China Datang wind power arm eyes US$1.5b in IPO
China Datang Corporation Renewable Power, the nation's second-largest wind power generator by installed capacity, is seeking to raise US$1.5 billion via an initial public offering to help fund a doubling in capacity over the next two years. CDCRP will join Huaneng Renewables - the clean energy unit of the nation's largest power producer, China Huaneng Group - and hydro power company EuroSibEnergo of Siberia in tapping the Hong Kong bourse for US$4 billion by the end of the year, people familiar with the deals said.
The wind power firm, a unit of China's second-largest power generator China Datang Group, aims to have installed capacity of 7,020 megawatts by the end of 2012, up from 3,236 Mw at June 30 this year, according to a JP Morgan research report. JP Morgan, UBS, Credit Suisse and Macquarie are handling the share offer.
Assuming the investment cost of eight million yuan (HK$9.3 million) per Mw to be stable in the next two years, the investment required for the expansion could be 30.27 billion yuan. Power plants are typically 80 per cent bank-loan financed and 20 per cent by shareholder funds.
The fast expansion and falling equipment costs - 20 per cent in the past two years - could see CDCRP's net profit more than triple to 1.34 billion yuan in 2012 from 412 million yuan this year, JP Morgan said.
CDCRP and Huaneng Renewables operate in a fast-growing but tightly regulated industry, which enjoys domestic tax incentives and subsidies under a UN-operated scheme where money is transferred from polluters in developed nations to help fund emission-reduction efforts in developing ones.
Beijing aims to raise China's installed wind power capacity to 150,000 Mw by 2020 from 26,000 Mw at the end of last year.
Still, the break-neck expansion and insufficient financial incentives for State Grid, the state power-distribution monopoly, to expand grid networks meant more than 30 per cent of capacity is not used as turbines are not connected to power grids.
About 15 per cent of CDCRP's output could not be dispatched because of this, JP Morgan estimated; A 1 per cent change in turbine utilisation could lead to 2.7 per cent adjustment in net profit for next year.
Another concern is uncertainties on the UN subsidy scheme due to expire in 2012. While its future is being discussed, approval has been tightened in the past year. JP Morgan said a 10 per cent cut in such subsidies would reduce CDCRP's next-year net profit by 2.1 per cent.
The company is highly debt-leveraged with its net debt-to-equity ratio projected to rise to 318 per cent in 2012 from 184 per cent. JP Morgan estimates each 0.5 percentage point rise in interest rate would cut its net profit the next year by 8.3 per cent.
The investment bank also said risk related to the quality of wind turbines, with more than 60 per cent of CDCRP's sourced from domestic makers with a shorter operating history than foreign peers. Their warranty will end in two to three years.
CDCRP will launch a marketing roadshow for its shares next week and aims to start trading early next month.
Wind power generator plans to double capacity in the next two years
The combined amount that China Datang, EuroSibEnergo and Huaneng Renewables plan to raise, in US dollars: $4b