IPO sentiment blows Suntien's way

China Suntien Green Energy Corporation has raised HK$2.87 billion ($369 million) ahead of its Hong Kong listing after pricing its initial public offering at the top of the indicated range. The strong demand for the deal marks a continuation of the appetite for green energy stocks, although contrary to some of the other recent IPOs, Suntien isn’t a pure solar or wind energy play.

It does have a growing wind farm business, but the state-owned company is also the leading distributor of natural gas that it buys through long-term contracts with PetroChina and then distributes through its network of pipelines to commercial, industrial or residential users in Hebei province in northern China. This makes Suntien a cross between gas distributor Beijing Enterprises and wind power generator Longyuan Power, both of which are also listed in Hong Kong. And it means that it has a steady cashflow business (the gas) that provides downside protection as it continues to develop the more profitable wind business.

For 2010 as a whole, the company is expected to derive 78% of its revenues from the gas business, although about 60% of its earnings will come from wind power generation thanks to the significantly higher operating margins – about 68% versus 22% for the natural gas business.

Like its peers, Suntien is expected to benefit from China’s increasing focus on renewable energy sources. With regard to wind, Beijing has set a target to boost the country’s generating capacity 10-fold to 120,000MW by 2020 from 12,000MW at the end of 2008.

According to its listing prospectus, Suntien will complete the majority of its wind farms under construction by the end of this year, which will bring its consolidated installed wind generation capacity to 900MW. On top of that it owns a portfolio of pipeline projects for future development with an estimated consolidated installed capacity of more than 8,500MW, which demonstrates the growth potential. Longyuan, which is also expanding aggressively, currently has an installed wind power capacity of about 6,500MW.

Investors have had a lot of IPOs to focus on over the past month, including several deals in the broader renewables sector, and there are clear signs that they have started to become more selective about which deals they spend their time on (see separate story about the re-launch of IRC’s IPO at a reduced size on our website today). According to sources, Suntien didn’t see a rush of orders right off the bat, but towards the end of the eight-day roadshow, investors began to view it as one of the remaining medium- to large-size Chinese companies with a renewable focus and interest picked up.

When the deal priced on Thursday last week, the institutional tranche was said to have been “highly oversubscribed” and Hong Kong retail investors had ordered more than 275 times the number of shares initially set aside for them, triggering a full clawback that increased the retail tranche to 50% of the deal from the original 10%. Suntien’s high-end pricing also came together in the final 24 hours, after the bookrunners went out with a message that the deal was covered across the range and was likely to price in the upper half. That prompted a gravitation of orders towards the top of the price range.

Most of the buyers came from Asia and included a number of anchor investors, renewable-focused funds, global asset managers and other accounts that met the management on the roadshow. The allocation was said to have been highly concentrated towards the top of the order book. The price was fixed at HK$2.66 per share after being offered in a range between HK$2.06 and HK$2.66. The final price translates into 16.4 times its earnings for 2011, based on the average bookrunner estimates, which is a significant discount versus Longyuan’s 21.9 times and also puts it at a decent gap to Beijing Enterprises, which was quoted at 18.9 times at the time of Suntien’s pricing.

One source noted that the discount versus Longyuan was reasonable and needed, rather than generous, given that Suntien is a much smaller company, both in terms of the scale of its generating assets and its earnings – according to the prospectus, Suntien estimates that its net profit in the first half of this year reached at least Rmb144 million ($22 million), while Longyuan reported a net profit of Rmb852 million. Longyuan also has a multi-province focus, while Suntien is active only in Hebei. However, others argued that the price range was set to attract investors’ attention, with the bottom of the price range pitching the company at a valuation of just 12.7 times next year’s earnings.

Suntien sold 1.077 billion new H-shares, which accounted for 35% of the company. There is a 15% greenshoe that could increase the deal to as much as $424 million, if fully exercised.

Other recent deals in the extended renewables sector include China Ming Yang Wind Power Group, which listed on the New York Stock Exchange on October 1 and Xinjiang Goldwind Science & Technology, which debuted in Hong Kong last Friday. Both these companies make wind turbines for energy generation. Ming Yang raised $350 million from the largest IPO by a Chinese company in the US this year – despite pricing its shares at the bottom. Goldwind priced its offering at the top after receiving more than 400 orders from institutional investors, allowing it to walk away with $917 million – the largest IPO in Hong Kong this year after Agricultural Bank of China’s record $22.1 billion offering. Also debuting late last week was solar module manufacturer Trony Solar, which raised $223 million from another well-received Hong Kong IPO.

Also pricing on the same day as Suntien was Daqo New Energy Corp, a Chinese manufacturer of polysilicon for use in solar wafers, which raised $72 million from an initial public offering on the New York Stock Exchange. The company, which was brought to market by Morgan Stanley, gained 6.6% in its first two trading days last week.

Meanwhile, Trony Solar gained 12.7% in its Thursday debut and Goldwind finished 6% above its IPO price on its first day, adding further to the relatively positive sentiment for new Hong Kong listings in the renewable space.

Before the IPO, which was arranged by Macquarie and Morgan Stanley, Suntien was wholly owned by Hebei Construction & Investment Group, an operator of coal-fired power plants and other energy and transportation infrastructure that is owned by the Hebei provincial government. The company is scheduled to start trading on Wednesday (October 13).