China Longyuan dives on share dilution fears
Shares in China Longyuan Power, the largest operator of wind power projects on the mainland, plunged by 11 per cent yesterday in response to its plan to issue more shares to fund wind and solar projects, which analysts said would dilute existing shareholders' interests.
The company announced after Friday's market close last week that it planned to issue 1.36 billion new shares, or 18 per cent of its total issued shares, within the next year. When trading got under way yesterday, its share price fell sharply to close at a nine-month low of HK$5.21.
Citi's head of Asia utilities research, Pierre Lau, said in a report that the issuance could dilute Longyuan's earnings per share by up to 5.5 per cent next year, after taking into account the benefit of interest expense savings by raising funds from a share issuance instead of bank loans or bonds.
The announcement surprised analysts, since Longyuan purchased the wind and biomass power generation assets from its parent Guodian Group for 1.5 billion yuan (HK$1.84 billion) in 2011, and scaled down its capacity expansion to 1,600 megawatts this year from an earlier target of 2,000 MW due to sustained power grid bottlenecks that curtailed returns of new wind farms.
'The fear that investors have repeatedly expressed is that these [renewable power] companies will simply spend on new projects at great haste without regard for returns, and then return to the equity market for more cash whenever they feel like it,' wrote Sanford Bernstein senior analyst Michael Parker.
'That appears to be roughly what is happening. The reputational damage to China Longyuan is clear.'
Parker said earlier he did not believe Longyuan would need to issue shares in the medium-term, given that wind and solar equipment costs were rapidly coming down and its debt burden, while high, was lower than its peers and not exceedingly high for the industry.
Jefferies' equities analyst Joseph Fong quoted Longyuan management as telling an analyst conference that the share issuance plan was aimed at improving its capital structure. Fong said it could be a move to circumvent tightened bank lending on the mainland.
Lau said Longyuan may miss its target to keep wind farm plant utilisation hours steady, due to power grid bottlenecks. He estimated a 5 per cent decline.
China Longyuan management expects revenue from European wind power subsidies to fall by this much. Some believe it will be 50 per cent