China Datang Corporation Renewable Power yesterday returned to the market to compete with Huaneng Renewables for investor interest in China’s clean energy companies.
The renewable energy unit of China Datang Corporation, one of the largest power generation groups in the country, initially planned to start the roadshow last week but delayed the offering due to concerns about market uncertainty.
However, yesterday it decided to go ahead after all, kicking off the bookbuilding for a Hong Kong initial public offering between HK$4.99 billion and HK$6.8 billion ($644 million to $879 million).
It was unclear why Datang made the decision to return so soon, but the Hong Kong equity market has stabilised somewhat despite lingering concerns about further tightening in China and the sovereign debt issues in Europe. Investors have become more selective, bankers say, but deals continue to get done. Yesterday, Chinese beverage packaging company Greatview Aseptic Packaging Co priced its IPO just above the mid-point of the range to raise HK$1.43 billion ($185 million) after attracting good demand from institutional investors.
Bankers say Datang needs to offer its shares at a discount of around 20% versus Huaneng, which kicked off the bookbuilding for a $1.3 billion Hong Kong IPO on Monday, because of its slower growth and lower profitability.
Datang is offering 30% of its enlarged share capital, or 2.14 billion new shares, at a price of HK$2.33 to HK$3.18 apiece. Based on the company’s forecast earnings for 2011, the price range corresponds to a price-to-earnings (P/E) ratio of 13.1 times to 17.9 times, which is about 8% to 10% lower than Huaneng's indicated valuation.
Huaneng is selling 2.49 billion shares at HK$2.98 to HK$3.98 per share. The price range corresponds to a 2011 P/E ratio of 14.7 times to 19.6 times. China Longyuan, another Chinese clean-energy play which listed in Hong Kong in December last year, is currently quoted at 18.5 times.
Datang has $250 million of demand already secured from six institutional investors who are coming in as cornerstone investors. Depending on the final price, they will buy between 28.4% and 38.8% of the total issue. Aluminum Corporation of China Overseas, a wholly-owned subsidiary of Aluminum Corporation of China; Angang Group Hong Kong, the international trade unit of steel producer China Angang Group; China Yangtze Power, a hydro power producer; and State Grid International Development, an investment arm of the State Grid Corporation of China, will each invest $50 million in the offering. Hero Asia Investment, a wholly owned subsidiary of Longyuan, will buy $30 million worth of shares, and investment firm High Action Limited will take $20 million.
Datang focuses on the procurement and development of wind power resources in various areas in China. Its total wind power capacity at the end of June this year was 2,717 megawatts (MW).
It plans to use 45% of the proceeds from the offering for the construction of wind power projects, and another 25% to repay bank loans, it will also use 20% to purchase wind turbines and other key components.
Datang made Rmb248.4 million ($37.3 million) of net profit last year, 77.6% more than the Rmb139.8 million it made in 2008. By comparison, Huaneng posted Rmb264.4 million of net earnings last year, representing a 397% jump from the previous year's Rmb53.2 million, according to the two companies' preliminary IPO prospectuses.
Datang will fix the IPO price on December 10 and the trading debut is scheduled for December 17. Cinda International, Credit Suisse, Everbright Securities, J.P. Morgan and UBS are joint bookrunners for the deal.
This year, investors in both Hong Kong and the US have embraced Chinese wind and solar power companies, banking on Beijing's efforts to increase the country's consumption of clean energy as a percentage of total power usage.
However, for the country's wind power companies, the technical transmission limitations imposed by the local power grids is a major obstacle affecting their development.
These limitations, including grid congestion caused by the underdevelopment of local grids in remote areas and temporary transmission interruption caused by system upgrades, may curtail the production of electricity and impair the power producer's ability to fully capitalise on a particular wind power project’s potential, Datang said in its prospectus.
Rapid construction of wind power projects in recent years, on the back of favourable government policies and abundant wind resources in areas such as Inner Mongolia, Jilin and Gangsu, combined with weaker economic conditions and lagging infrastructure development in these remote areas, have resulted in a situation where local installed wind power capacity is outpacing the transmission capacity of the local power grids.
Since electricity cannot be stored , but must be transmitted or used once generated, Datang may temporarily suspend some of its operating wind turbines to accommodate such transmission limitations from time to time, it said.
Meanwhile, Greatview's IPO was more than 15 times covered overall and attracted about 150 institutional investors, one source said. The retail tranche was 4.4 times subscribed, which means there will be no clawback. For that to happen, retail investors would have had to subscribe to at least 15 times the amount of shares earmarked for them. As a result, 90% of the deal was allocated to institutional investors, with the remaining 10% going to Hong Kong retail accounts.
The company, which produces aseptic (or sterile) packaging that is primarily used for dairy products and non-carbonated soft drinks, sold 333.4 million shares, or 25% of its share capital, at HK$4.30 each, translating into 17 times its projected earnings for 2011.
The shares were offered in a range between HK$3.55 and HK$4.98. About 70% of the shares were new, while the remainder were sold by a company owned by one of the founding shareholders and pre-IPO investors Bain Capital and CDH. The latter two will hold 31.6% and 23.9% respectively at the time of listing.
Tetra Pak, which is the global leader in the aseptic packaging industry, also has a leading market share in China with just over 70%. Greatview is the leading domestic player with a 9.6% market share, according to independent research agency Frost & Sullivan.
The company is being brought to market by Goldman Sachs and Morgan Stanley. It is scheduled to start trading on December 9.