Shandong Power listing on track despite market jitters

Shandong International Power Development (SIPD) will defy bearish sentiment to push ahead with its H-share listing, but hinted it might lower its pricing.

The company, which plans to raise up to $2.19 billion, launches its public subscription in Hong Kong today.

The listing will be an important barometer of the market's appetite for new issues after the year's first two initial public offerings failed to go ahead.

SIPD will issue 1.27 billion H shares at between $1.38 and $1.73 each, at a fully-diluted price earnings multiple of eight to 10 times the projected earnings for last year.

However, Kenneth Koo, executive director of sponsor Goldman Sachs (Asia), said SIPD could lower the price before the book closed on Friday.

'We have the flexibility to do so according to listing rules. But no such decision has been made,' Mr Koo said.

Only 76.55 million shares, or 6 per cent of the issue, have been allotted for the Hong Kong public, with the remainder to be placed internationally.

SIPD executives conducting a roadshow for the issue in San Francisco said they were confident it would be a success.

That was despite listing candidates Heilongjiang Agriculture and Zhujiang Steel Pipe Holdings calling off their flotations last month due to poor market sentiment.

SIPD vice-chairman Cheng Hongyuan said that even without increases in electricity tariffs, the company would be able to meet promised rates of return - on average net book value of fixed assets - of 12 per cent and 13 per cent for the next two years.

Tariff rises have been a useful way of helping mainland power operators to meet rates of return promised to investors.

'We will not fail to deliver on our promises,' Mr Cheng said.

He said the company would back up its pledge by making acquisitions of new plants to boost fixed-asset investment and by strong demand for electricity in Shandong.

Fixed-asset investment forms a central part of the calculation for the rate of return - a useful indicator for investors to gauge the attractiveness of infrastructure plays.

Most of the power firms on the mainland have failed to meet the returns promised to investors during the past few years, as authorities in Beijing vetoed tariff increases for fear of fuelling inflation.

As part of its drive to separate the government from business, Beijing last year said it would soon be distinguishing the generation of power from distribution of power.

The policy change has resulted in tariff reductions because power plants on the same grid are allowed to compete to fix their own on-grid tariffs.

This means power operators may have less flexibility to raise tariffs than previously allowed.

'We don't have much pressure to raise tariffs to meet the return rate,' Mr Cheng said.

Despite the sector's change of policy and a power glut elsewhere in the country, SIPD said Shandong remained attractive, at least until 2003.

The company would be able to yield a return of 14 per cent by 2001 and 15 per cent by 2002 and 2003, Mr Cheng said.

He added that it was common for H-share candidates to allocate a bigger portion of shares for international placement, leaving a minority for domestic subscription.