18.2)
(11.3) (9.1) (27.3)
52-week range ()
3-mth avg daily turnover 97
Stock borrowabi lity Easy
Thornburg Inv Mgmt 2
Blackrock group 2
398.0/263.6
Absolute ()
Absolute (US$)
Rel ati ve to Index
250
270
290
310
330
350
370
390
410
J
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60
70
80
90
100
110
Price
Rel MSCI Denmark
()
Price target 390
Source: Nomura
Price target 390
Source: Nomura
We are below consensus for 2010F,
as we anticipate an earnings miss.
But our forecast is above for 2011F,
since we expect order momentum to
drive earnings.
Maintained
BUY

Ac t i on
Even though a recovery in the wind sector might not happen until later this year, we
see a positive risk-reward balance, since on our reading Vestas share price does
not price in any order recovery before 2014F. We see this as an opportunity, given
the companys global leadership position in a market that should return to strong
growth. Our DCF share price target is Eur 390. BUY rating reaffirmed.
Cat al y s t s
Order flow should improve over the course of the year. In particular, we are looking
for US order momentum in the later quarters of 2010F.

Anc hor t hemes

Vestas is directly leveraged to global wind growth, a central theme of the global
climate change and new energy theme.

Vestas Wind Systems A/S Catharina Saponar, CFA
manufacturers more quickly than expected, as technology and cost of energy rather
than cost/MW become more important parameters.
Potential winner from offshore growth
In a very timely manner, Vestas has announced it is developing a new 6MW turbine
specifically dedicated to offshore. We think the company will be commercialising the
turbine from 2012F. Our industry contacts indicate an oligopolistic market in offshore
and a desire of many to diversify supply. Given Vestas standing in the onshore market,
we see it standing a good chance of capturing share in the offshore market.
Trough valuation
In our view, Vestas valuation reflects a very high degree of pessimism. The shares are
trading on a P/E of 11.6x 2011F, vs a four-year average of 13x, a 2009 trough of 7.4x
and a 2008 peak of 21x. We estimate that the current share price implies no order
recovery before 2014F, which we find too pessimistic. Our DCF share price target is
Eur 390.
Risks. We identify the major risk to our forecast in the invested capital of the business,
in that we assume going forward incremental revenue growth exceeds the requirement
for incremental capital. We also identify the possibility of legislative changes regarding
support for renewable and/or wind power technology in key markets that are not
modelled into our forecasts.


P&L
Sales [EUR m] 6035 6636 6718 8293 9352 10381 11420
%age growth % 24.2% 10.0% 1.2% 23.4% 12.8% 11.0% 10.0%
Gross Profit [EUR m] 1,179 1,441 1,276 1,576 1,777 1,972 2,170
%age growth % 42.9% 22.2% -11.4% 23.4% 12.8% 11.0% 10.0%
Gross margin % 19.5% 21.7% 19.0% 19.0% 19.0% 19.0% 19.0%
EBITDA [EUR m] 803 1067 833 1250 1411 1616 1778
%age growth % 38.2% 32.9% -21.9% 50.1% 12.9% 14.5% 10.0%
EBITDA margin % 13.3% 16.1% 12.4% 15.1% 15.1% 15.6% 15.6%
Depreciation [EUR m] 135 211 216 288 309 339 372
%age growth % 50.79% 28.14% -27.87% 55.82% 14.56% 15.90% 10.04%
Net financial Result [EUR m] 46 (48) (12) (12) (12) (12) (12)
PBT [EUR m] 714 809 606 951 1091 1266 1394
%age growth % 61.2% 13.3% -25.1% 56.9% 14.7% 16.1% 10.1%
PBT Margin % 11.8% 12.2% 9.0% 11.5% 11.7% 12.2% 12.2%
Income Tax [EUR m] (203) (230) (170) (276) (322) (380) (418)
Tax rate [EUR m] 28.4% 28.4% 28.0% 29.0% 29.5% 30.0% 30.0%
Net Income [EUR m] 511 579 436 675 769 886 976
%age growth % 75.60% 13.31% -24.66% 54.71% 13.93% 15.25% 10.14%
%age growth % 75.6% 13.3% -24.7% 54.7% 13.9% 15.2% 10.1%
EPS [EUR /sh] 2.76 2.91 2.14 3.31 3.77 4.35 4.79
EPS (Cont. Operations [EUR/sh ] 2.76 2.91 2.14 3.31 3.77 4.35 4.79
BPS
[EUR/sh ]
10.56 16.90 18.66 21.97 25.74 30.09 34.88


BALANCE SHEET
Intangible assets [EUR m] 644 812 1,121 1,097 1,071 1,047 1,021
Tangible assets [EUR m] 1,030 1,461 1,936 2,118 2,378 2,664 2,687
Total fixed assets [EUR m] 1,821 2,290 3,074 3,232 3,467 3,728 3,725
Inventories [EUR m] 1,612 1,663 1,612 1,990 2,244 2,491 2,741
Receivables [EUR m] 1,119 759 1,142 1,410 1,683 1,868 2,056
Payables [EUR m] 1,030 1,062 1,075 1,327 1,590 1,765 1,941
Working capital [EUR m] 212 639 470 498 561 519 571
Other assets [EUR m] 482 1,032 1,032 1,032 1,032 1,032 1,032
Retained Earnings [EUR m] 2,008 3,378 3,814 4,489 5,258 6,144 7,120
Minorities [EUR m] 0 0 0 0 0 0 0
Provisions [EUR m] 263 233 242 290 327 363 400
Short term liabilities [EUR m] 109 12 -13 -13 -13 -13 -13
Cash & cash equivalent [EUR m] -162 -488 -293 -831 -1,339 -2,041 -3,005
Net debt [EUR m] -39 -137 33 -505 -1,013 -1,715 -2,679
Total liabilities [EUR m] 226 98 277 -213 -683 -1,350 -2,277

CASH FLOW
EBIT [EUR m] 668 856 617 962 1,102 1,277 1,406
Change in Provisions [EUR m] -37 -30 9 48 37 36 36
Change in Working capital [EUR m] -269 -427 169 -27 -64 42 -52
Tax [EUR m] -203 -230 -170 -276 -322 -380 -418
Operating cash flow [EUR m] 294 380 841 996 1,063 1,315 1,344
Capex [EUR m] -678 -833 -1,000 -446 -544 -601 -369
Cash flow from investing activities [EUR m] -678 -833 -1,000 -446 -544 -601 -369
Interest [EUR m] 46 -48 -12 -12 -12 -12 -12
Dividends [EUR m] 0 0 0 0 0 0 0
Minority dividends [EUR m] 0 0 0 0 0 0 0
Cash flow from financing activities [EUR m] 46 744 -12 -12 -12 -12 -12
[EUR m]
Net change in cash [EUR m] -338 291 -170 538 508 703 964

Wacker Chemie Ag WCH GR


Qual i t y vol umes
A volume play
Wacker is our preferred play on solar end market volumes as end market
strength (30%-plus pa growth) feeds directly into polysilicon volume
growth. Wacker plans to more than double its capacity to over 35,000t
over the next two years, with potential for further expansion thereafter.
Sustainable advantage from high barriers to entry
As a sector with high barriers to entry, we see a big divide between
Tier-1 and other polysilicon manufacturers, with the former enjoying
quality and execution advantages. Wacker is a leading Tier-1
manufacturer and we expect it to sustain above-sector-average
volumes and ASPs due to its quality edge, secured contracted
volumes and leadership position.
Material cost edge
We believe Wacker has a significant cost advantage by being 3-5
years ahead of competitors. On our estimates, Wackers production
cost is some 50-60% below that of new-entrant competitors and is set
to come down further. Higher reactor yields, lower energy
consumption, a closed-loop production process as well as higher
purity grades of its product are the main factors. We think the
company can sustain its edge over the long term.
Valuation and risk
Wacker is one of the least expensive global large renewables names,
with a 2011F P/E of 10x vs our global solar average of 15x, despite its
premium quality and positioning. Our DCF fair value is Eur 145 and
we expect the shares to re-rate as the companys edge is increasingly
recognised. As for risks, Wacker is operating in a highly complex
chemical industry and expanding its capacity. This exposes it to
execution and technology risk and to chemical industry-specific
operational risk. Wacker may be affected by falling poly-Si prices in
the near term, as polysilicon is the most important driver for the company.
Revenue 4,298 3,719 4,491 4,931
Normal ised EPS () 8.43 3.41 10.17 12.82
Norm. EPS growth (%) 0.0 (0.6) 2.0 0.3
Norm. P/E (x) 14.4 35.7 12.0 9.5
EV/EBITDA (x) 5.8 10.0 5.4 4.5
Pri ce/book (x) 3.1 3.1 2.5 2.1
Di vidend yi el d (%) 0.0 0.0 0.0 0.0
ROE (%) 0.2 (0.0) 0.2 0.2
Net debt/equi ty (%) 0.0 0.0 0.0 0.0
Share price relative to MSCI Germany
1m 3m 6m
20.5 17.1 1.3
18.0 5.9 (13.0)
13.8 15.1 0.1
52-week range ()
Maj or sharehol ders (%) 50
Dr.Alexander
Wacker
Famil iengesell schaft
7,760
124.7/77.2
Absolute ()
Absolute (US$)
Rel ati ve to Index
Market cap (US$mn)
72
82
92
102
112
122
132
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100
110
120
130
Price
Rel MSCI Germany
()
Price target 145
Source: Nomura
Price target 145
Source: Nomura
We are above consensus for 2010F
and 2011F, as we expect the
company to hold firmer prices in a
strong market context.
Maintained
BUY
Ac t i on
Wacker is our top pick in the European solar sector as a volume play on global
solar end market strength. It is one of the least expensive global large renewables
names, with a 2011F P/E of 10x vs our global solar average of 15x, despite its
premium quality and positioning. Our DCF fair value is Eur 145, and we expect the
shares to rerate as the companys edge is increasingly recognised. BUY reaffirmed.
Cat al y s t s
We expect the share price to re-rate as investors get comfortable with the
companys sustainable competitive advantages and as pricing and volumes hold
firm.

Anc hor t hemes

Growth in the solar sector is a key theme within the global climate change and new
energy theme, and poly manufacturers are direct beneficiaries.

Wacker Chemie Ag Catharina Saponar, CFA

P&L
Sales [EUR m] 4298 3719 4491 4931 5245 5677 5742
%age growth % 13.7% -13.5% 20.8% 9.8% 6.4% 8.2% 1.1%
Gross Profit [EUR m] 1,188 1,072 1,694 1,934 2,046 2,232 2,148
%age growth % 3.1% -9.8% 58.1% 14.2% 5.8% 9.0% -3.7%
Gross margin % 27.6% 28.8% 37.7% 39.2% 39.0% 39.3% 37.4%
EBITDA [EUR m] 1055 607 1132 1317 1391 1522 1431
%age growth % 5.4% -42.5% 86.6% 16.3% 5.6% 9.4% -6.0%
EBITDA margin % 24.6% 16.3% 25.2% 26.7% 26.5% 26.8% 24.9%
%age growth % 4.62% -77.38% 387.67% 20.07% 4.69% 10.91% -10.62%
Net financial Result [EUR m] (2) (24) (21) (2) (1) (4) 3
PBT [EUR m] 642 3 700 891 945 1047 946
%age growth % 1.5% -99.5% ns 27.2% 6.1% 10.8% -9.7%
PBT Margin % 14.9% 0.1% 15.6% 18.1% 18.0% 18.4% 16.5%
Equity Income [EUR m] (5) 0 0 0 0 0 0
Income Tax [EUR m] (204) (78) (209) (267) (284) (314) (284)
Tax rate [EUR m] 31.7% 2357.6% 29.9% 30.0% 30.0% 30.0% 30.0%
Net Income [EUR m] 438 (75) 491 624 662 733 662
%age growth % 3.81% -117.00% -758.81% 27.05% 6.12% 10.81% -9.69%
Minority Interests [EUR m] 1 243 (1) (4) (4) (5)
%age growth % 4.1% -116.1% -791.4% 26.6% 6.1% 10.8% -9.7%
Net Profit Margin % 10.2% -1.9% 10.9% 12.6% 12.5% 12.8% 11.5%
EPS [EUR /sh] 8.43 3.41 10.17 12.82 13.60 15.06 13.65
DPS [EUR /sh] 1.80 1.30 2.00 2.50 3.00 3.50 4.00
Dividend Payout % 21% 38% 20% 20% 22% 23% 29%
BPS
[EUR/sh ]
39.66 38.89 47.78 58.25 68.99 80.65 90.39

Wacker Chemie Ag Catharina Saponar, CFA

BALANCE SHEET
Goodwill [EUR m]
Tangible assets [EUR m] 2,660 2,780 3,075 3,388 3,957 4,432 4,658
Total fixed assets [EUR m] 3,053 3,018 3,296 3,599 4,170 4,649 4,878
Receivables [EUR m] 467 467 614 645 707 759 764
Payables [EUR m] 297 218 248 260 285 306 308
Working capital [EUR m] 675 690 824 866 949 1,019 1,026
Minorities [EUR m] 14 17 20 24 28 33 37
Provisions [EUR m] 423 360 310 280 303 325 325
Short term liabilities [EUR m] 114 76 91 91 91 91 91
Cash & cash equivalent [EUR m] -204 -364 -456 -585 -438 -497 -772
Net debt [EUR m] 68 76 47 -82 64 6 -269
Other liabilities [EUR m] 1,188 1,061 1,101 1,101 1,101 1,101 1,101
Total liabilities [EUR m] 2,041 2,018 1,977 1,797 1,914 1,878 1,626

CASH FLOW
EBIT [EUR m] 681 154 752 902 945 1,048 937
Change in Provisions [EUR m] 60 158 -56 -50 -30 23 23
Change in Working capital [EUR m] 128 191 -126 -92 -113 -47 16
Tax [EUR m] -204 -78 -209 -267 -284 -314 -284
Other movements [EUR m] -68 -238 20 48 29 -27 -17
Operating cash flow [EUR m] 1,005 768 790 966 991 1,152 1,163
Capex [EUR m] -747 -803 -687 -737 -1,013 -945 -714
Disposals [EUR m] -338 104 -43 0 0 0 0
Cash flow from investing activities [EUR m] -1,085 -699 -729 -737 -1,013 -945 -714
Interest [EUR m]
Dividends [EUR m] -149 -90 -65 -99 -124 -149 -174
Minority dividends [EUR m] -0 0 0 0 0 0 0
Dividends received [EUR m]
Cash flow from financing activities [EUR m] -88 93 -15 -99 -124 -149 -174
Net change in cash [EUR m] -162 159 49 129 -147 58 275

Solarworld Ag SWV GR


Compet i t i on at t he hi gh end
Price premium to be eroded as premium market gets
crowded
We believe that Solarworld will continue to see the premium for its
high-end product eroded vs other competitors. Our recent channel
checks have shown that prices in Germany are firmer for Asian than
high-end European manufacturers. Beyond that, we think it will not be
able to command the same premium in other international markets,
leading to a lower global ASP for the company.
We are also seeing an increasing trend of brand equity building by
leading Chinese and other manufacturers. As a result, we see the
industry shifting towards Solarworlds model, which will likely result in
a reduction in the companys branding uniqueness and thus consumer
proposition, even if it will, as we believe, sustain some edge.
Cost reduction required for standstill
Solarworld recently presented cost-reduction initiatives from scaling
up through its US capacity build, improved production, silicon
consumption (-30% 2009-13F) and efficiency (to 18% for multi-
crystalline by 2013F). We think the company will require this in order
to move in line with the industry, and that this will only partly offset
margin pressure.
A likely survivor
We believe that Solarworld will be a likely survivor in a consolidating
market. In our view it will continue to be a leader in the premium
segment. But we are concerned over the price at which it will survive,
ie, at what level of profitability.
Premium valuation
Solarworld is trading on a 2011F P/E of 17x, vs our estimated 10.6x
average for high-end Asian manufacturers. Given pressure from those
competitors, we see the premium as too large. Our DCF share price
target is Eur 9.
Revenue 900 1,013 1,262 1,455
Normal ised EPS () 1.33 0.53 0.48 0.58
Norm. EPS growth (%) 0.3 (0.6) (0.1) 0.2
Norm. P/E (x) 7.8 19.6 21.6 17.0
EV/EBITDA (x) 3.5 7.0 8.1 7.0
Pri ce/book (x) 1.4 1.3 1.3 1.8
Di vidend yi el d (%) 0.0 0.0 0.0 0.0
ROE (%) 0.2 0.1 0.1 0.1
Net debt/equi ty (%) (0.1) 0.4 0.5 0.5
1m 3m 6m
22.9 1.4 (30.4)
20.3 (8.3) (40.3)
16.1 0.9 (27.2)
52-week range ()
18.23/7.95
Frank Asbeck 25
Absolute ()
Absolute (US$)
Rel ati ve to Index
7
9
11
13
15
17
19
J
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30
40
50
60
70
80
90
100
110
Price
Rel MSCI Germany
()
Price target 9
Source: Nomura
Price target 9
Source: Nomura
Our forecasts are in line with
consensus for 2010 and 2011 but we
believe that margin pressure will
persist despite the current positive
sentiment on end markets.
Maintained
REDUCE
Ac t i on
While Solarworld will likely be a survivor in a consolidating sector, we reiterate our
REDUCE stance, as we see its premium model being eroded and cost efficiencies
only partially compensating for margin pressure. Solarworld is trading on a 2011F
P/E of 17x, vs our estimated 10.6x average for high-end Asian manufacturers. Our
DCF share price target is Eur 9.
Cat al y s t s
We expect news flow on strong solar markets to underpin sentiment, while intense
competition will likely cap share price performance.

Anc hor t hemes

Solarworld is a beneficiary of solar growth within the broader new energy theme. It
is also very exposed to the broad theme of competitive dislocation within the solar
sector.

Solarworld Ag Catharina Saponar, CFA
Risks
SolarWorld may not meet earnings expectations. The company may face supply chain
constraints in sourcing silicon and new technology may not lead to reduction in energy
costs. The company may have difficulties with its capacity expansion. The company
may achieve better-than-expected pricing.


P&L
Sales [EUR m] 900 1013 1262 1455 1653 1787 1911
%age growth % 28.8% 12.5% 24.7% 15.3% 13.5% 8.1% 7.0%
Gross Profit [EUR m] 506 424 556 641 728 787 842
%age growth % 27.8% -16.2% 31.1% 15.3% 13.5% 8.1% 7.0%
Gross margin % 52.7% 38.0% 40.0% 40.0% 40.0% 40.0% 40.0%
EBITDA [EUR m] 315 215 203 238 258 271 291
%age growth % 30.8% -31.6% -5.8% 17.1% 8.4% 5.3% 7.5%
EBITDA margin % 35.0% 21.3% 16.1% 16.3% 15.6% 15.2% 15.3%
%age growth % 30.77% -41.63% -23.41% 17.74% 10.24% 6.10% 10.36%
Net financial Result [EUR m] -7.61 -25.36 -42.86 -42.60 -50.79 -46.73 -40.88
PBT [EUR m] 188 132 77 95 101 115 138
%age growth % 6.8% -29.9% -41.7% 23.9% 6.5% 13.4% 19.8%
PBT Margin % 19.6% 11.8% 5.5% 5.9% 5.6% 5.8% 6.5%
Equity Income [EUR m] (56) 10 8 5 5 5 5
Income Tax [EUR m] (53) (73) (23) (30) (32) (37) (44)
Tax rate [EUR m] 28.4% 55.2% 30.0% 32.0% 32.0% 32.0% 32.0%
Net Income [EUR m] 148 59 54 65 69 78 94
%age growth % 30.61% -60.13% -8.84% 20.36% 6.52% 13.44% 19.80%
%age growth % 30.6% -60.1% -8.8% 20.4% 6.5% 13.4% 19.8%
EPS [EUR /sh] 1.33 0.53 0.48 0.58 0.62 0.70 0.84
BPS
[EUR/sh ]
7.5 7.7 8.2 8.8 9.4 10.1 11.0


BALANCE SHEET
Tangible assets [Eurm] 575 788 1,007 1,066 1,111 1,147 1,138
Financial assets [Eurm] 31 50 46 42 38 35 32
Total fixed assets [Eurm] 606 838 1,052 1,108 1,149 1,182 1,170
Inventories [Eurm] 524 598 695 737 801 826 842
Receivables [Eurm] 71 211 97 99 100 108 116
Payables [Eurm] -70 -84 -101 -114 -127 -138 -147
Working capital [Eurm] 525 726 692 723 774 797 810
Other assets [Eurm] 22 14 22 26 31 36 41
Total assets [Eurm] 1,214 1,623 1,811 1,903 1,999 2,061 2,066
Share capital [Eurm] 112 112 112 112 112 112 112
Retained Earnings [Eurm] 469 523 587 656 734 828 931
Shareholders' funds [Eurm] 841 865 919 984 1,053 1,131 1,225
Minorities [Eurm] 0 0 0 0 0 0 0
Provisions [Eurm] 29 29 31 32 33 33 36
Long term liabilities [Eurm] 675 751 751 751 751 751 751
Short term liabilities [Eurm] 103 107 177 147 261 232 130
Cash & cash equivalent [Eurm] -836 -511 -447 -391 -479 -467 -455
Net debt [Eurm] -58 347 481 507 533 516 426
Other liabilities [Eurm] 358 329 329 329 329 329 329
Total liabilities [Eurm] 373 757 892 919 946 930 842
Total shareholders' funds & liabilities [Eurm] 1,214 1,623 1,811 1,903 1,999 2,061 2,066

CASH FLOW
EBIT [Eur m] 260 152 116 137 151 160 177
Depreciation [Eur m] 55 64 87 101 107 111 115
Change in Provisions [Eur m] 6 0 1 1 1 1 2
Change in Working capital [Eur m] -94 -201 34 -31 -51 -23 -13
Tax [Eur m] -53 -73 -23 -30 -32 -37 -44
Other movements [Eur m] 0 0 0 0 0 0 0
Operating cash flow [Eur m] 174 -58 215 177 175 212 236
Capex [Eur m] -273 -318 -306 -160 -151 -148 -105
Disposals [Eur m] 0 0 0 0 0 0 0
Cash flow from investing activities [Eur m] -273 -318 -306 -160 -151 -148 -105
New project finance [Eur m] 0 0 0 0 0 0 0
Interest [Eur m] -8 -25 -43 -43 -51 -47 -41
Dividends [Eur m] 0 0 0 0 0 0 0
Minority dividends [Eur m] 0 0 0 0 0 0 0
Dividends received [Eur m] 0 0 0 0 0 0 0
Cash flow from financing activities [Eur m] -8 -25 -43 -43 -51 -47 -41
Net change in cash [Eur m] -107 -402 -134 -26 -27 17 90

Centrotherm Photovoltaics Ag CTN GR


Ef f i c i enc y, i nnovat i on and gr ow t h
Market growth, cost drive and innovation cycle drive
equipment demand
We expect global solar end market growth in excess of 30% to 2015
at least to drive demand for manufacturing equipment. In addition, we
see a continued focus on technology improvement and innovation
resulting from intense price competition at the end market level. Lastly,
we perceive a specific focus on manufacturing efficiencies over the
medium term.
All of these will benefit Centrotherm as a leading high-end equipment
manufacturer, we believe.
Strong product portfolio to drive new orders
Centrotherm has a broad product portfolio, with recent upgrades that
deliver improvement on the parameters on which manufacturers focus.
Its most recent products deliver 25-30% throughput increases, 1-2%
efficiency improvement and lower electricity consumption. We believe
this should trigger order flow over the next few quarters. In the silicon
segment, the company has confirmed that it has received
downpayment for a Qatar order which could lift order intake above
200mn in 2Q.
Discount valuation
Our DCF-based share price target is 40. Centrotherm shares are
trading at a 12.4x 2011F P/E, vs. 14x for our equipment universe and
16x for our solar universe, despite the companys dominant position.
As for risks, Centrotherm enters into contracts with customers through
turnkey delivery solutions, while subcontracting parts of cell
production lines. This exposes the companys balance sheet to
additional risk through warranty provisions.
Revenue 375 509 576 695
Normal ised EPS () 2.06 1.35 1.84 2.34
Norm. EPS growth (%) 51 (35) 36 27
Norm. P/E (x) 14.0 21.4 15.7 12.4
EV/EBITDA (x) 8.1 7.6 6.0 4.9
Pri ce/book (x) 1.5 1.8 1.6 1.4
Di vidend yi el d (%) 0.0 0.0 0.0 0.0
ROE (%) 11 8 10 11
Net debt/equi ty (%) (45) (48) (38) (32)
1m 3m 6m
9.2 (16.5) (34.1)
6.9 (24.4) (43.5)
2.7 (15.3) (30.3)
52-week range ()
Stock borrowabi lity Hard
TCH GmbH 50.53
Autenrei th Beteil
5.01
Absolute ()
Absolute (US$)
Rel ati ve to Index
Market cap (US$mn) 747
47.77/24.40
22
27
32
37
42
47
52
J
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70
80
90
100
110
120
130
Price
Rel MSCI Germany
()
Closing price on 23 Jun 29
Price target 40
Source: Nomura
Price target 40
Source: Nomura
We are above consensus for 2010F
and 2011F. We believe that the
companys potential for execution on
new orders is underappreciated.
Maintained
BUY
Ac t i on
We reiterate our BUY recommendation as we see positive momentum for the
shares from strong solar market dynamics and improving order flow. Our DCF-
based share price target is 40. The share price trades at a discount to our
equipment universe despite Centrotherms dominant market position.
Cat al y s t s
We expect improving order flow on Asian manufacturers expanding capacity, while
the industry globally upgrades its capacity to improve its cost position.

