GCL-Poly Energy aims for HK$1.2b to buy plants, upgrade production

PUBLISHED : Tuesday, 30 October, 2007, 12:00am
UPDATED : Tuesday, 30 October, 2007, 12:00am


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GCL-Poly Energy Holdings, one of the largest cogeneration plant operators on the mainland, will start selling shares to the public tomorrow to raise as much as HK$1.18 billion to pay for new plant acquisitions and upgrades of existing facilities.

The company, 21 per cent owned by Hong Kong-listed Poly (Hong Kong) Investments, is selling 288 million shares at between HK$3.30 and HK$4.10 each, according to sources who attended the investor presentation yesterday.

Assuming an offer price of HK$4.10, the company can raise net proceeds of up to HK$1.18 billion.

The offering represents 28.97 per cent to 29.63 per cent of the company's enlarged share capital. Morgan Stanley is the sole lead manager and CCB International is a joint sponsor.

GCL-Poly Energy may increase the size of the offering to 331.2 million shares if demand warrants. The additional 43.2 million shares will be sold by MS China 3, a shareholder of the company. The share sale will close on November 6, with trading scheduled to start on November 13.

The company, which develops and operates cogeneration plants in Jiangsu and Zhejiang provinces, owns 10 power plants and had minority interests in five cogeneration power plants with a total attributable installed capacity of 464.26 megawatt-hours (MWh) as of April.

Cogeneration plants consume a fuel to produce steam which runs turbines to produce electricity. Instead of venting the excess steam, it is sold to customers, often for heating purposes. Such plants are more efficient users of power than conventional power plants.

The company's revenue was HK$910 million last year, 11 per cent higher than a year earlier. Net profits were HK$85.7 million, a 62 per cent increase.

GCL-Energy is expected to record a net loss of HK$212.1 million this year due to a loss on the increase in fair value of the convertible note which the company issued at the end of last year. Net profit for the year will be at least HK$63.9 million if not adjusted by the loss on the convertible note.

Poly (Hong Kong), a unit of the state-owned China Poly Group Corp, took a 21 per cent stake in GCL-Poly Energy in July by selling six cogeneration plants to the company. The value of the deal was about 410 million yuan, Poly (Hong Kong) said at the time.

The move allowed the firm to boost its installed capacity by 20 per cent to 558.11 megawatts.

GCL-Poly, which generates steam during the power generation process, derives its revenue from the sale of both power and steam. it also benefits from incentives provided by the government to environmentally friendly power plants such as higher on-grid tariffs, higher utilisation hours, higher dispatch priority, preferential tax treatments and exclusive rights to sell steam within the heat zone of cogeneration plants.

GCL-Poly, which sells steam to customers exclusively around the area where the company's power plants are located, generated HK$198.4 million from steam sales last year, accounting for 21.8 per cent of the total revenue.

The majority of the steam customers are engaged in industries such as paper and pulp manufacturing, wood processing, food product manufacturing, dyeing and electronics manufacturing.

Sales of electricity still make up the major portion of the company's revenue, although the percentage has been decreasing over the years as sales of steam become more significant. Electricity sales represented 91.7 per cent of total revenue in 2004, while they represented 76.5 per cent by the end of April.

However, the company has suffered from declining revenue from power sales at some of its plants due to an oversupply of power on the mainland.

Total power sales of the company decreased from 1.847 million MWh in 2005 to 1.807 million MWh last year. Seven of its power plants also experienced decreases in revenue in the first four months of this year.

GCL-Poly plans to use 45 per cent of the proceeds raised in the offering, as much as HK$530 million, to fund acquisitions as well as expansion at several cogeneration plants.

About HK$275 million of the proceeds will be used to repay a loan owned to MS China 3.

The company's cogeneration plants are primarily fuelled by coal.

The company also plans to use some of the proceeds to acquire the entire stake in Suzhou Fuel, a coal procurement agent for GCL-Poly, by the end of this year. The acquisition will help it secure more favourable terms when negotiating with coal suppliers such as China Shenhua Energy.

Coal costs represented 60.8 per cent of the total cost of sales for the first four months of this year, already a significant decrease from the 82.2 per cent in 2004.

What the analysts say

Francis Lun Sheung-nim, general manager, Fulbright Securities

Pros: The pricing of the shares is low

Cons: Renewable energy companies in the mainland are vulnerable to government policies

Patrick Yiu Ho-yin, associate director, CASH Asset Management

Pros: There are not many renewable energy companies listed in Hong Kong

Cons: Whether the pricing is attractive depends on whether the company can maintain strong growth

Kenny Tang Sing-hing, associate director, Tung Tai Securities

Pros: The pricing looks pretty low

Cons: The renewable energy sector in the mainland still faces serious policy risks