China Everbright International opened the institutional order books on Tuesday for an initial public offering worth up to HK$3.3 billion ($425 million) for its biomass and hazardous waste treatment business.
Hoping to hitch a lift on the bullish share price run in Hong Kong of other environmental solution providers, the 560 million-share deal for China Everbright Greentech is being pitched at HK$5.18 to HK$5.9 per share. That equates to 28% of the company’s equity capital, rising to 30.9% on a post-shoe basis given an overallotment option of 84 million shares.
Waste-to-energy, which broadly refers to the process of generating energy from municipal waste, was a relatively new and under-regulated sector in China until the beginning of this year, when the National Development and Reform Commission and the Ministry of Industry and Information Technology jointly proposed a comprehensive development plan.
According to this five-year plan, China wants to convert more than half of its municipal waste into energy by 2020, instead of putting it into land fill. That provides huge business opportunities for waste-to-energy companies, which together accounted for just 30% of the country’s municipal waste in 2015.
Most Hong Kong-listed waste-to-energy companies have seen their share prices rise since the development plan was announced in January. Those of Guangdong-based Canvest Environmental and China Everbright International have both risen by about 20% since the beginning of the year, while smaller player Dynagreen Environmental has gained an even more impressive 35%.
Deep discount
Still, China Everbright Greentech is unlikely to benefit from the more-favourable regulatory environment to the same extent as purer waste-to-energy companies. That's because the company is highly focused on biomass power production, by which chemical energy in wood residue or agricultural waste is transformed into thermal power.
Municipal waste-to-energy companies operate in bigger cities and towns, while biomass companies are based more in rural areas since the raw materials they need are more easily accessible and there is a higher dependency in biomass as an energy source.
Unlike municipal waste-to-energy companies, biomass companies tend to have a less diversified customer base because most of their clients are local governments.
In its preliminary prospectus, China Everbright Greentech cited customer concentration as a risk factor, since nearly 90% of its revenue last year was generated in the eastern provinces of Anhui and Jiangsu, which helps to explain the company’s extremely cautious valuation target. At $1.34 billion to $1.51 billion, the company is valued at about 11.9 to 13.5 times its estimated 2017 earnings of $112 million.
Even at the top of the implied valuation range, China Everbright Greentech will be valued at a deep discount to Canvest Environmental, which trades at a forward price-to-earnings multiple of 19 times.
It will also be valued at a slight discount to China Everbright International’s current price/earnings ratio of 14, indicating that the parent is selling the business at below market value.
The IPO features a rare cornerstone investment from Asian Development Bank, which will invest $10 million as part of the deal's $137 million cornerstone tranche.
The other cornerstone investors are China Structural Reform Fund ($75 million), Zhejiang Silicon Paradise Asset Management ($39 million), and GGHY (Xiamen) Asset Management ($13 million).
Collectively their investment accounts for 32.2% to 36.5% of the deal on a pre-shoe basis. There will also be a 90%/10% split between institutional and retail investors subject to clawback.
China Everbright Greentech is set to end the IPO subscription on April 27 and aims to list on May 8.
CICC and CEB International are joint sponsors of the IPO.
