Huadian Fuxin’s IPO takes to the air

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Amid an 85% year-on-year decline in global IPO volumes, clean energy firm Huadian Fuxin is set to price an initial public offering of up to US$389 million equivalent (including a 15% over-allotment option) on June 20. As a concession to current volatility, the deal was cut from an original US$1 billion.

The offering is being marketed at a bookbuilding price range of HK$1.60 to HK$1.76 per share. This translates into a pre-greenshoe price/earnings ratio of 6.1 times to 6.7 times 2013 forecast earnings. The company will use funds raised for new projects, acquisitions and debt repayment.

The firm specializes in clean energy, with roughly one third of its installed capacity coming from wind power and another third through hydroelectric dams. The balance is produced by coal-fired power plants, all in Eastern China.

This is a tricky sector. High initial hopes have been plagued by significant over-capacity, weak demand, thin margins, and competition from “branded” European companies – not to mention weak IPOs. Indeed, many deals were pulled after false starts, and most listed clean energy companies from China are still trading significantly below water. In Hong Kong and on the mainland exchanges, these include Huaneng Renewables (down more than 47 per cent since its IPO), Sinovel (over 83% below its offer price), China Datang (54% in the red), Xinjiang Goldwind (more than 83% down) and, more recently, Guodian Technology (down 18%).

So it’s no wonder that Huadian Fuxin took no chances this time around. No fewer than eight banks (of which joint four bookrunners) are on this deal, notwithstanding the fact that most of the offering is going to just a handful of investors. Six cornerstone investors have committed US$208.8 million towards the IPOs. These are all domestic industry players bar one (a unit of General Electric of the United States), with not an institutional fund manager, sovereign wealth fund or tycoon in sight. The fact the deal was largely pre-sold goes a long way to explaining why this issuer is attempting to bring an IPO in such a poor market.

Moreover, as a clean energy producer, the firm falls within China’s “seven strategic industries”, or sectors deemed important to China’s development. Investors might therefore expect the firm to benefit from state support. The issuer could also see an element of national interest to its listing that outweighs pricing concerns. This could explain the low valuation – on top obviously of the current, challenging market conditions.

The deal should get done, but aftermarket interest could dry out fast, as indeed could liquidity. Unusually for a company of this size, Huadian Fuxin applied for, and obtained, a waiver from the minimum free float requirement of 25%: only 22% of its shares (prior to any exercise of the over-allotment option) will be in public hands after trading starts. Meanwhile, the cornerstone investors who will own most of the free float post-listing will be restricted from selling their shares for at least six months. Trading volumes could be light and, for that reason, likely volatile.

Huadian Fuxin is part of state-owned China Huadian, the third largest independent power generation group in the country, as measured by installed capacity. The parent will retain a 66.9 per cent share in the total share capital of the company post-listing.

Trading is scheduled to start on June 28.

Philippe Espinasse, a former investment banker, is the author of “IPO: A Global Guide” (HKU Press).

[This article was originally published in The South China Morning Post on 18 June 2012 and is reproduced with permission.]