Anc hor t hemes

Centrotherm benefits from a long-term capacity build requirement in the solar
sector and also from the technology innovation theme. The latter is a key topic for
adoption and growth of solar within renewables.

Centrotherm Photovoltaics Ag Catharina Saponar, CFA

P&L
Sales [EUR m] 375 509 576 695 856 993 1171
%age growth % 125.4% 35.9% 13.1% 20.8% 23.2% 16.0% 17.9%
Gross Profit [EUR m] 111 187 173 209 257 298 351
Gross margin % 29.6% 36.7% 30.0% 30.0% 30.0% 30.0% 30.0%
%
EBITDA [EUR m] 57 59 77 96 117 139 165
%age growth % 167.5% 1.9% 31.9% 23.7% 22.4% 18.3% 18.7%
EBITDA margin % 15.3% 11.5% 13.4% 13.8% 13.7% 14.0% 14.0%
%age growth % 105.81% -14.47% 39.75% 31.04% 22.71% 16.73% 19.09%
Net financial Result [EUR m] 3 3 5 4 4 4 5
PBT [EUR m] 49 40 57 72 87 102 121
%age growth % 127.4% -18.2% 41.4% 27.1% 21.4% 16.6% 19.1%
PBT Margin % 13.1% 7.9% 9.9% 10.4% 10.2% 10.3% 10.4%
Income Tax [EUR m] (15) (11) (17) (22) (26) (31) (36)
Tax rate [EUR m] 29.9% 27.3% 30.0% 30.0% 30.0% 30.0% 30.0%
Net Income [EUR m] 34 29 40 50 61 71 85
%age growth % 142.05% -15.22% 36.27% 27.11% 21.35% 16.56% 19.08%
Minority Interests [EUR m] 0 (1) (1) (1) (1) (1) (2)
%age growth % 154.0% -17.4% 36.3% 27.1% 21.4% 16.6% 19.1%
EPS [EUR /sh] 2.06 1.35 1.84 2.34 2.84 3.30 3.94
BPS
[EUR/sh ]
18.92 16.28 18.19 20.62 23.58 27.02 31.11

Centrotherm Photovoltaics Ag Catharina Saponar, CFA

BALANCE SHEET
Goodwill [EUR m]
Tangible assets [EUR m] 44 71 90 114 143 176 216
Total fixed assets [EUR m] 274 302 314 331 353 377 405
Receivables [EUR m] 118 155 177 214 263 306 360
Payables [EUR m] -83 -152 -139 -143 -176 -204 -240
Working capital [EUR m] 58 43 80 121 149 173 204
Total assets [EUR m] 402 420 469 529 579 626 685
Retained Earnings [EUR m] 14 49 88 137 197 267 350
Shareholders' funds [EUR m] 318 344 385 436 499 572 658
Minorities [EUR m] -0 0 2 4 7 9 13
Provisions [EUR m] 14 35 21 25 31 36 42
Short term liabilities [EUR m] 11 0 0 0 0 0 0
Cash & cash equivalent [EUR m] -181 -168 -141 -138 -156 -186 -220
Net debt [EUR m] -142 -167 -144 -141 -159 -189 -224
Total liabilities [EUR m] -128 -132 -124 -116 -128 -154 -182
Total shareholders' funds & liabilities [EUR m] 402 420 469 529 579 626 685
CASH FLOW STATEMENT
EBIT [EUR m] 43 37 52 68 84 98 116
Depreciation [EUR m] 14 21 25 28 34 41 48
Change in Provisions [EUR m] 10 21 -14 4 6 5 6
Change in Working capital [EUR m] -29 16 -37 -41 -28 -24 -31
Tax [EUR m] -15 -11 -17 -22 -26 -31 -36
Operating cash flow [EUR m] 25 84 9 37 69 89 103
Capex [EUR m] -38 -52 -37 -45 -56 -65 -76
Cash flow from investing activities [EUR m] -38 -52 -37 -45 -56 -65 -76
Interest [EUR m] 3 3 5 4 4 4 5
Dividends [EUR m] 0 0 0 0 0 0 0
Minority dividends [EUR m] -0 1 1 1 1 1 2
Cash flow from financing activities [EUR m] 3 3 6 5 5 6 7
Net change in cash [EUR m] -10 36 -23 -3 18 30 34

EDF Energies Nouvelles Sa EEN FP


Ef f i c i enc y, i nnovat i on and gr ow t h
Impacted by weakness in the US PPA market
The current reluctance to sign PPAs by US utilities could in our view
result in an overhang on the share price for another couple of quarters
as EDF EN is strongly exposed to the MidWest where we believe the
impact of electricity demand destruction on wind demand has hit hard.
Strong solar growth
Besides wind, EDF EN has ambitious targets for growth in solar park
development. It is well on track to grow its installed capacity from less
than 100MW at the end of 2009 to 500MW by 2012. We think that
investors still underappreciate the earnings potential of this business.
Valuation reflects risks
Our DCF-based share price target is 39. We estimate that the
current share price reflects assets on the ground and under
construction with no value attached to the pipeline beyond that. EDF
EN shares are trading at 22.9x 2010F P/E vs 26.8x for the close peer
wind developers average. The company may face delays in project
development and supply of turbines and solar panels. It may not be
able to obtain PPAs according to expectations. The company may not
be able to secure demand for its project development business or for
its retail solar business as expected. Banks may consider the balance
sheet tight with negative consequences for project financing.
Management continuity is a risk with a successful serial entrepreneur
CEO. The company may achieve faster pipeline build-out than we
expect.

Revenue 1,007 1,173 1,167 1,289
Normal ised EPS () 0.89 1.27 1.25 1.62
Norm. EPS growth (%) 0.1 0.4 (0.0) 0.3
Norm. P/E (x) 32.2 21.4 22.9 17.7
EV/EBITDA (x) 16.7 15.1 14.0 12.3
Pri ce/book (x) 1.5 1.4 1.4 1.3
Di vidend yi el d (%) 0.0 0.0 0.0 0.0
ROE (%) 0.0 0.1 0.1 0.1
Net debt/equi ty (%) 0.9 1.9 2.1 2.5
Share price relative to MSCI France
1m 3m 6m
(6.6) (17.7) (20.2)
(8.6) (25.5) (31.5)
(12.5) (9.8) (13.1)
52-week range ()
38.66/27.62
Absolute ()
Absolute (US$)
Rel ati ve to Index
26
28
30
32
34
36
38
40
J
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Price
Rel MSCI France
()
Price target 39
FY net profit (mn) 97
Source: Nomura
Price target 39
FY net profit (mn) 97
Source: Nomura
We think that there is little
appreciation of the companys solar
business, but there might be risk to
consensus depending on the
development of the US market.
Maintained
NEUTRAL
Ac t i on
We retain our NEUTRAL stance as we see the company exposed to some risk from
the weakness in the US PPA market. Growth in the solar business could partly
offset this weakness. Over the long term, the company will benefit from a strong
position in its diversified wind and solar development business.
Cat al y s t s
Evidence of a recovery in demand for wind capacity by US utilities should underpin
confidence that the companys largest growth market is getting back on track. Solar
capacity build out will draw attention to the companys new growth driver.

Anc hor t hemes

EDF EN is a major beneficiary of the US stepping up its commitment to climate
change and renewable energy within the broader theme of a changing energy
sector moving towards new energy.

EDF Energies Nouvelles Sa Catharina Saponar, CFA

P & L
Year-end Dec [unit] 2006A 2007A 2008A 2009A 2010E 2011E 2012E 2013E
Sales [EUR m] 335 561 1007 1173 1167 1289 1603 1737
%age growth % -0.4% 67.4% 79.6% 15.5% -0.5% 10.4% 24.4% 8.4%
Gross Profit [EUR m] 156 210 656 758 727 781 1,018 1,094
%age growth % 0.3% 34.4% 212.7% 76.2% -4.0% 7.4% 30.5% 7.5%
Gross margin % 46.6% 37.4% 65.2% 64.5% 62.3% 60.6% 63.5% 63.0%
EBITDA [EUR m] 92 134 216 307 401 527 650 854
%age growth % 47.3% 46.3% 60.8% 33.2% 30.4% 31.4% 23.4% 31.3%
EBITDA margin % 27.4% 24.0% 21.4% 29.7% 34.4% 40.9% 40.6% 49.1%
Depreciation [EUR m] (30) (39) (67) (118) (112) (137) (173) (228)
Operating Profit [EUR m] 62 95 154 230 289 390 477 625
%age growth % 55.37% 54.78% 61.55% 39.05% 25.42% 35.15% 22.19% 31.16%
Operating Margin % 18.4% 17.0% 15.3% 19.6% 24.7% 30.3% 29.7% 36.0%
Net financial Result [EUR m] (24) (25) (43) (81) (156) (212) (268) (324)
Non-Operating Income [EUR m] 0 0 0 0 0 0 0 0
PBT [EUR m] 38 71 112 126 152 197 228 322
%age growth % 32.2% 87.2% 57.6% 6.9% 20.3% 30.0% 15.8% 41.0%
Equity Income [EUR m] 0.75 1 2 0 1 1 1 1
Income Tax [EUR m] (10.77) (18) (37) (21) (46) (59) (69) (97)
Tax rate % 28.5% 26.0% 33.2% 33.0% 30.0% 30.0% 30.0% 30.0%
Net Income [EUR m] 28 54 76 105 107 139 161 227
%age growth [EUR m] 27.32% 92.95% 42.42% 34.55% 2.38% 29.71% 15.72% 40.69%
Minority Interests [EUR m] (6) (2) (7) (7) (10) (13) (15) (22)
Income from Discontinued Operations [EUR m] (0) 0 0 0 0 0 0 0
Net earnings [EUR m] 22 51 69 98 97 126 146 205
%age growth % 31.9% 134.4% 34.6% 39.1% -1.2% 29.7% 15.7% 40.7%
KEY SHARE DATA [unit] 2006A 2007A 2008A 2009A 2010E 2011E 2012E 2013E
Number of Shares [in m] 62.1 62.1 77.6 77.6 77.6 77.6 77.6 77.6
EPS [EUR /sh] 0.35 0.83 0.89 1.27 1.25 1.62 1.88 2.64
EPS (Cont. Operations) [EUR/sh ] 0.36 0.83 0.89 1.27 1.25 1.62 1.88 2.64
DPS [EUR /sh] n/a 0.11 0.26 0.36 0.37 0.47 0.47 0.66
Dividend Payout % nm 30.0% 29.2% 28.5% 29.2% 29.2% 25.0% 25.0%

EDF Energies Nouvelles Sa Catharina Saponar, CFA
BALANCE SHEET
Intangible assets [EUR m] 4 4 12 19 11 11 10 9
Goodwill [EUR m] 41 78 106 116 106 106 106 106
Tangible assets [EUR m] 897 1,303 2,261 3,594 4,078 4,865 5,746 6,662
Financial assets [EUR m] 92 130 349 390 351 353 354 355
Total fixed assets [EUR m] 1,034 1,516 2,727 4,119 4,546 5,334 6,216 7,133
Inventories [EUR m] 121 128 279 0 0 0 0 0
Receivables [EUR m] 52 110 301 0 0 0 0 0
Payables [EUR m] -109 -55 -218 0 0 0 0 0
Working capital [EUR m] 65 183 362 728 691 865 1,057 1,266
Other assets [EUR m] 116 260 481 582 481 481 481 481
Total assets [EUR m] 1,215 1,959 3,571 5,429 5,719 6,680 7,754 8,880
Share capital [EUR m] 99 99 124 124 124 124 124 124
Net profit [EUR m] 121 157 206 278 332 421 530 682
Shareholders' funds [EUR m] 709 745 1,268 1,310 1,394 1,483 1,592 1,744
Minorities [EUR m] 13 12 223 263 223 223 223 223
Provisions [EUR m] 5 9 16 26 16 16 17 17
Long term liabilities [EUR m] 442 544 907 2,160 3,499 4,350 5,298 6,257
Short term liabilities [EUR m] 201 499 1,104 1,316 0 0 0 0
Cash & cash equivalent [EUR m] -403 -369 -632 -466 -101 -81 -65 -52
Net debt [EUR m] 240 673 1,379 3,010 3,398 4,269 5,233 6,206
Other liabilities [EUR m] 248 520 685 820 688 689 690 691
Total liabilities [EUR m] 493 1,202 2,080 3,856 4,101 4,974 5,940 6,913
Total shareholders' funds & liabilities [EUR m] 1,215 1,959 3,571 5,429 5,719 6,680 7,754 8,880
CASH FLOW
EBIT [EUR m] 62 95 154 230 289 390 477 625
Depreciation [EUR m] 301 39 67 118 112 137 173 228
Change in Provisions [EUR m] 1 0 -6 0 0 0 0 0
Change in Working capital [EUR m] 13 -11 -199 -193 -158 -174 -192 -208
Tax [EUR m] -8 -18 -37 -21 -46 -59 -69 -97
Other movements [EUR m] -2 12 5 2 1 1 1 1
Operating cash flow [EUR m] 95 116 -15 136 199 295 390 550
Capex [EUR m] -334 -523 -1,070 -1,095 -932 -923 -1,053 -1,144
Disposals [EUR m] 0 0 0 0 0 0 0 0
Cash flow from investing activities [EUR m] -334 -523 -1,070 -1,095 -932 -923 -1,053 -1,144
New project finance [EUR m] 300 366 749 822 745 785 895 972
Interest [EUR m] -26 -28 -31 -104 -137 -193 -249 -305
Dividends [EUR m] 0 -15 -20 -28 -28 -37 -36 -51
Minority dividends [EUR m] -4 -4 -7 -7 -10 -13 -15 -22
Dividends received [EUR m] 0 0 0 0 0 0 0 0
Cash flow from financing activities [EUR m] 271 319 690 683 570 542 594 594
Net change in cash [EUR m] 33 -88 -394 -276 -163 -87 -69 -0




Japanese companies

Toshiba Plant Systems & Services
1983 JP
TECHNOLOGY | J APAN
Ryo Tazaki +81 3 5255 1743 ryo.tazaki @nomura.com

Rec or d-hi gh pr of i t s l ook set t o
r i se even f ur t her
Nuclear power plants account for 35% of sales
Toshiba Plant Systems & Services has two main segments: power
generation systems (nuclear and thermal power) and infrastructure
and industrial systems. Sales to nuclear power plant operators
accounted for 35% of the total in 10/3.
Price target of 1,560
We forecast average annual operating profit growth of 10% over the
medium term as the company continues to post record profits, driven
mainly by contracts with nuclear power facilities. Reflecting its status
as a nuclear power-related stock, we apply a P/E of 18x, the target
P/E for the NOMURA 400 (excluding financials), to our 11/3 EPS
estimate to calculate our price target for the stock. Based on a P/E of
18x our 11/3 estimate, our price target comes to 1,560.
We forecast 9% operating profit growth in 11/3
We expect operating profit growth of 9% y-y in 11/3. We look for
healthy sales at the new power generation system segment (formed
by combining the power system and nuclear power system segments
and transferring the substation business to the infrastructure and
industrial system segment) because Japanese electric power
companies plan to increase capex by 12%. We also anticipate a
contribution from sales to overseas thermal power plants. Among
overseas projects, we look for an increase in thermal power plant-
related sales, centering on Southeast Asia, where work is progressing
on electric power infrastructure projects.

(bn) 10/3 11/3F 12/3F 13/3F
Revenue 155.1 167.0 178.0 188.0
Reported net profit 7.8 8.3 9.2 10.2
Normal ised net profit 7.8 8.3 9.2 10.2
Normal ised EPS () 80.5 85.2 94.4 104.7
Norm. EPS growth (%) 7.5 5.8 10.8 10.9
Norm. P/E (x) 14..3 13.5 12.2 11.0
EV/EBITDA (x) 5.7 5.3 4.6 4.0
Pri ce/book (x) 1.4 1.3 1.2 1.1
Di vidend yi el d (%) 1.3 1.3 1.3 1.3
ROE (%) 10.1 10.0 10.0 10.2
Net debt/equi ty (%) (0.4) (0.4) (0.4) (0.4)
Previ ous norm. net profi t 8.3 9.2 10.2
Share price relative to MSCI Japan
1m 3m 6m
(6.6) 11.4 4.8
(5.8) 9.7 1.1
1.0 19.3 7.2
52-week range ()
Stock borrowabi lity Hard
1,312/992
Toshi ba 59.6
Absolute ()
Absolute (US$)
Rel ati ve to Index
960
1,010
1,060
1,110
1,160
1,210
1,260
1,310
1,360
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90
95
100
105
110
115
120
125
130
Price
Rel MSCI Japan
Closing price on 23 Jun 1,175
Price target 1,560
Upside/downside 33%
Difference from consensus na
FY11F net profit (bn) 8.3
Source: Nomura
We have a slightly more bullish
outlook than the consensus because
we expect growth in power company
capex and maintenance work on
aging domestic plants.
Maintained
BUY
NOMURA S E CURI T I ES CO L T D
Ac t i on
We expect profits to keep reaching new highs from 11/3 on growth for operations
focusing on nuclear power plants in Japan and thermal plants overseas. Nuclear
plants account for 35% of sales, and we expect nuclear demand to grow. We thus
see the company as a nuclear power-related player to watch in the medium term.
Cat al y s t s
The company tends to issue conservative guidance and is likely to surpass its 11/3
forecasts, especially in nuclear plant-related business. We see growth in orders
related to new nuclear plants in China as a key medium-term share price catalyst.

Anc hor t hemes

Japan's power plants are aging and we expect this to drive increased demand for
maintenance. With regard to nuclear power plants, we anticipate stronger demand
for maintenance and other work to increase earthquake resistance and upgrade
aging facilities. We also expect power company capex to bottom and shift upward.

Toshiba Plant Systems & Services Ryo Tazaki
Orders look set to grow in 11/3
On the order front, we estimate a 5% y-y increase in 11/3. Orders are recovering at the
infrastructure and industrial system segment and at the power generation system
segment for overseas thermal power plant projects.
We expect big rise in infrastructure and industrial system sales
We think that sales growth will reach 26% at the infrastructure and industrial system
segment (or 18% adjusted to exclude the impact of transferring the substation
business to this segment). As well as a recovery in Japanese capex, we look for a
contribution from work to boost NAND flash memory production capacity at Toshiba
and mega-solar power generation facility work for electric power companies.
Continued strong sales to nuclear power plant operators
Sales related to nuclear power facilities should remain high on demand for earthquake
reinforcement work and measures to upgrade aging facilities. The company is due to
post sales from 11/3 on work at the new Oma nuclear power plant, which is due to
start operations in November 2014.
Scheduled inspection work on Kashiwazaki-Kariwa restart
At the Kashiwazaki-Kariwa nuclear power plant, only the No. 6 and No. 7 reactors
remain closed as a result of the Niigata-Chuetsu earthquake. We expect Toshiba Plant
Systems & Services to post sales on scheduled inspection work on reactors Nos 15
as they resume operations. The company's medium-term business plan calls for
ongoing orders of over 200bn from 12/3 for nuclear power-related and overseas
thermal power plant projects.
Risks to price target. Risks include changes in electric power companies capex and
maintenance spending in areas such as nuclear power, which could affect the power
generation systems segment, and trends in capex at companies such as Toshiba,
which could affect the infrastructure and industrial system segment.


