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The share price of China Longyuan Power, China’s biggest producer of wind power, yesterday dropped 10.8% after the company said it plans to issue new H-shares, as investors worried about the dilution and about a potential overhang on the stock until the sale has been completed. The drop left the stock at its lowest level since the listing in Hong Kong more than three years ago.
Longyuan didn’t specify the size of the deal, but said it may account for up to 50% of its existing H-share capital and 18.2% of its overall share capital. Based on Friday’s closing price of HK$5.84, the company could raise up to about HK$7.9 billion ($1 billion).
However, the new shares are expected to come at a discount versus the market price, so the deal would likely be smaller than that (unless the share price is higher at the time of the sale). Following yesterday’s sell-off, the maximum deal size dropped to $910 million.
Longyuan said in a statement after the market closed on Friday that it is proposing to issue up to approximately 1.36 billion new H-shares at a maximum discount of 20% versus the closing price on the day of the deal, and the average closing price during the previous five days. The sale will be done through a placement and needs approval from several Chinese entities — the China Securities Regulatory Commission (CSRC), the State-owned Assets Supervision and Administration Commission of the State Council (Sasac), the National Council for Social Security Fund of the PRC (NSSF), and the Ministry of Environmental Protection — which means it is hard to estimate the timing of the actual sale.
However, it won’t happen until early July at the earliest as Longyuan also needs shareholders’ approval, which it will seek at two separate class meetings for the holders of its unlisted domestic shares and H-shares respectively, as well as at an extraordinary general meeting (EGM) that are all scheduled for July 3. Morgan Stanley and UBS have been mandated to arrange the transaction.
In connection with the share sale, Longyuan’s controlling shareholder, China Guodian, and a second state-owned shareholder, Guodian Northeast Electric Power, will transfer shares equal to 10% of the placement to NSSF, in accordance with Chinese regulations. NSSF may choose to hold on to the shares, or may ask the company to sell them on its behalf — in which case they may be added to the overall size of the placement.
The company said in the announcement that the money raised will be used to fund its new renewable energy generation projects, particularly in the wind power sector. The sale of new shares will also help to optimise its capital structure and reduce its financing costs, the company said. At the end of December last year, its gearing stood at 59.6%.
When Longyuan listed in Hong Kong in December 2009 it had approximately 4,500 megawatt of installed wind power capacity, and ranked as the fifth-biggest wind power producer in the world. At the end of last year it had 8,598MW and was the second largest producer of renewable energy globally, including solar power and other renewable energy sources such as geothermal and biomass. At the time of the IPO it said it planned to add 2,000MW of wind power per year, which it has done.
So far it has financed its expansion through internal cash flows, a domestic bond and an offshore renminbi-denominated bond, and a source noted that the sale of shares will not only provide it with capital to invest directly, but will also give it more headroom on its balance sheet to fund future projects.
At a conference call on Friday evening, some analysts questioned whether it was really necessary for Longyuan to sell new shares, however, given that its gearing ratio is still below that of Hong Kong-listed competitors Huaneng Renewables Corp and China Datang Corporation Renewable Power.
Representatives for the company said that it is, as the target is still to add 2,000MW of wind power capacity every year, including offshore and overseas projects. The annual capital expenditure to support this growth will be approximately Rmb15 billion ($2.4 billion), they said, according to a transcript of the call posted on the company’s website.
“According to domestic regulations, the project’s equity contribution should be at least 20% to 30% (and) without this offering, our debt-to-asset ratio would exceed 70% by the end of this year. Therefore we consider equity financing,” they said.
One option would have been to seek an A-share IPO, but the company said that in light of the complicated approvals procedure, which makes the timing of such a deal less predictable, it decided that an H-share offering was the better route.
The company representatives added that funds raised from the placement together with its estimated cash flow will be sufficient to satisfy its future capex needs until 2015, and hence it won’t need to return to the equity market in the short-term. However, that doesn’t exclude the possibility of an A-share issue going forward, they added.
Whether there will be demand for a share sale of this size will likely depend a lot on the discount that the company offers at the time of the sale. Longyuan currently has the highest valuation among the Hong Kong-listed wind power producers and there are still a lot of concerns related to the sector, including grid congestion and a tight credit market. However, one source noted that a company like Longyuan should be able to attract investors, given it’s the market bell-weather and has the largest market cap and free-float, as well as a good track record of delivering on its grow plans.
China has also set a target to increase the country’s installed capacity of wind power to 100GW by 2015 and to 200GW by 2020 from 60GW today, and has policies in place to support that development, including feed-in tariff subsidies. The goal is for non-fossil fuel energy to contribute 11.4% to total energy consumption by 2015 and 15% by 2020. This should benefit the market leader.
Analysts at Citi downgraded Longyuan to “neutral” from “buy” yesterday, partly in view of the up to 5.5% dilution to earnings per share that the placement will cause in the next 12 months. “We recommend switching to Huaneng Renewables for lower valuations and no equity placement risk,” they said in a research note.
