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6165金沙发电股份有限公司

Investor Relations

Investors Q&A Annual Results 2015

1. From the Report of Annual Results 2015, we may notice that Fujian Ningde Nuclear Power Company Limited (“Ningde Nuclear Power”), themajority equity interest of which was held by the Datang International Power Generation Co., Ltd. (the “Company”), has an annual investment return of nearly RMB600 million in Ningde Nuclear Power Project; however, the investment return of the first three quarters has reached RMB550 million. What is the reason why the investment return in the fourth quarter shows such a great decrease?

The investment return of Ningde Nuclear Power for the forth quarter in 2015 show a decrease of about RMB40 million on a quarter-on-quarter basis. This is caused by the following two factors:

1. Ningde Nuclear Power overhauled one unit in the forth quarter, which caused the power generation decreased by 1.2 billion kWh on a quarter-on-quarter basis. 2. Some outsourced works were settled collectively at the end of year and the costs and expenses are significantly increased, which reduced the investment return compared with the previous three quarters.

2. In recent years, there are many newly-built units in Fujian province, causing significant oversupply of power. As we have seen that the utilization hours of nuclear power stations in Fujian are always less than those in Guangdong. According to this situation, will the utilization hours of Ningde Nuclear Power Project be affected, and can the power generated from local nuclear power units be given to priority for dispatching?

We all know that hydropower in Fujian is abundant. In January and February this year, Fujian has ample rainfall and the utilization hours of hydropower generation facilities were relatively higher. Power supply in Fujian is adequate. With the normal development of the electric power market, it can be seen that the utilization hours of nuclear power generation facilities will definitely decline compared with the same period of previous years.

3. There are currently four UHV power transmission lines under construction. After completion, half of the power generation will be transmitted to Beijing, Tianjin, and Hebei, and the other half will be transmitted to Shandong. Will these lines have great impact on the utilization hours of the power generation facilities of the Company? With the progress of China's reform to the power supply-side and implementation of the measures for cutting excessive industrial capacity in steel and cement industries, will the power demand be significantly affected?

There is drop point (power connection point) in Tongzhou district, Beijing from UHV West Inner Mongolia-Shandong Transmission Line. This is to provide a supportive power source to Beijing because the power demand in Beijing is basically satisfied by the export of high quality power. For instance, Datang Panshan Power Plant is usually required to generate reactive power to ensure stable and high quality energy can be supplied to the grid when no active power is generated. As an additional power source from this transmission line to Tongzhou, Beijing, it will not have significant impact on the utilization hours of the units in Beijing, Tianjin, and Hebei according to the available data.

The Company has deployed one third of the installed capacity of thermal power units in Beijing, Tianjin, and Hebei. Compared with the data of last year, the utilization hours of thermal power generation facilities in last year decreased significantly, but still higher than the average utilization hours of the thermal power generation facilities across China. It is predicted that the power demand in Beijing, Tianjin, and Hebei still has some potential to increase. It is caused by the following factors:

1. Coal-electricity integration projects experiences continuous development;

2. Development of electric vehicles increases the power demand; and

3. Urbanization helps improve the energy consumption capacity of local residents.

4. The Company's Xilinhaote Coal Mine Project has an annual production capacity of 10 million tonnes while the output of 2015 was around 5 million tonnes in 2015, which was far below the full load production capacity, what is the reason? Phase II project, which has an annual production capacity of 20 million tonnes, has nearly been completed. What is the time schedule for putting it into operation and how can the production capacity be digested after this project is put into operation?

Xilinhaote East Shengli No.2 Coal Mine had an output of 6.40 million tonnes in 2015. The calorific value and quality of the coal produced from this coal mine cannot meet high standard.  It is primarily used to provide coal to coal chemical projects. According to production conditions, Duolun and Keqi projects do not have huge raw coal demand. Therefore, the supporting coal production and future project expansion should be controlled prudently. The annual production capacity of 20 million tonnes of Phase II project will be realized gradually as the output of coal chemical projects increases.

5. During the "12th Five-Year Plan" period, the accumulative amount raised from equity financing and debt financing by the Company has reached RMB15.7 billion.  Does the Company have any plan for the primary trend and forms for the "13th Five-Year Plan" period? Which mode will the Company choose preferably among equity financing or debt financing?