Toshiba Plant Systems & Services [1983]: consolidated financial data
(mn, except where noted)
08/3 09/3 10/3 11/3F 12/3F 13/3F
178,518 165,420 155,181 167,000 178,000 188,000
% y-y 8.4 (7.3) (6.2) 7.6 6.6 5.6
61,207 52,536 41,663 - - -
33,047 41,425 54,112 - - -
- - - 92,000 100,000 109,000
84,263 71,458 59,405 75,000 78,000 79,000
% y-y
Power systems 14.7 (14.2) -20.7 - - -
Nuclear power systems (14.2) 25.4 30.6 - - -
- - - - 8.7 9.0
15.7 (15.2) (16.9) 26.3 4.0 1.3
171,354 183,436 170,673 179,000 187,000 193,000
% y-y 4.2 7.1 (7.0) 4.9 4.5 3.2
82,600 99,194 114,125 126,125 135,125 140,125
% y-y (8.1) 20.1 15.1 10.5 7.1 3.7
178,518 165,420 155,181 167,000 178,000 188,000
% y-y 8.4 (7.3) (6.2) 7.6 6.6 5.6
157,673 142,316 132,170 142,300 151,200 159,100
20,845 23,104 23,011 24,700 26,800 28,900
Margin (%) 11.7 14.0 14.8 14.8 15.1 15.4
10,056 10,408 10,109 10,600 11,100 11,600
As % of sales 5.6 6.3 6.5 6.3 6.2 6.2
10,789 12,695 12,902 14,100 15,700 17,300
% y-y 20.8 17.7 1.6 9.3 11.3 10.2
Margin (%) 6.0 7.7 8.3 8.4 8.8 9.2
250 73 520 400 400 400
11,039 12,768 13,422 14,500 16,100 17,700
% y-y 20.4 15.7 5.1 8.0 11.0 9.9
Margin (%) 6.2 7.7 8.6 8.7 9.0 9.4
0 175 106 0 0 0
201 0 197 0 0 0
6,285 7,303 7,840 8,300 9,200 10,200
% y-y 25.1 16.2 7.4 5.9 10.8 10.9
Margin (%) 3.5 4.4 5.1 5.0 5.2 5.4
64.5 74.9 80.5 85.2 94.4 104.7
72.2 82.8 88.0 94.0 103.7 113.4
15.0 15.0 15.0 15.0 15.0 15.0
705.6 762.7 829.0 899.7 979.1 1,068.8
97.5 97.5 97.4 97.4 97.4 97.4
COGS
Gross profits
Net nonoperating income
Recurri ng profi ts
Operati ng profi ts
SG&A expenses
Shares out (mn)
Extraordinary gains
BPS ()
Per-share i ndicators
Sales
Income statement
Sales
Power systems
Nuclear power systems
Infrastructure & industrial systems
Infrastructure & industrial systems
Extraordinary losses
Orders
Order backlog
Power generation systems
DPS ()
Net profi ts
EPS ()
CFPS ()
Power generation systems

Toshiba Plant Systems & Services [1983]: consolidated financial data
08/3 09/3 10/3 11/3F 12/3F 13/3F
136,458 130,871 130,334 138,296 147,884 158,263
Cash & deposits 29,660 23,335 31,227 32,372 35,411 39,836
Accounts receivable 81,521 80,300 76,181 81,983 87,383 92,292
Marketable securities 0 0 0 0 0 0
Inventory assets 19,451 20,816 16,207 17,441 18,590 19,635
Other 5,826 6,420 6,719 6,500 6,500 6,500
19,735 20,217 20,628 20,927 20,827 20,777
Property, plant and equipment 7,045 6,949 6,457 6,777 6,677 6,627
Investments, other assets 12,590 13,177 14,021 14,000 14,000 14,000
Intangible long-term assets 100 91 150 150 150 150
156,192 151,089 150,962 159,223 168,711 179,040
65,148 53,246 44,468 46,560 48,309 49,900
Accounts payable 45,317 31,515 24,680 26,560 28,309 29,900
Short-term interest-bearing debt 0 0 0 0 0 0
Other 19,831 21,731 19,788 20,000 20,000 20,000
22,179 23,461 25,668 25,000 25,000 25,000
Long-term interest-bearing debt 0 0 0 0 0 0
Other 22,179 23,461 25,668 25,000 25,000 25,000
68,865 74,381 80,825 87,663 95,402 104,140
156,192 151,089 150,962 159,223 168,711 179,040
6.8 8.3 8.5 9.1 9.6 9.9
9.4 10.2 10.1 9.9 10.1 10.2
1.1 1.1 1.0 1.0 1.1 1.1
(0.4) (0.3) (0.4) (0.4) (0.4) (0.4)
44.1 49.2 53.5 55.1 56.5 58.2
Net profits 6,285 7,303 7,840 8,300 9,200 10,200
Depreciation 758 768 737 860 900 850
Change in working capital (2,542) (13,946) 1,893 (5,157) (4,799) (4,363)
4,501 (5,875) 10,470 4,003 5,301 6,687
650 728 330 1,180 800 800
3,851 (6,603) 10,140 2,823 4,501 5,887
Balance sheet
Current assets
Long-term assets
Total assets
Current liabilities
Long-term liabilities
Net assets
Total l iabi li ties and net assets
ROA (%)
ROE (%)
Total capital turnover ratio (x/year)
Net D/E ratio (x)
Free cash flow
Owners' equity ratio (%)
Cash fl ow
Operati ng cash flow
Capex


Japan Steel Works 5631 JP
TECHNOLOGY | J APAN

Shi geki Okazaki +81 3 5255 1719 shigeki .okazaki@nomura.com

Par t s f or nuc l ear pl ant s f i r m, but
ot her par t s hur t by w eak eur o
We expect 13% drop in operating profits in 11/3 on rise
in depreciation and fall in margins
For 11/3, we project that depreciation expenses will rise roughly 6bn
y-y, mainly in the steel product segment. We think that margins on oil
refinery pressure vessels, made by the steel product segment, will
remain high owing to the booking of sales on orders received prior to
the global financial crisis in 2008. In contrast, margins are likely to be
slim in the machinery product segment, partly because of the booking
of sales on plastics machinery orders received in 10/3, after the crisis.
In plastics machinery, Japan Steel Works is set to book saIes mainly
for pelletisers in 11/3F, but the companys competitiveness could be
hampered in this segment, where German rival Coperion (unlisted) is
strong, owing to euro weakness versus the yen.
Rise in depreciation should ease in 12/3 but sharp fall in
pressure vessel sales likely to weigh on earnings
We see growth in depreciation easing in 12/3, but look for margins on
oil refinery pressure vessels to contract. Again, euro weakness could
hamper the company's competitiveness in this market vis--vis Italian
rivals such as Nuovo Pignone (unlisted), part of the General Electric
[GE US] group, and ATB Riva Calzoni (unlisted). We think that sales
of parts and materials for nuclear power plants will grow in 12/3, but
forecast only a small y-y increase in companywide operating profits.
However, for 13/3 we forecast operating profits of 37.5bn, which
would exceed the peak of 36.6bn in 09/3, supported by sharp sales
growth for nuclear power plant parts and materials and a roughly 3bn
y-y drop in depreciation.

(mn) 10/3 11/3F 12/3F 13/3F
Revenue 201,680 208,000 217,600 235,200
Normal ised EPS () 47.2 42.0 42.6 57.1
Norm. EPS growth (%) 9.3 (11.0) 1.4 34.0
Norm. P/E (x) 17.9 20.2 19.9 14.8
EV/EBITDA (x) 6.7 5.9 4.9 4.5
Pri ce/book (x) 3.1 2.7 2.5 2.1
Di vidend yi el d (%) 0.1 0.1 0.0 -0.2
ROE (%) 0.1 0.1 - (0.2)
Net debt/equi ty (%) 1.4 1.4 1.4 1.9
Previ ous norm. net profit 15,600 15,800 21,200
1m 3m 6m
(2.3) (21.1) (27.4)
(2.9) (20.9) (26.1)
(2.0) (13.2) (24.6)
52-week range ()
Stock borrowabi lity -
1,286/788
3,492
Absolute ()
Absolute (US$)
Rel ati ve to Index
Market cap (US$mn)
Japan Trustee Services Bank, Ltd 5.28
750
850
950
1,050
1,150
1,250
1,350
J
u
n
0
9
J
u
l
0
9
A
u
g
0
9
S
e
p
0
9
O
c
t
0
9
N
o
v
0
9
D
e
c
0
9
J
a
n
1
0
F
e
b
1
0
M
a
r
1
0
A
p
r
1
0
M
a
y
1
0
60
70
80
90
100
110
Price
Rel MSCI Japan
Price target 900
Source: Nomura
The QUICK consensus operating
profit forecast for 11/3 is 26.5bn,
while our projection is slightly higher
at 28.0bn.
Maintained
NEUTRAL

Ac t i on
Japan Steel Works is competitive in nuclear power plant parts and materials, and
we expect it to benefit from global demand growth in this area. But its oil- and gas-
related parts lack the same competitiveness and euro weakness is a negative. We
expect earnings to languish until 12/3. Now is not the time to invest in our view.
NEUTRAL maintained.
Cat al y s t s
Substantial cost reduction and forming a structure that enables the firm to achieve
high margins even with the euro at its current weak level.

Anc hor t hemes

One investment idea for the sector is to focus on companies that help reduce
greenhouse gas emissions. Japan Steel Works fits because it has around 80% of
the global market for pressure vessels used in nuclear power plants, which have
lower CO
2
emissions than thermal power plants.

Japan Steel Works Shigeki Okazaki
Company's medium-term plan looks achievable
On 21 May, Japan Steel Works announced a new medium-term business plan ending
in 13/3. We think that the plans final-year operating profit target of 37bn looks
achievable. Moves to expand part procurement beyond Europe should have some
impact in countering euro weakness. We note also that demand has been recovering
recently for high-value-added twin screw extruders. We view this as a positive for
Japan Steel Works, this being a segment of the plastics machinery market where
European companies have small market shares.
Firm outlook for nuclear power plant parts
The primary components for nuclear power plants that Japan Steel Works
manufactures include pressure vessels, steam turbines and pressurisers. Its
secondary part line includes steam turbine rotor shafts. In this field, the company has
an 80% share of the global market, supported by its advanced manufacturing
technologies in ingot casting, forging (using a 14,000t press) and heat processing
(temperature control technology, etc). We think that annual sales will rise steadily from
parts for six nuclear power plants in 11/3, to nine in 12/3 and 11 in 13/3, driving
earnings in the medium term.
Valuation
Our price target is 900. We apply to our 12/3 EPS estimate a P/E of roughly 21x,
which is higher than the NOMURA 400 benchmark P/E, but we think this is justified by
the company's competitiveness, as seen in its roughly 80% global market share for
certain parts and materials used in nuclear power plants.
Risks to our price target. Risks include yen appreciation (especially against the euro),
a sharp decline in crude oil prices, economic downturn in emerging markets, and a
major incident at a nuclear power plant.


Japan Steel Works [5631]: consolidated financial data
11/3F 12/3F 13/3F
166,179 227,656 228,804 264,550 240,420 209,843 198,800 214,600 233,200 212,000 255,000 280,000
64,357 105,299 102,700 118,007 120,011 94,342 101,000 110,600 121,000 107,200 118,000 123,000
21,800 27,100 35,800 42,700 59,900 58,500 57,000 62,000 71,000 58,900 68,500 75,000
Nuclear power (est) 9,000 15,000 18,000 34,900 38,500 40,000 46,000 56,000
Thermal power, etc (est) 18,100 20,800 24,700 25,000 20,000 17,000 16,000 15,000
9,200 30,600 19,200 23,500 19,700 2,800 10,000 12,000 12,000 12,000 13,000 11,000
15,200 29,900 27,800 35,000 25,100 20,300 21,000 22,000 23,000 22,500 22,000 23,000
18,157 17,699 19,900 16,807 15,311 12,742 13,000 14,600 15,000 13,800 14,500 14,000
99,363 119,347 124,118 144,461 118,643 113,711 96,000 102,200 110,400 103,000 135,000 155,000
16,800 24,200 26,900 40,300 25,700 26,700 28,000 30,000 32,000 28,000 33,000 36,000
27,200 33,500 30,900 33,800 18,200 15,500 22,000 24,200 25,400 22,000 27,000 32,000
55,363 61,647 66,318 70,361 74,743 71,511 46,000 48,000 53,000 53,000 75,000 87,000
Wind power 6,000 14,200 21,700 27,200 3,000 5,000 10,000 3,000 10,000 15,000
Other (guns, etc) 60,318 56,161 53,043 44,311 43,000 43,000 43,000 50,000 65,000 72,000
2,459 3,010 1,986 2,082 1,766 1,790 1,800 1,800 1,800 1,800 2,000 2,000
117,592 171,895 193,976 237,689 246,209 254,371 245,171 242,171 240,171
39,900 80,833 107,227 132,621 144,805 137,410 130,910 131,910 132,910
71,100 83,900 93,900 94,900 95,900
50,500 28,000 12,000 12,000 12,000
11,100 14,800 14,300 14,300 14,300
12,105 10,710 10,710 10,710 10,710
76,887 89,329 85,994 104,314 100,659 116,206 113,506 109,506 106,506
25,200 29,000 34,000 36,000 38,000
2,000 7,000 7,300 7,300 7,300
73,459 80,206 72,206 66,206 61,206
805 1,733 755 754 745 755 755 755 755
158,274 173,353 207,138 220,851 227,113 201,680 208,000 217,600 235,200 208,000 230,000 260,000
52,339 64,366 76,305 92,613 107,883 101,736 107,500 109,600 120,000 109,000 108,000 120,000
16,200 19,500 25,600 31,200 36,500 45,800 47,000 61,000 70,000 46,800 61,400 70,500
Nuclear power (est) 4,000 7,500 10,000 15,000 27,800 30,000 45,000 55,000
Thermal power, etc (est) 15,500 18,100 21,200 21,500 18,000 17,000 16,000 15,000
6,100 7,200 7,800 14,100 21,900 25,000 26,000 12,000 12,000 26,000 12,000 12,000
14,100 20,700 24,800 31,300 34,900 18,200 21,500 22,000 23,000 21,500 23,000 23,000
15,939 16,966 18,105 16,013 14,583 12,736 13,000 14,600 15,000 14,700 11,600 14,500
102,618 106,906 127,866 126,155 117,462 98,164 98,700 106,200 113,400 97,200 120,000 138,000
16,200 18,000 24,600 30,200 36,900 20,200 23,000 28,000 30,000 23,500 29,000 33,000
24,200 29,600 30,100 34,600 27,200 13,300 21,700 24,200 25,400 20,000 27,000 31,000
62,218 59,306 73,166 61,355 53,362 64,664 54,000 54,000 58,000 53,700 64,000 74,000
Wind power 2,900 4,100 1,800 18,800 11,000 11,000 15,000 11,000 13,000 15,000
Other (guns, etc) 70,266 57,255 51,562 45,864 43,000 43,000 43,000 42,700 51,000 59,000
3,317 2,081 2,967 2,083 1,768 1,780 1,800 1,800 1,800 1,800 2,000 2,000
7,721 12,876 24,678 32,475 36,633 32,185 28,000 28,500 37,500 25,500 26,000 37,000
4,259 7,617 13,971 25,185 31,473 31,640 27,700 26,900 35,100 28,000 24,000 30,500
Nuclear power (est) - - - 3,000 4,500 8,300 8,400 13,500 19,800
Other (est) - - - 22,185 26,973 23,340 19,300 13,400 15,300
7,521 9,791 15,429 13,263 11,435 6,535 6,500 8,000 9,000 4,300 8,500 13,500
1,130 746 868 689 743 733 700 700 700 700 700 700
(5,189) (5,278) (5,590) (6,662) (7,018) (6,723) (6,900) (7,100) (7,300) (7,500) (7,200) (7,700)
4.9 7.4 11.9 14.7 16.1 16.0 13.5 13.1 15.9 12.3 11.3 14.2
8.1 11.8 18.3 27.2 29.2 31.1 25.8 24.5 29.3 25.7 22.2 25.4
7.3 9.2 12.1 10.5 9.7 6.7 6.6 7.5 7.9 4.4 7.1 9.8
34.1 35.8 29.3 33.1 42.0 41.2 38.9 38.9 38.9 38.9 35.0 35.0
20.8 66.8 91.7 31.6 12.8 -12.1 -13.0 1.8 31.6 -20.8 2.0 42.3
1 5 6 9 11 Just over 5 9 11
6 6 9 12 12 9 12 12
Co's
13/3F
Orders by segment
Companywide orders
09/3 05/3 06/3 07/3 10/3 08/3 12/3F
Other
Regional development
Plastics machinery
Molding equipment
Companywide order backlog
Sales by segment
Companywide sales
Orders backlog by segment
Steel products (forging & casting + steel plates
& structures)
Machinery (plastics machinery + other)
Clad steel pipes & plates
Other
& structures)
Operating profits by segment
Companywide operating profits
Other
Plastics machinery
Molding equipment
Ref) Nuclear reactor-equivalent production capacity
Companywide ope profit growth (% y-y)
& structures)
Operating margin (%)
Company wide
Unallocatable expenses
Other
11/3F
& structures)
Nuclear/electric power
Pressure vessels
& structures)
Pressure vessels
Ref) Nuclear reactor-equivalent sales (est) (units/yea
Pressure vessels
Other
Plastics machinery
Molding equipment
Other

Note: (1) We estimate that a 1 rise against the US dollar would reduce 11/3 operating profits by roughly 50mn, and that a 1 rise against the euro would
reduce profits by roughly 20mn. The company is assuming rates of $1/90 and 1/120 for 11/3 (as do we). (2) According to the medium-term plan
announced on 21 May 2010, company guidance for recurring profits is 25.5bn and 36.5bn for 12/3 and 13/3, respectively. Guidance for net profits is
14.5bn (EPS of 39) and 21bn (EPS of 57), respectively. Operating profit guidance for 11/3 is 9.5bn for H1 and 16bn for H2.

Japan Steel Works [5631]: change in operating profits
06/3 07/3 08/3 09/3 10/3 11/3F 12/3F 13/3F
11/3
Co's
12,876 24,678 32,475 36,633 32,185 28,000 28,500 37,500 25,500
Operating profit growth (%) 67 92 32 13 -12 -13 2 32 -21
+5,155 +11,802 +7,797 +4,158 -4,448 -4,185 +500 +9,000 -6,685
+0 +1,300 +1,000 -1,300 -1,600 -200 +0 +0 -200
+3,739 +8,700 +7,500 +4,500 -7,900 +4,800 +5,500 +6,400 +2,700
+4,400 +5,700 +7,600 +4,500 +900 +0 -5,700 +0 -100
-2,600 -3,000 -3,300 -2,400 +4,300 -2,500 +0 +0 -3,000
-384 +100 -179 +54 -10 -33 +0 +0 +0
+0 -998 -4,824 -1,196 -138 -6,252 +700 +2,600 -6,085
Depreciation -4,621 -2,489 -2,600 -6,000 -600 +3,000 -6,000
Other -203 +1,293 +2,462 -252 +1,300 -400 -85
107 115 115 101 95 90 90 90 90
Operating profits
Y-y change
$/ rate
Forex
Volume
Sales prices and cost cuts
Rise in raw materials prices
Profits on regional development
Increase in fixed costs, other

Note: Most of the companys overseas sales are denominated in yen. We estimate that a 1 rise against the US dollar will reduce 11/3 operating profits
by just over 50mn.

Japan Steel Works [5631]: consolidated fi nancial data
05/3 06/3 07/3 08/3 09/3 10/3 11/3F 12/3F 13/3F
158,274 173,353 207,138 220,851 227,113 201,680 208,000 217,600 235,200
7,721 12,876 24,678 32,475 36,633 32,185 28,000 28,500 37,500
6,210 11,770 23,459 30,864 35,949 31,246 28,000 28,500 37,500
3,284 6,586 12,515 17,484 16,034 17,528 15,600 15,800 21,200
3,820 5,520 10,200 16,100 38,700 31,800 34,900 10,500 6,000
4,230 4,100 4,690 9,311 11,800 14,400 20,400 21,000 18,000
371 371 371 371 371 371 371 371 371
8.7 17.6 33.7 47.1 43.2 47.2 42.0 42.6 57.1
20.4 28.8 46.3 72.2 69.1 86.0 97.0 99.1 105.6
154.7 177.2 203.1 228.9 242.1 296.1 329.5 359.9 401.2
3 5 9 12 12 12 12 12 16
34 28 27 26 28 25 29 28 28
184,683 196,656 232,444 262,452 296,908 322,986 341,000 355,800 378,600
116,232 122,100 147,774 168,663 174,258 171,518 175,000 200,300 235,100
23,901 18,572 27,881 36,552 39,957 45,646 45,600 65,600 90,600
573 0 0 0 0 0 0 0 0
42,425 45,754 53,753 52,062 49,497 42,431 43,800 45,800 49,500
44,488 50,583 58,228 66,815 72,586 69,626 71,800 75,100 81,200
4,845 7,191 7,912 13,234 12,218 13,815 13,800 13,800 13,800
68,450 74,556 84,670 93,789 122,650 151,467 166,000 155,500 143,500
52,227 53,103 58,642 61,277 91,327 111,166 125,700 115,200 103,200
1,265 1,444 1,578 623 1,318 1,236 1,200 1,200 1,200
14,958 20,009 24,450 31,889 30,005 39,065 39,100 39,100 39,100
127,222 130,803 156,823 177,221 206,783 211,836 218,700 222,200 229,700
35,824 41,697 49,532 48,732 42,552 36,232 37,400 39,100 42,300
29,952 20,003 13,702 8,323 8,520 24,389 30,100 31,900 36,200
21,027 16,890 8,344 10,239 27,917 28,170 28,200 28,200 28,200
7,000 7,000 7,000 7,000 7,000 0 0 0 0
33,419 45,213 78,245 102,927 120,794 123,045 123,000 123,000 123,000
57,461 65,853 75,621 85,231 90,125 111,149 122,300 133,600 148,900
115,440 109,746 104,667 110,793 133,562 163,708 180,600 193,700 213,300
6.7 11.7 23.6 29.3 27.4 19.7 15.5 14.7 17.6
4.2 6.5 10.6 12.4 12.3 10.0 8.2 8.0 9.9
5.7 10.0 16.5 20.5 17.8 15.8 12.8 11.8 14.2
4.9 7.4 11.9 14.7 16.1 16.0 13.5 13.1 15.9
3.9 6.8 11.3 14.0 15.8 15.5 13.5 13.1 15.9
8.75 7.60 6.06 6.02 7.06 9.74 10.42 10.68 10.88
14.00 13.61 13.47 14.26 15.69 19.22 19.67 19.62 19.32
1.9 1.3 1.6 2.0 2.1 2.7 2.6 3.6 4.6
3.2 3.2 3.1 2.8 2.6 2.5 2.5 2.5 2.5
3.4 3.5 3.4 3.6 3.8 4.1 4.1 4.1 4.1
2.7 2.9 2.9 2.6 2.2 2.2 2.2 2.2 2.2
3.9 3.8 3.6 3.8 4.2 4.5 4.5 4.5 4.5
57,979 43,893 29,046 25,562 43,437 52,559 58,300 60,100 64,400
1.01 0.67 0.38 0.30 0.48 0.47 0.48 0.45 0.43
31.1 33.5 32.5 32.5 30.4 34.4 35.9 37.5 39.3
33,505 25,321 1,165 (10,990) 3,480 6,913 12,700 (5,500) (26,200)
0.58 0.38 0.02 (0.13) 0.04 0.06 0.10 (0.04) (0.18)
7,921 5,854 35,630 42,040 26,319 45,668 33,625 33,200 32,600
13,611 (6,534) (9,679) (24,765) (33,148) (37,287) (34,900) (10,500) (6,000)
21,532 (680) 25,951 17,275 (6,829) 8,381 (1,275) 22,700 26,600
Income statement
Capex
Depreciation
Shares out (mn)
Sales
Operating profits
Recurring profits
Net profits
EPS ()
CFPS ()
BPS ()
Liabilities
Investments, other assets
Accounts payable
Short-term debt
Long-term debt
Other
Cash & deposits
Payout ratio (%)
Marketable securities
Accounts receivable
DPS ()
Balance sheet
Total assets
Current assets
Long-term assets
Inventory assets
Other
Recurring margin (%)
Net assets
Invested capital
ROIC (%)
Property, plant & equipment
Intangible long-term assets
Net interest-bearing debt
Turnover periods (months)
Corporate bonds, etc
Investment cash flow
Key indicators
Invested capital
Operating cash flow
Working capital
Cash & equivalents
Accounts receivable
Free cash flow
ROA (%)
Inventory assets
Accounts payable
Total assets
ROE (%)
Net D/E ratio (x)
Interest-bearing debt
D/E ratio (x)


NPC Incorporated 6255 JP
TECHNOLOGY | J APAN

Tet suya Wadaki +81 3 5255 1797 tetsuya.wadaki @nomura.com

At t he f or ef r ont of st r at egi c
i ni t i at i ves w i t hi n t he i ndust r y
Production equipment market is in recovery phase
The solar cell market is over the worst, and prices have begun to
recover after falling consistently after the Lehman Brothers collapse.
Orders in 10/8 Q2 were back above the levels seen in 08/8 Q4,
thanks to a sharp recovery in module production equipment inquiries
and a rise in NPC's market share. Although the company has said that
Q2 orders were excessively high and projects orders of around 4-
5bn in Q3, it still expects orders to be close to where they were prior
to the fall of Lehman Brothers.
Introduction of new production systems
NPC is currently the price leader in the industry, but it nevertheless is
introducing new production systems rather than resting on its laurels.
To be more precise, it will be shifting to batch production from built-to-
order production and increasing the proportion of in-house production.
This will increase inventory risk, but should also help bring down lead
times and manufacturing costs. Although the introduction of new
systems will increase fixed costs, we think that it will also lower
variable costs, which means the company should see an improvement
in margins if it can secure a certain level of sales. We expect it to
reduce lead times by modularising equipment and increasing the
proportion of in-house production. It is seeking to halve lead times for
equipment that previously required four to six months to manufacture
and to achieve cost savings of 15%. It also appears that the new
systems incorporate the company's expertise in areas such as market
and order forecasting in order to reduce inventory risk. We think that
this will help differentiate it from competitors. With the booking of
large-scale orders and increase in technical strength and introduction
of new production systems that go with that, the company is now
forecasting a return to a recurring margin in excess of 15% in 11/8 Q3.

