July 4,2006 Shenergy (600642.SS) Gao Hua Securities Investment Research 1 July 4,2006 COMPANYUPDATE Shenergy (600642.SS) Tariff increases below expectation; maintain Sell What's changed Shenergy has announced Rmb0.004/kWh tariff increases for its power stations, effective June 30. Implications The increase was below our expectation of Rmb0.01/kWh and the lowest among the major peers that have announced tariff increases. Coupled with the most severe utilization decline in Eastern China according to our forecasts, the company’s performance in the power generation segment should continue to be lackluster. We maintain our Sell recommendation on the stock. We have adjusted earnings (+20% for 2006E and +4% for 2007E) to incorporate the actual increases and fine-tune other assumptions. Excluding the non-recurring pre-tax gain of Rmb363mn assumed for the disposal of the Pudong Development Bank shares, the change to 2006E earnings would only be -1%. Valuation We are also rolling forward our 12 month DCF-based share price target, moving to 2007 from 2006 data. Our price target increases to Rmb5.70 from Rmb5.60 as a result. This implies 6% downside from the current share price. The new target is equivalent to a 2007EP/E of 13x, compared to a peer group average of 12x. Key risks Higher-than-expected plant utilization rates or lower-than-assumed coal prices. Gao Hua Securities acknowledges the role of Stephen Oldfield and Christopher Wong of Goldman Sachs in the preparation of this note. INVESTMENTLISTMEMBERSHIP Asia Pacific Sell List Coverage View: Neutral China: Power Growth Returns * Multiple Volatility Volatility Multiple Returns * Growth Investment Profile: Shenergy Low High Percentile 20th 40th 60th 80th 100th * Returns = Return on Capital For a complete description of the investment profile measures please refer to the disclosure section of this document. 600642.SS Asia Pacific Utilities Peer Group Average Key data Current Price (Rmb) 6.09 Price target (Rmb) 5.70 Market cap (Rmb mn / US$ mn) 17,597.9 / 2,199.0 Foreign ownership (%) -- 12/0512/06E 12/07E 12/08E EPS (Rmb) New 0.500.620.450.47 EPS revision (%) 0.020.63.3 (6.1) EPS growth (%) 15.824.8 (28.3) 4.7 EPS (dil) (Rmb) New 0.500.620.450.47 P/E (X) 12.29.813.613.0 P/B (X) 184.108.40.206.3 EV/EBITDA (X) 220.127.116.11.7 Dividend yield (%) 18.104.22.168.8 ROE (%) 14.316.010.610.6 Price performance chart 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Jul-05 Oct-05 Jan-06 Apr-06 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 Shenergy (L) Shanghai SEAShare Index (R) Share price performance (%) 3 month 6 month 12 month Absolute 13.28.9 (21.5) Rel. to Shanghai SEAShare Index (10.7) (23.5) (51.2) Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 7/04/2006 close. Franklin Chow, CFA +86(10)6535-3012 | email@example.com Beijing Gao Hua Securities Company Limited Qi Zhou +86(10)6535-3054 | firstname.lastname@example.org Beijing Gao Hua Securities Company Limited Beijing Gao Hua Securities Company Limited and its affiliates do and seek to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For analyst certification, see the text preceding the disclosures. For other important disclosures, contact your investment representative. Beijing Gao Hua Securities Company Limited Investment Research July 4,2006 Shenergy (600642.SS) Gao Hua Securities Investment Research 2 Shenergy: Summary financials Profit model (Rmb mn) 12/0512/06E 12/07E 12/08EBalance sheet (Rmb mn) 12/0512/06E 12/07E 12/08E Total revenue 7,964.28,538.68,914.39,739.3 Cash & equivalents 1,798.54,276.33,696.54,783.6 Cost of goods sold (4,896.2) (5,341.1) (5,895.3) (6,483.4) Accounts receivable 744.2784.8819.3895.1 SG&A (179.8) (185.2) (190.8) (196.5) Inventory 171.0157.4173.8191.1 R&D -- -- -- -- Other current assets 258.7258.7258.7258.7 Other operating profit/(expense) (75.6) (81.2) (84.8) (92.7) Total current assets 2,972.35,477.24,948.26,128.5 EBITDA 2,812.52,931.12,743.52,966.6 Net PP&E 10,803.511,669.113,373.713,731.2 Depreciation & amortization (1,077.6) (1,140.5) (1,231.5) (1,384.6) Net intangibles 53.649.846.142.3 EBIT 1,734.91,790.61,512.01,582.0 Total investments 4,202.44,387.34,500.94,582.2 Interest income 26.543.457.060.6 Other long-term assets 22.214.171.124.8 Interest expense (213.0) (203.8) (213.9) (242.9) Total assets 18,033.621,585.322,870.724,486.0 Income/(loss) from uncons. subs.368.0364.1389.8377.0 Others 140.7562.2178.1118.2 Accounts payable 1,090.71,314.81,451.21,596.0 Pretax profits 2,057.12,556.51,923.11,894.9 Short-term loans 2,377.62,229.92,018.41,736.4 Income tax (473.0) (572.3) (402.8) (313.8) Other current liabilities 448.6624.8455.4366.3 Minorities (241.2) (235.7) (228.7) (229.1) Total current liabilities 3,917.04,169.53,925.03,698.7 Long-term debt 2,507.83,418.74,381.95,367.7 Net income pre-preferred 1,342.91,748.41,291.51,352.0 Other long-term liabilities 0.00.00.00.0 Preferred dividends 0.00.00.00.0 Total long-term liabilities 2,507.83,418.74,381.95,367.7 Net income (pre-exceptionals) 