China Datang Corporation, the controlling shareholder of the Company has promised to inject thermal power assets during the "13th Five-Year Plan" period. However, the detailed plan for the implementation of this project is not available now. The Company will optimize the financing mode and debt structure according to the capital structure of the Company and market interest rates, to reduce the financial costs of the Company.

6. In October 2010, China Datang Corporation promised to inject some eligible thermal power assets in Hebei into the Company in five to eight years. Does the Company have any plan for the following five years?

According to the notice made in October 2015 that the plan for the injection of thermal power assets in Hebei by China Datang Corporation has been postponed. This is because the restructuring of coal chemical business has great impact on the earnings per share and return on net assets of the Company. The Company has given the priority to the development of the plan for the restructuring of coal chemical segment.  After the plan for restructuring is finalized, the Company will find proper opportunity to negotiate with China Datang Corporation for orderly injection of thermal power assets from major shareholders as early as possible in accordance with relevant rules and regulations.

7. In January 2016, the average on-grid tariff of thermal power in China was reduced by RMB0.03/kWh. Is there any possibility that on-grid tariff will further decrease and to what extent it will decrease?

The on-grid tariff of thermal power units was reduced by the coal price and electricity price leakage mechanism in January 2016 according to the coal price. In recent months, the coal price has kept at historically low level and has limited potential to decline. The adjustment trend for the on-grid tariff of thermal power units should be determined according to the changing trend of coal price.

Moreover, the electric power market reform speeded up remarkably in this year, and the share of power generated and on-grid tariff determined based on market situation continued to increase. The original pricing mode has been gradually changing from based on administrative instruction to based on market demand. Therefore, the on-grid tariff is not likely to be adjusted based on the coal price and electricity price linkage mechanism adopted in the past.

8. According to the announcement by the Company for the results of the third quarter in 2015, 8.6 billion kWh power was supplied directly to large consumers. What is the contract amount for direct power supply to large consumers this year?

In this year, direct power supply to large consumers has been widely applied in the Company's 11 service areas. However, during the electric power market reform, China has not implemented unified management for direct power supply to large consumers. Different power supply and sales modes are adopted in different regions. For instance, in some regions, the power generated is traded in a specified quantity on a monthly basis. Therefore, it is difficult to predict the specific share of the Company in the market by the end of this year. On one hand, it depends on our competitiveness during bidding, and on the other hand it depends on the proportion of the power to be traded in the market based on competitive bidding in national power consumption. According to current trend, the share of direct power supply to large consumers shows a rapid growth, and local government also has stringent requirements on direct power supply to large consumers.

In 2015, the proportion of power generation to be supplied directly to large consumers accounted for around 5% in the total power generation. It is predicted that this proportion will reach 12-13% in this year.

9. In 2015, the proportion of disused wind energy in wind power generation industry reached 15%. Has any similar measure been taken for the Company's wind power unit? And will the disuse of wind energy further increase in the future? To what extent does the disuse of wind energy have impact on operational performance of the Company?

Disuse of wind energy happens in such service areas as Ningxia and Hebei. If you are a professional in power industry, it will be easily understood that wind power generation will be affected by a variety of natural factors such as volatility of wind. A major distinctive feature of power compared with other commodities is that it cannot be stored in a large scale. Power generation and consumption should be roughly at the same time. Therefore, stringent requirements are imposed on the power, voltage, and frequency for grid operation.

The solar power units generally operate under full load during daytime and begin to operate under reduced load at around five o'clock in the afternoon when the sunshine is not adequate. However, it is also at the time of peak demand.

Substantial decline in the utilization hours of thermal power generation facilities is on one hand is caused by the slowdown in the growth of power demand, and on the other hand by China's encouraging policy for vigorous development of renewable energy, and both of them also have some objective connection. China also paid special attention in this aspect, and issued some documents intensively, one of which is the Regulations for Guiding The Utilization of Renewable Resources, which specifies that every province should report the proportion of renewable power generation in the total power generation. There is also a guide for every power enterprise, which requires that by 2020 the renewable power generation of each enterprise must be more than 9% of its total power generation. In this way, compulsory requirements have been put forward to objectively promote the utilization of renewable resources in China.

10. The Company announced to terminate the Framework Agreement for Restructuring of Coal Chemical Business with China Reform Holdings Corporation Ltd., and the restructuring  will be led by the parent company. Does this indicate that the coal chemical business will be taken over by the parent company?

