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Amid an 85 per cent year-on-year decline in global IPO volumes, clean energy firm Huadian Fuxin is set to price an initial public offering of up to US$389 million equivalent (including a 15 per cent over-allotment option) on June 20. 
As a concession to current volatility, the deal was cut from an original US$1 billion.
The offering is being marketed at HK$1.60 to HK$1.76 per share.
Before the over-allotment, this translates into a price-to-earnings ratio of 6.1 times to 6.7 times 2013 forecast earnings. The P/E ratio is a standard measure for assessing the price of IPOs. It is the price of the share divided by earnings by share.  
The company will use the funds raised for new projects, acquisitions and debt repayment. 
The firm specialises in clean energy, with about a third of its installed capacity coming from wind power and another third through hydroelectric dams. The balance is produced by coal-fired power plants, all in eastern China. 
This is a tricky sector. High initial hopes have been plagued by significant overcapacity, weak demand, thin margins, and competition from 'branded' European companies - not to mention weak IPOs. 
Indeed, many deals were pulled after false starts, and most listed clean energy companies from the mainland are still trading significantly below water. In Hong Kong and on mainland exchanges, these include Huaneng Renewables (down more than 28 per cent  in the year to date),  China Datang (19 per cent in the red), Xinjiang Goldwind (more than 29 per cent down) and Guodian Technology (down 22 per cent). 
So it's no wonder that Huadian Fuxin took no chances this time around. No fewer than eight banks are on this deal, notwithstanding the fact that most of the offering is going to just a handful of investors. Six cornerstone investors have committed US$208.8 million towards the IPO. 
These are all domestic industry players bar one (a unit of General Electric of the United States), with not an institutional fund manager, sovereign wealth fund or tycoon in sight. 
The fact the deal was largely pre-sold goes a long way to explaining why this issuer is attempting to bring an IPO in such a poor market.
Moreover, as a clean energy producer, the firm falls within the 'seven strategic industries', or sectors deemed important to China's development. Investors might expect the firm to benefit from state support. The issuer might also see an element of national interest to its listing that outweighs pricing concerns, possibly explaining its willingness to market the deal at a low price during a poor market. 
The deal should get done, but after-market interest could dry out fast, as indeed could liquidity. Unusually for a company of this size, Huadian Fuxin applied for, and obtained, a waiver from the minimum free float requirement of 25 per cent: only 22 per cent of its shares (prior to any exercise of the over-allotment option) will be in public hands after trading starts. 
Meanwhile, the cornerstone investors who will own most of the traded shares after will be restricted from selling their shares for at least six months. Trading volumes could be light and, for that reason, likely volatile. 
Huadian Fuxin is part of state-owned China Huadian, the third largest independent power generation group in the country, as measured by installed capacity. 
The parent will retain a 66.9 per cent share in the total share capital of the company post-listing. 
Trading is scheduled to start on June 28.
Philippe Espinasse, a former investment banker, is the author of IPO: A Global Guide (HKU Press)



Huadian hopes to clear the air