Huaneng Renewables IPO

Huaneng's wind power unit raises $800 million ahead of HK listing

Huaneng Renewables allocates 93.5% to institutional investors after the retail tranche of its IPO is undersubscribed.
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Huaneng Renewables is aiming to raise its wind power capacity to 5.1GW this year from 3.5GW at the end of 2010. (AFP)</div>
<div style="text-align:left;"> Huaneng Renewables is aiming to raise its wind power capacity to 5.1GW this year from 3.5GW at the end of 2010. (AFP)</div>

Huaneng Renewables, the wind power unit of China’s largest power producer, China Huaneng Group, has raised HK$6.23 billion ($800 million) from its second attempt at a Hong Kong initial public offering.

The company’s first effort in December last year was called off before pricing partly due to a competing IPO from a key mainland rival, Datang Renewable, that was offered at a cheaper valuation. So it was probably with some satisfaction that Huaneng was able to price its re-launched and scaled-down offering at a premium to that same competitor.

The company achieved this even after pricing the deal in the lower half of the range at HK$2.50 per share, having been offered between HK$2.28 and HK$2.98.

The offering was multiple times covered across the range, according to sources. However, they noted that key players, such as global long-only funds with a renewable focus and sovereign wealth funds, were coming together around the final price. And, in light of the downturn in the Hong Kong market in the second half of last week — the Hang Seng Index fell 1.6% on Thursday and another 1.3% on Friday — the company was said to have been keen to price at a level where it would strike a balance between raising the amount of cash it needs and achieving a successful deal that trades well in the secondary market. Whether it succeeded in doing so will become clear when the stock starts trading on Friday.

Almost all the institutional investors that submitted orders when Huaneng was in the market in December are said to have participated again, which is perhaps not too surprising since the valuation was a bit less demanding this time around. At the same time, the outlook for the wind power industry is also looking a bit brighter than it did six months ago. Among other things, China has confirmed its target to increase the country’s installed wind generating capacity to 180 gigawatts by 2020 from 45 gigawatts at the end of last year, and the nuclear disaster in Japan has prompted Beijing to halt further nuclear expansion while it completes an independent investigation into potential risks, which could create a power shortage and help increase the demand for wind power.

Retail investors were less impressed by the IPO, however, and the 10% portion earmarked for them was only about 65% covered. This was a huge difference compared to when China Longyuan Power Group listed in Hong Kong in December 2009. Being the first Chinese wind power generator to go public in Hong Kong, it attracted about $26.5 billion worth of retail cash and the initial 5% retail portion was approximately 230 times covered.

However, most retail investors currently seem to have their sights set on the two international consumer products companies that are about to list later this month — Samsonite International and Prada — and might be saving their cash for those. Samsonite, which is looking to raise between $1.2 billion and $1.5 billion from its IPO, started taking orders from retail investors last Friday, while Prada opened the institutional books for its $2 billion to $2.5 billion IPO yesterday (Monday). The retail offering will follow on June 13.

Well-known consumer brands tend to attract a lot of investor interest and, as a result, the shares often gain substantially on debut — something retail investors in particular are keen to exploit. And with several of the major IPOs this year still trading below issue price, investors are a bit starved for returns, which makes them more likely to go for deals they consider certain winners.

The under-subscription of Huaneng by retail investors means that only 6.5% of the deal will go to the Hong Kong public, while the remaining 93.5% will be allocated to institutions. Even before launch, Huaneng had signed up $415 million worth of orders from 13 cornerstone investors, and it also had a number of anchor orders to rely on right from the start, which would have helped to fill the order books as the market turned more challenging. The cornerstones included China Investment Corp (CIC), State Grid International Development, Temasek Holdings and Standard Chartered Private Equity. For a full list, as well as more details on the IPO, see our story published on May 27.

The majority of the institutional orders came from Asia-based accounts, while the remainder was fairly evenly split between the US and Europe.

Huaneng Renewables sold 2.49 billion new shares, which translates into 30% of the enlarged share capital. There is also a 15% greenshoe that could increase the total deal size to as much as $920 million from the base deal of $800 million.

The IPO price values the company at about 14.3 times this year’s projected earnings, which is slightly below the bottom of the P/E range for the first IPO attempt in December. Back then, Huaneng was trying to raise up to $1.3 billion and was marketing its shares at a 2011 price-to-earnings ratio between 14.7 times to 19.6 times, which at the time translated into an absolute share price between HK$2.98 and HK$3.98. This time the valuation ranged from 13 to 17 times this year’s earnings.

Even with the lower valuation, Huaneng was priced at a slight premium to its key competitor China Datang Corporation Renewable Power, the renewable energy unit of China Datang Corp which is one of China’s five large-scale power generators. Datang Renewable was listed at a 2011 P/E multiple of 13.1 times in December last year, and as of Friday was quoted at 13.7 times, according to Bloomberg data.

However, Huaneng did come at a discount to Longyuan, the largest operator of wind farms in China, which is currently quoted at 19 times this year’s earnings, and smaller state-owned operator China Suntien Green Energy, which has a growing wind farm business but is also a distributor of natural gas. The latter closed at a 2011 P/E multiple of 15.9 times on Friday after gaining 9.2% during Huaneng’s five-day roadshow. Shares in Longyuan and Datang were both largely unchanged during that same period.

Huaneng’s installed wind 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 IPO was arranged by joint bookrunners CICC, Goldman Sachs, Macquarie and Morgan Stanley, with the latter also acting as the sole global coordinator.

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