Chinese IPOs

Builder of Three Gorges Dam seeks $2.7 billion IPO

Sinohydro is competing with Shaanxi Coal Industry to be the biggest IPO in China this year.
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Sinohydro's Three Gorges Dam
<div style="text-align: left;"> Sinohydro's Three Gorges Dam </dam>

State-owned Sinohydro Corp is seeking to raise Rmb17.3 billion ($2.7 billion) in a Shanghai initial public offering, in a clear indication that Chinese authorities are determined to develop hydroelectric capacity despite turbulence in the country’s equity markets.

The deal is contesting to be China’s biggest IPO this year, alongside Shaanxi Coal Industry’s planned share sale, also worth around $2.7 billion — and will be the biggest deal since China Everbright Bank’s $3.2 billion IPO last August. The two issuers will add 5.5 billion new shares to the Shanghai stock market, which has fallen 12% year-to-date, even after yesterday’s strong rally.

China’s securities regulator, the CSRC, typically only approves transactions this big when it has confidence in market conditions — and it is certainly not afraid to block new equity offers when markets are weak, analysts say.

Sinohydro also has plenty of strong selling points in its own right, which should help it to attract buyers even in the current conditions. First and foremost, it has strong government ties and is the builder of many flagship Communist Party projects, including the Three Gorges Dam, the world’s biggest hydroelectric project. It has built around two-thirds of all medium- and large-size dams in the country.

Sinohydro needs Rmb17.3 billion to buy new equipment, supplement working capital and fund four clean energy and infrastructure projects in China and overseas, the company said in a prospectus. 

The expansion of Sinohydro serves many purposes, not least of which is Beijing’s push to reduce the country’s reliance on coal, its most traditional (yet filthy) fuel. China also sends its builders overseas to export its prowess. Sinohydro is involved in many different hydroelectric projects in Africa, Latin America and South Asia, according to the company.

Sinohydro’s net income rose 27% in 2010 to Rmb2.91 billion on increased demand for hydropower facilities, it said in July. The company had 261 projects under construction in 55 countries at the end of last year, with overseas projects accounting for 26% of revenue and 35% of gross profit, it said.

Although no countries have a purely private sector for electricity generation, the government’s meddling is especially strong in China. As such, government ties are an important element of Chinese companies’ prospects and investors look at the strength of such relationships as much as at the company’s business fundamentals.

Sinohydro is under direct supervision of the State-owned Assets Supervision and Administration Commission, which is a powerful government agency. However, there are factors that Sinohydro might want to play down in investor meetings — the company was involved in China’s high-speed train construction, for example. A crash between two high-speed trains in July raised fresh questions about the quality of engineering work in China. And, during Libya’s upheaval, Sinohydro had to suspend billions of dollars of projects in the country, leaving them unfinished and repatriating its workers, which will hurt the company’s profits.

Synohydro is offering up to 3.5 billion shares, or 35% of its enlarged share capital. The company plans to announce the price range on Friday and start taking institutional orders on September 26. The public offering is booked for September 27 and the final price will be fixed the following day. The allocation of shares to institutional and retail investors is split 50:50. BOC International and China Securities are joint underwriters of the deal, the company said in a statement to the Shanghai Stock Exchange.

Shaanxi Coal plans to issue up to 2 billion shares and will use the proceeds from the offering to fund mining activities and replenish working capital, according to a draft prospectus sent to the CSRC.

¬ Haymarket Media Limited. All rights reserved.
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