Other China wind stocks set to follow Longyuan to Hong Kong

In December, China Longyuan raised $2.2 billion in its initial public offering (IPO) on the Hong Kong Stock Exchange, with pricing at the top of the range and the issue heavily oversubscribed.

“We think the Chinese wind sector is very attractive ... but it’s quite difficult to play as a foreign investor,” said Lee Clements, investment manager at UK-based environmental fund manager Impax Group. “Given the scarcity value of this kind of asset, and given the huge oversubscription, they could have squeezed even more out of it,” he added.

Opportunities for direct foreign investment in China’s wind power sector, which has doubled in capacity each of the past four years, have declined as Beijing’s incentive and support policies have increasingly favoured domestic developers and equipment suppliers. China Longyuan, which owns 20% of China’s installed wind power assets, is the listed subsidiary of China Guodian, one of the country’s ‘big five’ state-owned power generators.

According to Sebastian Meyer, director of research and advisory at Beijing-based consultancy and developer Azure International, China’s big five own 51% of installed wind assets in the country.

In this environment, said Charles Yonts, Hong-Kong based renewable energy analyst at brokerage CLSA, investors were willing to pay a premium for an entry into the China wind market. “Everyone agreed that the price was high, but shrugged and said, ‘If you want to be exposed to wind in China, you just have to close your eyes and accept it’.”

Yonts added that, although the listing of state-owned subsidiaries is nothing new, the Longyuan deal should lead to more IPOs and international investment in the sector. “There is going to be more deal flow coming through,” he said.

Goldwind, the leader in the Chinese wind turbine market, intends to be the next big wind listing in Hong Kong, with plans to raise $1.5 billion there in the first half of the year.

China’s number two turbine manufacturer by market share, Sinovel, is also reportedly mulling an IPO, but the company has announced no firm plans.

Cornerstone investors in China Longyuan’s IPO included China’s sovereign wealth fund, China Investment Corporation, which took a $400 million stake, as well as US billionaire investor Wilbur Ross, China Life Insurance Company, Value Partners Group and Bank of East Asia chairman David Li. Parent China Guodian remains the majority owner of the newly listed subsidiary.

Investors and analysts said the 4 December rejection of 10 Chinese wind power projects by the regulatory body of the Clean Development Mechanism, which appears to put future carbon credit revenue for Chinese wind power companies in doubt, had little impact on the initial valuation. Clements said that Impax did not include projections of CDM revenue in its evaluation of Longyuan’s bottom line: “We wanted to value it as though the CDM revenue might only be the cream on the top,” he said.

Longyuan claimed the CDM would account for only 1% of 2010 revenues, compared with 13.8% for the first half of 2009 and 17.6% in 2008. The stock had seen 33% gains since its 10 December listing by mid-January.

The listing was underwritten by Morgan Stanley and UBS.

Joshua Speckman