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China Everbright International shares tumble after surprise US$1.3 billion rights issue announcement

The environmental services company says it wants more funding for its projects, but analysts note it had said in March it already had sufficient cash

PUBLISHED : Tuesday, 14 August, 2018, 5:28pm
UPDATED : Tuesday, 14 August, 2018, 11:05pm

Shares of state-backed China Everbright International, one of the nation’s largest producers of energy from municipal waste, slumped as much as 25.6 per cent after it unveiled a surprise rights issue at a sharp discount to raise HK$10 billion (US$1.3 billion) to fund projects and repay debt.

The company will sell 1.66 billion new shares – on the basis of 10 for every 27 held by shareholders – at HK$6 each, a 31.4 per cent discount to Monday’s closing price of HK$8.75.

“It came as a complete surprise since the company said in March it had HK$14 billion of undrawn bank facilities and HK$10.8 billion of cash, which was enough to meet its project development needs for one to two years,” said Daiwa Capital Markets’ head of utilities and renewables research, Dennis Ip. “And the sharp discount was offered after the company’s share price has fallen 22 per cent so far this year.”

Shares in CEI, a unit of conglomerate China Everbright Group, closed 21.1 per cent lower on Tuesday at HK$6.90. They had traded as high as HK$12.78 on January 22 this year. The Hang Seng Index declined 6.6 per cent by market close on Monday from the start of the year.

The share sale was announced as the company unveiled a net profit rise of 23 per cent to HK$2.2 billion – half of analysts’ full-year consensus estimate – in the first six months from the same period a year earlier. Revenue increased 29 per cent to HK$11.8 billion. An interim dividend of 12 HK cents per share was proposed, the same as last year.

“The reason we announced a HK$10 billion share placement amid volatile stock market conditions is that we believe there will be exceptionally ample development opportunities in the next three to five years for us to become a world class environmental protection enterprise,” CEI chief executive Wang Tianyi told reporters on Tuesday.

He dismissed speculation that the company expects to face a credit squeeze, or has already locked in a sizeable acquisition target.

CEI aims to take a significant share of available new-build waste-to-energy projects with daily capacities of around 200,000 tonnes by the end of 2020 under Beijing’s industry development plan, and acquire rivals that will face difficulty amid credit tightening and rising financing costs, he added.

Chief financial officer Raymond Wong Kam-chung said each 500,000 tonnes of new-build daily waste to energy capacity requires 10 billion yuan of investment, of which 30 per cent is typically financed by bank loans.

The company had said in an earlier statement to Hong Kong’s stock exchange that it planned to use around 60 per cent of the rights issue proceeds to fund ongoing and future waste-to-energy projects, 25 per cent for other environmental protection projects including waste sorting, technological research and atmospheric monitoring businesses, and the remainder to repay debt and as working capital.

CEI also aims to boost its overseas market presence via new build projects and acquisitions so that overseas profit contribution will exceed 10 per cent in five to 10 years from less than 2 per cent currently.

CEI has six business operating units, including Singapore-listed water and sewage treatment firm China Everbright Water and Hong Kong-listed hazardous waste treatment and solar and wind farms operator China Everbright Greentech, which was spun off as a separate listing 15 months ago.

The water unit announced earlier this month it would seek a listing in Hong Kong by selling new shares to broaden its investor base.

It has projects in Vietnam and Poland, and has been exploring opportunities in Australia, Singapore, Ireland and developing Asian nations, it said.

CEI is forecast to post a 26 per cent net profit growth to HK$4.42 billion for the whole of this year, rising by a further 19 per cent next year to HK$5.26 billion next year, according to the average estimate of 16 analysts polled by Bloomberg.