China Resources Power kicks off rights issue

China Resources Power (CRP), a company that develops and operates power plants in China, has launched a HK$5.93 billion ($760 million) renounceable rights issue, according to a stock exchange filing posted late last Thursday. This is the largest rights issue undertaken by a Chinese company so far this year.

Hong Kong-listed CRP will issue 423 million shares at a ratio of one rights share for every 10 existing shares. The subscription price is HK$14 per share, which represents a 21.8% discount to Thursday's closing price and a 20.3% discount to the theoretical ex-rights price at the same time.

Outstanding share options, if vested, could bring the total number of shares issued as part of the deal to 432 million, which would in turn increase the maximum deal size to HK$6.04 billion.

"The purpose of the rights issue is to strengthen the company's capital base, augment its overall financial position, and provide more flexibility to enable the company to capture any development and expansion opportunities in the future," said the filing. Expansion could take the form of acquiring more coal resources in China, building large-scale coal plants, or developing renewable energy plants.

The rights issue will help address an outstanding debt issue that relates to a $500 million five-year syndicated loan taken out in 2005. The covenants on the loan stipulate that the company's debt-to-equity ratio cannot exceed 150%. CRP is getting close to this limit, but in a research note released after the rights issue was announced, CIti estimated that the deal will reduce the net debt-to-equity ratio for the 2009 financial year to 92% from 124%. This will give the company greater freedom to borrow for future expansion and capital expenditure needs.

The company's parent, China Resources Holdings (CRH), has already announced its commitment to subscribe to all the shares that its 65% stake entitles it to. It will also underwrite the balance.

The HK$3.8 billion injected by CRH will be used to pay off debt, while the remaining HK$2.1 billion is to be used as working capital.

"We recommend subscribing for the new shares as the subscription price is at a 22% discount to the current share price and 17% below our [discounted cash flow]-based [target price]," said Citi.

CRP is a major power producer in China. Most of its generators are large in size, between 300MW and 600MW, and all but one of its generators use primarily domestically manufactured equipment. Its plants are mostly situated in provinces where the demand for power growth is above the national average: 34% in eastern China and 24% in southern China.

Power generation is an important economic indicator in China. Power generation in the middle 10 days of May was down 0.57% year-on-year, according to the State Grid Dispatching Centre. This is a significant improvement on the 3.9% year-on-year drop in the first 10 days of May and the 3.6% year-on-year drop for the entire month of April. The good news for CRP is that the growth was focused in eastern and southern China, while northern and western China reported the greatest declines.

However, according to a Credit Suisse research note, the improvements in mid-May could be distorted. In May 2009, there was one more working day than in the same period of 2008 and the Sichuan earthquake, which occurred on May 12 last year, resulted in a low base for comparison.

Looking at the numbers on an absolute basis, however, does give some cause for optimism. In the middle 10 days of May this year, 9.6 billion kilowatts were generated, higher than any other 10-day period since September last year.

The record date for the rights issue is June 24 and the rights will be tradable on the Hong Kong stock exchange between June 29 and July 7. The offer closes on July 10 and an announcement declaring the results of the deal will be made on July 16. Goldman Sachs and J.P. Morgan are acting as financial advisors to CRP.

The lion's share of Asian rights issues this year have emanated from Singapore, Malaysia and South Korea. Greater China has not featured prominently. According to Dealogic data from the beginning of last week, there have been 21 rights issues in Hong Kong raising $155 million and just two rights issues in mainland China, raising a total of $7 million. The CRP rights issue is therefore the most significant deal of its kind in China, year-to-date. Dealogic doesn't include the portion of a rights issue that is taken up by a controlling shareholder when it calculates the size of the deal.