In the middle of October, China Power International Development completed a listing on the Hong Kong Stock Exchange, raising HK$2.5 billion ($320 million) from a 990 million share deal led by Merrill Lynch.
The transaction represented a turning point for the Hong Kong market, which had been struggling along since the end of the second quarter. Whereas IPO's since then had tended to price towards the bottom end of their indicative ranges, CPI priced towards the top at HK$2.53. As of November 22, it was trading at HK$3.125.
The company is the flagship arm of the China Power Group, the largest of China's five national independent power producers (IPP's). Here its elegant and articulate chairwoman, Li Xiaolin, daughter of former premier Li Peng, discusses the company's achievement and strategy.
Your IPO was very successful. Why do you think that was?
Yes it was incredibly successful and even beat my expectations. I thought we'd achieve an oversubscription level of around the 50 times (editor's note: retail oversubscription topped 295 times). I think there were four reasons why this happened. Firstly, China is experiencing strong growth and this is underpinning the power sector. Secondly, we've been incorporated in Hong Kong for 10 years now and during that time have continued to enhance our operations and performance. Thirdly we have a strong parent that gives us enormous backing and fourthly we work very well together as a team.
How did you find the process of going on global roadshows and dealing with investors? Were you surprised by any of the questions they asked you?
No I was expecting the questions which were thrown at us. Investors were very focused on earnings and growth drivers. They also asked about coal prices and tariff adjustments. We were well prepared and because we answered the questions thoroughly and well, we attracted great demand for the IPO.
In fact I'd say our IPO was a textbook case of how to complete a great deal and I believe it was more impressive than any other deal from the Chinese power sector. It was good in terms of pricing and execution. We were really conscious of the need to leave some money on the table for investors so the share price performed well in the secondary market. I think we got a good balance between providing a satisfactory return for investors and achieving a good valuation for ourselves.
How has the deal performed in the secondary market? At pricing you achieved a P/E ratio of 11.9 times 2005 earnings, whereas your domestic peers such as Huaneng Power International and Datang Power were trading around the 13 times level.
We're trading at 14 to 14.5 times 2005 earnings and this is now higher than any of our peers, so we're all extremely pleased.
Since the IPO have there been any change to the earnings guidance you gave investors?
In the prospectus for our IPO we forecast full year earnings of RMB633 million. We don't want to make promises that we can't keep, so we've been working hard to achieve it. We take our credibility extremely seriously and would not set targets we didn't believe we could meet. And I do not think our end of year results will disappoint anyone.
A lot of investors have been worred about the impact of coal prices since they have a significant impact on the pwoer sector and increased so quickly during the first half of the year. But the government has initiated a number of policies to counter this. It has raised tariffs twice to help coal generators.
What steps has the govenrnment been taking to better align tariffs and coal prices?
The State Council commissioned a report, which recommended a pass through policy for tariffs so that coal generators would not be adversely impacted by rising prices. The State Council has agreed in principle with the report and is currently figuring out a way to implement it. We hope this will happen asap.
In the meantime, our company does have a competitive advantage given that a lot of our coal plants are mine mouth facilities. Our coal supply is guaranteed and we have lower costs than our competitors.We're alsocontinuing to reduce our operating costs.
Realistically how quickly do you think the government can implement a pass through policy?
We'd like it to be implemented as soon as possible, but it will take a little while for the government to do a study and a pilot project. The most optimistic think it will be operational early next year. However, if there are hiccups and more research is needed, then it could take longer. But the government's temporary policies have done a good job to alleviate difficulties for the power generators.
The government is also in the process of removing ownership of state-owned coal mines away from the control of regional governments. At the moment, regional governments are hugely benefiting from increasing coal prices because they get greater taxes. But it makes much more sense for the central government to own these mines since it has a broader view over the whole industry and can see that it needs to lessen the impact of rising prices on power generators. Of course the implementation of the pass through policy will be a major plus for the power generation sector. It will also stabilize margins going forward and will ease margin erosion.
What's China Power's policy towards asset injections? At listing you had attributable installed capacity of MW3,010, while your parent has MW22,000. Many investors are hoping you spur earnings growth through injections.
We're definitely focusing on asset injections over the short-term and over the medium term we have three greenfield power projects on the way that will increase capacity by 3GW. We're likely to acquire the power plants that are already under our management (editor's note: six plants with installed capaity of MW3,465) and we're also not ruling out acquisitions of assets currently held by our parent.
