Dynagreen opens books ahead of IPO

Demand appears strong for one of China’s leading waste-to-energy companies, which aims to corner an untapped market - small- to medium-sized cities.

The retail book for Dynagreen Environmental Protection Group, a Chinese waste-to-energy company, opened on Monday ahead of its planned Hong Kong initial public offering.

Demand for the company appears to be strong. Dynagreen, one of China's leading waste-to-energy companies, is in an attractive sector and, given that it will be offered at a discount to its closest peer China Everbright, the books were covered on the first day of bookbuild.

The company is offering 30% of its enlarged share capital pre-greenshoe via the 300 million-primary share base deal, which is being marketed between HK$3 and HK$3.70 per share. It aims to raise $143 million.

There will be a 90/10 split between institutional and retail investors, with pricing set for June 12. As a Reg-S offering, only Asian and European institutions and funds can invest in the company.

The deal is being marketed on an estimated 14 to 17 times forward 2014 earnings, a significant discount to China Everbright, which is currently trading at 26 times forward earnings.

China Everbright has a market capitalisation of $6.5 billion. Shares are down 14% so far this year but up 61% from June 2013.

Bright outlook

Dynagreen – which converts 5,250 tonnes of waste per day into clean energy -  currently has seven WTE plants in operation around China and another 13 under development, and aims to use the proceeds raised from the IPO towards  completing these projects.

The company is a clear play on the Chinese consumer theme - as the population grows and the Chinese get wealthier, they will produce more waste. According to EY Advisory, China’s population hit 1.36 billion at year-end 2013, and is forecast to hit 1.37 billion by 2015. The urbanisation rate is also increasing, growing at a CAGR of 2.7% from 2008 to 2013.

The rising economic development and urbanisation has led to a rapid increase in municipal solid waste. The waste in small- to medium-size cities - which includes kitchen, packaging and food waste - has been growing at a CAGR rate of 9% over the past five years. It totalled 70 million tons in 2012 and is forecast to hit 85 million tons in 2015.

Rural areas also account for an important source of waste, having generated 280 million tons in 2012 alone. Dynagreen estimates there are approximately 40,000 townships and 600,000 administrative villages without an established environmental protection infrastructure in place, which means large amounts of waste go uncollected.

The waste produced by China still remains behind its developed counterparts. In the US, the per capita waste totalled 2.6kg per day as of December 2013, compared with China’s 1.1kg per day, according to the prospectus.

The treated municipal solid waste in China’s cities totalled 179 million tons as of year-end 2012, of which 34 million tons, or approximately 113,380 tons per day, were incinerated and converted to energy.

EY estimates the amount of waste incinerated will increase steadily each year, accounting for 35% of 224 million tons by 2015, whereas the proportion of waste sent to landfills will decrease to 59% by 2015 from 80% in 2010.

This is largely supported by the Chinese government’s Twelfth Five-Year Plan, which stated that total incineration treatment capacity should more than double by 2015, representing a CAGR of 28%, while simultaneously decreasing the amount of waste sent to landfills.

On the roadshow, the company argued that these market dynamics, coupled with supporting government initiatives, should help Dynagreen become a dominant player in the WTE industry, particularly with small- and mid-sized mainland cities.

The company reported a net profit of Rmb150.9 million ($24.2 million) in 2013, a 3% rise over Rmb146.3 million in 2012 and a 99% spike from Rmb75.8 million in 2011.

In addition to its 13 projects under construction, it aims to use proceeds to further develop its technologies, including its waste incineration flue gas purification and oxygen-enriched waste incineration processes.

It also has plans to expand offshore, and will conduct feasibility studies, environmental impact assessments and undertake the necessary preliminary work to construct WTE projects in Thailand and Malaysia, according to its prospectus.

The company’s controlling shareholder is BSAM Group, a large-scale state-owned investment company authorized by the Beijing municipal government to operate and manage state-owned assets in the city.

CLSA is the sole bookrunner while Citic is acting as the sponsor.


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