(mn) 09/8 10/8F 11/8F 12/8F
Revenue 14,164 17,000 18,700 20,500
Reported net profit 1,575 808 1,627 2,071
Normal ised net profit 1,575 808 1,627 2,071
Normal ised EPS () 89.9 46.1 92.8 118.2
Norm. EPS growth (%) - - - -
Norm. P/E (x) - 32.9 16.3 12.8
EV/EBITDA (x) - 16.3 8.1 6.5
Pri ce/book (x) - 3.2 2.7 2.3
Di vidend yi el d (%) 0.0 0.0 0.0 0.0
ROE (%) 21.0 9.8 16.7 13.1
Net debt/equi ty (%) 0.0 0.0 0.0 0.0
Previ ous norm. net profi t 808 1,627 2,071
1m 3m 6m
(9.4) (26.0) (29.4)
(8.7) (27.1) (31.9)
(3.2) (18.8) (27.1)
52-week range ()
Chi kaki Yoshiro 13.0
2,635/1,430
Ito Masafumi 10.4
Absolute ()
Absolute (US$)
Rel ati ve to Index
Market cap (US$mn) 314.7
1,300
1,500
1,700
1,900
2,100
2,300
2,500
2,700
2,900
J
u
n
0
9
J
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0
9
A
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0
9
S
e
p
0
9
O
c
t
0
9
N
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0
9
D
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0
9
J
a
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1
0
F
e
b
1
0
M
a
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1
0
A
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1
0
M
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1
0
50
60
70
80
90
100
110
Price
Rel MSCI Japan
10/8F net profit (mn) 808
Source: Nomura

Ac t i on
The solar cell production equipment market is in a recovery phase. NPC is likely to
see higher sales but lower profits in 10/8 owing to weak orders last year, price
competition and a recent large strategic order. But we view strategic orders as
investments for future growth that should help boost the firms competitiveness.
Cat al y s t s
New large-scale projects and production systems should improve cost
competitiveness, cut manufacturing times, and improve technologies, boosting its
already strong market share.

Anc hor t hemes

The solar cell market has been expanding rapidly since last year, led by Japan and
Europe. Cuts in German subsidies are a negative, but we expect growth in China,
Japan and the US. We think pricing, lead times and reliability will be the main
differentiators for production equipment makers.

NOT
RATED

NPC Incorporated Tetsuya Wadaki
Differentiation and survival strategies
Margins have been dented in 10/8 by NPC taking on several low-margin orders
involving substantial development work. Although the company has not disclosed any
details of the orders in question, the products themselves automate the transportation
of solar cells between module equipment. We expect the company's market share to
rise further thanks to improvements in product competitiveness and the ability to sell
packages of module equipment currently sold individually. We have identified the
emergence of Chinese competitors as the main medium-term risk for NPC and we like
the way that these automated systems have raised the barriers to entry for emerging
economy companies. NPC has stated its wish to be at the forefront of initiatives within
the industry, with the main aim of cost savings and capex efficiency gains being to
reduce costs for solar power systems and achieve grid parity more rapidly, rather than
simply boosting its own profit margins. We think that its focus on services and its
clients should help NPC to gain their trust and ensure it continues to garner large
market share.


NPC [6255]: consoli dated fi nancial data
Co' s 10/8F
4,189 6,554 9,373 14,164 17,029 17,000 18,700 20,500
% y-y 56.5 43.0 51.1 20.2 20.0 10.0 9.6
3,578 5,958 8,837 13,676 16,600 18,300 20,100
% y-y 66.5 48.3 54.8 21.4 10.2 9.8
611 596 536 487 400 400 400
% y-y -2.5 -10.1 -9.1 -17.9 0.0 0.0
1,462 1,921 2,936 4,644 3,678 5,240 5,953
Margin (%) 34.9 29.3 31.3 32.8 21.6 28.0 29.0
816 1,097 1,550 2,017 2,420 2,563 2,632
645 824 1,386 2,626 1,205 1,258 2,677 3,321
% y-y 27.8 68.2 89.5 -54.1 -52.1 112.8 24.1
838 1,213 1,907 3,343 2,058 3,477 4,121
% y-y 44.7 57.2 75.3 -38.4 68.9 18.5
(30) (78) (5) 19 0 0 0
% y-y
(163) (310) (515) (735) (800) (800) (800)
17 19 80 51 100 100 100
1 2 13 19 19 19 19
69 52 35 54 50 50 50
10 1 0 0 0 0 0
593 791 1,431 2,623 1,253 1,308 2,727 3,371
% y-y 33.4 80.9 83.3 -52.2 -50.1 108.5 23.6
0 11 0 0 0 0 0
0 0 0 0 0 0 0
593 802 1,431 2,623 1,308 2,727 3,371
246 319 627 1,145 500 1,100 1,300
(3) 15 (30) (97) 0 0 0
0 0 0 0
351 467 834 1,575 849 808 1,627 2,071
% y-y 33.0 78.6 88.8 -46.1 -48.7 101.4 27.3
3 72 110 165 270 320 370
332 364 1,895 1,084 1,000 2,000 2,000
17 33 93 166 200 300 400
55,100.7 133.5 50.5 89.9 46.6 46.1 92.8 118.2
106,977.6 494.2 339.1 425.8 470.3 557.2 667.3
53,844.0 127.9 52.9 99.3 57.5 110.0 141.0
1,750.0 6.0 2.0 5.0 3.0 6.0 8.0
0.007 3.910 17.525 17.525 17.525 17.525 17.525
11/8F 12/8F 06/8 07/8 08/8 09/8
CFPS ()
DPS ()
Shares out (FY-end, mn)
Depreciation
Pre-share i ndi cators
EPS ()
BPS ()
Minority interests
Net profi ts
R&D expenses
Capex
Pretax profits
Corporation tax, etc
Adjusted corporation tax
Nonoperating expenses
Interest paid & discounts
Recurring profits
Extraordinary gains
Vacuum packaging machines
Eliminations/companywide
Nonoperating income
Interest & dividends received
Gross profits
SG&A expenses
Operating profits
Photovoltaic manufacturing equipmen
Income statement
Sales
Photovoltaic manufacturing equipmen
Vacuum packaging machines

NPC [6255]: consoli dated fi nancial data (continued)
(mn)
06/8 07/8 08/8 09/8 10/8F 11/8F 12/8F
Balance sheet
1,091 1,711 5,033 5,376 9,990 9,512 9,543
644 476 1,349 1,271 1,500 1,700 1,900
1,595 1,568 4,371 3,921 4,700 5,200 5,700
(18) (2) (5) (21) 0 0 0
197 204 586 659 700 700 700
3,509 3,957 11,334 11,206 16,890 17,112 17,843
591 860 2,577 3,452 4,252 5,952 7,552
5 60 86 123 100 100 100
125 141 194 218 200 200 200
721 1,061 2,857 3,793 4,552 6,252 7,852
4,231 5,018 14,191 14,999 21,442 23,364 25,695
Accounts payable 1,241 1,872 4,203 3,471 4,200 4,600 5,000
Short-term borrowings 75 0 0 0 5,000 5,000 5,000
Bonds maturing within one year 40
Other current liabilities 2,029 1,209 4,045 4,000 4,000 4,000 4,000
3,385 3,081 8,248 7,524 13,200 13,600 14,000
Long-term borrowings 0 0 0 0 0 0
Bonds 100 0 0 0 0 0 0
Other long-term liabilities 14 1 1 13 0 0 0
114 1 1 13 0 0 0
3,500 3,083 8,249 7,537 13,200 13,600 14,000
Legal capital 180 550 2,158 2,158 2,158 2,158 2,158
Capital surplus 103 473 2,080 2,080 2,080 2,080 2,080
Profit reserve 441 897 1,708 3,249 4,004 5,526 7,457
725 1,921 5,947 7,487 8,242 9,764 11,695
(2) 10 4 (25) 0 0 0
5 13 (5) (25) 0 0 0
731 1,935 5,942 7,462 8,242 9,764 11,695
4,231 5,018 14,191 14,999 21,442 23,364 25,695
Cash flow
530 554 2,039 1,585 729 1,627 2,171
593 802 834 1,575 808 1,627 2,071
17 33 93 166 200 300 400
(137) 173 (880) 58 (229) (200) (200)
(694) 28 (2,803) 439 (779) (500) (500)
368 619 2,333 (727) 729 400 400
383 (1,101) 2,462 74 0 0 0
(315) (782) (1,481) (4,146) (3,949) (4,967) (4,967)
(17) (319) 402 (2,967) (2,967) (2,967) (2,967)
0 0 0 0 0 0 0
(279) (408) (1,811) (1,150) (1,000) (2,000) (2,000)
0 0 0 0 0 0 0
16 (1) 12 0 18 0 0
(35) (54) (84) (29) 0 0 0
(461) 513 3,164 (35) 4,947 (105) (140)
74 (75) 0 0 5,000 0 0
(588) (140) 0 0 0 0 0
57 740 3,180 0 0 0 0
0 0 0 0 0 0 0
(5) (11) (23) (34) (53) (105) (140)
1 (1) 7 (1) 0 0 0
5 15 0 (27) 0 0 0
(240) 301 3,723 (2,622) 1,727 (3,445) (2,936)
1,095 854 1,155 4,879 2,256 3,983 538
854 1,155 4,879 2,256 3,983 538 (2,398)
Share buybacks
Dividends paid
Other
Other
Change in short-term borrowings
Change in bonds and long-term borrowings
Change owing to issuance of shares
Change in marketable securities
L-T assets (PPE/intangible) acquisition
L-T assets (PPE/intangible) sale
Change in investment securities & long-term loa
Forex adjustments
Accumulated other comprehensive income
Pretax profits
Net assets
Total l iabi li ti es and net assets
Other current assets
Property, plant and equipment
Total investments, other assets
Cash & deposits
Accounts receivable
Inventory assets
Bad-debt reserves
Change in cash & equivalents
Cash & equivalents at FY-start
Cash & equival ents at FY-end
Current assets
Long-term assets
Total assets
Total liabilities
Operating cash fl ow
Investment cash fl ow
Financi al cash flow
Current liabilities
Forei gn currency translati on difference in cash & equivalents
Depreciation
Change in accounts receivable
Change in inventory assets
Change in accounts payable
Other
Change in time deposits
Shareholders' equity


Hitachi 6501 JP
TECHNOLOGY | J APAN

Masaya Yamasaki +81 3 5255 0571 masaya.yamasaki@nomura.com

I nc r easi ng pow er syst em f oc us
on envi r onment -f r i endl y f i el ds
Hitachi targets 16/3 power system sales of 1.2tn and
operating margin of 6%
Hitachi targets power system sales of 900bn in 13/3 and 1.2tn in
16/3, versus 882.1bn in 10/3, and an operating margin of 5% in 13/3
and 6% in 16/3, versus 2.5% in 10/3. The sales figures are effectively
a downward revision from its previous 12/3 target of 1tn, but we
consider the adjustment an appropriate response to recent changes in
the business environment. We anticipate firm short-term earnings
based on the order backlog for overseas thermal power projects and
domestic nuclear power projects. Orders appear to have slowed
owing to financial market turmoil, and we need to focus on order
acquisition going forward. Nevertheless, we anticipate the adoption of
clean coal technology, promotion of nuclear power and continued
growth in wind power, solar power and other renewable energy
sources as part of efforts to create a low-carbon society over the
medium to long term.
Greater priority on emerging markets and environment-
friendly businesses
Power system sales totaled 882.1bn in 10/3, with the thermal power
business accounting for 57%, the nuclear power business 24% and
other businesses 19%. The segment incurred losses through 08/3 as
a result of unprofitable orders and poor project management, but has
been profitable since 09/3 due to subsequent efforts to emphasise
profitability in orders and strengthen project management, with the
operating margin rising to ~2.5% in 10/3. The company plans to place
greater priority on emerging markets with strong growth prospects and
on businesses that contribute significantly to the environment. As
noted, it targets 16/3 sales of 1.2tn and an operating margin of 6%.
We expect profitability to gradually improve. Although this segment is
(bn) 10/3 11/3F 12/3F 13/3F
Revenue 8,969 9,300 9,600 9,900
Reported net profit (107) 140 180 210
Normal ised net profit (107) 140 180 210
Normal ised EPS () (29.2) 31.3 40.2 46.9
Norm. EPS growth (%) - - 0.3 0.2
Norm. P/E (x) - 11.2 8.7 7.5
EV/EBITDA (x) 6.7 5.5 4.9 4.4
Pri ce/book (x) 1.2 1.1 1.0 0.9
Di vidend yi el d (%) 0.0 2.3 2.8 2.8
ROE (%) (9.2) 10.3 11.8 12.4
Net debt/equi ty (%) 1.8 1.6 1.3 1.1
Previ ous norm. net profi t 140 180 210
1m 3m 6m
(13.4) 7.1 47.3
(12.7) 5.5 42.0
(7.1) 13.8 46.8
52-week range ()
Mi tsubi shi UFJ Trust and 5.0
Master Trust Bank of Japan 4.2
418.0/231.0
17,182
Absolute ()
Absolute (US$)
Rel ati ve to Index
Market cap (US$mn)
210
260
310
360
410
460
J
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0
9
J
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0
9
A
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0
9
S
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0
9
O
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0
9
N
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0
9
D
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0
9
J
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1
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F
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1
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M
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1
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A
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1
0
M
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1
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70
80
90
100
110
120
130
140
Price
Rel MSCI Japan
Price target 500
FY11F net profit (bn) 140
Source: Nomura
Our 12/3 EPS forecast of 40.2 is
above the QUICK consensus
forecast of 37.7.
Maintained
BUY

Ac t i on
Hitachi is restructuring problem businesses while focusing on its social innovation
business. Power system business (ie, thermal and nuclear power; new energy
fields) is focusing on emerging markets and environment-friendly regions. A swift
move to shareholder return-based management should see ongoing margin
improvement. BUY reiterated.
Cat al y s t s
We think the share price has been hurt excessively by concerns that the weak euro
and UK fiscal retrenchment will impact Hitachis prospects for winning railway
projects. Margins looks set to improve sharply on the increased focus on the social
innovation business and restructuring and we expect the share price to reflect this.

Anc hor t hemes

The power system business has strong growth potential in a range of fields. Coal-
fired thermal power is not seen as environment friendly, but remains a key source
of electric power and we expect companies to upgrade to more efficient technology.

Hitachi Masaya Yamasaki
affected by forex risk, we do not anticipate a major impact due to the long-term nature
of its operations and progress in localisation, assuming appropriate forex rates.
Thermal power business: expand environmental and gas turbine
businesses
The company seeks to expand its thermal power sales from 500bn in 10/3 to 650bn
in 16/3. Coal-fired thermal power seems to have poor growth prospects compared with
nuclear power and renewable energy sources, including solar and wind power, but we
actually anticipate growth for coal-fired thermal as a core power source. In particular,
for highly efficient coal-fired thermal power, the latest commercial systems have a
thermal efficiency of 45%, versus the global average for systems in operation of 35%.
The company targets 50% or higher in the development of next-generation systems
and when this is combined with CO
2
recovery technologies, we expect demand to
grow. Hitachi operates globally based on the three pillars of Japan, Hitachi Power
Europe (accounts for over 40% of sales), and Hitachi Power Systems America.
Nuclear power business: bolster overseas sales outside US
Hitachi aims to expand its nuclear power sales from 210bn in 10/3 to 380bn in 21/3.
It is steadily acquiring new business in Japan and participating in the construction of all
advanced boiling water reactors. Hitachi-GE Nuclear Energy is responsible for
acquiring orders overseas, but we think that its performance has lagged behind those
of other companies. We believe that this reflects the development of a sales structure
that focuses on the US in anticipation of market growth driven by the US. As
expectations for demand growth in other regions have increased, the company has
expanded its joint sales facilities with GE (GE US) and started to actively seek orders.
Hitachi targets orders for at least 38 new plants by 2030. This target seems somewhat
high and it breaks down into at least 10 plants in North America, at least 10 plants in
Asia and the Middle East, five plants in Europe, and under 10 plants in Japan. We
think that the company needs to step up efforts in the area of fuels and in the
acquisition of equipment orders.
Renewable energy business: expand as system integrator
The company is targeting expansion of its renewable energy sales from 60bn in 10/3
to 200bn in 16/3. It plans to be active as a system integrator for wind and solar power
generation and has already received a complete order for a large solar power plant for
an electric power company. Hitachi is also aggressively pursuing smart grid-related
operations, including control systems, storage batteries and other technologies for
limiting power fluctuations of natural energy sources, high-efficiency and high-
performance power conditioners, and micro grid control technologies.
Valuation
We look for a recovery in EPS owing to a shift to focusing on profitability at the net
level, and we apply a P/E of 15x, which we consider appropriate for the industrial
electronics sector, to our adjusted 12/3 EPS estimate. Our price target is 500.
Risks to price target
Risks include execution risk on social infrastructure and other projects, and further yen
appreciation.


Hitachi[6501]: consol idated fi nancial data
(bn, except where noted)
08/3 09/3 10/3 11/3F 12/3F 13/3F
11,227 10,000 8,969 9,300 9,600 9,900
% y-y 9.6 -10.9 -10.3 3.7 3.2 3.1
Info. & Telecommunication Systems 1,945 1,706 1,740 1,770 1,800
Power Systems 862 882 885 890 900
Social Infrastructure & Industrial Systems 1,334 1,250 1,115 1,150 1,200
Electronic Systems & Equipment 984 999 1,100 1,110 1,090
Construction Machinery 725 584 730 750 770
High functional materials & components 1,561 1,249 1,420 1,500 1,600
Automotive Systems 682 639 680 700 720
Components & Devices 978 755 870 950 1,000
Digital media & consumer products 1,104 929 920 900 900
Financial services 401 420 360 380 400
Others 831 764 780 800 820
Elimination (1,407) (1,207) (1,300) (1,300) (1,300)
% y-y
Info. & Telecommunication Systems -12.3 2.0 1.7 1.7
Power Systems 2.3 0.3 0.6 1.1
Social Infrastructure & Industrial Systems -6.3 -10.8 3.1 4.3
Electronic Systems & Equipment 1.5 10.2 0.9 -1.8
Construction Machinery -19.5 25.1 2.7 2.7
High functional materials & components -20.0 13.7 5.6 6.7
Automotive Systems -6.3 6.4 2.9 2.9
Components & Devices -22.8 15.2 9.2 5.3
Digital media & consumer products -15.8 -1.0 -2.2 0.0
Financial services 4.6 -14.2 5.6 5.3
Others -8.1 2.1 2.6 2.5
11,227 10,000 8,969 9,300 9,600 9,900
% y-y 9.6 -10.9 -10.3 3.7 3.2 3.1
8,778 7,816 6,849 6,985 7,185 7,386
2,449 2,184 2,119 2,315 2,415 2,514
Margin (%) 21.8 21.8 23.6 24.9 25.2 25.4
2,104 2,057 1,917 1,955 1,995 2,034
As % of sales 18.7 20.6 21.4 21.0 20.8 20.6
346 127 202 360 420 480
% y-y 89.3 -63.2 59.0 78.1 16.7 14.3
Margin (%) 3.1 1.3 2.3 3.9 4.4 4.8
(21) (417) (139) (25) (20) (20)
325 (290) 64 335 400 460
% y-y 60.5 - - 5.3x 19.4 15.0
Margin (%) 2.9 -2.9 0.7 3.6 4.2 4.6
(58) (787) (107) 140 180 210
% y-y - - - - 28.6 16.7
Margin (%) -0.5 -7.9 -1.2 1.5 1.9 2.1
-17.5 -236.9 -29.2 31.3 40.2 46.9
145.4 -92.8 91.4 122.9 134.1 143.0
6.0 3.0 0.0 8.0 10.0 10.0
652.9 315.9 287.1 321.9 357.7 400.2
3,325 3,324 3,663 4,474 4,474 4,474
COGS
Gross profits
Net profi ts before tax
Operating profits
SG&A expenses
Shares out (mn)
Extraordinary gains
BPS ()
Sales
Income statement
Sales
DPS ()
Net profi ts
EPS ()
CFPS ()
Per-share i ndi cators
Note: segmentation has been changed since 09.3

Hitachi[6501]: consol idated fi nancial data
08/3 09/3 10/3 11/3F 12/3F 13/3F
5,402 5,065 4,775 4,892 4,973 5,085
Cash & deposits 561 808 578 559 543 559
Marketable securities 61 9 9 9 9 9
Inventory assets 1,441 1,456 1,222 1,267 1,282 1,296
Other 809 659 724 732 739 746
Property, plant and equipment 2,654 2,394 2,220 2,175 2,155 2,135
Investments, other assets 1,043 693 713 713 713 713
Other 1,611 1,700 1,507 1,462 1,442 1,422
10,531 9,404 8,952 9,036 9,110 9,214
4,753 4,622 3,931 3,928 3,939 3,950
Short-term interest-bearing debt 1,110 1,530 755 705 655 605
Other 1,975 1,913 1,921 1,921 1,940 1,959
2,465 2,602 2,753 2,685 2,587 2,490
Long-term interest-bearing debt 1,422 1,290 1,612 1,562 1,482 1,402
Other 1,043 1,313 1,141 1,123 1,105 1,088
3,313 2,179 2,268 2,423 2,583 2,774
10,531 9,404 8,952 9,036 9,110 9,214
3.6 1.6 2.4 4.4 5.0 5.6
-2.5 -48.9 -9.2 10.3 11.8 12.4
1.1 1.1 1.0 1.0 1.1 1.1
0.9 1.9 1.4 1.2 1.0 0.8
20.6 11.2 14.4 15.9 17.6 19.4
Net profits -58 -787 -107 140 180 210
Depreciation 541 479 442 410 420 430
Change in working capital -17 -74 129 -82 -48 -47
466 -383 464 468 552 593
474 422 265 300 330 330
-8 -805 199 168 222 263
Balance sheet
Current assets
Long-term assets
Total assets
Current liabilities
Net assets
ROA (%)
ROE (%)
Net D/E ratio (x)
Free cash flow
Cash flow
Capex


Toshiba Corp 6502 JP
TECHNOLOGY | J APAN

Masaya Yamasaki +81 3 5255 0571 masaya.yamasaki@nomura.com

St r engt heni ng i nt egr at ed nucl ear
power busi ness
C Social infrastructure systems changing from stable to
growth business
Toshibas growth businesses include storage devices, including NAND
flash memory; social infrastructure, mainly nuclear power; and new
businesses, including new rechargeable batteries and new lighting. The
social infrastructure segment includes the power and industrial system
business (including power generation systems and transmission,
distribution, and industrial systems), the social infrastructure system
business, the elevator business, the medical system business and the
IT solutions business. Social infrastructure segment sales fell 3.9% y-y
to 2,302.9bn in 10/3, but operating profits rose 20.3% to 136.3bn,
accounting for 116% of the companywide total. The social infrastructure
segment has a relatively long business cycle and works through an
order backlog. Consequently, earnings tend not to deviate significantly
from company forecasts. We expect sales to grow 10.7% y-y to 2.55tn
and operating profits to expand 10.1% to 150bn in 11/3. Social
infrastructure systems are transforming from a stable business into a
growth business on the expansion of infrastructure investment, and the
company has medium-term targets of 3.11tn in sales and 210bn in
operating profits in 13/3.
C Power and industrial systems account for 57% of social
infrastructure segment
The power and industrial system business, the largest in the social
infrastructure segment, had sales of 1,303.6bn and operating profits of
77.9bn in 10/3. We estimate a sales breakdown at over 800bn for
power generation systems and under 500bn for transmission,
distribution, and industrial systems. We estimate nuclear energy
business sales at over 600bn, and the company targets sales of 1tn
in 16/3.
(bn) 10/3 11/3F 12/3F 13/3F
Revenue 6,382 7,000 7,500 8,000
Reported net profit (19.7) 100 150 200
Normal ised net profit (19.7) 100 150 200
Normal ised EPS () (4.9) 23.6 35.4 47.2
Norm. EPS growth (%) - - 0.5 0.3
Norm. P/E (x) - 20.5 13.7 10.3
EV/EBITDA (x) 8.4 6.2 5.1 4.4
Pri ce/book (x) 2.6 2.3 2.0 1.8
Di vidend yi el d (%) 0.0 1.0 1.2 2.1
ROE (%) (3.2) 11.9 16.0 18.5
Net debt/equi ty (%) 1.7 1.4 1.2 0.9
Previ ous norm. net profi t 100 150 200
1m 3m 6m
(6.9) 6.8 (6.9)
(6.2) 5.2 (10.3)
(0.6) 13.5 (5.4)
52-week range () 564/322.
Japan Trustee Services 8.0
21,703
Absolute ()
Absolute (US$)
Rel ati ve to Index
Market cap (US$mn)
Master Trust Bank of Japan 6.5
290
340
390
440
490
540
590
J
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120
140
160
180
Price
Rel MSCI Japan
Price target 700
11/3F net profit (bn) 100
Source: Nomura
Price target 700
Source: Nomura
Our 12/3F EPS forecast of 35.4 is
higher than the QUICK consensus
forecast of 33.0.
Maintained
BUY

O Ac t i on
Toshiba is emphasising ROI more. Having acquired Westinghouse and positioning
nuclear power as a growth business, it plans to cultivate the BWR and PWR
markets. It is strengthening its integrated nuclear power business with moves into
various fields and displays strong medium- to long-term growth potential. BUY.
Cat al y s t s
Euro weakness hurts PC and TV sales, but profitability is improving in problem
areas due to restructuring. Plans are to spin off mobile phone ops and focus on
globally competitive businesses. Focus will be on new businesses (new lighting
technology; rechargeable batteries) as well as NAND flash and nuclear power ops.

