Chinese polysilicon manufacturer Xinte Energy belatedly began pre-marketing an initial public offering in Hong Kong on Monday, which could raise the company as much as $185 million based on an initial fair-value estimate.
Bankers familiar with the situation told FinanceAsia that the deal will comprise primary shares, or about 15% of the company’s enlarged share capital, and has a target listing date of December 29.
Xinte Energy is currently 86.93%-owned by Shanghai-listed electrical equipment maker Tebian Electric Apparatus and is based in Xinjiang, China's northwestern-most province.
Judging by the lengthy gap between the company’s filing to the Hong Kong stock exchange on July 20 and the deal launch, it appears the management strategically decided to wait for capital market conditions to quieten down before approaching equity investors.
One equity capital markets banker said it normally takes two months for companies to clear queries from the stock exchange operator once they file their listing applications. But the period after the initial filing was overshadowed by rocky trading conditions in China and investor uncertainty heading up to the Federal Reserve’s October interest rate decision.
New issuance activity was tepid when Hong Kong’s Hang Seng Index hit its lowest point of the year on September 29.
By opting for a year-end deal, Xinte Energy could garner more attention compared with late October and early November, when the market was packed with larger transactions such as China Huarong Asset Management, China Reinsurance, CICC, and Dali Foods.
Xinte Energy has a fair-value estimate of between $937 million and $1.23 billion, according to one of the syndicate banks.
Integrated solar power company
Xinte Energy is a comprehensive solar company which engages in both the upstream polysilicon manufacturing business and downstream solar-power project development business.
In the upstream business, it is China’s second-largest polysilicon manufacturer by designed capacity and had a market share of 8.8% last year, behind GCL-Poly Energy with 38%, according to the company’s preliminary prospectus.
The polysilicon manufacturing market is highly concentrated in China; the top-five producers account for close to 60% of the total market.
Polysilicon manufacturers have gone through a tough period in the last three years as falling global demand has created a glut in the market. As a result, China’s average export price fell to $11.9 per kilogramme this October from $23.9 per kilogramme in January 2012, data from the China Customs General Administration shows.
However, the situation looks likely to change in the near future as the National Development and Reform Commission considers cutting solar on-grid tariffs, according to local media reports. Sector analysts expect the cut will relieve cost pressures on grid firms and result in a pick-up in demand for polysilicon products.
That could potentially benefit Xinte, which generated 63% of its gross profit last year from polysilicon manufacturing.
Even so, the price of polysilicon can be highly volatility due to fluctuating demand, as reflected by the group's gross profit margin, which has ranged over the last three years from a negative 42.5% to a positive 36.7%.
So syndicate analysts are looking at the company's downstream project development business as a more reliable source of revenue in the long run.
In the downstream business, which has been the biggest revenue contributor over the last three years, Xinte Energy provides engineering design, consultancy, and construction support to solar project operators.
According to syndicate analysts, the company is also looking to launch its own solar and wind power projects next year to help lift its profit margins beyond the 10% area.
Xinte Energy also engages in photovoltaic wafer and module production. This is often known as the mid-stream business in the value chain as it entails the process of turning raw polysilicon into PV cells that are suitable for solar panel manufacturing.
But the business has been in red with an average loss of Rmb50 million ($7.8 million) in each of the last three years, although the loss narrowed to Rmb3.2 million in the first six months of 2015.
Valuation
Based on the $937 million to $1.23 billion fair value given earlier, Xinte Energy will be valued at approximately 9.4 times to 12.3 times forecast 2015 earnings and 7.2 times to 9.3 times 2016 earnings.
That is fairly in line with GCL-Poly Energy, whose share price trades at 12 times current earnings and 9.3 times on a rolling twelve-month basis.
Considering Xinte Energy’s smaller scale and the common practice of applying a discount to comparables on new listings, the IPO could be priced at a high-single-digit multiple to forward earnings.
In April the company completed a pre-IPO round of funding with commitments from China Minsheng Investment, GF Securities, and Hong Kong-based asset manager L.R. Capital.
According to bankers familiar with the matter, Xinte Energy is set to conduct management roadshows and bookbuilding from December 16 to December 21 with a target listing date on December 29.
GF Capital and UBS are joint sponsors of the Xinte Energy IPO.