As we have known that we signed this framework agreement with China Reform Holdings Corporation Ltd. on July 7, 2014 and terminated it on March 29, 2016. It is primarily because we fail to reach a consensus with China Reform Holdings Corporation Ltd. on the restructuring scheme. For this, China Datang Corporation, as the major shareholder of the Company has paid much attention and given great support to the restructuring of our coal chemical business. In order to continue to promote the restructuring work, the Company and China Datang Corporation have made the decision through negotiation to further promote this work under the leading of China Datang Corporation. Therefore, the restructuring has not been terminated and will continue to achieve the established goals and direction.

The Company and China Datang Corporation will negotiate to determine whether to take over the coal chemical business by China Datang Corporation and work out the specific scheme and mode for restructuring, and start financial audit and new asset assessment as soon as possible. Subsequently, the Company will work out the detailed implementation plan according to the resolutions from the Board of Directors and the general meeting of shareholders of the Company, and the deployment of the entire restructuring process by China Datang Corporation. We will report the latest progress and believe that under the leading of China Datang Corporation the restructuring of coal chemical business will be further promoted.

11. What is the difference between the price for direct power supply to large consumers and the benchmark price? Does it increase or decrease compared with the previous year?

In 2015, the power directly supplied to large consumers accounted for around 5% of the total power generation of the Company. The different between the price for direct power supply to large consumers and benchmark price varies in different service areas, ranging from RMB0.006-0.007/kWh to RMB0.17/kWh, representing an average decrease of around RMB0.08/kWh. From January to March this year, the prices for direct power supply to large consumers in Shanxi and Guangzhou are nearly RMB0.02/kWh and RMB0.01/kWh lower than the benchmark price, respectively. The price for direct power supply to large consumers is generally lower than the benchmark as the competition in power market is getting stiffer.

12. May I ask what is the general trend of power market reform in the opinion of the Company's management? As we know that there is no substantive progress in the power market reform in the past many years. Under intensive reform, investors are worried that the electricity price will fall dramatically due to oversupply of power, which will have great pressure on power generation industry. So what is the opinion of the Company's management on this issue?

In China, a socialist country based on market economy, the pricing mode has been gradually changing from based on administrative instruction to based on the market, which is general trend.

In our opinion, the reform in 2002, which separated power generation companies from grid companies, actually aims to cultivate the mainstay enterprises in the competitive market. At that time, five major power generation groups are required to take a no more than 20% share in power supply in each regional grid to prevent them from becoming monopoly groups in a certain region. To cultivate multiple mainstay enterprises to participate in market competition was a principle for power market reform at that time.

According to Zhongfa No.9 document issued on March 2015, the spirit of the power system reform is opening up the market at the power generation side and power sales side, and having direct control over the transmission and distribution network so that profitability mode of grid companies will change from based on price difference to based on wheeling charges. The reform focus is actually on the power generation supply side and power sales side. Therefore, more stringent requirements will be imposed on every power generation companies. We should be familiar with the rules of the market and adapt to the market competition as soon as possible to become real mainstay enterprise in the market economy.

13. May I ask Mr. Wang that as you formerly worked in the Group and now in the Company, what is your opinion on the restructuring of the Company's coal chemical business and injection of thermal power assets in Hebei into the Company, and do you have any specific opinion or plan for both issues?

The Company's coal chemical business is considered as a national strategic energy demonstration program.  Its necessity is determined by relevant national energy policies. And it requires joint efforts both from China Datang Corporation and the Company. As the price of oil is low now, restructuring has encountered some difficulties and problems during the production and operation. As a demonstration project, the coal chemical projects have enjoyed relevant preferential policies in China. But for the time being, more details about the restructuring of coal chemical business cannot be disclosed. The direction and goals of the restructuring do not change and more efforts will be put into this work.

Both the restructuring of coal chemical business and injection of thermal power assets are correlated and complementary. After the scheme for restructuring coal chemical business, we will certainly follow up the work of injecting thermal power assets. The Company and China Datang Corporation are endeavoring to promote the progress of both the restructuring of coal chemical business and assets injection.

14. Is any time schedule available for the restructuring of coal chemical business? Will it be completed in the first half of this year?

