The deal comes at a time as China pushes for more small hydropower projects to provide electricity to rural areas.
Olympus Capital is the largest outside shareholder in the company. Other investors have included Morgan Stanley Infrastructure Partners (MSIP), FountainVest Partners and the International Finance Corporation (IFC). IFC said it has fully exited.
Olympus has already taken some money out of the company, said a person familiar with the matter. But Olympus now wants to cash out for more — leading the consortium in the sale of a stake that is now worth several hundred million US dollars.
Zhaoheng Hydropower is a private-sector small-to-medium hydropower developer with offices in Hong Kong and Shenzhen. It was founded in 2002, when the hydropower industry was still dominated by state-owned enterprises.
Led by entrepreneur Guosheng Xu, the company has grown through acquisitions of hydropower projects or distressed projects under construction throughout China’s Southern and Western provinces where income per capita is lower than in the coastal cities. It has also developed its own greenfield hydropower projects.
The company's growth has also been given a boost by China’s burgeoning energy needs and the government's efforts to displace fossil fuel-based power stations to mitigate local pollution and climate change.
Hydropower, like wind and solar power, is a form of clean-energy. Small hydropower, defined as less than 30 megawatts, needs less reservoirs and construction activity and so has a negligible impact on the environment
Weather or not
China aims to hike clean energy’s share of its power generation to nearly 40% in 2020 from 33% in 2014. As part of this the state has been promoting the construction of hydropower plants, which account for 68% of China's clean energy generation capacity. It also supports small hydropower projects in rural areas as set out in the twelfth Five-Year Plan.
Zhaoheng Hydropower focuses on small and medium sized hydropower projects with installed capacity between 10 and 100 megawatts.
Globally the small hydropower market size by installed base was more than 110 gigawatts for 2015 and growing, thanks in large part to favourable government policies and government subsidies, tax benefits and other incentives.
The International Energy Agency said China, as an emerging economy, will see a 30% growth in electricity. Some 40% of the world’s new clean electricity comes from China. In the past five years clean and renewable energy investments in China have exceeded the total investments of United States and Europe combined.
Zhaoheng Hydropower has been picking off struggling projects. Sometimes small hydropower projects falter given companies’ difficulty in securing local bank debt for very small-hydro projects with capacity under 30 MW.
Weather risk is another major hurdle faced by hydropower enterprises. In interviews with over 80 Chinese hydropower enterprises Swiss Re and the International Center on Small Hydro Power found that more than 90% of respondents said that they have encountered weather risks during the past 20 years, of which over half of the enterprises experienced losses. In some cases, those losses even threatened the survival of some companies.
Hydropower stations also often encounter local resistance. Earlier this year, Yunnan Province stopped approving small hydropower stations along its stretch of the Nujiang River.
In the year ending December 2008, the last time it published annual results, Zhaoheng had revenues of $13.5 million, on which it earned a gross profit of $10 million, up from revenues of $9.3 million and a gross profit of $7.4 million for the previous calendar year.
Peer Guizhou Qianyuan Power is trading at a P/E 2016 of 12.77 times and Sichuan Chuantou Energy is trading at 10.01 times.
Olympus acquired a “significant minority stake” in Zhaoheng Hydropower for $47.5 million in 2009.
At the time, the company had assets with a total installed capacity of around 200 MW and sold electricity primarily to the State Grid Corporation of China and to China South Power Grid Company.
MSIP and Fountainvest joined with Olympus in an consortium to invest $150 million in 2010.
Between 2010 and 2012, revenue climbed by 50%, according to MSIP, prompting the consortium to put in an additional $150 million in 2012. The combined $300 million investment represented the largest foreign investment in China's renewable energy and hydropower sector.
Olympus made the largest commitment in the 2012 fund-raise based on existing ownership percentages.
At the time the company said it had an installed capacity of over 600 MW which it said it expected to grow to 1,000 MW.
In 2013, IFC invested $400 million, $25 million of which was in equity capital and the rest in long-term debt to finance several under-construction projects. At the time, the company owned 36 small-to-medium sized hydropower assets in China with total capacity of around 683 MW. Over 90% of the company’s projects were located in the southern frontier regions including Yunnan, Guizhou, Guangxi, Sichuan, Hunan and Hubei Province in China.
Zhaoheng was incorporated as a Cayman Islands based entity which owns indirectly, through an intermediate vehicle Zhaoheng Hong Kong, a 100% interest in Shengzhen Zhaoheng Hydropower, a Sino-foreign investment holding company incorporated in the People’s Republic of China.
This story was updated on October 19 to include IFC's statement that it had already fully exited Zhaoheng Hydropower