China Longyuan Power, China’s biggest producer of wind power, last night finally launched its long-awaited sale of new shares which has hung over the stock ever since it first announced the plans in May.
However, the share price had recovered somewhat after the company issued a $400 million hybrid bond two weeks ago, which indicated that the size of its upcoming share sale would likely be smaller — and hence less dilutive — than initially planned.
Indeed, when it hit the market after the close yesterday, it was with a deal that accounted for just 17.2% of its existing H-share capital. That compared with a plan for a share sale of up to 50% of its H-share capital (18.2% of its overall share capital) back in May, which was later revised to a maximum of 30% in an attempt to revive the share price.
Investors liked the fact that the share sale would now finally be out of the way and together with recent positive news surrounding both the company and the sector that resulted in a lot of interest in the placement. When the order books closed at 9:30pm Hong Kong time, the deal was multiple times covered — as much as four times covered, some said — which allowed the bookrunners to upsize the deal by 23%.
In the end the Hong Kong-llisted company sold HK$2.91 billion ($375 million) worth of H-shares, which translated into 21.1% of its H-share capital, 7.7% of its overall share capital and about 50 days of trading volume.
The price was fixed at HK$5.08, which equalled a discount of 8.1% versus yesterday close of HK$5.53. The shares were marketed at a discount between 6% and 9.6%, or at an absolute price of HK$5 to HK$5.20.
The bookrunners had made sure that the deal wouldn’t stumble by signing up a number of anchor investors, although some of those orders were also driven by reverse inquiries from investors who wanted the stock. One source said the anchor demand was actually in access of the entire deal amount. But they needed have worried. Almost 100 investors piled into the deal, including global long-only funds, hedge funds, sovereign wealth funds and renewable clean energy funds.
There was also strong support from existing shareholders and in fact several of the anchors were investors who already owned the stock.
The allocations were said to be skewed towards the anchors and other existing shareholders and in the end, the top-10 investors took about 80% of the deal.
As the deal has been known for so long, investors have had plenty of time to read up on the company, but the management has also met investors at conferences and non-deal roadshows several times during the past few months, which may have led to the strong interest.
But more importantly, Longyuan last week reported strong operating numbers for November, including a 33.6% pick-up in wind power output and a 17.6% increase in its total power generation (the company also has coal-fired power plants). And on top of that China's National Development and Reform Commission said early last week that long overdue subsidies owed to renewable power producers by the grid companies has to be settled within 10 days. This is good news as the delay has put a strain on the cashflows of several of these power producers.
The payments refer to a seven-month period starting from October 2010 onwards and analysts estimates that this should result in a payment of about Rmb1.4 billion ($223 million) to Longyuan.
And of course, the overhang on the stock caused by the pending share sale will now be removed, allowing the share price to fully reflect the fundamentals. Longyuan's H-shares are up 9.3% since last Monday on a combination of the operating data, the hybrid bond issue and the subsidy news.
But the share price is still below the HK$5.84 where it was trading when the company announced the share sale plans in May. The stock fell 10.8% the day after that news and 23.1% in the following week to a 2012 low of HK$4.49 on May 23. Longyuan has been edging its way back ever so slowly since then but has continued to underperform its peers.
The reason the share placement hasn’t happened earlier — shareholders approved it on July 3 — is that the company has been waiting for approval from the Chinese regulators. That is believed to have come through after it decided to go ahead and issue a hybrid bond.
The company said in May that the money raised from the share sale will be used to fund its new renewable energy generation projects, particularly in the wind power sector. It will also help to optimise its capital structure and reduce its financing costs. In a statement issued this morning, it specified that 50% of the net proceeds will go towards onshore wind power projects, while 20% will be invested in offshore wind projects and 15% in wind and solar power projects overseas. Another 5% may be invested in solar power generation projects in China. The remaining 10% will be added to its working capital.
When Longyuan listed in Hong Kong in December 2009 it had approximately 4,500 megawatt of installed wind power capacity and ranked as the fifth-biggest wind power producer in the world. At the end of June it had 8,994MW and had become the second largest producer of renewable energy globally. At the time of the IPO it said it planned to add 2,000MW of wind power capacity every year, which it has done.
This is still a target and in a conference call back in May representatives for the company said that this will require annual capital expenditure of approximately Rmb15 billion ($2.4 billion).
The placement was arranged by Morgan Stanley and UBS.
