Huadian Fuxin powers to market in turbulent time
Huadian Fuxin Energy has been forced to tap the stock market at a tough time.
The clean energy flagship of China Huadian Group, the mainland's fourth-biggest state-owned power generator by capacity, is seeking a fresh injection of cash from a Hong Kong listing just as share market valuations are taking a battering from the global slowdown.
But the highly debt-leveraged company has little choice - it's already pushing the limits of central government debt-ratio ceilings and needs other sources of funding to realise its ambitious expansion plans.
As a sign of just how tough the times are, the Hang Seng China Enterprise Index, which tracks the share-price performance of mainland state-backed firms, has tumbled 18.3 per cent between this year's peak on February 29 and last Wednesday.
The share prices of electricity producers from clean energy sources have plunged even further. Wind power producer and industry leader China Longyuan Power Group fell 22.4 per cent over the same period, while solar sector leader GCL-Poly Energy Holdings shed 31.6 per cent.
'Given the poor performance [of clean energy stocks] over the past year, and the general lack of market interest in initial public offerings of shares, it is a curious time for Huadian Fuxin to come to the market,' Sanford Bernstein senior analyst Michael Parker said.
Huadian Fuxin is also playing catch-up to its more established state-backed rivals. China Longyuan, Huaneng Renewables and China Datang Corporation Renewable Power have already tapped the Hong Kong market for funds in the past 30 months. China Longyuan even announced a proposed second share issue in May, which saw a sell-off of its stock as investors thought it would dilute the company's earnings on a per-share basis.
Huadian Fuxin has a pressing need to raise funds. Its net debt-to-shareholders' equity multiple stood at 3.85 times, close to the four-times ceiling state companies are not supposed to surpass, according to the State-owned Assets Supervision and Administration Commission.
To meet its ambitious expansion targets, a share issue is key, since the company would find it increasingly difficult to pile on more bank loans.
It aims to raise its wind power generating capacity by 47 per cent by year-end to 3,200 megawatts (MW) from 2,171.3 MW a year earlier. Besides building 600 MW of coal-fired power plants that would add to its existing fleet's capacity of 2,050 MW, it also has a 190 MW in hydro power projects under construction or planned that would add to the 2,223 MW of its existing hydro capacity.
In the next two years, it has budgeted a total of 20 billion yuan (HK$24.5 billion) for wind, coal and hydro capacity expansion. It has also set aside 800 million yuan for the early construction of a nuclear power plant. According to industry practice, power plants must be at least 20 per cent financed by equity capital, and the rest is typically funded by bank loans. This means Huadian Fuxin needs four billion yuan of capital to meet the requirement for the next two years. It had 1.49 billion yuan in cash on hand at the end of last year, and the listing proceeds would amount to HK$2.34 billion (around 1.9 billion yuan), if the mid-point of the HK$1.6 to HK$1.76 price range is the final pricing of its shares.
Together with net cash inflows from operations, the company believes it will be able to meet the requirement, although it would seek to issue bonds to lower financing costs.
The price range represents 6 to 6.8 times the company's forecast earnings a share, assuming it can achieve the same forecast earnings a share in this year's second half, compared with the HK$0.13 it projected for the first half.
This valuation is in line with the corresponding price-earnings multiple of 6.1 of Huaneng Renewables, 6.4 times of China Datang, but lower than industry leader China Longyuan's 10.5 times earnings.
To ensure a successful offering, Huadian Fuxin has secured commitments from suppliers and even rival Huaneng Renewables to buy up 60 per cent of the shares on offer, leaving 40 per cent for other investors.
Parker said this year was a good time to consider buying into mainland wind power producers as plant utilisation levels were expected to rebound from next year as more power grids were built to relieve chronic bottlenecks in transmission capacity caused by wind farms being built much faster than grids.
Huadian Fuxin saw its wind farm's utilisation drop to 2,072 hours last year from 2,232 hours in 2010 and 2,726 hours in 2009. Higher utilisation gives higher profit margins.
The number of new shares Huadian Fuxin is offering
- Depending on demand, it may issue 15 per cent more