The Huaneng stake is one of three key assets transferred from the company's unlisted parent, China Resources Holdings, an investment unit of the State Council.

China Resources Power, scheduled to debut early next month, will be the smallest of the Hong Kong-listed mainland IPPs in terms of capacity. The others are Huaneng Power International, Beijing Datang Power Generation and Shandong International Power Development.

China Resources Power was incorporated in 2001 and has been expanding by acquiring power-generation assets from its parent company and departing American producers.

It will have 1,545 megawatts (MW) of capacity by the end of the year, and an additional 2,893 MW of capacity is scheduled to be built by 2006.

China Resources Power has plants in Hebei, Jiangsu, Zhejiang, Hunan and Guangdong provinces, where electricity demand surpasses supply.

According to pre-marketing papers prepared by underwriting syndicate member CLSA, the company's stake in unlisted Huaneng translates into an effective 4.3 per cent stake in the H-share unit.

The equity ownership will contribute almost HK$200 million annually in investment income.

Other assets which have been injected into China Resources Power were 35 per cent of the 600 MW Xuzhou power plant in Jiangsu and 40 per cent of the 600 MW Wenzhou Telluride Phase Two power plant in Zhejiang.

In the past year, it has spent HK$3.08 billion buying power plants in Hebei, Zhejiang and Guangdong from United States firms such as Sithe and Mirant.

The acquisitions swelled China Resources Power's portfolio, but put stress on its financial position.

To help boost the company's valuation, its parent will retain four less lucrative plants in Sichuan and Guangdong.

CLSA estimated net goodwill charges arising from the acquisitions would be HK$560 million, with part of the charges expected to eat into this year's forecast profit of $310 million.

Lower profitability also has put pressure on China Resources Power's return on assets, which CLSA estimated at 3.8 per cent this year and 5.6 per cent next year.

To hit its target of expanding capacity to 4,438 MW by 2005, China Resources Power had earmarked HK$15 billion in capital expenditure until 2006, the brokerage said.

This is a far cry from the US$350 million to be raised by the listing.

'The assumed HK$4.2 billion debt-equity swap with China Resources Holdings is therefore critical,' CLSA said.

The brokerage expects China Resources Power will rely on borrowings to meet requirements and estimates the net debt-equity ratio will rise from 56 per cent this year to 66 per cent next year and 79 per cent in 2005.

CLSA estimates the company will maintain an annual 25 per cent dividend payout ratio.