CRP braves market downturn with placement

On a day when Hong Kong stocks take a tumble, China Resources Power raises $623 million for its first investment in coal production.
It didnÆt seem like the most auspicious of days to raise fresh equity with the Hong Kong market tumbling 1,391 points from its intra-day high and finishing the session more than 700 points down. Rumours of several more potential placements, including one for Sun Hung Kai Properties, was also widely cited as a contributing factor to why the local market suddenly reversed course.

But China Resources Power (CRP) took on the challenge and launched a top-up placement of more than $600 million after the market close through Morgan Stanley and Citi. The task was made even more difficult by the fact that the stock was suspended from afternoon trading, which meant it missed most of the downturn and ended 3.7% up on the day. But since the deal wasnÆt launched until after the close, the bookrunners had at least the opportunity to reflect the market decline in the price.

Sources also pointed to the fact that the money raised will be used to finance an investment in a greenfield coal mine development in Inner Mongolia and therefore should be regarded as a positive event for the company. Since it listed in November 2003, CRP has been aggressively adding to its power generation capacity both through greenfield projects and acquisitions, but this will be its first move into upstream coal production.

ôThe company is growing quickly and this investment will ensure better control over its raw material prices,ö one source says.

Mainland-based CRP already has a good grip on its coal costs and, in the first half of this year, its standard coal cost increased by only 3.7% compared with the industry average of 8%-10%. Also, its unit fuel cost actually declined by 0.6% in the first six months thanks to an improvement in the quality of its coal, effective control on coal consumption and the start of operations of its larger and more efficient power facilities, the management told analysts after the first half results.

Owning its own coal mine should help cut its raw material costs even further, although no further details on this transaction were available last night.

The top-up placement comprised 200 million shares, or about 5.1% of the existing share capital, which were offered to investors at a discount of between 6.1% and 9.9% versus yesterdayÆs record close of HK$26.40. In absolute terms, this translated into a price range of HK$23.80 to HK$24.80.

The price was fixed at the mid-point of that range at HK$24.30 for a discount of 7.95% and a total deal size of HK$4.86 billion ($623 million). The discount is wider than on all but two of the seven placements for Hong Kong-listed companies over the past couple of weeks (one of those two was priced at 8%), but observers say they thought it was still reasonable. Not only because of yesterdayÆs decline in the market, but also because the stock has run up 32% in the past four sessions alone.

This latest jump û which has left the share price up 130% year-to-date - came after Goldman Sachs raised its target price on the stock to HK$29 from HK$23.50. At the time of the call, CRP's stock was trading just above HK$20.

ôWe expect China Resources PowerÆs capacity expansion to continue to surprise on the upside,ö says Goldman analyst Franklin Chow in a research note published in connection with the target price revision.

In mid-August, the company's management raised its 2010 capacity target to 20 gigawatts (GW), which suggests a 130% increase from the current capacity of 8.7GW. The companyÆs previous target for 2010 was 14GW.

According to sources, about 75 investors submitted orders and the deal ended up about 2.5 times covered. Perhaps thanks to the pending acquisition, there was more interest from long-only funds than what is common on block trades as these typically require the participants to make an investment decision at very short notice. The Asian bookbuild closed after about two hours but the books were kept open for US investors for another two hours.

Some investors may be surprised to find that Citi was a joint bookrunner on this deal since its name wasnÆt included on at least some of the initial term sheets that were sent out. According to sources, the bank did indeed come into the transaction at a very late stage with some saying it may have been brought in by the issuer, after the fact, for relationship reasons. As a result, Morgan Stanley was believed to be taking the bulk of the fees.

CRP is expected to be suspended from trading at least through the morning session today and sources say the company will provide more details about its coal mine investment before it resumes trading.

While no details were available, observers say the investment may have been prompted by the fact that CRP's management expects coal prices to remain at the current high levels throughout 2008. The reason, it told analysts after the earnings release, is that transportation bottlenecks, an increase in coal levies and surcharges and regional coal mining monopolies will offset the positive impact that will be derived from the fact that there will be a balance between coal supply and demand in China next year after years of supply shortages.
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