Longyuan Power shows investors are keen to buy green

China's leading provider of wind power, China Longyuan Power Group Corp, was able to raise the maximum funds it sought from its initial public offering after the deal attracted the support of several global funds specialising in renewable energy.

A source said these funds helped drive the momentum in the bookbuilding and also gave the company and the bookrunners the confidence to fix the price at the top of the offering range despite some price sensitivity in the order book.

The final price of HK$8.16 resulted in a total deal size of HK$17.49 billion ($2.3 billion). The stock is due to start trading on the Hong Kong main board on Thursday (December 10).

But experts on renewable energy were by no means the only ones interested in this company, which is expected to grow in line with the Chinese government's aim for a 10-fold increase in the country's total wind power generating capacity by 2020. Longyuan currently has a 24% market share and an installed capacity of about 3,900MW, but is expected to grow this to 12,000MW by 2020. Some analysts also expect the company to become the second largest wind power producer in the world by 2013, from its ranking as the fifth largest today.

Hong Kong retail investors definitely bought the story. According to sources, they subscribed to approximately 230 times the number of shares initially set aside for them, tying up $26.5 billion worth of cash and triggering a full clawback that increased the size of the retail tranche to 20% from the initial 5%.

While the amount of cash committed by retail investors is less than half the $64 billion worth of retail orders received by pharmaceutical distributor Sinopharm in September, and the $59 billion put towards BBMG Corp's IPO in July, it is still impressive given that the retail segment of the Hong Kong market has been tapped for $4.5 billion since mid-September (including the institutional tranches, these companies have raised a combined $23.5 billion). And on top of that, we are only a couple of weeks away from Christmas -- a time of year when investment activity slows down significantly.

After the clawback and excluding the 31.2% of the total deal ($730 million worth of shares) that was reserved for cornerstone investors, the remaining $1.1 billion institutional tranche was about 27 times covered. More than 400 institutional investors submitted orders.

The deal was priced on Friday, a couple of days ahead of the start of the Framework Convention on Climate Change (UNFCCC) in Copenhagen today, which will try to achieve a new agreement on how to limit carbon dioxide emissions by both developed and developing countries. While such an agreement remains in doubt, the Copenhagen summit has put the spotlight on the need for more alternative energy sources and, in that respect, Longyuan's IPO was well timed. As an operator of wind farms, Longyuan has a right to sell carbon credits from approved projects into the international market and, since 2007, a certain portion of its profit has come from the sale of such credits.

The company sells both certified emission reductions (CERs) and voluntary emission reductions (VERs) and a syndicate research report projects that revenues from carbon credit sales will account for 8.8% of Longyuan's operating profit this year and 14.2% in 2010.

Longyuan offered 2.143 billion new shares, or a 30% stake in the company at a price ranging from HK$6.26 to the final IPO price of HK$8.16. The price translates into a 2010 price-to-earnings multiple of 28.9 times, or 2.2 times the company's estimated book value in the same year.

The cornerstones comprised: China Investment Corp, which bought $400 million of the deal with an agreement not to sell its shares for the first 12 month; China Life Insurance, which took $180 million worth of shares; private equity investor Wilbur L Ross who bought $100 million worth; Value Partners which took $30 million worth; and a fund affiliated with Hong Kong tycoon David Li, which invested $20 million.

CIC's large-scale support for the deal is likely at least partly a result of the fact that the Chinese sovereign wealth fund is also a substantial shareholder in Morgan Stanley, one of the two bookrunners for Longyuan's IPO. CIC bought $5 billion worth of equity units in the US investment bank in December 2007 that will convert to common shares in August 2010, giving it a maximum 9.9% stake.

However, CIC has shown an interest in alternative energy companies before, and the investment in Longyuan fits well in with its perceived overall strategy - to invest in companies that provide access to energy and metals and mining resources that are in shortage in China. In early November it invested $2.2 billion to acquire an equity interest in Virginia-based power generation and distribution firm AES Corporation and signed a letter of intent to also buy 35% in AES's wind generation business.

Later in the same month it invested HK$5.5 billion ($710 million) for a 20% equity stake in Hong Kong-listed GCL-Poly Energy Holdings, a polysilicon supplier and a power producer that generates electricity from co-generation plants.

Beijing-based Longyuan is a first-mover when it comes to the building of wind farms in China and has been able to acquire a lot of the best wind sites in the country. In addition to its existing installed capacity, the company also has enough land, across 15 different provinces, on which to erect wind turbines with a combined capacity of 43,000MW. Together with the funds raised from the IPO, Longyuan has the key ingredients in place to deliver on its growth plans.

The deal was jointly arranged by Morgan Stanley and UBS.

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