1,342.91,748.41,291.51,352.0 Total liabilities 6,424.77,588.28,306.89,066.4 Post tax exceptionals 0.00.00.00.0 Net income 1,342.91,748.41,291.51,352.0 Common stock & premium 4,827.05,984.25,984.25,984.2 Other common equity 4,951.46,027.46,443.57,148.8 EPS (basic, pre-except) (Rmb) 0.500.620.450.47 Total common equity 9,778.412,011.612,427.713,133.0 EPS (basic, post-except) (Rmb) 0.500.620.450.47 Minority interest 1,830.51,985.52,136.22,286.7 EPS (diluted, post-except) (Rmb) 0.500.620.450.47 DPS (Rmb) 0.250.310.220.23 Total liabilities & equity 18,033.621,585.322,870.724,486.0 Dividend payout ratio (%) 126.96.36.199.1 Free cash flow yield (%) 8.75.9 (4.4) 3.8 BVPS (Rmb) 3.644.164.304.54 Growth & margins (%) 12/0512/06E 12/07E 12/08ERatios 12/0512/06E 12/07E 12/08E Sales growth 188.8.131.52.3 ROE (%) 14.316.010.610.6 EBITDA growth 16.44.2 (6.4) 8.1 ROA (%) 184.108.40.206.7 EBIT growth 23.43.2 (15.6) 4.6 ROACE (%) 11.814.010.09.8 Net income growth 15.830.2 (26.1) 4.7 Inventory days 10.811.210.310.3 EPS growth 15.824.8 (28.3) 4.7 Receivables days 33.532.732.832.1 Gross margin 38.537.433.933.4 Payable days 89.882.285.685.8 EBITDA margin 35.334.330.830.5 Net debt/equity (%) 31.611.421.817.7 EBIT margin 21.821.017.016.2 Interest cover - EBIT (X) 9.3220.127.116.11 Cash flow statement (Rmb mn) 12/0512/06E 12/07E 12/08EValuation 12/0512/06E 12/07E 12/08E Net income pre-preferred dividends 1,342.91,748.41,291.51,352.0 P/E basic (X) 12.29.813.613.0 D&A add-back 1,077.61,140.51,231.51,384.6 P/B (X) 18.104.22.168.3 Minorities interests add-back 241.2235.7228.7229.1 EV/EBITDA (X) 22.214.171.124.7 Net inc/(dec) working capital (100.0) 373.3 (83.9) (37.4) Div yield (%) 126.96.36.199.8 Other operating cash flow (40.1) (399.1) (479.3) (474.0) Cash flow from operations 2,521.53,098.82,188.42,454.2 Additional metrics 12/0512/06E 12/07E 12/08E Capital expenditures (891.0) (2,066.1) (2,842.8) (1,641.3) Volume output -- -- -- -- Acquisitions 0.00.00.00.0 Demand growth (%) -- -- -- -- Divestitures 1.598.90.00.0 Total capacity (MW) 3,624.03,624.03,624.04,524.0 Others (28.9) 179.1276.3295.6 Attributable capacity (MW) 3,335.63,806.63,866.64,226.6 Cash flow from investments (918.3) (1,788.1) (2,566.5) (1,345.7) Peak demand (MW) -- -- -- -- Utilization rate (%) 7,167.96,845.36,537.36,421.2 Dividends paid (common & pref) (537.9) (672.4) (875.5) (646.7) Reserve margin (%) -- -- -- -- Inc/(dec) in debt (776.1) 763.2751.7703.8 Weighted average tariffs ($k/Wh) 0.30.40.30.3 Common stock issuance (repurchase) 0.01,157.20.00.0 Unit fuel costs -- -- -- -- Other financing cash flows (401.9) (80.7) (78.0) (78.6) Cash flow from financing (1,715.9) 1,167.2 (201.8) (21.4) Total cash flow (112.7) 2,477.9 (579.9) 1,087.1 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. Analyst Contributors Franklin Chow, CFA email@example.com Qi Zhou firstname.lastname@example.org July 4,2006 Shenergy (600642.SS) Gao Hua Securities Investment Research 3 RegAC I, Franklin Chow, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Investment profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as 30-day historical volatility, annualized and adjusted for dividends. Quantum Quantum is Goldman Sachs proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in- depth analysis of a single company, or to make comparisons between companies in different sectors and markets. Disclosures Coverage group(s) of stocks by primary analyst(s) Franklin Chow, CFA: China Utilities. China Utilities: Beijing Capital, GDPower Development, Guangdong Electric, Guangdong Investment, Shanghai Municipal Raw Water, Shenergy, Tianjin Capital. Company-specific regulatory disclosures The following disclosures relate to relationships between Goldman Sachs Gao Hua Securities Company Limited ("Goldman Sachs Gao Hua") and companies covered by the Investment Research Division of Beijing Gao Hua Securities Company Limited ("Gao Hua Securities") and referred to in this research. There are no company-specific disclosures for: Shenergy (Rmb6.09) Ratings, coverage groups and views and related definitions Buy, Neutral, Sell -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25-35% of stocks as Buy and 10-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at . The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price, if any, have been removed pursuant to Gao Hua Securities policy when Goldman Sachs Gao Hua is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). We have suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should July 4,2006 Shenergy (600642.SS) Gao Hua Securities Investment Research 4 not be relied upon. Coverage Suspended (CS). We have suspended coverage of this company. Not Covered (NC). We do not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded. 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It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of the investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. 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