China Energy's $2b HK IPO may not air until 2016

Another Chinese state-owned enterprise is targeting a Hong Kong listing as the government moves to introduce private capital to enhance efficiency.

China Energy Engineering has taken the first step to launching an initial public offering in Hong Kong, having filed a listing application last week, but shaky markets might make it difficult for the deal to go through any time soon.

A source familiar with the company said the power construction giant is targeting as much as $2 billion from the IPO but that a listing towards the very end of the year or in the first quarter of next year is now more realistic given current market conditions.

Hong Kong’s stock market slid 5.2% on Monday to its lowest level so far this year as Chinese growth worries accumulated, while the Shanghai Composite Index lost 8.5%, its sharpest drop in eight years.

If the China Energy comes to market this year it could help Hong Kong to regain its crown as the world’s largest IPO hub. Hong Kong raised HK$168.4 billion ($21.7 billion) from IPOs last year and ranked second in terms of IPO fundraising after New York, according to HKEx data.

China International Capital Corporation and Citic CLSA Securities are joint sponsors on the China Energy IPO.

Other high-profile IPOs in the pipeline include China Huarong Asset Management’s $3 billion transaction and China Reinsurance’s $2 billion deal. CICC, China’s first joint venture investment bank, is also targeting $1 billion from an IPO by the end of the year.


China Energy specialises in the design and construction of power projects and transmission systems. Last year about 75.6% of its revenue was generated from the construction of power projects, with the remainder coming from design and surveying, equipment manufacturing, civil explosives, and cement production, as well as investment gains.

Similar to China’s railway manufacturing sector, China’s power construction industry is a duopoly market with the majority of market share divided between China Energy and Power Construction Corporation of China (Power China).

Power China, which owns part of the secondary business branches spilt from the State Grid, listed in Shanghai in July 2011. Since then, its shares have traded mostly below the Rmb4.5 IPO price until October 2014, when the A-share market frenzy sent the stock up to as high as Rmb18.28.

Power China shares ended at Rmb7.95 Monday, valuing the company at $17 billion, or roughly 16 times 2014 earnings.

China Energy is in many aspects similar to Power China but it has a slightly larger order backlog. As of the end of last year, China Energy’s outstanding contract value was estimated to be worth Rmb597 billion ($94 billion), which is about 3.25 times its 2014 revenue. By comparison, Power China had an order backlog of slightly less than three times its annual revenue.

China Energy was formed in December 2014 through the injection of key assets from its parent China Energy Engineering Group, an entity wholly-owned by the State-owned Assets Supervision and Administration Commission.

Among the key assets injected was a majority stake in China Gezhouba Group, which was spun off from the group in a Shanghai listing in 1997. China Energy's 42.05% interest in the Hubei-based construction engineering company is worth approximately $2.27 billion at the current price.

Due to the high level of government intervention and the large amount of capital required in constructing power projects, the power industry has traditionally been closely linked with the economic development of the nation. As a result, there has been a very high correlation between the performances of Power China’s share price and the Shanghai Composite Index.

Correlation between Power China (white) and the Shanghai Composite Index
Source: Bloomberg
What that may hint to prospective investors of China Energy is that they will have to consider the broader market performance when evaluating an investment in the company.

Electricity reform

China’s electricity market is on the verge of major structural change as the State Council announced a nationwide electricity reform in April.

According to the State Council document, Beijing plans to overhaul the electricity market to improve efficiency and promote competitive pricing. One of the key reform objectives is to introduce private capital into China’s electricity generation and sales market, which has long been dominated by state entities.

Currently, electricity distribution, transmission, and sales in China are held in the hands of three state-owned entities, namely State Grid, China Southern Power Grid, and Inner Mongolia Power Group. The government is hoping that the introduction of private capital and experience would enhance efficiency and provide more reliable power supply to households and industrials.

China’s electricity reform will initially focus on increasing competition among power suppliers and distributors. But the profitability of power construction companies may still be indirectly affected if the overall profitability of power generators falls as a result of lower electricity prices, the source familiar with the company said.

In the long run, China Energy may also face stiffer competition if the government extends the introduction of private capital to the power construction and engineering market.

This article was updated to correctly reflect the backlog figure for 2014.

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