Restructuring of coal chemical business is a task for assets operation requiring huge investment. as well as assets assessment, audit, and other relevant concrete work. The Company will speed up relevant work, and we believe that this work will have a satisfactory result in the following one year.

15. Operating segments other than power generation of the Company continued to suffer losses in 2015. Can you provide more details about the losses in these segments? What is overall situation about the losses in 2016 according to prediction?

In 2015, the Company's operating segments other than power generation continued to suffer losses amounting to nearly RMB7 billion, representing a year-on-year decrease of nearly RMB0.9 billion compared with previous year. Of course, some losses are caused by impairment of assets. By excluding this factor, the total operational losses reached RMB3.6 billion, also representing a year-on-year decrease.

Details about the losses of each non-power generation projects: Duolun project: loss of RMB2.8 billion; Keqi: a profit of RMB47 million after some deferred income are received due to turning the equipment into the fixed assets on November 1, 2015; Hulun Buir Fertilizer project: loss of RMB250 million, representing a year-on-year decrease of around RMB50 million; Xilinhaote mine project: loss of RMB700 million, representing a year-on-year decrease of RMB24 million.

In 2016, we strive to continuously control and reduce the losses. By increasing the production steadily, improving the management, and reducing costs, it is predicted that the overall losses of non-power generation segments will be controlled within around RMB3 billion.

16. We note that the fuel cost of thermal power units of the Company decreased by about 10%, while that of other industry peers has generally decreased about 20%. What is the reason?

The reported decrease of 10% is actually the comprehensive fuel cost for power generation, including the cost of gas. The unit price of standard coal for all units of the Company is RMB381/tonnes, showing a significant decrease of 21.7% (RMB105/tonnes) on a year-on-year basis. We cannot be compared with other companies in the following two aspects: our operational structure and the base of previous year. For this, the fuel costs of the Company have decreased significantly. In the first quarter of this year, the unit price of standard coal is around RMB340/tonnes, which is a relatively low level and roughly the same as the fuel costs in November last year. With the operation of Fuzhou power plant, the average unit price of standard coal will be increased because it uses 1000 MW units, which consumes a large quantity of coal, and coal price is relatively high as part of coal needs to be transported from other provinces.

17. What is the target unit price of the standard coal for thermal power units in 2016? What is the predicted utilization hours of thermal power units in 2016?

The target unit price of the standard coal for power generation is RMB340/tonnes in 2016, and we have confidence to achieve this target within this year.

In 2015, the national power consumption reached 5.55 trillion kWh, which increased slightly by 1.5% compared with 2014. It is predicted by China Electricity Council that the national power consumption will increase by 1%-2% in 2015. However, the operation data of the first three months are not satisfactory. Specifically, the average utilization hours of the coal-fired units for Beijing-Tianjin-Tangshan grid, which is the key service area of the Company are 4620. According to the prediction by the grid, the annual average utilization hours in 2016 will be around 4090. According to available data and operation data from January to March in this region, the utilization hours of our units will somehow decrease in 2016.

18. Could the management of the Company indicate the unit price of standard coal and utilization hours for coal-fired units? Is there any instruction for the utilization hours of coal-fired units in 2016?

The unit price of standard coal is around RMB400/tonnes, representing a year-on-year decrease of RMB97/tonnes. If excluding the cost of gas, it is RMB126.9/tonnes, representing a year-on-year decrease of 30.4%. We can see from above that the cost of standard coal is reduced by over 20%. The utilization hours of the coal-fired units of the Company are 4620.

19. What is the plan for the new installed capacity of coal-fired, gas-fired, hydropower, solar power, and wind power units in 2016? As required in the document issued by the Energy Administration that by 2020 the proportion of clean energy and renewable energy in the total power generation of each power generation enterprise should reach 9%, what is the plan of the Company for the installed capacity of such units by 2020.

In terms of thermal power units, in April 2016, 1000 MW Unit 2 of Jiangxi Fuzhou Power Plant was put into operation; the Company plans to put one 660 MW unit of Inner Mongolia Togtoh Power Plant Phase V Project into operation by the end of this year. In terms of hydropower units, units 5 and 6 of Sichuan Huangjinping Hydropower Station will be put into operation in June with a total installed capacity of 50 MW; Bodui Hydropower Station in Tibet Autonomous Region will be put into operation in June with an installed capacity of 3.2 MW. The total installed capacity of hydropower units is just 53.2 MW in total. In terms of wind power units, in 2016 a total of 186 MW will be put into operation, which is installed primarily in Jiangxi and Shanxi provinces. In terms of photovoltaic power units, a total of 130 MW will be put into operation in 2016, which is installed primarily in Yunnan, Qinghai, and Hebei. From the above, the installed capacity that has been and will be put into operation in 2016 is significantly reduced compared with the previous year. This is because the power supply is relatively adequate. Therefore, the Company will consciously control the operation of installed capacity to ensure stable development of the Company.

