One of the IPO themes that has been keeping investors busy over the past couple of weeks has been renewable energy in China, with no fewer than three deals that fit that description pricing at the end of last week and another one set to close on Wednesday.
The industry is in focus as Beijing plans to invest more than $700 billion over the next decade into wind, solar, nuclear and other clean energy technology and has said it wants at least 15% of its energy to come from renewable sources by 2020. And global investors are seemingly keen to participate in the anticipated growth. However, there are signs that they are being selective about how to increase their exposure.
Wind turbine manufacturer Xinjiang Goldwind Science & Technology and solar module maker Trony Solar Holdings, which are both listing in Hong Kong, saw strong demand and were able to price their respective offerings at the top of the range, while China Ming Yang Wind Power Group, which has elected to list on the New York Stock Exchange, priced at the bottom, and traded down another 5.4% in its debut on Friday.
At the same time though, Ming Yang was able to raise $350 million, which makes it the largest IPO by a Chinese company in the US this year. It is also the first Chinese wind turbine maker to list in the US, which may have made some investors hesitant to commit.
The largest of the three deals was Goldwind, which raised HK$7.1 billion ($917 million) and attracted a level of demand that was reminiscent of the 2007 bull-market. The institutional tranche attracted about 400 orders from a mixture of accounts that included large long-only funds, major hedge funds and alternative energy players, and was well over 20 times covered after taking out the cornerstone tranche and the retail portion, one source said. There was no final subscription numbers available for the Hong Kong public offer, but this portion of the deal was increased to 30% from 10%, which means that it would have been between 15 and 50 times covered.
The deal, which priced on Saturday morning Hong Kong time, had a few key things going for it. For one, Urumqi-based Goldwind is a state-owned enterprise, making investors more confident that it will be one of the beneficiaries of state investments into this industry. Second, the bookrunners had lined up five cornerstone investors, including International Finance Corp, that had agreed to buy a combined $190 million worth of shares at a time when many other issuers have had trouble getting cornerstones to commit to a lockup. And third, Goldwind is already listed in Shenzhen and the Hong Kong IPO was offered at a healthy discount to the price of those A-shares. However, the source said that while the discount was watched by investors, not that many would have been able to trade on the difference, given the restrictions on foreign investment into Chinese A-shares.
So, perhaps the most important contributor to its success was the fact that the deal was covered on day one and the bookrunners had stressed from the beginning that there was no way this deal would fail. That was important since this was Goldwind’s second attempt at a Hong Kong listing in three months. In early June the company was on the road with a transaction of up to $1.2 billion, but called off the deal just before pricing, citing “recent unexpected and excessive market volatility”.
For this latest offering, the company brought in Goldman Sachs and J.P. Morgan to complement existing bookrunners China International Capital Corp (CICC), Citi and Haitong Securities, while Credit Suisse, which was also on the June deal, was dropped from the line-up. Another significant change was the inclusion of cornerstones, which the company didn’t have on its June offering.
This new deal also came at a discount to the earlier offering, which may have helped boost the interest. With the top-end pricing the company was, however, still able to raise 90% of its minimum target amount three months earlier.
Goldwind sold 395.3 million new H-shares, or 15% of the enlarged share capital, at a price of HK$17.98 apiece. The shares were initially offered in a range between HK$15.98 and HK$17.98. The final price equals a discount of approximately 14% versus its Shenzhen-listed A-shares, which fell 5.8% on the final four days of the five-day bookbuilding, and values the company at approximately 13.6 times its projected earnings for 2011, based on the syndicate average.
The deal comes with a 15% greenshoe option that could boost the total size to $1.05 billion if fully exercised. Goldwind is due to start trading on Friday (October 8).
Although in the same industry as Goldwind, Ming Yang faced a bit more headwind for its US IPO, which could simply be due to the fact that the company, while growing rapidly, is smaller and less established than its state-owned competitor. And it has yet to show a full-year profit. While the largest privately owned wind turbine manufacturer in China, some investors may also have worried that Ming Yang doesn’t have the same obvious government support as comes with being a state-owned enterprise. That said, Ming Yang too was covered on day one.
The company sold 25 million American depositary shares (ADSs), or 20% of its enlarged share capital at $14 apiece for a total deal size of $350 million. The IPO was arranged by Bank of America Merrill Lynch, Credit Suisse and Morgan Stanley and was offered in a range between $14 and $16 per ADS. The final price, which was fixed after the US close on Thursday, valued the company at 9.7 times projected 2011 earnings, or at a 29% discount to Goldwind, based on the valuation of its Hong Kong IPO.
There was no information available about the subscription levels or who bought the deal, but the fact that the stock fell in its trading debut on Friday, while the Dow Jones index added 0.4%, suggests that there may not have been a lot of excess demand.
That was certainly not the case for Trony Solar, which had received orders from more than 200 institutional investors when it priced its Hong Kong offering at the top of the range Thursday for a total deal size of HK$1.73 billion ($223 million). The retail tranche was 494 times covered, according to a source, triggering a full clawback that increased the size of the retail portion to 50% from the original 10%. Since $30 million of the deal was also sold to two cornerstone investors, this meant that, even including the 15% overallotment option, there was only $115 million left for institutional investors after the clawback -- a scenario which tends to lead to additional buying in the secondary market as institutions try to top up their allocations.
Like Goldwind, this was Trony’s second attempt at an IPO although the last time it was in the market – in December last year -- it tried to list in the US. The US listing plans were abandoned for good in August and, after adding CLSA and ICBC International as fully-fledged bookrunners alongside J.P. Morgan and removing Credit Suisse, which was a bookrunner on the US deal together with the US house, it decided to approach the Hong Kong market instead. And, given the demand, this appears to have been the right move.
While most other Chinese solar power companies are listed in the US, Trony is different in that it uses thin-film technology to make its solar modules – as opposed to polysilicon wafers which are most common in China – and the fact that it has chosen Hong Kong instead of New York shouldn’t therefore be a big issue. Its modules are also targeted at off-grid applications, which means its customers are generally based in areas that lack power transmission networks. However, they also include users -- companies or schools for instance -- that want to be self-sufficient with regard to electricity.
A second selling argument was Trony’s low costs and high margins, although the former is partly offset by the fact that thin-film has a lower conversion rate (solar rays into energy) than polysilicon.
The company sold 385 million new shares, or a 25.7% stake, at a price of HK$4.50 apiece – the top end of a range that started at HK$3.10. The final price translates into 9.3 times its projected earnings for the fiscal year to June 2011, or an adjusted 8.15 times for calendar 2011. The latter is in line with other Chinese solar power companies listed in both Hong Kong and the US, which on average trade at 2011 price-to-earnings multiples between eight and nine. But it is a significant discount versus the market leader within thin-film technology -- US-based First Solar -- which is quoted at a 2011 P/E of close to 17 times.
Trony is scheduled to start trading on Thursday (October 7).
Meanwhile, China Suntian Green Energy Corp is in the market trying to raise up to $369 million from a Hong Kong IPO led by Macquarie and Morgan Stanley. The company, a natural gas distributer with an increasing share of its profits coming from the operation of wind farms, is owned by an investment unit of the Hebei provincial government. It is due to price after the US market closes on Wednesday.
Looking slightly further ahead, China’s top two power producers, China Huaneng Group and Datang Corporation, are also expected to take advantage of the appetite for clean energy and spin off their renewable energy units for separate listings in Hong Kong.