Yangtze Power attended our AccessChina 2018conference and we lay out thekey takeaways below: Power output: The water inflow improved much in 2H17and the totalgeneration in 2017was up by 2.4% yoy (vs. 4% decrease in 1H17). ThreeGorges/Gezhouba recorded 4.4%/4.1% generation growth while Xiluodu’s outputremained flattish and Xiangjiaba’s output decreased slightly by 1.2%. Accordingto the management, there are 6bn kwh power curtailment in 2017(vs. 210.8bnkwh total power output) mainly in Xiluodu/Xiangjiaba and management expects itto decrease going forward. The synchronized dispatching among Yangtze’s fourhydro plants has contributed 9.6bn kwh additional power output in 2017andmanagement believes there is still further room to improve. Tariff updates: Yangtze Power just announced the tariff hike for its Xiluodu/Xiangjiaba (effective on Jul 2017) due to the mid-year tariff hike for thermal power.Tariff was raised by Rmb1.9/mwh to Rmb326.3/mwh for Xiluodu (Right) and wasraised by Rmb4.6/mwh to Rmb300.6/mwh for Xiluodu (Left) and Xiangjiaba. Outof the total 210.8bn kwh power output in 2017, around 12bn kwh is market-basedvolume with a price discount of c.Rmb20/mwh. Capital deployment: Yangtze has budgeted Rmb12bn/year for externalinvestments for next 2-3year. They will mainly focus on hydro/power retail sectorin domestic market and are also interested in overseas opportunities in hydro/power retail/gas power sector. Other key takeaways: The company is aware of the draft version notice by NDRCto reduce the VAT for hydro power, but they are still waiting for further officialupdates on this. Mgmt expects the financial cost to drop yoy in 2017and remainflattish in 2018with some reduction in total debt offset by higher effective interestrate. Yangtze will stick to its dividend policy of no less than Rmb0.65/sh for2017-20.

Yangtze Power reported robust 3Q17results with net profit up by 11% toRmb9.7bn. As a result, 9M17net profit increased by 9% yoy to Rmb17.8bn,accounting for 90% of our previous full-year forecast (historically 79-83%). The3Q earnings growth are primarily driven by a 4% yoy increase in power output,a 87% yoy increase in investment income and a 11%/19% yoy drop in financial/operational cost. Consequently, we lift FY17/18earnings by 10/9% on the backof strong 3Q results. With 15% upside to our new target price of Rmb18.3, wereiterate Buy on Yangtze Power given 1) a high-quality hydro power assets withstable earnings, 2) an absolute DPS commitment at Rmb0.65/sh until 2020(4.0%yield) and >75% payout post 2020, 3) potential earnings upside if the favorableVAT rebate policy gets extended. Management will host a call at 9:00am on 1Nov (dial in: China: 95040123456; overseas: +865722760523). 3Q17results boosted by higher output, investment income and cost savings In 3Q17, net profit was up by 11% yoy to Rmb9.7bn driven by 4% yoy increase innet output, a 87% yoy increase in investment income and a 11%/19% yoy drop infinancial/operational cost. Power generation growth recovered from a 4% declinein the first half to 4% yoy in 3Q17thanks to improving water flows in Three Gorges(output +6% yoy) and Gezhouba (output +11% yoy). While Chuanyun (Xiluoduand Xiangjiaba)’s power output growth remains stable with 1% improvement in3Q17. As a result, 9M17net profit was up 9% yoy to Rmb17.8bn. The 1% yoy decreasein net power output was well offset by 12%/24% yoy decrease in financial/operational cost and doubled investment income. 9M17results accounts for 90%of our previous full year estimates, ahead of the historical range of 79-83%. Further room for financial cost savings In 9M17, Yangtze's financial cost was lowered by 12% yoy to Rmb4.4bn withstable net gearing at 110%. Effective interest rate was lowered by 0.3ppt to 4.4%per our calculation. During the 1H17results conference call held in September,mgmt expects the debt to asset ratio to decrease gradually from 59% to 30%, afterwhich Yangtze may consider M&A and raise the debt to asset ratio again. We seefurther room for financial cost savings going forward as a result of deleveraging. Hydro VAT rebate could be extended, positive to Yangtze According to Energy News on 8Sep, the NDRC is soliciting feedbacks for thenotice of Reduce the Tax for Enterprises in Renewables Energy Sector. In thenotice, the NDRC proposes to reduce the VAT for hydro power units (with capacityabove 50MW) from 17% to 13% and to extend the VAT rebate period to 2020for those with capacity above 1GW. If passed, Yangtze Power would be the keybeneficiary and we estimate the extended VAT rebate would bring 9.6%/9.4%2018/19E earnings upside. See report Hydro VAT rebate could be extended,positive to Yangtze Power and SDIC, 8th Sep 2017for more details.

