Grid connection has been a major concern for investors, but we expect this issue to be resolved gradually with more coordinated wind project planning and the proposed implementation of the Renewable Portfolio Standard (RPS). Medium term, the development of ultra high voltage (UHV) lines and pumped storage facilities will result in a turnaround in wind utilization rates. Another concern has been the high frequency of wind turbine accidents, which should improve following the implementation of a national grid code earlier this year. A third concern for investors has been the decline in carbon prices. However, the market is already factoring in depressed carbon prices and risk looks skewed to the upside. In addition, the likelihood of lower interest rates is a positive.

Strong earnings growth, attractive valuations
Stock prices have fallen 30-50% in the past 12 months and they now trade at about half of their IPO prices. We expect the three wind developers we cover to generate a strong 2012-14E earnings CAGR of 20-24%, putting them on very attractive PEG ratios of <0.5x. All three wind developers are trading well below replacement cost. On P/B vs. RoE they also look attractive and cheaper than other China utility stocks. Our target prices are based on DCF, assuming a Ke of 11-12% and a TGR of 2%, and imply 40-65% upside over the next 12 months.

Eoin Treacy's view Following an enthusiastic period prior to the financial crisis the wind turbine market became oversupplied as low cost Chinese manufacturers increased production, pushing out more established companies. Concurrently, many communities are questioning the wisdom of building wind farms anywhere close to residential areas. Low US natural gas prices have also called the economics supporting the renewables sector into the question. Considering the sector's current difficulties, cost is likely to remain the key concern which is an advantage for Chinese companies.

Denmark's Vestas Wind Systems continues to trend lower and while it has stabilised in the region of DKK30 over the last month, a sustained move back above the 200-day MA will be required to signal more than temporary demand dominance. Spain's Gamesa has underperformed Vestas.

China's Longyuan Power Group and China Datang Renewable Power Corp were not immune from the malaise affecting the global wind sector. However, they found at least short-term support, following accelerated declines in May and posted short-term higher reaction lows in the last couple of weeks. At least a mean reversion rally is underway but a sustained move above the 200-day MA will be required to suggest a return to medium-term demand dominance. Huaneng Renewables has lost downward momentum and failed to hold the downward break this week. A sustained move below HK1.2 would now be required to check potential for some additional upside.