Morgan Stanley and CICC are believed to have been awarded joint books for the flotation of the Guangdong Grid Co, which is being used by the Chinese government as a pilot study for its reform of the entire sector. The flotation of the transmission and distribution network (T&D) of what is currently known as the Southern Alliance is expected either late this year or at the latest early next year and although both houses are faced with a large restructuring task, they have recently been aided by the release of a reform framework for the entire sector.
In this respect the deal may face less of a challenge than the outstanding telco mandates. Rather than list a couple of companies and then watch their share prices plummet sharply as investors wake up to the onset of competition, the the Chinese government has at least made its plans for the power sector clear from the outset. Shortly after Chinese New Year, it issued a restructuring roadmap, which will lead to the dismantling of the omnipresent State Power Corp (SPC) and disaggregation of T&D from generation. What should emerge are two T&D companies and five roughly equally-sized national independent power producers (IPPs).
The SPC was originally formed in 1997 when the government removed the operating assets from the Ministry of Electric Power and split its regulatory functions between the State Economic & Trade Commission and the Ministry of Finance. Under SPC control came about 45% of China's electricity generation and 70% of the country's grid operations. All provincial and autonomous regional power companies became affiliates of the SPC with the exception of the Guangdong Power Group, Inner Mongolia Autonomous Region Power Group and Hainan Province Power.
Under the structure of the new framework, the SPC's existing generating assets will be carved out into some existing IPP's such as Huaneng Power International (HPI) and some newly established IPP's. One of T&D networks will remain with the SPC, which will become a holding company for five regional T&D networks covering the north, northeast, northwest, central China and Tibet.
The second T&D network comprises the Southern Alliance (Guangdong Grid Co), which groups the Guangdong grid with four provinces comprising Hainan, Guizhou, Guangxi and Yunnan. This second grouping differs slightly since Guangdong has always had a lot more autonomy than the rest of the country and also owns a number of generation assets. However, in August last year, Guangdong province formally began the process of separating power generation from distribution, transferring total assets worth Rmb71 billion and installed capacity of 9,000MW to a new company called Guangdong Power Asset Management Company.
The emergent Guangdong Grid Co has, therefore, moved a lot further towards complete disaggregation and will not need to wait for the formation of the SPC holding company before seeking its own listing. Sector experts say that a future listing of the SPC or its constituent T&D networks is some way down the road, with UBS Warburg said to be working in an informal advisory capacity.
However, while the road map has been laid out, most of the detail has yet to be filled out and there is as yet no clear picture of the regulatory framework and the tariff structure, which will determine the ultimate efficiency and profitability of the new groupings. The government also needs to amend current legislation if it is to allow strategic investment in the sector.
A prospective valuation of the Guangdong Grid Co is still in its infancy and there are few comparables in Asia. To date, the only country that has completed the process of splitting T&D from generation is Singapore and the grid, under Singapore Power, has yet to be listed. Analysts say that companies in Hong Kong such as CLP Power and Hong Kong Electric tend to trade anywhere between two to four times book value because the government's Scheme of Control ensures high rates of return, while Kepco tends to trade slightly below book value. In China, on the other hand, listed IPP's such as HPI tend to trade around book value and analysts believe that the country's Grid Co's will be pitched at a comparable level since they will similarly be treated as growth stocks rather than utility plays.
In a recent research report, Lehman Brothers analysed the relative efficiencies of grid operators across Asia. Where the Chinese Grid Co's are concerned, it said that performance will be driven by a need to upgrade and expand the current network, with the government projecting capex of Rmb300 billion ($36 billion) under its 10th five-year plan (2001 to 2005). About one third of the amount is slated to be equity funded.
By 2005, the government hopes to extend 220kV and above transmission line network from 146,150km to 210,000km, a CAGR (compound annual growth rate) of 7.5%.
Lehman Brothers analyst Angello Chan concludes that in terms of transformer capacity relative to installed capacity, China stands fourth in the region behind Singapore, Hong Kong and Malaysia. However, in terms of transformer capacity per person, China drops right down the rankings to third from bottom ahead of Indonesia and the Philippines. This suggests that substantial capex will be required to connect all of China's huge population to the national grid.
The investment bank also computes the overall efficiency of each grid based on five rankings - transformer capacity/installed capacity; transformer capacity per capita; affordability of electricity; GDP per grid and transmission line loss. Here China also comes in just ahead of the Philippines and Indonesia and below Singapore, Hong Kong, Korea, Thailand, Malaysia and Taiwan.
In terms of China's own power grids, Southern China (excluding Hainan) comes fifth behind east China, north China, Shandong and northeast China. The southern grid already connects Guangdong, Guangxi, Yunnan and Guixhou and at the end of 2000, total installed capacity was 51,386MW with 116,518km of 35kV and above transmission lines. The grid is mainly engaged in sending power eastward to Guangdong, the most economically developed of the provinces.
"This network covers an area with abundant hydro reserves and rich coal reserves," Chan comments. "Therefore, the region is not reliant on imported power like east China, but is an exporter of electricity to neighbouring regions."
Analysts also point out that the Southern grid has a massive long-term advantage because of its interconnection with CLP s grid. Some predict that once Hong Kong's Scheme of Control expires in 2008, the Territory will become an importer rather than exporter of electricity from the Mainland.
