China General Nuclear Power, the country’s largest nuclear energy producer, will kick off pre-investor education on Monday ahead of its planned $3 billion initial public offering in Hong Kong.
The Shenzhen-based company's looming flotation is timed to coincidence with the Chinese government’s drive to curb coal usage in favour of cleaner energy. If it meets its target, CGN Power will be Hong Kong's second-largest IPO this year after HK Electrics $3.1 billion offering in January.
CGN Power this week won approval from the Hong Kong stock exchange to proceed with the share sale. Bank of America Merrill Lynch, CICC, and ABCI Securities — the investment arm of Agricultural Bank of China — are overseeing the deal and will launch the bookbuilding process two weeks after the pre-investor education.
CGN Power currently generates about 9.4 gigawatts or half of China’s total nuclear energy output.
As marketing for the deal is still in its early stages, no price range has been set and there is no guidance for how many shares the company is looking to float.
Even so, sources close to the deal said that CGN Power has a number of comparables, including China Longyuan Power Group and Huaneng Power International.
The share price performance so far this year of Longyuan and Huaneng varies: Longyuan has dropped 16% while Huaneng Power is up 30%.
The valuations for both companies are also split. While Longyuan is trading at 20.35 times its 2014 earnings, Huaneng is at a much cheaper 8.09 times 2014 earnings, according to Bloomberg. Sources close to the deal say that, on average, Chinese clean energy companies are trading at between 14 to 15 times expected 2014 earnings, although they also note that it remains unclear if CGN Power will be sold at a premium or a discount to its comparables.
Some will undoubtedly argue that as the world’s first, pure nuclear energy play seeking to float its shares, CGN Power should come at a premium to its peers. (While NYSE-listed US Exelon Corporation has nuclear operations, it also operates a number of other divisions.)
Improved outlook
China suspended approvals for new nuclear power plant construction after the Fukushima disaster in Japan in 2011. However, there are now indications that the mainland will lift these restrictions before year-end as part of its environmental efforts, hence the timing of CGN Power’s flotation.
There are currently 22 operational nuclear reactors in China and 26 under construction, according to the World Nuclear Association.
Safety concerns remain a paramount issue following a number of high profile nuclear disasters, including Fukushima. Yet it is clear nuclear power has strong advantages over more traditional power sources. Stable power supply, zero emissions and cost efficiencies to name a few are all tremendously beneficial for China’s high-end equipment manufacturers.
According to BOCI research, nuclear power has an internal rate of return of 20% compared with China’s power average of 15% and coal-fired power at 18%. This should provide a strong incentive for further investment in this area.
Research forecasts that there will be a total of 60.6Gw of operating nuclear power capacity in China by 2020, which will deliver a compound annual growth rate of 22% from 2013 to 2020. This trumps the mainland’s total power generation CAGR of 5.5% and wind power generation’s CAGR of 17%.
Nuclear power is also an obvious solution to help clear up China’s chronic pollution problem. BOCI estimates that nuclear power generation will grow from 4-13% to 7-38% of total power generation by 2020 in a number of coastal provinces, notably in Zhejiang, Guangdong, Liaoning and Fujian.
Uranium oversupply
Another supportive factor is the depressed price of uranium, a key source of nuclear fuel. Despite expected nuclear power restarts in China, Korea and Japan, uranium production is forecast to remain in oversupply for the next six years.
The spot price of uranium will likely rise as demand picks up but research indicates that nuclear power plants returns should remain unaffected. Even if in an extreme case uranium rises to $140 per pound from just over $40/pound currently, there would only be a 2% drop in returns for nuclear power plants, research notes.
In addition, China stocked up on uranium when prices dropped and some analysts believe it now has enough uranium to last until 2020.
As of 2013, 7,635,200 tonnes of uranium resources were identified, according to the International Atomic Energy Association. Annual output stood at 59,531 tonnes, with the global uranium production capacity totalling 74,410 tonnes annually. Given uranium capacity was 25% times higher than demand, prices fell 20% last year.
To be sure, nuclear safety remains a top concern for the public and for investors. But China has the advantage of entering the industry some 25 years after the first plant, and as such, arguably has improved safety standards. In this respect, BOCI research notes that China uses pressurised water reactor technology, and focuses on third-generation AP100 standard for nuclear development.
Additional reporting by Jing Song
