Huadian Fuxin prices IPO above low end to raise $319 million

Huadian Fuxin Energy Corp has raised HK$2.48 billion ($319 million) from its initial public offering after pricing the deal slightly above the bottom of the price range at HK$1.65 per share. The company, which is the renewable energy arm of the China Huadian Group, is due to start trading in Hong Kong on June 28.

In response to the poor sentiment for IPOs at the moment, the deal was pretty much covered before launch by cornerstones and anchor investors, so the fact that it got done would have come as a surprise to no one. But, according to sources, there was some incremental demand including a few orders from financial institutions and high-net-worth individuals.

That said, the vast majority of the deal was taken up by a combination of customers, suppliers and other strategic and corporate investors out of China. There are believed to have been no orders from outside of Asia.

The big surprise was that Hong Kong retail investors appear to have regained some of their appetite for IPOs. After shunning most of the deals this year — in some recent transactions, the retail tranche has been less than 5% covered — they were suddenly out in force again and subscribed to about 94% of the shares set aside for them. Since Huadian Fuxin’s retail tranche accounted for 10% of the total deal, this means retail investors committed about $32 million to the deal — not that much, perhaps, but significantly more than what they have been prepared to invest in the past few months.

It was unclear what made retail investors decide to come in on this particular deal, but the overall market has had a bit of a rebound this week and following yesterday’s 0.5% gain the Hang Seng Index is now up 5.9% this year. The Huadian Group is also well-known as one of China’s big five state-owned power producers. Prior to this deal, Huadian Group owned 85.8% of Huadian Fuxin. The rest was owned by a group of Chinese pre-IPO investors.

The shares that were left over in the retail tranche were re-allocated to the institutional tranche.

There was no information of how well covered the institutional tranche was, but sources said that the company and its four bookrunners had made a decision to reduce the greenshoe slightly to 12.2% of the total deal from the planned 15%. They did stress though that not all investors got allocated 100% of their orders, some did get scaled-back.

This means that the total deal size, including the shoe, will be capped at $358 million.

The base deal comprised 1.5 billion new shares, or 20% of the enlarged share capital. They were offered at a price between HK$1.60 and HK$1.76.

The six cornerstones bought a combined $208.8 million worth of shares, which equals about 65% of the base deal at the final price. The two largest cornerstones were Sinovel Wind Group, a wind turbine maker, which invested bought $58.8 million worth of shares, and CSR Zhuzhou Electric Locomotive Research Institute, a unit of Hong Kong-listed train manufacturer CSR Corp (formerly known as China South Locomotive & Rolling Stock Corp), which took $50 million worth.

Huaneng Renewables, Shanxi Lu’An Mining and State Grid Corp each invested $30 million and a unit of GE Capital put in $10 million.

The final price translates into a 2012 price-to-book multiple of about 0.92 and a price-to-earnings ratio for the same year of about 7.8 times. Both measures values Huadian Fuxin at a premium to two of its closest rivals, Huaneng Renewables and China Datang Corporation Renewable Power, which trade at a 2012 P/B multiple of about 0.6 and at P/E multiples of 6.1 time and 6.5 times respectively.

However, it is coming at a discount to China’s largest wind power producer, China Longyuan Power, which is currently quoted at 1.1 times book and 10.8 times earnings, both for 2012.

While those other three are focusing primarily on wind power, Huadian Fuxin has a more diverse business model. At the end of 2011, its generating capacity was divided between hydro-power (2.2 gigawatt), wind power (2.2GW), thermal coal plants (2GW) and others, which include solar power and a nuclear power plant that is under development (80 megawatt).

Looking ahead, the company will focus primarily on the expansion of its hydropower and wind power capacity, which has significantly wider margins than its other businesses. However, its coal-fired power plants, together with the hydropower business, will continue to generate significant revenues and cash-flow to support the development of its clean energy projects, the company said in the listing prospectus.

Bank of America Merrill Lynch, Citic Securities, CLSA and UBS were joint bookrunners for the IPO.