by Hans Chen | July 6th 2011
On June 10th, 2011, Huaneng Renewable Energy Holding, the renewable energy (predominately wind energy) subsidiary of state-owned power company China Huaneng Group, raised HK$6.23 billion (~$800 million) through its second attempt at an IPO on Hong Kong Stock Exchange.
It would turn out to be the largest cleantech IPO globally in 2Q 2011. After Sinovel Wind Group’s $1.4 billion IPO in 1Q 2011, it’s likely that we will get used to at least one gigantic IPO in China every quarter these days.
It’s already the third IPO on the China/Hong Kong stock markets for a wind energy subsidiary of a state-owned power company. Of the five major Chinese state-owned power companies, Guodian, Datang and Huaneng have already had their wind energy subsidiaries making public market debuts. The remaining two, Huadian and China Power Investment, both already established renewable energy subsidiaries.
The story here seems to be: Wind energy in China was boosted by lucrative subsidies. Rich power companies invested billions of RMB to establish renewable business. These businesses, aided by huge financial support from parent companies, are able to develop rapidly and go public in a relatively short amount of time, bringing even more capital.
Stock performances of these subsidiaries, however, would suggest otherwise.
Longyuan (wind energy subsidiary of Guodian), Datang Renewable and Huaneng Renewable all sank below the issuing price on the date of IPO. Take Huaneng Renewable as an example, the stock price dropped 8.58% on the first day. Only 65% of the offered shares were subscribed. Moreover, according to a company official, the IPO was actually “satisfactory” despite the drop in price and lack of interest from investors. Sinovel, the largest cleantech IPO this year to date, also suffered a stock price drop at nearly 10% on the first day of offering.
With all these attention, all the big-name underwriters and unbreakable support from some of the most powerful (literally) state-owned companies in China, why did these companies perform poorly in public markets?
The stand-out reason here is that investors are a little reluctant about wind power project development, especially when there is an unsolved issue of getting wind power generation on-grid in China. Note that the Chinese government strongly encourages wind equipment manufacture, but the subsidies are not as clear and aggressive when it comes to actual on-grid project development. As a result, a surplus of wind equipment manufacture is looming, making investors think twice before investing in wind energy.
For a deeper explanation, I would like to use a quote that I heard in China when I worked there. “All power & electric companies in China have three full-time jobs. They work for coal companies in the upstream. They work for the grid in the downstream. Finally, they have to work for the banks.” In other words, these power companies may be big, but they also had their own issues such as lack of profit and huge amount of debt. On average, the debt ratio for the five major power companies is 80%—a good reason for management to consider raising money in public market. And that was exactly what happened.
As project developers, these renewable subsidiaries are in desperate need of capital. 80% of the $800 million raised by Huaneng will be used for project development. And the other 20%? You guessed it: paying off debt.
With the expectation that the 12th Five-year Plan will have more detailed and consistent policies for wind energy development, the future is still bright for the power companies and their subsidiaries. Let’s keep an eye on the next gigantic IPO for one of these subsidiaries, because their performance might as well represent the industry trend for the next few years.