Anc hor t hemes

We see opportunities in nuclear power in North America and China and also expect
growth elsewhere, so attention should focus on projects where the company can
win orders. It aims for stable profits from aggressive expansion of its fuel business.

Toshiba Corp Masaya Yamasaki
C Aiming for rise in nuclear power orders from 14 now (including
unofficial ones) to 39 by 2015
Toshiba and subsidiary Westinghouse Electric have in hand orders for 14 nuclear
power plants, including unofficial orders, and are targeting cumulative orders for 39
plants by 2015. Project financing and profitability have been problems in the US, but
the Obama administration has decided to provide government loan guarantees, which
we believe has alleviated concerns about the order received for a third and fourth unit
at the Vogtle nuclear power plant. The company also plans to start plant construction
in China and Japan. We think that progress with construction plans in the UK, Finland
and Kazakhstan, in addition to the US and China, could increase the companys
chances of winning orders.
C Bolstering integrated structure by expanding fuel and service
businesses
Responding to the increase in nuclear power demand, Toshiba is working to expand
its production capacity as well as its fuel and service businesses. The company has
expanded the Isogo Engineering Center, augmented production facilities at Keihin
Product Operations, and agreed to establish a turbine equipment joint venture with IHI
[7013 JP]. Toshiba is actively working to expand its fuel business, including: the
forming of a UK-based uranium supplier, Advance Uranium Asset Management, to
strengthen its supply chain; acquiring UK-based fuel supplier Springfields Fuel;
concluding a memorandum of understanding with Tenex of Russia to commercialise
enriched uranium products; and concluding a memorandum of understanding with
Kazatomprom to acquire uranium interests and cooperate in the field of rare metals.
C Expanding nuclear energy business in all directions
Toshiba plans to cover the entire range of front-end fuel operations, from uranium
mine development and mining rights acquisition to uranium production, enrichment,
and fabrication. It plans to enter back-end operations as well, including the
reprocessing of spent fuel. We expect these fuel businesses to generate large
earnings and make a stable contribution to earnings.
Targeting solar power generation system sales of 200bn in 16/3
Toshiba is focusing on solar power generation systems as a new business and targets
sales of 200bn in 16/3. Although it does not operate a panel business, Toshiba has
launched a solar power generation system business based on the strength of its power
system construction technologies and power electronics technologies. It has already
received orders for three large plants in Japan, comprising the Taketoyo Mega Solar
Power Plant of Chubu Electric Power [9502 JP], the Ukishima Solar Power Plant
Facility of Tokyo Electric Power [9501 JP], and the Miyako Island Microgrid Verification
Test Facility of Okinawa Electric Power [9511 JP]. Overseas, it has informally received
a licence in Yambol, Bulgaria. Toshiba is also involved in residential solar power
generation systems and had received orders for 10,000 homes as of May 2010. It
plans to aggressively expand this business.
C Valuation
Our price target of 700 is based on fair shareholder value derived from a sum-of-the-
parts valuation of operating profits in each segment in three to five years time. In
addition to Toshiba gaining the lion's share of profits from NAND flash and the long-
term growth potential of the nuclear power business, we see solid prospects for the
startup of new businesses.
Risks to price target
Risks include yen appreciation against the euro (we estimate a 1 change depresses
operating profits by 3.5bn) and a greater-than-expected decline in NAND flash prices.


Toshiba [6502]: consoli dated fi nancial data
08/3 09/3 10/3 11/3F 12/3F 13/3F
7,668 6,655 6,382 7,000 7,500 8,000
% y-y 7.8 (13.2) (4.1) 9.7 7.1 6.7
Digital products 2,951 2,468 2,364 2,610 2,780 2,960
Electronic device 1,739 1,325 1,309 1,410 1,540 1,670
Social infrastructure 2,419 2,396 2,303 2,550 2,770 2,960
Consumer electronics 774 674 580 600 625 650
Others 385 334 316 370 365 370
Elimination (600) (543) (490) (540) (580) (610)
% y-y
Digital products 5.2 (16.4) (4.2) 10.4 6.5 6.5
Electronic device 4.9 (23.8) (1.2) 7.7 9.2 8.4
Social infrastructure 17.0 (0.9) (3.9) 10.7 8.6 6.9
Consumer electronics 3.2 (12.9) (14.0) 3.5 4.2 4.0
Others (1.8) (13.1) (5.5) 17.2 -1.4 1.4
7,668 6,655 6,382 7,000 7,500 8,000
% y-y 7.8 (13.2) -4.1 9.7 7.1 6.7
5,760 5,366 4,922 5,348 5,712 6,085
1,908 1,288 1,459 1,652 1,788 1,915
Margin (%) 24.9 19.4 22.9 23.6 23.8 23.9
1,670 1,539 1,342 1,382 1,438 1,495
As % of sales 21.8 23.1 21.0 19.7 19.2 18.7
238 (250) 117 270 350 420
% y-y (7.8) - - 130.4 29.6 20.0
Margin (%) 3.1 (3.8) 1.8 3.9 4.7 5.3
17 (29) (92) (60) (40) (30)
256 (279) 25 210 310 390
% y-y (14.4) - - 8.4x 47.6 25.8
Margin (%) 3.3 (4.2) 0.4 3.0 4.1 4.9
127 (344) (20) 100 150 200
% y-y (7.3) - - - 50.0 33.3
Margin (%) 1.7 (5.2) (0.3) 1.4 2.0 2.5
39.5 (106.2) (4.9) 23.6 35.4 47.2
157.2 1.9 69.7 89.0 106.2 120.4
12.0 5.0 0.0 5.0 6.0 10.0
315.9 138.3 188.3 206.9 236.3 273.5
3,229.1 3,235.8 4,004.8 4,235.4 4,235.4 4,235.4
DPS ()
Net profi ts
EPS ()
CFPS ()
Per-share i ndicators
Sales
Income statement
Sales
COGS
Gross profits
Operati ng profi ts before tax
Operati ng profi ts
SG&A expenses
Shares out (mn)
Extraordinary gains
BPS ()

Toshiba [6502]: consoli dated fi nancial data
08/3 09/3 10/3 11/3F 12/3F 13/3F
2,929 2,721 2,762 2,889 3,031 3,194
Cash & deposits 249 344 267 263 249 257
Inventory assets 851 758 796 847 907 967
Other 517 535 514 519 524 530
3,006 2,733 2,690 2,744 2,849 2,945
Property, plant and equipment 1,332 1,090 979 1,022 1,122 1,212
Investments 593 535 623 635 642 648
Other 1,081 1,108 1,088 1,087 1,086 1,085
5,936 5,453 5,451 5,634 5,880 6,139
2,986 3,068 2,488 2,625 2,739 2,844
Short-term interest-bearing debt 520 1,034 257 257 257 257
Other 1,241 1,030 1,039 1,060 1,081 1,092
1,557 1,626 1,835 1,802 1,810 1,807
Long-term interest-bearing debt 923 907 1,109 1,069 1,069 1,059
Other 635 719 726 733 740 748
1,392 759 1,128 1,206 1,331 1,489
5,936 5,453 5,451 5,634 5,880 6,139
4.5 (4.2) 2.3 5.0 6.1 7.0
12.5 (76.8) (2.5) 11.4 15.0 17.3
1.3 1.2 1.2 1.2 1.3 1.3
0.9 2.1 1.0 0.9 0.8 0.7
23.5 13.9 20.7 21.4 22.6 24.2
Net profits 127 (344) (20) 100 150 200
Depreciation 380 350 299 277 300 310
Change in working capital (151) 65 43 (11) (57) (57)
357 71 322 366 393 453
619 425 210 320 400 400
(262) (354) 112 46 (7) 53 Free cash flow
Cash fl ow
Capex
ROA (%)
ROE (%)
Net D/E ratio (x)
Current liabilities
Net assets
Total l iabi li ties and net assets
Balance sheet
Current assets
Long-term assets
Total assets


Ulvac Inc 6728 JP
TECHNOLOGY | J APAN

Tet suya Wadaki +81 3 5255 1797 tetsuya.wadaki @nomura.com

Rec over y at ex i st i ng oper at i ons,
bot t omi ng sol ar c el l equi pment
Ulvac secured higher profits than it expected in 10/6 Q3
In 10/6 Q3, sales reached 58.1bn (up 49.4% y-y), operating profits
were 2.2bn (vs a loss of 2.6bn a year earlier), recurring profits hit
2.4bn (vs loss of 3.1bn), and net profits were 2.5bn (vs loss of
1.3bn). Sales and orders were slightly short of company estimates,
reflecting the delay of some FPD production equipment sales and
solar cell production equipment orders to Q4 FY10. However,
operating profits were slightly better than expected thanks to
efficiency gains.
Strong operating climate for core businesses
The market environment has continued to improve. Ulvac is also in
negotiations with manufacturers in Korea and China for production
equipment for LTPS TFTs and OLEDs, seen as likely drivers for
medium-term earnings. In its best-case scenario, management thinks
that these two could be 10bn businesses in two or three years' time.
We also have seen signs of a pick-up in inquiries for the company's
solar cell production equipment, which had been faring poorly. Ulvac
has been fielding inquiries for its well-received production equipment
for tandem thin-film silicon solar cells. Some customers that use its
systems have moved to full-scale production of these solar cells. The
company has even won orders from customers in Europe, where rival
manufacturers are based. We see this as evidence of an improvement
in the competitiveness of Ulvacs products.
Expectations looking ahead to 11/6
Heading toward 11/6, we expect a modest rise in orders and sales of
FPD production equipment, flat orders for solar cell production
equipment or perhaps a slight decline, and a sharp rise in orders and
sales of SPE. It looks as though Ulvac has increased its share of the
(mn) 09/6 10/6F 11/6F 12/6F
Revenue 223,825 246,500 279,000 320,700
Reported net profit 811 3,000 6,100 8,400
Normal ised net profit 811 3,000 6,100 8,400
Normal ised EPS () 18.9 65.2 123.8 170.5
Norm. EPS growth (%) - - - -
Norm. P/E (x) - 29.0 15.3 11.1
EV/EBITDA (x) - 8.9 8.4
Pri ce/book (x) - 0.8 0.9 0.8
Di vidend yi el d (%) 0.0 0.0 0.0 0.0
ROE (%) 1.0 2.9 5.6 7.3
Net debt/equi ty (%) 0.0 0.0 0.0 0.0
1m 3m 6m
(0.9) (17.6) (15.1)
(0.1) (18.8) (18.2)
5.5 (10.5) (13.3)
52-week range ()
Ni ppon Life Insurance 7.3
2,830/1,815
Tai yo Fund Management 7.2
Absolute ()
Absolute (US$)
Rel ati ve to Index
1,700
1,900
2,100
2,300
2,500
2,700
2,900
J
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60
70
80
90
100
110
Price
Rel MSCI Japan
Price target 3,896
10/6F net profit (mn) 3,000
Source: Nomura
Price target 3,896
10/6F net profit (mn) 3,000
Source: Nomura
Earnings remain healthy, backed by
a recovery in semiconductor
production equipment (SPE) and
FPD capex. We maintain our bullish
view of the company.
Maintained
BUY

Ac t i on
Orders have been recovering for mainstay FPD production equipment and SPE. PV
production equipment demand may be in a rut, but we expect a rise in orders for
tandem thin-film, CIGS and crystalline PVs, as well as a resumption of investment
in China. We see signs of Ulvac increasing its share of the SPE market in Korea.
BUY reaffirmed.
Cat al y s t s
We expect strong medium-term growth thanks to equipment for environmentally
friendly products, such as solar cells. If this growth potential is recognised, it should
be valued more highly than SPE, which is in a medium-term contractionary cycle.

Anc hor t hemes

We see signs of an SPE order recovery. With Korean and Japanese makers
stepping up capex, we expect orders to recover without another major bottom. We
expect Taiwanese memory makers to lift capex in H2 2010. Our medium-term
focus is on low-cost production technologies and LED and solar cell equipment.

Ulvac Inc Tetsuya Wadaki
Korean market for semiconductor sputtering equipment, possibly owing to competitors
missteps. We also think that LED production equipment orders could double y-y to
5.0bn in 10/6. Ulvac's earnings recovery has been helped by a pick-up in the
semiconductor and LCD production equipment markets, and we have also seen signs
of recovery and growth in environment-related businesses. That said, recovery
momentum is slower than at other sector companies, likely reflecting the diversity of
Ulvacs businesses and its use of work-in-progress accounting.
Valuation
We expect strong medium-term growth to be driven by production equipment for
environmentally friendly products such as solar cells, and we therefore use a different
P/E ratio than for makers of semiconductor production equipment, the market for which
has entered a medium-term cyclical contraction. For 13/6, when we expect the next
peak in earnings, we estimate EPS of 205.1, to which we apply a peak P/E of 19x,
extrapolated from historical trends. This yields our target price of 3,896.
Risks to our price target
Risks include a failure for silicon thin-film solar cells to regain competitiveness over the
medium term, and weak LCD capex owing to oversupply of flat-panel TVs.


Ulvac [6728]: consol idated financi al data
07/6 08/6 09/6 10/6F 11/6F 12/6F 13/6F
239,151 241,212 223,825 246,500 279,000 320,700 350,200
% y-y 12.6 0.9 -7.2 10.1 13.2 14.9 9.2
206,648 200,461 178,325 200,000 230,000 269,700 297,200
% y-y 14.1 -3.0 -11.0 12.2 15.0 17.3 10.2
120,633 127,174 128,353 142,000 161,000 183,700 210,200
% y-y 9.6 5.4 0.9 10.6 13.4 14.1 14.4
86,832 89,040 72,353 95,000 114,000 129,700 142,700
% y-y -12.3 2.5 -18.7 31.3 20.0 13.8 10.0
2,400 11,400 40,000 47,000 47,000 54,000 67,500
% y-y 475.0 250.9 17.5 0.0 14.9 25.0
38,184 32,043 14,150 24,000 31,000 45,000 45,000
% y-y 36.9 -16.1 -55.8 69.6 29.2 45.2 0.0
27,111 23,041 21,321 20,000 23,000 25,000 25,000
% y-y -1.7 -15.0 -7.5 -6.2 15.0 8.7 0.0
20,720 18,203 14,500 14,000 15,000 16,000 17,000
% y-y 32.4 -12.1 -20.3 -3.4 7.1 6.7 6.3
32,503 40,752 45,500 46,500 49,000 51,000 53,000
% y-y 3.8 25.4 11.7 2.2 5.4 4.1 3.9
192,700 195,092 184,134 202,100 225,400 259,700 282,600
COGS ratio (%) 80.6 80.9 82.3 82.0 80.8 81.0 80.7
46,451 46,120 39,691 44,400 53,600 61,000 67,600
Margin (%) 19.4 19.1 17.7 18.0 19.2 19.0 19.3
29,826 37,040 36,208 36,100 40,000 43,400 47,100
SG&A expense rati o (%) 12.5 15.4 16.2 14.6 14.3 13.5 13.4
16,625 9,081 3,483 8,300 13,600 17,600 20,500
% y-y 12.4 -45.4 -61.6 138.3 63.9 29.4 16.5
Margin (%) 7.0 3.8 1.6 3.4 4.9 5.5 5.9
14,663 8,377 7,138 11,311 16,772 21,507 24,324
% y-y 23.4 -42.9 -14.8 58.5 48.3 28.2 13.1
Margin (%) 7.1 4.2 4.0 5.7 7.3 8.0 8.2
8,182 5,769 8,931 12,941 16,795 18,050 20,895
% y-y 21.1 -29.5 54.8 44.9 29.8 7.5 15.8
Margin (%) 6.8 4.5 7.0 9.1 10.4 9.8 9.9
3,810 3,047 (1,401) (1,310) (550) 2,022 1,933
% y-y 98.1 -20.0 - - - - -4.4
Margin (%) 10.0 9.5 -9.9 -5.5 -1.8 4.5 4.3
1,953 (342) (185) (372) 255 622 122
% y-y -24.5 - - - - 144.3 -80.3
Margin (%) 7.2 -1.5 -0.9 -1.9 1.1 2.5 0.5
718 (98) (208) 52 272 813 1,374
% y-y 16.8 - - - 428.5 198.6 69.0
Margin (%) 3.5 -0.5 -1.4 0.4 1.8 5.1 8.1
1,567 (135) (4,168) (3,524) (3,685) (4,420) (4,337)
% y-y -44.6 - - - - - -
Margin (%) 4.8 -0.3 -9.2 -7.6 -7.5 -8.7 -8.2
396 839 513 513 513 513 513
% y-y 365.9 111.9 -38.9 0.0 0.0 0.0 0.0
Margin (%) 491.5 1,037.3 623.6
(520) (4,006) (2,648) (2,500) (2,700) (2,900) (3,100)
(610) (893) (1,142) (1,500) (1,700) (1,900) (2,100)
90 (3,113) (1,506) (1,000) (1,000) (1,000) (1,000)
16,105 5,075 835 5,800 10,900 14,700 17,400
% y-y 9.0 -68.5 -83.5 594.6 87.9 34.9 18.4
Margin (%) 6.7 2.1 0.4 2.4 3.9 4.6 5.0
(2,478) 1,375 (2,435) (1,000) (1,000) (1,000) (1,000)
402 3,115 214
2,880 1,740 2,649
13,627 6,451 (1,600) 4,800 9,900 13,700 16,400
% y-y -7.6 -52.7 - - 106.3 38.4 19.7
Margin (%) 5.7 2.7 -0.7 1.9 3.5 4.3 4.7
7,307 2,953 1,561 1,800 3,800 5,200 6,200
1,148 0 2,829 0 0 0 0
45.2 45.8 79.3 37.5 38.4 38.0 37.8
133 (112) (1,142) 0 0 100 100
7,335 3,610 811 3,000 6,100 8,400 10,100
% y-y -9.5 -50.8 -77.5 269.9 103.3 37.7 20.2
Margin (%) 3.1 1.5 0.4 1.2 2.2 2.6 2.9
7,980 10,932 12,320 12,200 12,500 12,800 13,100
32,109 23,382 19,567 19,000 19,000 19,000 19,000
171.0 84.2 18.9 65.2 123.8 170.5 205.1
2,105 2,052 1,961 2,277 2,213 2,330 2,470
47 21 21 21 39 54 65
Sal es
Income stat ement
Components
Semi conductor production equipment
Di splay and el ectronic component product
Vacuum-rel ated
By segment
FPD producti on equi pment
of which, Solar cell producti on equi p
Gross profi ts
COGS
Industrial equipment
Vacuum appli cation
Display and electronic component production equip
Semi conductor production equipment
Components
Industrial equipment
Operati ng profi ts
SG&A expenses
By segment
Vacuum equipment
Vacuum appli cation
Adjustment to tax (subtract)
Corporati on tax, etc
Pretax profits
Extraordi nary l osses
Extraordi nary gains
Extraordinary gains/losses
Recurr ing profi ts
Other net nonoperating income
Net i nterest i ncome
Internal el iminations/companywide
Tax rate (%)
DPS ()
Depreci ati on
Capex
EPS ()
BPS ()
Net prof i ts
Mi nority interest
Net nonoperating i ncome

Ulvac [6728]: consol idated financi al data (continued)
(mn)
07/6 08/6 09/6 10/6F 11/6F 12/6F 13/6F
207,876 186,578 199,307 228,731 252,911 280,151 306,649
11,889 17,603 22,985 41,738 41,918 39,158 44,656
87,399 76,193 77,430 85,000 96,000 110,000 120,000
0 0 0 0 0 0 0
96,561 81,728 86,219 95,000 108,000 124,000 135,000
4,723 4,711 5,695
7,558 6,517 7,293 7,293 7,293 7,293 7,293
(253) (175) (315) (300) (300) (300) (300)
109,701 116,491 118,769 125,173 131,673 137,873 143,773
81,822 93,799 96,545 103,345 109,845 116,045 121,945
3,811 3,838 3,828 3,828 3,828 3,828 3,828
24,068 18,854 18,396 18,000 18,000 18,000 18,000
317,577 303,069 318,076 353,904 384,584 418,024 450,422
169,467 150,771 151,753 170,491 196,991 224,691 250,191
Accounts payable 72,099 63,873 38,763 43,000 49,000 56,000 61,000
Short-term interest-bearing debt 43,715 42,588 82,091 97,091 117,091 137,091 157,091
Other current liabilities 53,653 44,310 30,899 30,400 30,900 31,600 32,100
53,745 60,445 76,165 76,449 76,449 76,449 76,449
Long-term interest-bearing debt 40,626 44,115 54,049 54,049 54,049 54,049 54,049
Other long-term liabilities 13,119 16,330 22,116 22,400 22,400 22,400 22,400
223,212 211,216 227,918 246,940 273,440 301,140 326,640
86,111 87,477 87,981 104,824 109,004 114,744 121,642
Legal capital 13,468 13,468 13,468 20,873 20,873 20,873 20,873
Legal capital surplus 14,695 14,695 14,695 22,100 22,100 22,100 22,100
Other retained earnings 57,948 59,313 59,818 61,851 66,031 71,771 78,669
4,208 567 (3,860) (3,860) (3,860) (3,860) (3,860)
0 0 0 0 0 0 0
4,047 3,810 6,036 6,000 6,000 6,000 6,000
94,365 91,854 90,158 106,964 111,144 116,884 123,782
317,577 303,069 318,076 353,904 384,584 418,024 450,422
Balance sheet
Total assets
Other
Reserve for bad loans
Current assets
Long-term assets
Total liabilities
Net assets
Cash & deposits
Accounts receivable
Inventories
Deferred tax assets
New stock rights
Minority interests
Marketable securities
Investments & other assets
Current liabilities
Owners' equity
Accumulated other comprehensive income


