China Southern Power Grid has submitted a proposal on its stock market flotation to the central government, although analysts said a listing without a reform of the existing tariff-setting system would mean a tough sell to investors.
The smaller of the nation's two main power distributors has put forward a preliminary listing proposal to authorities including the State-owned Assets Supervision and Administration Commission (Sasac), State Electricity Regulatory Commission (SERC) and National Development and Reform Commission, said Caijing magazine.
The grid operator in five southern provinces may abandon an earlier plan to issue shares from both the A-share market in Shanghai and H-share market in Hong Kong and opt for an A-share only listing, it added.
A senior SERC official yesterday confirmed the company had submitted the proposal to Sasac, which was circulated to SERC for comments. He declined to say whether it is leaning more towards an A-share only issue.
The company is considering floating only on the mainland because it can obtain a better valuation, although a final decision has not been made.
Despite falling almost a third since the start of the year, the Shanghai stock market yesterday still traded at a price-to-earnings ratio of 29.5, more than double that of the Hong Kong market's 14.23.
Analysts said the existing electricity distribution and transmission tariff system meant a low rate of returns for power distributors and unless this is changed, listings would be tough to sell. Under the system, power distributors get a tariff equivalent to the end-user tariff minus power plants' on-grid tariff.
With inflation at the forefront of Beijing's economic agenda, there is little room for end-user tariff increases this year. At the same time, surging coal costs mean power generators' on-grid tariffs will also rise.
This means power distributors' already-low return rates risk being squeezed. According to a Credit Suisse research report, mainland power grids' return on equity averaged 4.67 per cent in 2006, lower than the 14 per cent to 16 per cent in India, 6.5 per cent in Germany, 8 per cent in Australia and 10.57 per cent in the United States.
'Given this, I think a listing will only be feasible if the A-share market suddenly reverts to a bull run where fundamentals do not matter so much,' said a utilities analyst at a US brokerage.
To rectify this, the analyst said a rate of return formula was already devised by SERC years ago, although when and how this would be launched to ensure sufficiently attractive long-term return for distributors is unknown.
The planned rate of return equals the cost of debt plus two to three percentage points. Ten-year bank loans carry interest rates of around 7 per cent, although power firms have been able to issue bonds at around 5.8 per cent interest.
Additional reporting by Tim LeeMaster