Huaneng Renewables is returning to the market today with a scaled-down deal after calling off a Hong Kong initial public offering in December last year.
According to sources, the wind power unit of China’s largest power producer, China Huaneng Group, is aiming to raise between HK$5.68 billion and HK$7.42 billion ($728 million to $951 million), which compares with a target of up to $1.3 billion six months ago.
The smaller deal size is a result both of a lower valuation and a weaker profit forecast for this year. At the same time, analysts argue that the outlook for the wind power industry in China is brighter now than it was at the end of last year, which together with the lower valuation should help attract investors to the transaction.
However, the company and its four bookrunners are leaving nothing to chance this time and have already signed up $415 million worth of orders from 13 cornerstone investors. This is significantly more than the $160 million that it secured from five cornerstones back in December, and means that about half the transaction is already covered when the order books open this morning.
State Grid International Development, Temasek Holdings, Bank of China Investments, US private equity investor Wilbur Ross, and China Chengtong Holdings are all sticking with the deal and are joined by eight other high-profile names, including China Investment Corp (CIC), which is contributing the largest cornerstone investment with $60 million. Also among the new supporters are Standard Chartered Private Equity, GE Capital and Olympus Capital.
Another key difference compared with the offering in December is that Huaneng won’t be going head to head with another company in the same sector. Last time, the renewable energy unit of China Datang — China Datang Corporation Renewable Power — relaunched a $644 million to $870 million IPO two days after Huaneng at a significantly cheaper valuation, which made Huaneng look a bit expensive in the eyes of some investors, especially at a time when there were expectations of further credit tightening in China and many investor were winding down their activities for the year. It didn’t matter that most analysts acknowledged that Datang was growing at a slower pace and was less profitable than Huaneng.
The outcome was that Huaneng withdrew its offering, citing a “change in market conditions and recent unexpected and excessive market volatility”, while Datang went on to price its offering at the bottom of the range, or at about 13.1 times its projected 2011 earnings.
But while it may not have to contend with a direct competitor this time, there are a number of other deals in the market or in the immediate pipeline competing for investor attention, including Samsonite and Prada, which are looking to raise up to $1.5 billion and $2.5 billion respectively, and operate in a sector (consumer retail) that tends to be a bit of an investor favourite.
Investors have also become more selective and price sensitive recently, according to bankers, as several major IPOs are still trading below issue price, including Glencore International, which raised $10 billion from a dual listing in London and Hong Kong earlier this month, and Hutchison Port Holdings Trust, which raised $5.45 billion ahead of a Singapore listing in March. Shanghai Pharmaceutical, whose $2 billion IPO is the largest in Hong Kong so far this year, has closed flat to its IPO price for the past couple of days after dipping below earlier in the week.
Like last time, Huaneng is offering 30% of its enlarged share capital in the form of 2.49 billion new shares. The price is slightly lower this time, however, and ranges from HK$2.28 to HK$2.98 per share, which translates into a 2011 PE multiple of 13 to 17 times, according to a source.
Last time, it was trying to sell its shares at HK$2.98 to HK$3.98 apiece, which corresponded to a 2011 P/E ratio of 14.7 times to 19.6 times.
The top of the current range pitches Huaneng at a discount to China Longyuan Power Group, the largest operator of wind farms in China, which trades at about 18.9 times its 2011 earnings, according to Bloomberg data. At the bottom of the range it also comes at a discount to Datang, which is currently quoted at 13.8 times this year’s earnings.
Smaller state-owned operator China Suntien Green Energy Corp, which has a growing wind farm business but is also a leading distributor of natural gas in Hebei province in northern China, is trading at a 2011 P/E multiple of 14.5 times.
Longyuan and Datang have both been quite volatile since their respective listings in Hong Kong. Longyuan, which debuted in December 2009, is currently trading virtually flat to its IPO price of HK$8.16 with a close of HK$8.14 yesterday. Meanwhile, Datang finished 4.3% below its IPO price at HK$2.23 yesterday, having recovered from a low of HK$1.87 in mid-February.
Both stocks have, however, seen good support since March when Beijing issued its 12th five-year plan, which confirmed its target to increase the portion of China’s total energy that comes from renewable non-fossil energy sources to 15% by 2020 from about 8% today. As part of that plan, the government intends to increase the country’s installed wind-generating capacity to 180GW by 2020 from 45GW at the end of last year. Wind power capacity is already growing at a rapid pace and in 2010 increased by 19GW, exceeding the projected growth of 15GW.
The nuclear disaster in Japan following the March earthquake has also prompted China to suspend the construction of all continuing nuclear plants and to put a moratorium on further nuclear expansion while it completes an independent investigation into the risks and benefits of nuclear power. This could help increase the demand for wind power — at least in the short term. The government has also raised the tariffs for electricity produced by coal-fired power plants this year, which has reduced the price differential between wind (which is more expensive) and coal.
Huaneng’s installed capacity increased to 3.5GW last year and the company is projecting a further increase to 5.1GW by the end of this year. The latter is slightly below the 5.5GW that it was targeting back in December, but still represents 45% growth. One reason for the slightly slower expansion, sources say, is the fact that the company is raising less money from the IPO.
Based on the company’s guidance, the joint bookrunners have also lowered their profit forecast for Huaneng for this year to Rmb1.2 billion ($185 million) due to rising higher interest rates and the slower expansion. At the time of the December IPO they were forecasting a 2011 net profit of more than Rmb1.4 billion.
In 2010, Huaneng posted a net profit of Rmb528 million, which exceeded the forecast of Rmb511 million quoted in the IPO prospectus in early December.
Huaneng’s institutional roadshow will run from today until June 2, with the final price expected to be fixed after the New York close that day. The 3.5-day retail offering will open on Monday and the trading debut is scheduled for June 10.
The deal is arranged by joint bookrunners China International Capital Corp, Goldman Sachs, Macquarie and Morgan Stanley, with the latter also acting as the sole global coordinator.
The full list of cornerstones is as follows: CIC, $60 million; State Grid, whose parent company is a customer of Huaneng’s, $50 million; Temasek, $50 million; China South Locomotive & Rolling Stock, $50 million; Standard Chartered Private Equity, $50 million; BOC Investments, $30 million; China Huadian, $30 million; Dalian An Gang Steel, $30 million; Fubon Life, $20 million; GE Capital, $15 million; Wilbur Ross, $10 million; China Chengtong Holdings, which is a Chinese infrastructure and logistics company, $10 million; and Olympus Capital, $10 million.