Ulvac [6728]: consolidated financial data (continued)
(mn)
07/6 08/6 09/6 10/6F 11/6F 12/6F 13/6F
1,131 32,068 (31,891) 24,812 146 (1,839) 7,158
13,627 6,451 (1,600) 4,800 9,900 13,700 16,400
7,980 10,932 12,320 12,200 12,500 12,800 13,100
982 1,446 1,023 329 0 0 0
Increase in bad-debt reserves 212 (81) 288 15 0 0 0
Increase in retirement benefit reserves 1,084 1,123 1,222 264 0 0 0
Increase in directors' retirement bonus reserves (391) 64 98 9 0 0 0
Increase in warranty reserves 77 340 (585) 41 0 0 0
(2,837) 10,089 2,463 (7,570) (11,000) (14,000) (10,000)
(18,739) 10,607 (16,105) (8,781) (13,000) (16,000) (11,000)
2,687 (8,082) (24,280) 4,237 6,000 7,000 5,000
(2,569) 625 (5,712) 19,597 (4,254) (5,339) (6,342)
Losses on disposal of long-term assets 533 522 1,098
Equity in net income of affiliates 560 (36) (14) 0 0 0 0
Corporation tax paid (8,413) (6,808) (2,399) (1,561) (1,800) (3,800) (5,200)
Interest & dividends received 383 417 259
Interest payable (905) (1,333) (1,406) (1,500) (1,700) (1,900) (2,100)
Other 5,273 7,863 (3,250) 22,658 (754) 361 958
(26,850) (25,944) (14,051) (19,000) (19,000) (19,000) (19,000)
(2,125) (20) 20 0 0 0 0
Income from sale of investment securities 23 462 32
Acquisition of investment securities (2,122) (440) (12)
Spending on loans (253) (289) 0
Income from the recovery of loans 227 247 0
(27,809) (27,241) (14,696) (19,000) (19,000) (19,000) (19,000)
2,965 1,948 2,470
119 (631) (1,845)
23,404 (1,750) 51,325 14,099 19,033 18,079 17,340
7,435 (446) 32,770 15,000 20,000 20,000 20,000
17,614 689 13,061 0 0 0 0
Income from issuing bonds 15,500 0 0
Spending on redemption of bonds 0 0
Net change in CP (4,000) (1,000)
Revenues from long-term borrowings 14,222 17,416 28,140
Spending on repayment of long-term loans (12,108) (12,727) (14,079)
(1,645) (1,993) 5,494 (901) (967) (1,921) (2,660)
Share buybacks 0
Income from issung shares 0
Dividend payments (1,587) (2,016) (901) (901) (967) (1,921) (2,660)
Payments to minority shareholders (58) (46) (26)
Other 0 69 6,421
658 (526) (604)
(1,322) 3,849 4,779 19,911 179 (2,760) 5,499
10,515 11,664 16,977 21,827 41,738 41,918 39,158
2,472 1,464 71
11,664 16,977 21,827 41,738 41,918 39,158 44,656
Cash flow
Operating cash flow
Pretax profits
Depreciation
Increase in bad-debt and other reserves
Change in accounts receivable
Change in inventory assets
Change in accounts payable
Other
Investment cash flow
Change in investment securities, etc
Expenditure on acquiring long-term assets
Income from sale of long-term assets
Other
Financial cash flow
Change in short-term borrowings
Cash & equivalents at FY-start
Change due to change in scope of consolidation
Cash & equivalents at FY-end
Change in bonds and long-term borrowings
Other
Foreign currency translation difference in cash & equivalents
Change in cash & equivalents


Mitsubishi Heavy Industries 7011 JP
TECHNOLOGY | J APAN

Shi geki Okazaki +81 3 5255 1719 shigeki .okazaki@nomura.com

Need t o sec ur e mar gi ns
We expect improved operating profits from 11/3
For 11/3, we forecast a 39% y-y rise in operating profits to 91.0bn,
driven by a rebound in product demand and cost reductions for
economy-sensitive products. Such products include printing machinery
(part of machinery & steel structures in the new segment
classification), general machinery and special vehicles (the GM & SV
segment), which include fork lifts and automotive turbo chargers, and
air conditioning & refrigeration systems (the air-con segment). Our
11/3 operating profit forecast is higher than the companys projection,
reflecting managements more cautious cost reduction, mainly at the
shipbuilding and power system businesses.
Recovery in power system orders is likely, but margins
are below pre-financial crisis levels
We expect orders at the mainstay power system segment to return to
growth in 11/3. The company appears to have started attracting
inquiries for projects that could turn into orders in 11/3, including
desalination plants and gas turbines for emerging economies. US
subsidies for wind power systems are ending in 2010, and we expect
a related rush in demand. That said, demand remains lower than
before the 2008 financial crisis, and with order margins also below
pre-crisis levels because of yen appreciation, we think the segment is
unlikely to contribute to overall profit growth until 12/3. Meanwhile, in
the aerospace segment, yen appreciation is a negative, but we think
that 11/3 losses will be in line with those in 10/3 as one-time
development costs for the Mitsubishi Regional Jet project decline and
the company cuts costs on production of parts for the Boeing 777.
Despite a forecast y-y increase in Mitsubishi Regional Jet
development costs again in 12/3, we look for operating losses at the
segment to narrow next fiscal year on expected improved earnings
from parts for the Boeing 787.

(bn) 10/6 11/3F 12/3F 13/3F
Revenue 2,940.9 2,900.0 3,024.0 3,062.0
Normal ised EPS () 4.20 9.10 13.40 16.40
Norm. EPS growth (%) (41.7) 116.7 47.3 22.4
Norm. P/E (x) 77.1 35.6 24.2 19.8
EV/EBITDA (x) 11.2 9.9 9.1 8.7
Pri ce/book (x) 0.8 0.8 0.8 0.8
Di vidend yi el d (%) 1.2 1.9 1.9 1.9
ROE (%) 1.1 2.3 3.3 3.9
Net debt/equi ty (%) 0.9 0.9 0.9 0.9
Previ ous norm. net profit 14.2 30.6 45.0 55.2
Change from previous (%) - - - -
Previ ous norm. EPS () 4.2 9.1 13.4 16.4
1m 3m 6m
(0.3) (11.5) 0.9
(0.9) (11.2) 2.8
(0.0) (3.6) 4.3
52-week range ()
401.0/274.0
Japan Trustee Services Bank, Ltd 4.5
12,130
Absolute ()
Absolute (US$)
Rel ati ve to Index
Market cap (US$mn)
260
280
300
320
340
360
380
400
420
J
u
n
0
9
J
u
l
0
9
A
u
g
0
9
S
e
p
0
9
O
c
t
0
9
N
o
v
0
9
D
e
c
0
9
J
a
n
1
0
F
e
b
1
0
M
a
r
1
0
A
p
r
1
0
M
a
y
1
0
70
75
80
85
90
95
100
105
Price
Rel MSCI Japan
Price target 360
Source: Nomura
The QUICK consensus operating
profit forecast for 11/3 is 79.9bn,
while our projection is higher at
91.0bn.
Maintained
NEUTRAL

Ac t i on
We expect operating profit improvement from 11/3 as Mitsubishi Heavy Industries
(MHI) cuts printing and general machinery costs, but look for operating losses at
these businesses. For us to turn more bullish, the company needs to improve
earnings by shifting production for low-margin projects overseas. NEUTRAL.
Cat al y s t s
We forecast global demand growth for nuclear power plants. Order wins could be a
catalyst for the shares. One issue, however, is securing margins by enhancing
project management on construction overseas. We think MHI needs to work with
US partner UPS [UPS US].

Anc hor t hemes

Like many of its peers, MHI is susceptible to yen appreciation and needs a strategy
that would make it more resistant to FX fluctuations, such as increasing overseas
production and / or boosting margins by cutting costs on low-margin projects.

Mitsubishi Heavy Industries Shigeki Okazaki
Medium-term plan looks slightly ambitious
We think the medium-term business plan released along with 10/3 results calling for
13/3 operating profits to reach 160bn and grow to 250bn in 15/3 is slightly
ambitious in terms of its profit figures for the power system and air-con segments.
However, the company should push forward with the move away from a vertically
integrated structure, in our view, and increase its overseas production, as detailed in
the medium-term plan. We will monitor developments.
Order expectations for nuclear power plant
In May 2010, MHI won an order from US electric power company Dominion Resources
[D US] for a US-APWR reactor its third order won in the US market. Dominion
Resources probably will carry out safety and reliability checks up until the plant is
commissioned. We also expect MHI to win orders from customers in Jordan and for its
ATMEA1 medium-sized reactor (1.1GW) being jointly developed with Frances Areva
[CEI FP].
Valuation
Based on historical trends, we apply a P/BV of 0.9x to our forward (end-11/3) BPS
estimate to derive our price target of 360.
Risks to our price target. Risks include yen appreciation against the US dollar or
euro and an economic downturn in emerging markets.


Mitsubi shi Heavy Industri es [7011]: sector breakdown of fi nancial data
11/3F 13/3F 15/3F
2,476,200 2,965,000 3,240,000 3,520,000 3,100,000 3,800,000 4,400,000
150,800 150,000 170,000 200,000 190,000 230,000 230,000
982,200 1,130,000 1,230,000 1,400,000 1,230,000 1,680,000 1,920,000
404,300 520,000 600,000 650,000 570,000 640,000 810,000
435,500 600,000 600,000 600,000 600,000 510,000 590,000
291,000 330,000 380,000 400,000 300,000 450,000 520,000
138,400 145,000 160,000 160,000 140,000 200,000 240,000
113,400 140,000 150,000 160,000 120,000 150,000 160,000
(39,400) (50,000) (50,000) (50,000) (50,000) (60,000) (70,000)
2,940,887 2,900,000 3,024,000 3,062,000 2,850,000 3,400,000 4,100,000
230,600 270,000 270,000 220,000 270,000 220,000 210,000
1,066,100 1,050,300 1,037,500 1,068,600 1,050,000 1,350,000 1,700,000
625,700 550,000 582,000 604,000 550,000 600,000 730,000
500,200 465,000 494,900 499,600 460,000 500,000 650,000
286,800 330,000 380,000 400,000 310,000 450,000 520,000
137,400 145,000 160,000 160,000 140,000 200,000 240,000
146,800 140,000 150,000 160,000 120,000 130,000 140,000
(52,800) (50,300) (50,400) (50,200) (50,000) (50,000) (90,000)
65,660 91,000 114,000 130,000 75,000 160,000 250,000 3,600
14,544 13,200 12,200 5,200 8,000 5,000 7,000
900
82,603 77,900 74,500 79,700 70,000 95,000 125,000 700
3,000 18,000 23,700 28,400 18,000 32,000 40,000 300
(6,424) (6,000) (3,600) 1,400 (10,000) 0 17,000 1,300
(23,200) (12,400) (2,400) 1,600 (11,000) 13,000 35,000 400
(9,900) (6,600) (100) 1,400 (6,000) 4,000 11,000 0
5,100 7,100 10,100 13,100 6,000 11,000 15,000 0
(63) (200) (400) (800) 0 0 0 0
2.2 3.1 3.8 4.2 2.6 4.7 6.1
6.3 4.9 4.5 2.4 3.0 2.3 3.3
7.7 7.4 7.2 7.5 6.7 7.0 7.4
0.5 3.3 4.1 4.7 3.3 5.3 5.5
(1.3) (1.3) (0.7) 0.3 (2.2) 0.0 2.6
(8.1) (3.8) (0.6) 0.4 (3.5) 2.9 6.7
(7.2) (4.6) (0.1) 0.9 (4.3) 2.0 4.6
3.5 5.1 6.7 8.2 5.0 8.5 10.7
0.1 0.4 0.8 1.6 0.0 0.0 0.0
(41,651) (40,000) (39,000) (38,000) (40,000) (50,000) (50,000)
(419) (7,000) (7,000) (7,000)
(2,074) (500) (1,300) (1,300)
of which, Mi tsubi shi Motors
700 2,300 1,500 1,500
(39,158) (32,500) (30,700) (29,700)
24,009 51,000 75,000 92,000 35,000 110,000 200,000
14,163 30,600 45,000 55,200
4.2 9.1 13.4 16.4
95 90 90 90 90 90 90
129 120 120 120 130 - -
3,806,200 3,871,200 4,087,200 4,545,200
574,800 454,800 354,800 334,800
1,747,400 1,827,100 2,019,600 2,351,000
589,100 559,100 577,100 623,100
795,900 930,900 1,036,000 1,136,400
41,600 41,600 41,600 41,600
16,200 16,200 16,200 16,200
18,400 18,400 18,400 18,400
22,800 23,100 23,500 23,700
Ful l-year
forex
sensi tivi ty
Co' s
10/3 11/3F 12/3F 13/3F
GM & SV
Machi ne tool s, other
Operating margi n (companywi de, %)
Aerospace
Reconci liations
Reconci liations
Shipbui lding & ocean devel opment
Power systems
Machi nery & steel structures
Aerospace
Total orders
Reconci liations
Sal es
GM & SV
Air-con
Power systems
Aerospace
Power systems
Aerospace
EPS ()
$/ assumpti ons
/ assumpti ons
Order backl og t ot al
Power systems
Aerospace
Reconci liations
Air-con
GM & SV
Air-con
Reconci liations
Operati ng profi ts
Power systems
GM & SV
Air-con
GM & SV
Air-con
Equi ty in earni ngs of affi liates
Other nonoperating i tems
Recur ri ng pr ofi t s
Net prof i ts
Nonoperati ng i ncome
Forei gn exchange gai ns/losses
Note: Business segments revised from 11/3. Printing machinery and industrial machinery moved from former
industrial machinery business to machinery & steel structures segment, machine tools moved from former industrial
machinery business to others segment. Exchange rate sensitivity is degree to which 1 rise in the value of the yen
against the US dollar dents 11/3 operating profits. Every 1 rise in the value of the yen against the euro dents 11/3
operating profits by around 500mn over the full year. Main products at machinery & steel structures segment are:
chemical plants (sales of 115bn in 10/3), steelmaking equipment (we estimate 95bn), plant compressors (48bn),
public transit systems (47bn), paper printing machinery, expressway toll systems and waste disposal plants. MHI
announced the following numerical targets in its 2010 medium-term business plan released in April 2010: ROE of 5%
in 13/3 and 8% in 15/3; ROIC of 3% and 8%; D/E ratio of 0.9x and 0.8x; interest-bearing debt of 1.3trn and 1.2trn;
and DPS of 6 and 10.

Mitsubi shi Heavy Industri es [7011]: factors behind y-y changes i n operati ng profits (1)
08/3 09/3 10/3 11/3F 12/3F 13/3F
11/3F
Co' s
3,715.2 3,268.7 2,476.2 2,965.0 3,240.0 3,520.0 3,100.0
3,203.1 3,375.7 2,940.9 2,900.0 3,024.0 3,062.0 2,850.0
136.0 105.9 65.7 91.0 114.0 130.0 75.0
+27.1 -30.1 -40.2 +25.3 -2.0 +3.2 +9.3
+2.5 -48.2 -47.1 -20.0 +0.0 +0.0 -23.5
+8.0 +38.0 -20.0 +0.4 -0.0 +4.7 -0.5
-14.0 -25.0 -8.0 +5.5 -6.0 +0.0 +6.0
+30.6 +5.1 +34.9 +8.6 +4.0 -1.5 +27.3
-21.2 -3.8 -6.3 +1.5 -5.0 +0.5 +0.0
+51.8 +8.9 +41.2 +7.1 +9.0 -2.0 +27.3
Margins +34.7 +27.7 +7.1 +9.0 -2.0
Cumulative effect of accounti ng changes -25.8 +13.5 +0.0 +0.0 +0.0
353.6 271.3 150.8 150.0 170.0 200.0 190.0
283.9 240.1 230.6 270.0 270.0 220.0 270.0
4.1 1.6 14.5 13.2 12.2 5.2 8.0
+9.5 -2.5 +12.9 -1.3 -1.0 -7.0 -6.5
+0.8 -8.4 -5.2 -6.3 +0.0 +0.0 -7.0
+0.0 +0.0 +0.0 +2.0 +0.0 +0.0 +2.0
-3.5 -3.5 -7.0 +6.0 -4.0 +0.0 +6.0
+12.2 +9.4 +25.1 -3.0 +3.0 -7.0 -7.5
-2.8 +0.0 +0.2 +0.0 +0.0 +0.0 +0.0
+15.0 +9.4 +24.9 -3.0 +3.0 -7.0 -7.5
Margins +10.5 +23.8 -3.0 +3.0 -7.0
Cumulative effect of accounti ng changes -1.1 +1.1 +0.0 +0.0 +0.0
1,214.9 1,148.8 982.2 1,130.0 1,230.0 1,400.0 1,230.0
946.9 1,209.1 1,066.1 1,050.3 1,037.5 1,068.6 1,050.0
58.3 80.0 82.6 77.9 74.5 79.7 70.0
+1.5 +21.7 +2.6 -4.7 -3.4 +5.2 -12.6
-1.1 -13.1 -10.3 -8.7 +0.0 +0.0 -9.5
+5.5 +43.0 -13.0 +0.0 -1.9 +4.7 +0.0
-3.0 -8.5 -0.5 +0.0 -2.0 +0.0 +0.0
+0.1 +0.3 +26.4 +4.0 +0.5 +0.5 -3.1
-8.1 -3.0 -0.6 -5.0 -1.5 -1.5 -5.0
+8.2 +3.3 +27.0 +9.0 +2.0 +2.0 +1.9
Margins +0.5 +29.8 +9.0 +2.0 +2.0
Cumulative effect of accounti ng changes +2.8 -2.8 +0.0 +0.0 +0.0
All-company orders
Margins, R&D expenses, etc
R&D expenses
Forex impact
Impact of change in sales
All-company sales
All-company operating profits
Change in profits (y-y)
Materials
R&D expenses
Margins
Forex impact
Forex impact
Materials
(2) Power systems sales
Power systems operating profits
Margins
(1) Shipbuilding & ocean development sales
Shipbuilding & ocean development operating profits
(1) Shipbuilding & ocean development orders
(2) Power systems orders
Materials
R&D expenses
Margins

Note: All bookings and drawdowns of loss reserves (for forex and steel products) are included in the item marked
"margins" under factors affecting profits. We estimate MHI uses 300,000400,000tpy of thick steel plate for ships. We
calculate that a 10,000/t price increase pushes costs 34bn higher per year. The company made roughly 7.3bn in
loss provisions at the shipbuilding & ocean development segment in 09/3.

Mitsubishi Heavy Industries [7011]: factors behind y-y changes in operating profits (1) (continued)
08/3 09/3 10/3 11/3F 12/3F 13/3F
11/3F
Co's
557.3 527.8 323.8
472.5 542.2 542.0
11.3 31.6 30.1
+8.4 +20.3 -1.5
-0.3 -2.4 -9.1
-4.0 +5.5 +2.0
-0.5 -3.0 -0.5
+13.2 +20.2 +6.1
-1.8 -1.3 -1.2
+15.0 +21.5 +7.3
Margins +22.1 +6.7
Cumulative effect of accounting changes -0.6 +0.6
404.3 520.0 600.0 650.0 570.0
625.7 550.0 582.0 604.0 550.0
542.0 470.0 500.0 520.0 470.0
83.7 80.0 82.0 84.0 80.0
3.0 18.0 23.7 28.4 18.0
30.1 33.0 34.0 35.0 30.0
-27.1 -15.0 -10.3 -6.6 -12.0
+15.0 +5.7 +4.7 +15.0
-1.0 -1.0 -1.0 -1.0
-9.0 +3.2 +2.2 -9.0
+0.0 -2.0 +0.0 +0.0
+25.0 +5.5 +3.5 +25.0
-1.5 -1.5 -1.5 -1.5
+26.5 +7.0 +5.0 +26.5
615.8 510.8 435.5 600.0 600.0 600.0 600.0
500.5 512.3 500.2 465.0 494.9 499.6 460.0
14.7 -10.3 -6.4 -6.0 -3.6 1.4 -10.0
0.0 -6.5 -15.0 -8.5 -12.0 -10.0 -8.5
14.7 -3.8 8.6 2.5 8.4 11.4 -1.5
+0.3 -25.0 +3.9 +0.4 +2.4 +5.0 -3.6
-1.4 -13.8 -9.8 -5.0 +0.0 +0.0 -5.0
+0.5 +1.0 +0.0 -1.7 +1.9 +0.0 +0.0
-0.5 +0.0 +0.0 -0.5 +0.0 +0.0 +0.0
+1.7 -12.2 +13.7 +7.6 +0.5 +5.0 +1.4
-4.5 -0.1 -7.7 +6.5 -3.5 +2.0 +6.5
+6.2 -12.1 +21.4 +1.1 +4.0 +3.0 -5.1
Margins +11.0 +6.4 +1.1 +4.0 +3.0
Cumulative effect of accounting changes -23.1 +15.0 +0.0 +0.0 +0.0
115 103 95 90 90 90 90
159 145 129 120 120 120 130 / rate
$/ rate
R&D expenses
Margins
Materials
R&D expenses
Margins
(4) Aerospace sales
Forex impact
Aerospace operating profits
MRJ
Excl MRJ
(4) Aerospace orders
(3) New machinery & steel structures sales
Forex impact
Materials
R&D expenses
Forex impact
Materials
Margins
(3) New machinery & steel structures orders
Former machinery & steel structures orders
Former machinery & steel structures sales
Machinery & steel structures operating profits
Former printing & industrial machinery sales
Operating profits
Former printing & industrial machinery sales

Note: All bookings and drawdowns of loss reserves (for forex and steel products) are included in the item marked
"margins" under factors affecting profits. We estimate MHI uses 300,000400,000tpy of thick steel plate for ships. We
calculate that a 10,000/t price increase pushes costs 34bn higher per year. The company made roughly 7.3bn in
loss provisions at the shipbuilding & ocean development segment in 09/3.

