Huaneng Renewables seeks $1.3 billion from Hong Kong IPO

The wind-power producer and its bookrunners believe the company deserves a valuation premium to other clean-energy plays in China.

Huaneng Renewables Corporation, the wind-power unit of the nation’s largest power producer China Huaneng Group, is looking to raise HK$7.4 billion to HK$9.9 billion ($965 million to $1.28 billion) from a Hong Kong IPO.

The company, which will be the only pure wind-power producer among China's big industry players to list on an international market, kicked off the institutional bookbuilding yesterday and has received a positive response so far. Investor interest is supported by the company’s growth prospects and a total of $160 million of demand from high-quality cornerstones, according to sources.

Orders from the six cornerstone investors, which are all very selective in terms of their IPO investments, are sending an important message to the market, one source said.

State Grid International Development, the investment arm of State Grid Corporation of China (SGCC), will buy $60 million worth of shares. SGCC provides 88% of the country’s electricity and is the largest utility company as well as the largest customer of China's wind-power companies. This is the first major investment SGCC has ever made in a Hong Kong IPO.

Temasek Holdings has agreed to invest $50 million. The Singapore government-owned investment company has been offered investment opportunities in different Chinese energy IPOs, including China Longyuan, Xinjiang Goldwind Science & Technology and China Suntien Green Energy, but only picked Huaneng, noted the source.

The other cornerstone investors are: Bank of China International, a major lender to Huaneng group, which has agreed to purchase $30 million worth of shares; US private equity investor Wilbur Ross; and China Chengtong Holdings, a Chinese infrastructure and logistics company, which each agreed to invest $10 million in the IPO.

Ross, the founder of New York-based private equity firm WL Ross & Co, holds stakes in firms in a wide range of sectors, but this is only his second IPO investment in Asia after his participation in China Longyuan Power’s $2.2 billion new share sale in December 2009.  

Huaneng plans to sell 30% of the company’s enlarged share capital, or 2.49 billion shares, at HK$2.98 to HK$3.98 apiece. The price range corresponds to a 2011 price-to-earnings (P/E) ratio of 14.7 times to 19.6 times.

This compares with a 2011 P/E of 18.5 times for domestic competitor Longyuan. However, the company and its bookrunners believe Huaneng deserves to trade at a premium to Longyuan because of its greater growth prospects, profitability, asset quality, and cashflow, a banker explained.

Also, Longyuan is not a pure clean-energy company; it has conventional businesses such as coal-fired power generation, which trades at a discount to renewable power. The price of coal-fired power is largely determined by coal commodity prices which fluctuate a lot in China.

Meanwhile, China Datang’s renewable energy unit, which decided to postpone its Hong Kong IPO last week, will come back to the market this week. However, bankers say Datang will need to offer its shares at a discount of around 20% versus Huaneng to attract enough investors. Despite having a bigger production capacity, Datang has slower growth and makes less profit than Huaneng.

The belief is that the company that can achieve the fastest growth in China’s booming renewables sector, will win the market. Beijing plans to invest more than $700 billion over the next decade into wind, solar, nuclear and other clean-energy technology and it wants at least 15% of its energy to come from renewable sources by 2020.

Huaneng plans to use the proceeds to expand its wind-power business, repay bank loans and acquire wind-power projects in China and overseas.

The shares will be priced on the evening of December 9 (US time) and the company is due to start trading on December 16. China International Capital Corp, Goldman Sachs, Macquarie and Morgan Stanley are handling the deal.

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