Kazakhstan power nuclear power and hydropower prospects are promising

Harbin Power's new orders for the first half of 2010 reached RMB 15.43 billion, a year-on-year increase of 17%. The new orders for the nuclear power business contributed approximately RMB 6.2 billion, which is equivalent to the 2009 new orders for nuclear power business. At present, Harbin Power has obtained nuclear power business orders with both AP1000 technology and second generation technology. We believe that Harbin Power's mastery of these two nuclear power technologies will strengthen its ability to obtain more orders for nuclear power business. In addition, Harbin Power has increased the production capacity of nuclear island equipment and will reach an annual output of 3-4 sets at the end of the year.

We believe that the hydropower business will have great opportunities for development in the next five years. After the approval of hydropower projects in the past one-and-a-half years, it is expected that the investment in hydropower will reach 1 trillion in the 12th Five-Year Plan. As one of the leading companies in hydropower equipment, Harbin Power has the ability to obtain a 30%-40% market share.

We expect that the future growth of thermal power business will mainly come from overseas markets, especially the Asian market. But risk comes with opportunities. Since there is no hedging for foreign exchange, the appreciation of the renminbi will erode the profits of Harbin’s overseas markets.

We have seen signs of an increase in the proportion of nuclear power orders and the huge room for growth in the hydropower business. Taking into account the increase in overall gross profit margin in the first half of 2010 and maintaining stable gross profit margin in the second half of the year, we revise up the EPS forecast for 2010-2012 from the original forecast of RMB 0.50, RMB 0.56, and RMB 0.66 to RMB RMB 0.66, RMB 0.72, RMB 0.78. Based on the latest transaction price of HK$7.48, based on our 2010-2012 earnings forecast, Harbin Power's P/E ratio for 2010-2012 was 10.1x, 9.3x and 8.6x, respectively. We cautiously gave 11x 2011 P/E, updated the target price to HK$9.00 and maintained the rating of overweight.