Mitsubishi Heavy Industries [7011]: factors behind y-y changes in operating profits (2)
08/3 09/3 10/3 11/3F 12/3F 13/3F
11/3F
Co's
901.7 767.0 541.3
913.6 805.4 544.3
40.1 -7.0 -62.5
+8.7 -47.1 -55.5
+4.5 -10.5 -12.7
+6.0 -9.5 -9.0
-6.5 -10.0 +0.0
+4.7 -17.1 -33.8
-4.0 +0.4 +3.0
+8.7 -17.5 -36.8
Margins -15.3 -39.0
465.2 439.3 291.0 330.0 380.0 400.0 300.0
474.4 432.7 286.3 330.0 380.0 400.0 310.0
% y-y 10 (9) (34) 15 15 5 8
20.8 -1.3 -23.2 -12.4 -2.4 1.6 -11.0
+4.2 -22.1 -21.9 +10.8 +10.0 +4.0 +12.2
+2.4 -7.5 -9.6 -2.8 +0.0 +0.0 -1.0
+2.5 -2.5 -4.0 +6.6 +5.0 +2.0 +4.5
-4.0 -7.5 +0.0 -2.0 +0.0 +0.0 +0.0
+3.3 -4.6 -8.3 +9.0 +5.0 +2.0 +8.7
-1.1 -0.4 +1.8 +0.0 +0.0 +0.0 +0.0
+4.4 -4.2 -10.1 +9.0 +5.0 +2.0 +8.7
Margins -2.8 -11.5 +9.0 +5.0 +2.0
212.1 186.2 138.4 145.0 160.0 160.0 140.0
211.8 187.5 137.4 145.0 160.0 160.0 140.0
% y-y 7 (11) (27) 6 10 0 2
6.2 -2.4 -9.9 -6.6 -0.1 1.4 -6.0
+3.0 -8.6 -7.5 +3.3 +6.5 +1.5 +3.9
+1.7 -1.6 -2.0 -0.5 +0.0 +0.0 +0.0
+3.0 -1.5 -2.0 +0.8 +1.5 +0.0 +0.5
-1.5 -1.0 +0.0 -1.0 +0.0 +0.0 +0.0
-0.2 -4.5 -3.5 +4.0 +5.0 +1.5 +3.4
-1.8 +0.5 -0.3 +0.0 +0.0 +0.0 +0.0
+1.6 -5.0 -3.2 +4.0 +5.0 +1.5 +3.4
Margins -4.6 -3.6 +4.0 +5.0 +1.5
224.3 141.5 111.9
227.2 185.2 120.6
% y-y 4 (18) (35)
13.1 -3.3 -29.4
+1.5 -16.4 -26.1
+0.4 -1.4 -1.1
+0.5 -5.5 -3.0
-1.0 -1.5 +0.0
+1.6 -8.0 -22.0
-1.1 +0.3 +1.5
+2.7 -8.3 -23.5
Margins -7.9 -23.9
113.4 140.0 150.0 160.0 120.0
146.8 140.0 150.0 160.0 120.0
5.1 7.1 10.1 13.1 6.0
+3.0 +3.0 +3.0 +0.9
+0.0 +0.0 +0.0 +0.0
+3.0 +3.0 +3.0 +1.5
-1.0 +0.0 +0.0 +0.0
+0.0 +0.0 +0.0 -0.6
+0.0 +0.0 +0.0 +0.0
-1.0 +0.0 +0.0 -0.6
115 103 95 90 90 90 90
159 145 129 120 120 120 130 / rate
(7) Machine tools, ohter sales
Materials
R&D expenses
Margins
Operating profits
Forex impact
R&D expenses
Margins
(7) Machine tools, ohter orders
Forex impact
Materials
(5) GM & SV sales
(5) GM & SV operating profits
Former mass & medium-lot manufactured machinery orde
Former mass & medium-lot manufactured machinery sales
Former mass & medium-lot manufactured machinery oper
(5) GM & SV orders
(6) Air-con orders
Materials
Materials
R&D expenses
Margins
(6) Air-con sales
(6) Air-con operating profits
R&D expenses
Margins
Forex impact
Forex impact
$/ rate
R&D expenses
Margins
Materials
Former industrial machinery orders
Former industrial machinery sales
Former industrial machinery operating profits
Forex impact


Mitsubishi Heavy Industries [7011]: sales at MHI's power systems segment
09/3 10/3 11/3F 12/3F 13/3F
1,209,100 1,066,100 1,050,300 1,037,500 1,068,600
319,000 363,000 372,300 359,900 381,400
of which, parent 190,000 226,000 226,000 203,400 213,600
of which, maintenance services 129,000 137,000 146,300 156,500 167,800
300,000 231,000 210,000 190,000 180,000
106,000 98,000 98,000 117,600 137,200
320,000 251,000 240,000 250,000 250,000
164,100 123,100 130,000 120,000 120,000 Other
Wind power
Sales
Gas turbines
Conventional
Nuclear power


Mitsubishi Heavy Industries [7011]: Boeing-related orders and sales
99/3 00/3 01/3 02/3 03/3 04/3 05/3 06/3 07/3 08/3 09/3 10/3F 11/3F 12/3F
Orders 63 59 64 53 46 42 42 51 83 86 67 61 84
Sales 77 59 61 61 36 39 39 49 75 81 67 82 66 84
Orders - - - - - - - - 30 48 24 6 24
Sales - - - - - - - - 0 4 4 15 31 48
Boeing777
Boeing787

Note: We assume sales of around 700mn per B777 (MHI's participation ratio 10%) and about 1bn for the B787
(MHI's projected participation ratio 18%). B777 production volume fell in OctDec 2008 because of a strike. Boeing
will change its monthly production plans for the B777 from seven aircraft to five from June 2010, but is due to revert to
seven aircraft from mid-2011 (announced on 19 March 2010). The B787 completed its maiden flight in December
2009, and first deliveries to customers are slated for OctDec 2010. Mitsubishi Regional Jet inaugural flight scheduled
for 2011, commercial operations due to start in 2012.

Mitsubishi Heavy Industri es [7011]: quarterl y financial data (former segment)
08/3 09/3 10/3
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
674,600 1,095,000 649,100 1,296,500 1,054,200 787,500 771,500 655,500 582,700 533,000 380,400 980,100
Shipbuilding & ocean development 33,100 179,200 15,400 125,900 174,500 6,000 12,000 78,800 5,900 49,200 5,600 90,100
Power systems 249,500 326,800 211,200 427,400 477,300 342,700 260,000 68,800 346,800 180,000 130,700 324,700
Machinery & steel structures 103,000 227,000 78,600 148,700 124,400 98,900 225,900 78,600 71,200 70,000 61,700 120,900
Aerospace 69,300 106,600 114,100 325,800 55,900 86,700 100,900 267,300 35,200 83,500 51,300 265,500
Mass & medium-lot manufactured machinery 210,600 236,100 209,700 245,300 211,800 239,700 165,200 150,300 118,500 139,100 119,400 164,300
Other 9,100 19,300 20,100 23,400 10,300 13,500 7,500 11,700 5,100 11,200 11,700 14,600
685,710 760,690 682,000 1,074,685 698,342 876,310 804,948 996,074 603,300 718,300 677,700 941,587
Shipbuilding & ocean development 68,900 69,200 54,300 91,500 71,000 56,556 58,944 53,600 34,600 70,900 60,100 65,000
Power systems 227,400 222,300 178,400 318,800 226,400 315,100 305,700 361,900 233,000 254,200 231,900 347,000
Machinery & steel structures 86,500 91,500 108,100 186,400 83,700 135,400 135,400 187,700 93,800 121,100 150,700 176,400
Aerospace 83,000 114,000 108,300 195,200 98,300 117,600 109,200 187,200 90,100 123,600 107,100 179,400
Mass & medium-lot manufactured machinery 203,900 241,100 211,400 257,200 206,300 241,900 181,800 175,400 118,400 141,100 122,300 162,500
Other 16,010 22,590 21,500 25,585 12,642 9,754 13,904 30,274 33,400 7,400 5,600 11,287
24,745 31,127 38,103 42,055 22,270 50,452 27,778 5,359 3,800 21,300 20,900 19,660
Shipbuilding & ocean development 1,682 936 1,355 91 4,800 2,040 1,760 (6,959) 8,400 4,100 (2,000) 4,044
Power systems 14,559 10,205 12,437 21,086 13,800 28,813 23,987 13,401 13,400 18,300 25,600 25,303
Machinery & steel structures (2,748) 2,863 6,756 4,457 (2,200) 5,711 13,989 14,105 (3,900) 7,700 12,600 13,748
Aerospace 1,112 4,036 5,730 3,779 (2,500) 2,844 (6,344) (4,340) 0 3,100 (4,000) (5,524)
Mass & medium-lot manufactured machinery 7,907 10,125 8,307 13,719 6,300 9,238 (7,538) (15,030) (15,000) (14,300) (14,300) (19,023)
Other 2,233 2,962 3,518 (1,077) 2,070 1,806 1,924 4,182 900 2,400 3,000 1,112
3.6 4.1 5.6 3.9 3.2 5.8 3.5 0.5 0.6 3.0 3.1 2.1
Shipbuilding & ocean development 2.4 1.4 2.5 0.1 6.8 3.6 3.0 -13.0 24.3 5.8 -3.3 6.2
Power systems 6.4 4.6 7.0 6.6 6.1 9.1 7.8 3.7 5.8 7.2 11.0 7.3
Machinery & steel structures -3.2 3.1 6.2 2.4 -2.6 4.2 10.3 7.5 -4.2 6.4 8.4 7.8
Aerospace 1.3 3.5 5.3 1.9 -2.5 2.4 -5.8 -2.3 0.0 2.5 -3.7 -3.1
Mass & medium-lot manufactured machinery 3.9 4.2 3.9 5.3 3.1 3.8 -4.1 -8.6 -12.7 -10.1 -11.7 -11.7
Other 13.9 13.1 16.4 -4.2 16.4 18.5 13.8 13.8 2.7 32.4 53.6 9.9
119 115 114 111 106 110 101 96 101 94 92 93
160 160 157 160 159 166 136 119 132 139 132 111
$/ rate
/ rate
Orders
Sales
Operating profits
Operating margin (all-company, %)

Source: Nomura, based on company data

Mitsubishi Heavy Industries [7011]: consolidated financial data
04/3 05/3 06/3 07/3 08/3 09/3 10/3 11/3F 12/3F 13/3F
2,373,440 2,590,733 2,792,108 3,068,504 3,203,085 3,375,674 2,940,887 2,900,000 3,024,000 3,062,000
% y-y -8.5 9.2 7.8 9.9 4.4 5.4 -12.9 -1.4 4.3 1.3
66,630 14,772 70,912 108,912 136,030 105,859 65,660 91,000 114,000 130,000
% y-y -42.2 -77.8 380.0 53.6 24.9 -22.2 -38.0 38.6 25.3 14.0
29,772 12,538 50,365 83,048 109,504 75,306 24,009 51,000 75,000 92,000
% y-y -61.9 -57.9 301.7 64.9 31.9 -31.2 -68.1 112.4 47.1 22.7
21,787 4,049 29,816 48,839 61,332 24,217 14,163 30,600 45,000 55,200
% y-y -36.5 -81.4 636.4 63.8 25.6 -60.5 -41.5 116.1 47.1 22.7
109,800 112,200 140,500 175,900 191,400 196,600 177,100 160,000 180,000 180,000
98,800 99,200 100,810 106,700 129,200 153,800 140,400 140,000 145,000 145,000
6.5 1.2 8.9 14.6 18.3 7.2 4.2 9.1 13.4 16.4
35.8 30.8 38.9 46.3 56.8 53.0 46.1 50.8 56.6 59.7
393.2 390.4 410.2 425.5 423.2 369.9 380.8 399.0 406.5 416.9
6.0 4.0 4.0 6.0 6.0 6.0 4.0 6.0 6.0 6.0
209,805 211,911 195,185 244,233 274,885 435,038 274,061 274,100 274,100 274,100
1,759 2,571 1,549 2,772 3,569 3,010 9 0 0 0
995,306 1,048,892 1,097,403 1,166,702 1,086,580 1,082,569 948,200 935,000 975,000 987,200
975,976 958,513 971,508 1,048,586 1,164,853 1,268,616 1,240,061 1,222,800 1,275,100 1,291,100
220,141 243,758 277,840 325,022 406,999 375,826 364,331 364,300 364,300 364,300
743,231 736,500 765,236 824,744 875,653 892,347 896,350 916,400 951,400 986,400
33,728 33,726 35,769 33,444 29,037 30,991 29,149 29,100 29,100 29,100
535,412 595,273 702,632 746,361 675,572 437,816 510,698 510,700 510,700 510,700
3,715,358 3,831,144 4,047,122 4,391,864 4,517,148 4,526,213 4,262,859 4,252,400 4,379,700 4,442,900
630,970 649,144 669,667 746,591 733,500 699,678 646,538 637,500 664,800 673,200
1,101,268 1,172,894 1,198,663 1,273,571 1,365,392 1,612,800 1,495,324 1,483,400 1,558,500 1,578,200
644,405 683,917 784,732 925,266 977,827 930,484 792,225 792,200 792,200 792,200
14,216 15,211 17,770 0 0 0 0 0 0 0
1,324,497 1,309,977 1,376,289 1,446,436 1,440,429 1,283,251 1,328,772 1,339,300 1,364,200 1,399,300
2.7 0.6 2.8 4.0 4.8 3.7 2.3 3.2 3.9 4.4
1.8 0.4 1.8 2.5 3.0 2.3 1.5 2.1 2.6 2.9
1.6 0.3 2.2 3.4 4.3 1.9 1.1 2.3 3.3 3.9
2.8 0.6 2.5 3.5 4.2 3.1 2.2 3.1 3.8 4.2
1.3 0.5 1.8 2.7 3.4 2.2 0.8 1.8 2.5 3.0
2,425,765 2,482,871 2,574,952 2,720,007 2,805,821 2,896,051 2,824,096 2,822,700 2,922,700 2,977,500
Invested capital 12.26 11.50 11.07 10.64 10.51 10.30 11.52 11.68 11.60 11.67
Total assets 18.78 17.75 17.39 17.18 16.92 16.09 17.39 17.60 17.38 17.41
Cash & equivalents 1.07 0.99 0.85 0.97 1.04 1.56 1.12 1.13 1.09 1.07
Accounts receivable 5.03 4.86 4.72 4.56 4.07 3.85 3.87 3.87 3.87 3.87
Inventories 4.93 4.44 4.18 4.10 4.36 4.51 5.06 4.51 5.06 4.51
Accounts payable 3.19 3.01 2.88 2.92 2.75 2.49 2.64 2.64 2.64 2.64
Working capital 6.78 6.29 6.01 5.74 5.69 5.87 6.29 6.29 6.29 6.29
889,704 958,412 1,001,929 1,026,566 1,086,938 1,174,752 1,221,254 1,209,300 1,284,400 1,304,100
0.83 0.90 0.87 0.88 0.95 1.26 1.13 1.11 1.14 1.13
0.67 0.73 0.73 0.71 0.75 0.92 0.92 0.90 0.94 0.93
35.6 34.2 34.0 32.9 31.9 28.4 31.2 31.5 31.1 31.5
165,430 113,972 171,722 215,612 265,230 259,659 206,060 231,000 259,000 275,000
3,369 3,355 3,355 3,356 3,356 3,356 3,356 3,356 3,356 3,356
ROE (%)
Recurring margin (%)
Invested capital
Turnover period (months)
Shares out (mn)
Net interest-bearing debt
D/E ratio (x)
Net D/E ratio (x)
EBITDA
Short-term securities
Accounts receivable
ROIC (%)
ROA (%)
Key financial indicators
Minority interests
Net assets
Total assets
Income statement
Capex
Depreciation
EPS ()
Net profits
Recurring profits
Operating profits
Accounts payable
Cash & deposits
Balance sheet
Sales
Other liabilities
CFPS ()
BPS ()
DPS ()
Other assets
Inventories
Other current assets

Note: Actuarial differences in pension benefit accounting stood at 259,640mn as at end 09/3, equivalent to 20% of net assets.

Tokyo Electric Power Co 9501 JP
TECHNOLOGY | J APAN

Shi geki Mat sumot o +81 3 5255 1605 shigeki .matsumoto@nomura.com

Ex pec t i ng r api d ear ni ngs r ebound
on r i se i n nuc l ear c apac i t y f ac t or
Kashiwazaki-Kariwa plant
Reactors Nos. 6 and 7 have already resumed normal operation at the
Kashiwazaki-Kariwa plant, while reactor No. 1 was restarted (for test
operation) at the end of May. We expect reactor No. 5 to be restarted
(for test operation) sometime in 3Q10. We think that the remaining
three reactors will probably be restarted during 12/3 because the
company will need time to complete earthquake reinforcement work.
We forecast a capacity factor for the plant of 45% in 11/3, 77% in 12/3,
and 81% in 13/3, when we expect the plant to be fully operational for
the full year.
Adjusted EPS estimates
Our adjusted EPS estimate of 205 for 11/3 provides the basis for our
price target (on a P/E of 17x). The revised EPS forecast is calculated by
taking our unadjusted estimate of 67.5 (recurring profits of 208.1bn)
and factoring in 1) 60.0bn in shortfalls in past reserves for the
dismantling of nuclear power generating facilities as part of asset
retirement obligations and in depreciation reserves (because
extraordinary losses are not included in recurring profits); 2) a 155.0bn
boost from a higher nuclear capacity factor; and 3) 140.0bn for losses
incurred under the fuel cost adjustment system and the amortisation of
actuarial differences in pension accounting and (until 12/3) of residual
value accompanying tax system revisions, and then stripping out 4)
47.1bn from factors such as increased costs.
Miscellaneous costs should be held in check
The company has deferred miscellaneous costs such as maintenance
and repair costs and overhead in order to make up for the losses that
it incurred as a result of the shutdown of the Kashiwazaki-Kariwa plant.
Although it intends to keep miscellaneous costs under control, we
think that they could increase again as the plant resumes normal
(bn) 10/3 11/3F 12/3F 13/3F
Revenue 5,016 5,318 5,479 5,533
Normal ised EPS () 99.2 67.5 172.7 206.0
Norm. EPS growth (%) - (0.3) 1.6 0.2
Norm. P/E (x) - 36.0 14.1 11.8
EV/EBITDA (x) - 10.5 8.9 8.8
Pri ce/book (x) 1.3 1.3 1.3 1.2
Di vidend yi el d (%) - 2.5 2.7 2.9
ROE (%) 5.5 3.7 9.1 10.2
Net debt/equi ty (%) 3.1 3.1 3.0 2.7
Previ ous norm. net profi t 91.1 233.0 277.9
Previ ous norm. EPS () 67.5 172.7 206
1m 3m 6m
5.3 (0.1) 4.8
6.1 (1.6) 1.1
11.7 6.7 5.9
52-week range ()
Japan Trustee Services Bank 7.0
Dai Ichi Li fe Insurance 4.1
2,496/2,095
36,513
Absolute ()
Absolute (US$)
Rel ati ve to Index
Market cap (US$mn)
2,000
2,100
2,200
2,300
2,400
2,500
2,600
J
u
n
0
9
J
u
l
0
9
A
u
g
0
9
S
e
p
0
9
O
c
t
0
9
N
o
v
0
9
D
e
c
0
9
J
a
n
1
0
F
e
b
1
0
M
a
r
1
0
A
p
r
1
0
M
a
y
1
0
80
85
90
95
100
105
110
Price
Rel MSCI Japan
Price target 3,500
Source: Nomura
We are bullish on the impact of the
fuel cost savings likely to be
achieved by the restart of the
Kashiwazaki-Kariwa nuclear power
plant.
Maintained
BUY

Ac t i on
We expect all reactors at the Kashiwazaki-Kariwa nuclear plant to be operating by
end-12/3 and look for recurring profits to reach a new peak in 13/3, when fuel cost
savings will be felt for a full year. The near-record gap between dividend yield and
long-term interest rates suggests limited downside in the share price. BUY.
Cat al y s t s
The company's New Management Vision, due to be published in August, should
cast some light on how it intends to achieve profit growth over the long term (eg, by
investing more in overseas projects).

Anc hor t hemes

This defensive stock is unlikely to attract much interest during the economic upturn,
but the recent correction presents a good longer-term opportunity. If the
government promotes nuclear energy as means to a low-carbon society, the
company could attract attention for its high reliance on nuclear power.

Tokyo Electric Power Co Shigeki Matsumoto
operations. Thus, we forecast a higher level in 13/3 than before the shutdown.
However, the company may have succeeded in structurally reducing some
miscellaneous costs.
First Japanese power company involved in overseas nuclear plant
project
On 10 May, the company announced that it would be involved in extension work to the
South Texas Project nuclear power plant. The new unit will be a 1,350MW advanced
boiling water reactor and is due to come on-line in 201718. The company will initially
have a stake of just over 9%, which it has the option of increasing by a similar amount.
Risks include lower fuel costs
Excluding the impact of the time lag in the fuel cost adjustment system, lower fuel
costs have a negative impact on the company's profits. The company's fuel cost
savings (we define fuel costs as fuel consumption volume x average fuel price) from
the Kashiwazaki-Kariwa plant's improved capacity factor diminish if the price of fuel
declines. We estimate that adjusted recurring profits (see (2) above) are reduced by
6.7bn for each US$1/bbl decline in the crude oil price and by roughly 6.4bn by each
1 appreciation of the yen versus the US dollar.


Tokyo Electric Power [9501]: fi nancial data
06/3 07/3 08/3 09/3 10/3 11/3F 12/3F 13/3F
113 117 114 101 93 90 90 90
56 63 79 91 69 85 85 85
66 74 45 44 53 63 79 81
94 103 94 96 95 100 100 100
10.0 8.0 14.0 19.0 12.0 17.0 - -
26.0 8.0 16.0 17.0 15.0 16.0 - -
8.0 9.0 12.0 15.0 10.0 13.0 - -
1.0 1.0 1.5 1.5 1.0 1.5 - -
288.7 287.6 297.4 289.0 280.2 287.0 290.7 293.6
% y-y 0.7 -0.4 3.4 -2.8 -3.0 2.4 1.3 1.0
401.0 458.9 337.7 483.4 481.3 448.0 425.3 437.0
1,040.0 1,062.7 1,755.1 2,078.7 1,192.6 1,453.8 1,385.2 1,390.0
469.3 459.0 432.1 381.3 373.9 432.1 467.0 477.0
153.7 148.0 143.0 134.6 129.5 129.2 129.2 129.2
753.4 704.5 726.2 708.6 709.8 674.8 674.8 629.5
629.3 650.6 773.2 842.5 722.5 722.5 722.5 722.5
1,134.4 1,201.7 1,120.1 1,143.9 1,084.1 1,122.8 1,158.2 1,159.7
5,255.5 5,283.0 5,479.4 5,887.6 5,016.3 5,317.5 5,479.4 5,533.1
4,895.6 4,952.3 5,168.5 5,553.7 4,732.8 5,020.1 5,182.1 5,235.7
359.9 330.7 310.9 333.8 283.5 297.4 297.4 297.4
576.3 550.9 136.4 66.9 284.4 288.1 471.0 541.9
572.7 526.3 94.4 21.7 245.9 260.1 437.0 507.9
0.5 23.4 40.9 35.5 38.0 27.5 33.5 33.5
3.1 1.2 1.2 9.7 0.5 0.5 0.5 0.5
52.6 67.0 69.8 63.5 73.2 82.0 73.2 73.2
201.9 176.6 173.0 165.1 153.3 162.0 162.0 162.0
427.0 441.3 33.1 -34.6 204.3 208.1 382.2 453.1
-3.3 6.0 -5.0 -3.9 -8.4 0.0 0.0 0.0
- - - - - 10.0 10.0 10.0
51.1 60.7 18.6 0.0 10.7 0.0 0.0 0.0
7.6 0.0 269.3 68.8 0.0 50.0 0.0 0.0
473.8 496.0 -212.5 -99.6 223.5 148.1 372.2 443.1
163.4 197.9 -62.4 -15.0 89.7 57.0 139.2 165.2
310.4 298.2 -150.1 -84.5 133.8 91.1 233.0 277.9
Pretax profits
Tax, etc
Net profi ts
Recurring profits
Nuclear power pl ant depreciation reserves
Extraordinary gains
Drought reserves
Electricity
Other
Eliminations
Nonoperating income
Sales
Electricity
Other
Operating profits
Consoli dated i ncome statement
Depreciation
Purchased electricity
Other
Parent i ncome statement
Assumpti ons
Sensi ti vity
Electricity sales volume (bn kWh)
Mai n recurri ng costs
Personnel expenses
Fuel costs
Repair costs
Interest paid
Forex ($/)
Crude oil price ($/bbl)
Nuclear power capacity factor (%)
Water flow rate (%)
Forex
Crude oil price
Nuclear power capacity factor
Water flow rate
Note: (1) Sensitivity is sensitivity to cost and sensitivity figures are as calculated by management. (2) Expected costs
arising from closure of Kashiwazaki-Kariwa nuclear power plant are not based on these sensitivity figures and for
sake of convenience have been included in fuel costs. (3) Negative values for drought reserves and nuclear power
plant depreciation reserves indicate drawdown of reserves (positive impact on profits).

