Sinovel Wind Group, one of the largest wind turbine producers in China, plans to raise Rmb9.4 billion ($1.4 billion) from one of the most expensive IPOs in Shanghai, taking advantage of Beijing’s efforts to promote renewable energy.
However, the deal -- the first major one this year -- will test the Shanghai equity market, whose stock index was among the world's worst performers in 2010. Sinovel is offering its shares at a price between Rmb80 and Rmb90 apiece, which translates into a price-to-earnings (P/E) ratio of 38.8 to 43.7 times, based on the company’s 2009 earnings. By comparison, Shanghai-listed stocks are trading at P/Es of 20 to 30 times on average.
Investor appetite in the stock remains to be seen, but the high offering price has already triggered strong debate in the market. Some argue Sinovel is overly optimistic since the A-shares of another leading turbine maker, Xinjiang Goldwind, are currently trading at only 17 times earnings. Goldwind sold shares at a P/E ratio of 30 times in its $244 million Shenzhen IPO in 2007. Datang Renewable, a clean energy company, priced its Hong Kong IPO last month at 13 times its forecast earnings for 2011.
Others argue that since Sinovel is set for rapid growth -- it posted a profit of Rmb1.27 billion in the first half of 2010 -- it deserves a higher-than-average valuation.
The sector in which Sinovel operates has also become a topic of heated discussion. Bearish analysts think China’s wind power industry relies too much on government policies and, despite the pledge of clean energy expansion, there isn’t substantial development in the sector.
Meanwhile, the bullish camp believes clean energy companies will benefit from the Chinese government's plan to spend $736 billion over the next decade to make the most of wind, solar, nuclear and other clean energy technology. At the moment 80% of China's energy need is met by power plants fuelled by coal -- the most traditional and most polluted fuel source.
Sinovel kicked off its IPO on Tuesday this week and is due to fix the price today, according to a statement filed with the Shanghai Stock Exchange. It is offering 105 million A-shares, with 20% targeted at institutional investors and the remaining 80% at retail investors. Essence Securities is arranging the deal.
The company will use the IPO proceeds towards its Rmb1.7 billion worth of projects, including a reseach and development centre for wind turbines with a capacity of at least three megawatts. It also plans to build turbine manufacturing plants in Dalian, Yancheng.
Chinese companies, led by financial institutions and information technology firms, may raise Rmb400 billion ($61 billion) from IPOs in the domestic markets this year, PricewaterhouseCoopers (PwC) has predicted.
That is lower than the Rmb478 billion raised via IPOs on the mainland exchanges in 2010. Large deals like those launched by Agricultural Bank of China and Huatai Securities are unlikely to be repeated this year as most mega-sized state enterprises have completed their restructuring and become publicly traded already, the accounting firm explained at a briefing earlier this week.
The IPO funds raised in Shanghai in 2010 amounted to Rmb180.2 billion, an increase of 44% compared to 2009, while the total funds raised on the Shenzhen Stock Exchange totalled Rmb298.1 billion, an increase of 375% from the previous year, according to PwC.
The firm forecasts that some 30 issuers will raise Rmb150 billion on the Shanghai bourse this year, while 290 companies will sell Rmb250 billion worth of shares on the Shenzhen exchange.