What happened

Recently, the National Development and Reform Commission（NDRC） held training sessions on carbon quota allocation andcalculation. It unveiled a draft plan for carbon-quota allocation tothe power, cement and aluminum sectors using abenchmark-based method. We believe the move will drive fasterconstruction of a national emission trading market and benefitZhixin Electric.

Comments

Benchmark-based quota calculation likely to bepromoted across the nation. A benchmark-based calculationwould be adopted for all the three sectors with 2015 output asthe benchmark. Initially, 70% of the quota will be allocated tothe power sector, 50% to the cement sector and 50% to thealuminum sector. The actual quota will be recalculated based onthe actual 2017 output. Moreover, the calculation method fornew facilities might be unveiled going forward.

Local governments allowed to set their own benchmarksto manage regional emission quota flexibly. For the threesectors, local governments are allowed to set lower benchmarksthan the national ones, implying even stricter standards in localmarkets.

Increasing popularity of carbon trading should boostZhixin’s valuation, given its leading deployment in thisfield. As of end-2016, its emission rights assets totaledRmb187mn. The upcoming launch of the national emissiontrading market in 2017 should boost Zhixin’s valuation.

Maintain our 2017/18e EPS forecasts at Rmb0.40/0.48, implying19x/16x 2017/18e P/E. Maintain BUY and TP at Rmb10.66（27x 2017e P/E）， implying 42.5% upside room.

Risks

Disappointing investment in power distribution networks;delayed launch of a carbon trading market.