Tokyo Electric Power [9501]: consoli dated fi nancial data
(bn)
06/3 07/3 08/3 09/3 10/3 11/3F 12/3F 13/3F
12,848.6 12,670.7 12,697.5 12,351.3 12,221.4 12,524.2 12,868.0 13,077.0
10,170.5 9,779.0 9,543.6 9,305.4 9,024.0 8,946.3 8,923.0 8,938.7
917.1 893.8 921.8 915.9 903.0 982.1 1,056.4 1,129.1
1,760.9 1,997.9 2,232.1 2,130.0 2,294.5 2,595.8 2,888.6 3,009.2
Long-term investments 744.6 864.5 646.4 499.0 527.1 539.7 552.4 565.0
Nuclear fuel processing reserves 262.2 346.5 517.9 667.5 824.4 1,089.1 1,365.3 1,469.2
Deferred tax 316.1 305.9 461.7 443.5 435.8 459.8 463.8 467.8
Other 438.6 481.6 606.6 520.6 507.8 507.8 507.8 507.8
Bad-debt reserves -0.7 -0.6 -0.5 -0.6 -0.7 -0.7 -0.7 -0.7
745.3 850.7 981.5 1,208.0 982.6 956.5 967.8 971.5
109.5 143.9 154.6 301.4 180.2 180.2 180.2 180.2
363.9 388.5 388.7 430.1 348.8 369.7 381.0 384.7
271.9 318.3 438.2 476.5 453.6 406.6 406.6 406.6
0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0
13,594.1 13,521.4 13,679.1 13,559.3 13,204.0 13,480.7 13,835.7 14,048.5
8,432.4 8,073.8 8,602.6 9,067.8 8,769.4 9,009.1 9,199.9 9,216.3
Interest-bearing debt 6,277.9 5,870.7 6,156.2 6,624.6 6,354.0 6,485.0 6,578.3 6,462.9
Pension reserves 441.6 445.3 430.9 428.9 420.9 420.9 420.9 420.9
Provisions for reprocessi ng of spent nucl ear fuel 1,634.7 1,686.6 1,739.2 1,746.0 1,756.4 1,925.2 2,055.4 2,187.2
Other 78.2 71.1 276.2 268.3 238.1 178.1 145.3 145.3
2,329.8 2,351.4 2,363.6 2,058.6 1,913.0 1,929.8 1,938.8 1,941.8
Liabilities due in less than one year 1,051.8 897.8 847.2 694.6 747.6 747.6 747.6 747.6
Short-term borrowings 376.5 362.9 382.2 389.2 363.6 363.6 363.6 363.6
Accounts payable 213.7 201.2 390.7 242.0 279.1 295.9 304.9 307.9
Accrued taxes 133.2 213.0 58.2 75.9 78.4 78.4 78.4 78.4
Other 554.5 676.4 685.2 656.9 444.2 444.2 444.2 444.2
16.5 22.4 17.4 13.5 5.1 5.1 5.1 5.1
- - - - - 10.0 20.0 30.0
10,778.7 10,447.6 10,983.6 11,139.8 10,687.5 10,954.0 11,163.8 11,193.1
35.7 - - - - - - -
2,779.7 - - - - - - -
- 3,073.8 2,695.5 2,419.5 2,516.5 2,526.7 2,671.9 2,855.4
7,840.1 7,388.6 7,675.7 7,938.0 7,523.9 7,654.9 7,748.1 7,632.8
935.6 1,073.7 509.9 599.1 988.3 742.9 855.7 1,071.1
310.4 298.2 -150.1 -84.5 133.8 91.1 233.0 277.9
824.0 751.6 772.5 757.1 759.4 724.6 732.0 693.0
-198.8 23.9 -112.5 -73.4 95.1 -72.8 -109.3 100.2
-623.7 -574.7 -664.3 -696.0 -640.9 -792.9 -861.3 -861.3
311.9 499.0 -154.4 -96.8 347.4 -50.0 -5.6 209.8
Working capital, etc
Capex
Free cash flow
Cash flow
Net profits
Depreciation
Minority interests
Net assets
Other
Deferred assets
Total assets
Total liabilities
Current liabilities
Drought reserves
Nuclear power plant depreciation reserves
Investments, other
Current assets
Cash & deposits
Accounts receivable
Balance sheet
Long-term assets
Power division long-term assets, etc
Nuclear fuel


Kansai Electric Power Co 9503 JP
POWER & UTI LI TI ES | J APAN

Shi geki Mat sumot o +81 3 5255 1605 shigeki .matsumoto@nomura.com

Hi gher c r ude oi l pr i c es boost
benef i t s of new t her mal pl ant s
Upgrading and constructing thermal plants with total
capacity of 5.8GW
The Sakaiko thermal power plant is being upgraded to become an
LNG-fired combined cycle facility. Capacity will remain at 2GW, but
thermal efficiency will rise from 41% to 58% (on a lower heating value
(LHV) basis), with CO
2
emissions likely to fall from 0.51kg/kWh to
0.36kg/kWh. The start-up at the Maizuru coal-fired thermal power
station's No. 2 unit (capacity of 900MW) will enable less oil to be used.
In the medium term, the Himeji No. 2 power plant is due to be
upgraded to an LNG-fired combined cycle facility from October 2013
through October 2015. Total capacity is set to increase from 2,550MW
to 2,919MW, with thermal efficiency rising from 42% to 60% (LHV
basis) and CO
2
emissions falling from 0.470kg/kWh to 0.327kg/kWh.
We expect nuclear capacity factor to improve
Kansai Electric Power's nuclear capacity factor is only 81% as a result
of work to improve earthquake resistance, but it expects this to rise to
84% in 13/3. We forecast a nuclear capacity factor of 81% and remain
cautious on the risk of suspended operations, but the company's high
weighting toward nuclear power means any improvement in the
nuclear capacity factor should have a major impact. Kansai Electric
Power estimates that each 1ppt fluctuation in the nuclear capacity
factor affects recurring profits by 5.5bn.
Adjusted EPS estimates
We derive our 11/3 adjusted EPS estimate of 148 (adjusted recurring
profits of 215bn) by adding the following to our unadjusted EPS
estimate of 84.7 (unadjusted recurring profits of 156.0bn): 1)
shortfalls in past reserves for the dismantling of nuclear power
generation facilities as part of asset retirement obligations (one-time
extraordinary losses of 36bn); 2) improvement in the nuclear
Key financials & valuati ons
(bn) 10/3 11/3F 12/3F 13/3F
Revenue 2,607 2,707 2,755 2,788
Reported net profi t 127 76 122 142
Normali sed net profi t 127 76 122 142
Normali sed EPS () 140.2 84.7 138.2 162.2
Norm. EPS growth (%) - (0.4) 0.6 0.2
Norm. P/E (x) - 25.2 15.5 13.2
EV/EBITDA (x) - 8.4 8.1 8.0
Price/book (x) 1.1 1.1 1.0 1.0
Di vidend yi el d (%) - 2.8 2.8 2.8
ROE (%) 7.3 4.3 6.8 7.6
Net debt/equity (%) 1.9 2.0 1.9 1.8
Ear ni ngs r evi si ons
Previous norm. net profit 76 122 142
Previous norm. EPS () 84.7 138.2 162.2
Share price relat ive to MSCI Japan
1m 3m 6m
5.3 (0.1) 4.8
6.1 (1.6) 1.1
11.7 6.7 5.9
52-week range ()
3-mth avg dail y turnover 31.36
Stock borrowabili ty -
Ci ty of Osaka 8.9
2,205/1,943
Kansai El ectri c Power 5.3
Absol ute ()
Absol ute (US$)
Relative to Index
1,900
1,950
2,000
2,050
2,100
2,150
2,200
2,250
J
u
n
0
9
J
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l
0
9
A
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0
9
S
e
p
0
9
O
c
t
0
9
N
o
v
0
9
D
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c
0
9
J
a
n
1
0
F
e
b
1
0
M
a
r
1
0
A
p
r
1
0
M
a
y
1
0
80
85
90
95
100
105
110
115
Price
Rel MSCI Japan
Key financials & valuati ons
(bn) 10/3 11/3F 12/3F 13/3F
Revenue 2,607 2,707 2,755 2,788
Reported net profi t 127 76 122 142
Normali sed net profi t 127 76 122 142
Normali sed EPS () 140.2 84.7 138.2 162.2
Norm. EPS growth (%) - (0.4) 0.6 0.2
Norm. P/E (x) - 25.2 15.5 13.2
EV/EBITDA (x) - 8.4 8.1 8.0
Price/book (x) 1.1 1.1 1.0 1.0
Di vidend yi el d (%) - 2.8 2.8 2.8
ROE (%) 7.3 4.3 6.8 7.6
Net debt/equity (%) 1.9 2.0 1.9 1.8
Ear ni ngs r evi si ons
Previous norm. net profit 76 122 142
Previous norm. EPS () 84.7 138.2 162.2
Share price relat ive to MSCI Japan
1m 3m 6m
5.3 (0.1) 4.8
6.1 (1.6) 1.1
11.7 6.7 5.9
52-week range ()
3-mth avg dail y turnover 31.36
Stock borrowabili ty -
Ci ty of Osaka 8.9
2,205/1,943
Kansai El ectri c Power 5.3
Absol ute ()
Absol ute (US$)
Relative to Index
1,900
1,950
2,000
2,050
2,100
2,150
2,200
2,250
J
u
n
0
9
J
u
l
0
9
A
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g
0
9
S
e
p
0
9
O
c
t
0
9
N
o
v
0
9
D
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c
0
9
J
a
n
1
0
F
e
b
1
0
M
a
r
1
0
A
p
r
1
0
M
a
y
1
0
80
85
90
95
100
105
110
115
Price
Rel MSCI Japan
Price target 2,500
Source: Nomura
Price target 2,500
Source: Nomura
We are bullish on fuel cost savings
achieved via the introduction of new
thermal power facilities and an
improvement in the companys
nuclear capacity.
Maintained
BUY

Ac t i on
Thermal power plants are becoming more efficient. The higher fuel prices go, the
better the outlook for profitability at new thermal plants, and operations are
resuming at nuclear plants following suspensions. Relatively high dependence on
nuclear power means earnings could get a boost long term if nuclear power usage
is promoted as a means to a low-carbon society. BUY Kansai Electric Power.
Cat al y s t s
The Mihama No. 2 reactor is expected to resume operation by end-July 2010, and
new thermal plants due to ramp up include the Maizuru No. 2 unit (coal) expected
in August and the Sakaiko No. 5 unit (LNG combined cycle) slated for October.

Anc hor t hemes

Defensive stocks are unlikely to attract much investor attention but the company
merits consideration for its efforts to secure medium-term profit growth with new
thermal plants, upgraded nuclear plants and investment in utility services.

Kansai Electric Power Co Shigeki Matsumoto
capacity factor (just over 39bn); and 3) a decline in residual value amortisation (just
under 23bn), while subtracting 4) overall gains of just over 3bn from the fuel cost
adjustment system and other factors (emission rights, etc).
Valuation
We derive our price target of 2,500 by applying the sector target P/E of 17x to our
adjusted 11/3 EPS estimate (excluding gains realised under the fuel cost adjustment
system and other factors not expected to have a medium-term impact on earnings) of
148.
Risks to price target. Excluding the impact of the time lag in the fuel cost adjustment
system, lower fuel costs have a negative impact on profits at Kansai Electric Power.
We estimate that every US$1/bbl fall in the price of crude oil results in a 1.2bn decline
in the combined fuel cost reduction benefit realised from new thermal power plants and
an increased nuclear capacity factor, with the full amount of that change carrying
through to adjusted recurring profits as defined in the above paragraph. We estimate
that each 1 appreciation of the yen against the dollar has an impact of around 1bn.


Kansai El ectric Power [9503]: financi al data
06/3 07/3 08/3 09/3 10/3 11/3F 12/3F 13/3F
113 117 114 101 93 90 90 90
56 64 79 91 69 85 85 85
75 77 75 72 77 76 81 81
89 101 87 88 103 100 100 100
3.2 3.6 5.7 7.6 4.3 4.8 - -
3.4 3.8 6.0 5.0 3.8 3.5 - -
4.8 5.8 7.5 8.8 5.2 5.5 - -
0.8 1.0 1.2 1.5 0.9 1 - -
147.1 147.3 150.4 145.9 141.6 145.1 146.8 148.0
% y-y 1.5 0.1 2.1 -3.0 -2.9 2.5 1.1 0.8
246.2 206.9 211.9 235.8 236.3 238.8 238.3 242.1
300.2 358.3 556.7 638.2 351.4 431.4 426.9 441.0
208.7 235.4 229.5 263.5 286.2 263.2 300.0 300.0
62.6 56.5 52.6 51.4 49.8 49.8 49.8 49.8
338.3 310.4 312.7 314.0 322.8 342.8 337.8 311.2
404.6 415.8 379.3 471.3 352.9 352.9 352.9 352.9
636.3 649.7 648.8 671.7 627.2 650.2 627.2 632.2
2,579.1 2,596.4 2,689.3 2,789.6 2,606.6 2,706.9 2,755.1 2,788.3
2,358.7 2,338.2 2,410.9 2,487.5 2,281.7 2,366.9 2,410.2 2,438.4
220.3 258.2 278.4 302.1 324.9 339.9 344.9 349.9
327.2 271.6 187.1 31.0 227.7 190.6 235.0 267.0
299.7 230.0 148.1 -20.2 169.5 140.4 179.8 211.8
25.7 41.6 40.0 52.5 58.1 50.1 55.0 55.0
1.7 0.0 -1.0 -1.2 0.1 0.1 0.1 0.1
17.8 30.7 31.6 33.5 32.7 32.7 32.7 32.7
97.4 70.7 66.3 77.1 67.3 67.3 67.3 67.3
247.6 231.7 152.4 -12.6 193.1 156.0 200.4 232.4
-9.6 -0.1 -8.5 0.0 0.0 0.0 0.0 0.0
0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
0.0 0.0 24.1 0.0 0.0 36.0 0.0 0.0
257.1 231.8 136.9 -12.6 193.1 120.0 200.4 232.4
96.1 83.8 51.6 -3.8 66.0 44.4 78.2 90.3
161.0 147.9 85.3 -8.8 127.2 75.7 122.3 142.1
Eliminations, companywide
Electricity
Other
Electricity
Other
Net profi ts
Recurri ng profi ts
Drought reserves
Extraordinary gains
Tax, etc
Parent i ncome statement
Assumpti ons
Mai n recurri ng costs
Pretax profits
Consoli dated i ncome statement
Sales
Operati ng profi ts
Nonoperating income
Forex ($/)
Crude oil ($/bbl)
Depreciation
Nuclear power capacity factor (%)
Water flow ratio (%)
Forex
Crude oil
Purchased electricity
Other
Sensi tivity
Personnel expenses
Fuel costs
Repair costs
Interest paid
Nuclear power capacity factor
Water flow ratio
Electricity sale volume (bn kWh)
Note: (1) Sensitivity figures are rough estimates of the impact on fuel costs. (2) A minus figure for drought reserves
indicates a reversal (a profit-boosting factor).

Kansai El ectric Power [9503]: consol idated financi al data
(bn)
06/3 07/3 08/3 09/3 10/3 11/3F 12/3F 13/3F
6,464.7 6,339.6 6,284.0 6,429.5 6,558.2 6,784.6 6,971.2 7,098.4
5,021.2 4,863.4 4,748.4 4,752.4 4,749.2 4,740.3 4,719.1 4,723.6
512.4 483.8 484.2 507.2 499.1 533.0 568.6 604.2
931.0 992.4 1,051.4 1,169.9 1,309.9 1,511.4 1,683.5 1,770.6
Long-term investments 313.8 318.2 269.2 265.7 292.0 300.7 309.4 318.1
Reserves 136.3 183.4 273.3 358.3 447.3 610.7 774.1 852.5
Deferred tax 282.8 275.7 295.4 319.3 319.4 333.8 333.8 333.8
Other 199.5 216.7 215.1 228.8 252.7 267.7 267.7 267.7
Bad debt reserves -1.4 -1.5 -1.4 -2.2 -1.5 -1.5 -1.5 -1.5
391.8 487.7 505.6 540.6 558.4 564.3 567.1 569.0
66.8 127.6 82.6 69.6 78.2 78.2 78.2 78.2
147.9 158.8 161.8 166.6 151.7 157.5 160.3 162.3
177.1 201.2 261.2 304.4 328.5 328.5 328.5 328.5
6,856.5 6,827.2 6,789.6 6,970.1 7,116.6 7,348.9 7,538.3 7,667.4
4,187.7 4,079.3 4,012.2 4,261.6 4,312.5 4,534.4 4,670.5 4,728.6
Interest-bearing debt 2,841.1 2,726.8 2,632.5 2,826.8 2,821.5 2,908.6 2,945.8 2,905.1
Pension reserves 377.2 348.9 332.1 339.9 347.5 347.5 347.5 347.5
Provisions for the reprocessing of spent nuclear fu 899.4 939.3 961.9 1,001.1 1,025.0 1,159.8 1,258.6 1,357.4
Other 70.0 64.3 85.7 93.8 118.6 118.6 118.6 118.6
869.3 862.1 931.7 1,001.8 1,014.7 1,019.0 1,021.0 1,022.4
Liabilities due in less than one year 334.4 370.0 429.4 413.4 357.8 357.8 357.8 357.8
Short-term borrowings + CP 150.8 105.8 99.4 223.2 212.2 212.2 212.2 212.2
Accounts payable 96.6 94.6 144.9 96.4 111.6 115.9 117.9 119.4
Accrued taxes 66.3 69.4 38.1 40.2 94.8 94.8 94.8 94.8
Other 221.2 222.1 219.8 228.6 238.3 238.3 238.3 238.3
8.6 8.5 0.0 0.0 0.0 0.0 0.0 0.0
5,065.6 4,949.9 4,943.8 5,263.4 5,327.2 5,553.4 5,691.5 5,751.0
4.9 - - - - - - -
1,786.0 - - - - - - -
- 1,877.4 1,845.8 1,706.7 1,789.4 1,795.5 1,846.8 1,916.4
3,324.0 3,207.2 3,166.4 3,466.9 3,391.6 3,478.7 3,515.9 3,475.2
528.9 541.8 411.7 281.3 667.2 505.5 527.4 606.8
161.0 147.9 85.3 -8.8 127.2 75.7 122.3 142.1
402.7 378.1 383.3 382.3 403.1 430.0 426.0 400.4
-34.9 15.8 -56.9 -92.2 136.9 -0.2 -21.0 64.3
-268.7 -297.5 -354.0 -510.9 -430.6 -504.8 -490.4 -490.4
260.2 244.3 57.7 -229.6 236.6 0.8 37.0 116.4
Net profits
Depreciation
Working capital, etc
Free cash flow
Capex
Net assets
Drought reserves
Total liabilities
Minority interests
Accounts receivable
Other
Total assets
Current liabilities
Balance sheet
Cash fl ow
Long-term assets
Power division long-term assets, etc
Nuclear fuel
Investments, other
Current assets
Cash & deposits

Note: In principle, capex does not include investments and financing.

Any Authors named on this report are Research Analysts unless otherwise indicated

ANALYST CERTIFICATIONS
Each of the research analysts referenced on the cover page or in connection with the section of this research report for which he or she is
responsible hereby certifies that all of the views expressed in this report accurately reflect his or her personal views about any and all of the
subject securities or issuers discussed herein. In addition, each of the research analysts referenced on the cover page or in connection with the
section of this research report for which he or she is responsible hereby certifies that no part of his or her compensation was, is, or will be,
directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any
specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or by any other Nomura
Group company or affiliates thereof.

ISSUER SPECIFIC REGULATORY DISCLOSURES

Conflict-of-interest disclosures
Important disclosures may be accessed through the following website: http://www.nomura.com/research/pages/disclosures/disclosures.aspx. If
you have difficulty with this site or you do not have a password, please contact your Nomura Securities International, Inc. salesperson (1-877-
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Three-year stock price and rating history
KEPCO
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35
40
45
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Price Price target
W ('000)
1
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3
4
5
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Rating system revised on 29
Oct, 2008
Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10
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Online availability of research and additional conflict-of-interest disclosures:
Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and
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Distribution of Ratings:
Nomura Global Equity Research has 1,884 companies under coverage.
48% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 34% of companies with this
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14% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 8% of companies with
this rating are investment banking clients of the Nomura Group*.
As at 31 March 2010.

*The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin
America for ratings published from 27 October 2008:
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.
Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management
discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate
valuation methodology such as discounted cash flow or multiple analysis, etc.
Stocks:
A rating of "1", or " Buy" , indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months.
A rating of "2", or " Neutral" , indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months.
A rating of "3", or " Reduce" , indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months.
A rating of " RS-Rating Suspended" , indicates that the rating and target price have been suspended temporarily to comply with applicable
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Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks
(accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research); Global Emerging Markets (ex-
Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.
Sectors:
A "Bullish" stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months.
A "Neutral" stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months.
A "Bearish" stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months.
Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI
Emerging Markets ex-Asia.

Explanation of Nomuras equity research rating system for Asian companies under coverage ex Japan
published from 30 October 2008 and in Japan from 6 January 2009:
Stocks:
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target Current Price) / Current Price,
subject to limited management discretion. In most cases, the Price Target will equal the analysts 12-month intrinsic valuation of the stock,
based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc.
A "Buy" recommendation indicates that potential upside is 15% or more.
A "Neutral" recommendation indicates that potential upside is less than 15% or downside is less than 5%.
A "Reduce" recommendation indicates that potential downside is 5% or more.
A rating of "RS" or "Rating Suspended" indicates that the rating and target price have been suspended temporarily to comply with applicable
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Stocks labelled as "Not rated" or shown as "No rating" are not in Nomura's regular research coverage.
Sectors:
A "Bullish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation.
A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral
A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative

Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and
ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008):
Stocks:
A rating of "1", or " Strong buy" , indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six
months.
A rating of "2", or " Buy" , indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the
next six months.
A rating of "3", or " Neutral" , indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5%
over the next six months.
A rating of "4", or " Reduce" , indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15%
over the next six months.
A rating of "5", or " Sell" , indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months.
Stocks labeled " Not rated" or shown as " No rating" are not in Nomura's regular research coverage. Nomura might not publish additional
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information contained herein.
Sectors:
A " Bullish" stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months.
A " Neutral" stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months.
A " Bearish" stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months.
Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector
Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe;
Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg
World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan
published prior to 30 October 2008:
Stocks:
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price,
subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of
the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't
think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the
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A "Strong buy" recommendation indicates that upside is more than 20%.
A "Buy" recommendation indicates that upside is between 10% and 20%.
A "Neutral" recommendation indicates that upside or downside is less than 10%.
A "Reduce" recommendation indicates that downside is between 10% and 20%.
A "Sell" recommendation indicates that downside is more than 20%.
Sectors:
A "Bullish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral
A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative

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AP80b/82c/d/87

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