At present, there is a big gap between the proportion of the new energy in the total power generation of the Company and the target of 9%. Therefore, we will speed up the development of new energy projects during the 13th Five-Year period. On one hand, onshore wind power projects will be developed both in large-scale and distributed manner. Large scale key projects will be built primarily in Inner Mongolia, Hebei, and Ningxia. In addition, some projects will be built in the central and southern regions for the exploitation of distributed and low speed wind resources. On the other hand, we will put more efforts to the development of offshore wind power projects in Pingtai County, Fujian Province and coastal area in Gangdong.

The Company is vigorously developing large scale ground photovoltaic power generation projects in Qinghai, Ningxia, and Yunnan so as to shorten the distance with national policy requirements.

20. What is the average interest in 2015 and is there any prediction for 2016?  What is the dividend distribution policy in 2016?

With national reduction of benchmark lending rate for several times in 2015, the overall financial cost of the Company is reduced accordingly. With the stock assets of last year, the financial cost in power generation segment is relatively lower than the non-power generation segment. By the end of December, the consolidated interest for power generation segment was 4.6% and that for all operating segments was 4.8%.

As for the dividend distribution, it is in accordance with the Articles of Association of the Company and based on 50% of the net profits of the parent company under China Accounting Standards for Business Enterprises in recent two years. The dividends to be paid per share are determined to be RMB0.13 in 2015 and RMB0.17 in 2016.

21. Can you describe the impact of the power generation to be supplied directly to large consumers on the operational performance of the Company with specific cases? The Company has obvious advantage in North China Grid. As the power market reform may not be implemented in this area this year, how can the Company maintain this advantage in such a case?

After No.9 document for the reform has been issued, comprehensive pilot reform has been carried out in Yunnan, Guizhou, and Shanxi. Pilot reform for power sales side has been carried out in Guangdong and Chongqing. In Yunnan, benchmark price is canceled and annual power plan is established. After these practices, the monthly and day-ahead electricity market will be established based on bidding mode. The "day-ahead electricity market" refer to such a power market where the bidding of the day-ahead electricity is carried out based on the prediction of tomorrow's load change, and after bidding, dispatching department will arrange the power generation by successful bidders after safety check. In the future, spot electricity market will be developed. In this market, the power generation enterprises will make real-time offers for bidding. However, it has not been worked out in China and further study is still needed.

In comparison, spot electricity market has been launched in Australia. In China, Yunnan is an area with the fastest pace of reform. Both all-inclusive electricity market and day-ahead electricity market have been established in Yunnan.

By now, China has no unified standard for the management of direct power supply to large consumers. Different bidding rules are used in Different provinces across China. In some provinces, matchmaking tradeoff model is used. In some provinces, local economic planning committee will define the price reduction range, and power generation enterprises may bid within this range. Successful bidders are those who offer the lowest price or average price. In both methods, the price determined by bidding is definitely lower than the benchmark price, and the income of power generation enterprises is also reduced. On the other hand, however, it is also an exploratory attempt for future development.

Currently, the power supply increase is faster than the increase of power demand. In terms of electricity elasticity coefficient, there will be a large difference between the electricity elasticity coefficient in the previous year and that in this year. As we have mentioned earlier, this is to say, the new installed capacity is predicted to be 100 million kWh whereas the power demand increase is predicted to be only 1% or probably will not increase. The power system reform has brought austere challenge to our power generation enterprises. In order to cope with the operating pressure due to the reform, on one hand we are building a power marketing team, which are required to familiarize themselves with the bidding rules adopted in various provinces to work out the policies for the management of power marketing and bidding. On the other hand, we will take the initiative to adapt to the competitive power market, and strive to generate more power to supply to the market and make more profit in multiple ways and multiple channels after ensuring proper equipment management.

Editor:支春明    Source:6165金沙证券与资本运营部

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