Better earnings stability than a thermal peer, more upside than hydro peers Positive tariff outlook, better capex discipline, improving free cash flow SDIC enjoys higher earnings visibility, as well as stability, than thermal power peers, due to its 57% capacity exposure to hydropower. Over 2016-1H17, almost all the earnings came from the hydro segments. Meanwhile, SDIC’s thermal business can also benefit from accelerating supply-side reform and year-end tariff hikes. We expect SDIC to turn FCF positive starting in 2018, thanks to earnings recovery and better capex discipline, indicating potential upside to our assumed 35% payout ratio and dividend yield of 3%. Relative to Yangtze Power, SDIC is an overlooked A-share hydro name, with an attractive valuation and similarly strong hydro capacity pipeline. Reiterating Buy. Positive tariff outlook, better capex discipline, improving free cash flow SDIC’s 1H17 results were slightly below expectation, with a 13/37% yoy decline in reported/recurring net profit, but still much better than thermal peers, which are near breakeven. Thermal tariff recovered by 7.5% yoy, due to a lower DPS discount. Hydro tariff dropped 6% yoy in 1H17 but the declining trend slowed in the second quarter. Management expects the discount to narrow going forward, with less competition from peers. Furthermore, its inter-provincial hydro power sales tariff should benefit from the thermal tariff hike in July and potentially another round at year-end. In response to supply-side reform, SDIC is delaying three coal-fired generation units (total 3GW) and plans no other thermal capacity additions over 2017-19E. We expect its free cash flow to reach c.Rmb8.0bn in 2018/19E, supporting a stable dividend outlook. Earnings revisions We revise down our 2017/18/19E net profit forecasts by 14%/4%/1% to reflect higher fuel cost, delay in thermal projects, higher thermal tariff due to a lower DPS discount and July tariff hike, and lower hydro tariff due to higher discount. Valuation and risks Our TP is based on DCF with WACC of 7.0% and zero TGR. SDIC is trading at 12x 2018E P/E and 1.5x P/B, well below Yangtze’s 17x P/E and 2.3x P/B. Risks: lower-than-expected thermal tariff hike, weaker water flow, higher coal prices.

Yangtze reported in-line 1H17 results with net profit up 7% yoy. Yangtze will enjoya higher tariff for its inter-provincial power sales in 2H17 thanks to a thermal tariffhike in July. Furthermore, it may also benefit from another round of thermal tariffhikes at year end. The company also has further room for financial cost savingsas the mgmt aim to lower their debt/asset ratio to 30%. We maintain Buy onYangtze due to its unique dividend commitment supported by highly predictablecash flows which generate a an attractive 4.3% 2017E yield. 1H17 results in line. Yangtze's net profit was up 7% yoy to Rmb8.1bn in 1H17, in line with our forecast. The growth is mainly driven by cost savings (SG&A -18% yoy; financial cost -13%yoy) and investment gains (+82% yoy), partially offset by weaker net output (-4%yoy). Generation declined in Three gorges (-11%) and Gezhouba (-4%) due to weakwater flows and slightly increased in Xiluodu and Xiangjiaba (+4%). Free cashflow reached Rmb10bn in 1H17. Key takeaways from conference call. Tariff: Mgmt expect a higher tariff in second half for their inter-provincial powersold by Xiluodu and Xiangjiaba to Shanghai and Guangdong thanks to the thermaltariff hike on 1 July. There is further room for tariff hikes if the fuel cost passthroughfor thermal plants is executed at year end. Power output: Mgmt expect full-year output to reach 191-200 bn kwh. Thegeneration was impacted by a typhoon in July-Aug but has started to recover inSept. Market-based volume is expected to rise over the next few years. Capital structure and financial cost: Mgmt plan to use cash flow for debtrepayment as they do not have major M&A plans currently. Mgmt expect thedebt to asset ratio to decrease from the current 59% to 30%, after which Yangtzemay consider M&A and raise the debt to asset ratio to 60% again. Mgmt arecomfortable with a debt ratio of 42-55% . In 1H17, the average interest rate was4.2% and mgmt expect it to increase mildly to 4.35% in 2H17. Capex: Yangtze does not have a major M&A target for now but expects to acquiresome hydro/power retail assets related to its core business. Mgmt are also lookingfor potential targets overseas and the company has gained experience via a 288MW wind power acquisition in Germany. Over 2018-19, the company hasbudgeted for Rmb10bn capex each year. Other key takeaways: Yangtze will continue to use investment income to smooththe earnings volatility driven by water flows fluctuations.