How to Harvest from China’s Renewable Asset Sales— Or Not (1)

Cash-strapped RE

Bombshell this week as China Huaneng—2nd largest power producer in China— changed its plan in terms of buying 51% equity of GCL Poly New Energy, the world’s 2nd largest PV power producer.

Instead of buying the firm’s majority share all at once, Huaneng revealed to switch the plan to acquire only the domestic photovoltaic solar power assets of GCL Poly New Energy, instead.

The deal and now the “twist” is eventful in several dimensions:

  • RE Asset Sale Wave: as one of the wind/solar generation asset sales initiated this year, it is a symbolic event of an apparent trend among Chinese private renewable companies to sell off solar/wind power asset
  • Risk Signifier: Huaneng’s hesitation to buy the world’s 2nd largest solar power producer indicates the underlying financial risks beneath China’s “booming” renewable power market
  • Energy Transition: the interest of state-owned energy companies (like Huaneng) to take these risky asset show energy conglomerates’ commitments in renewable assets (from the traditional energy asset)
  • Risk-Profile Distinction: it also shows the clear distinction between private and state-owned players in their risk-taking capacities between state-owned and private companies in China 

The change of plan is suspected as Huaneng’s measure to lower the risk and the cost to purchase a rather complex HK-listed company, while its main target is to quickly expand its renewable (especially solar) asset size to reform its internal power production structure. 

Moving forward, we are expecting to see more Chinese companies—mainly private or public—seeking to sell wind and solar power assets.

If true, it is a trend that investors and operators outside of China—who are interested in tapping the Chinese RE opportunity—should notice.

But what are the motives behind the RE asset sales? And what are the risk factors? Are there opportunities for foreign companies in the wave of asset sales? We will break down in the subsequent three separate analyses.

GCL Poly New Energy key facts:
7.3 GW PV capacity installed
of which 7.2 domestic.

D-E Ratio: 84%

Net profit (2018) decreased 39% YoY

Two Symbolic Wind Power Asset Sales

Earlier this year, three high-profiled wind and solar companies announced plans to sell off their renewable power plants. The unfulfilled PV plant sale between GCL Poly and China Huaneng is only one of the trio.

The other two are initiated by wind companies—Goldwind and Envision, the 1st and 2nd biggest wind turbine supplier in the Chinese market. For those who do not know, the two—as well as some other Chinese renewable OEMs—also owned, developed and operated significant amounts of wind power plant assets, both as a business strategy to secure customers and a financial strategy to mitigate impacts fro the manufacturing down cycles.

Goldwind started its wind business journey, firstly as a power developer and before it forges the world’s third-biggest turbine empire. As an origin, windpower business contributed 13.6% of Goldwind’s revenue. But that is another story to talk about some other days.

The duo sold off some of their wind power plants this year, prompting the speculation of an asset sales wave upcoming in the wind sector. 

Goldwind, on 14 June, revealed to sell 100% of a wind project developing subsidiary to China Development Bank (CDB) Energy, a fund initiated by CDB, Everbright Bank, Sequoia Capital, and several other bankers. Notably, Goldwind also owns 13% of the fund. 

The subsidiary sold is the developer and owner of the Xiajin I and II wind farm totaling 200MW in Shandong province. The total transaction amount is ¥931mn.

Before that, Envision has sold 100% of its subsidiary wind farm, Changzi Shizhe of 99MW nameplate capacity, to Tianneng Heavy Industrials, at ¥190mn.

Envision, as the top 2 in China’s onshore and offshore market, has spent more energy to make inroads into EVs, storage, and “smart-city” businesses in recent years. It revealed a plan earlier to sell off 300MW wind farm plants this year.

After selling off the 99MW wind farm, Envision is spotted of withdrawing its investment from at least four wind development project companies—two at Jiangyin (Jiangsu) and two at Feigning (Hebei) and Gangling (Shanxi).

A Larger Sales Trend in the PV Power Industry

Compared to the two wind asset arrangments, GCL Poly’s case to sell off the majority share of its PV power development subsidiary, GCL New Energy, is an even more significant case in terms of scale.

It is indicative of a larger wave of asset sales in the PV power sector (compared to wind). [READ MORE on Chinese photovoltaic manufacturers’ business under pressure]

GCL Poly group is a new energy conglomerate in China, with massive stakes in PV equipment manufacturing, solar power development, as well as natural gas business. [Its LNG and gas pipeline in Ethiopia has marked its unique position.] It is also looking into storage and hydrogen sectors. 

The subsidiary on the table, GCL New Energy, is the world’s 2nd largest biggest solar power producer, with 7.3GW installed capacity and 211 plant assets around the world by the end of 2018. The plan to sell off the majority (51%) of the firm entails the farming-out of GCL from the solar generation business.

From 2014-2018, GCL has deployed an aggressive “buying strategy”, resulting in a 20-fold increase of its PV plant asset from just 353MW back at its 2014 IPO in HKSE.

Before the negotiation with Huaneng, GCL has already sold part of these assets to China General Nuclear, China Three Gorges, Wuling Power (a subsidiary of State Power Investment), and a few other state-owned background funds. The sold asset is estimated at 1.7GW.

[Who is Huaneng? READ MORE about the Five Largest Chinese Power Producers]

As a leader in China’s PV power sector, GCL’s case is a clear indication of a “wave.” It is far from a singular case. Not long ago, Panda Green Energy also announced a jaw-dropping asset sale deal with Beijing Energy Group.

The smaller PV power plant had an identical journey to that of GCL. The ambitious “Panda” has been 15-fold its power capacity in six years and now sold the 100-Panda-PV-Plants business, entailing 5GW capacity, all at once.

Logic Behind the RE Asset Sale Wave

Why is there a wave of renewable asset sales all of a sudden?

Although the asset sales are different, in scale, between the wind and the solar producers, there are some shared logics.

Mounting debts & cashflow issue:

The asset sales reflect some serious financial issues beneath the booming renewable market and the expanding renewable companies. In the PV sector, especially, many manufacturers face life-threatening high leverage (debt-to-equity) issues.

GCL New Energy reported 84.1% debt-to-equity rate and a 384% new debt ratio. Its short-term debt is recorded at 9.5Bn, with combined liquidity and credit of only ¥12.8Bn.

Similarly, Panda Green Energy has been registered over 80% leverage in the past five years, mounting to 24.9Bn debt by last year’s end.

Another well-known PV manufacturer Hanergy this year announced to sell off its cash cow Jin’an Bridge hydropower project, a desperate attempt to prevent bankruptcy.

Hanergy, in its heyday, invested in several small hydro, which later provide stable cash flow for the aggressively expanding PV star, [Pic: Yihe Hydropower plant of Hanergy]

Stayed as a private company, Envision’s financial situation is less transparent compared to the others. It recently revealed a 40% year-on-year earning boost, citing an audited report. But the firm’s mounting debt (to equity) is well noticed in the international bond market. Fitch downgraded the firm’s rating from BBB- to BB+ early this year, citing of an elevated debt ratio.

Goldwind’s debt issue, if any, is less serious. In the current wind turbine installation dash, the firm saw a 38% year-on-year growth in revenue in the past Q3, but noticeably a shape 54% decrease in net profit. In the first nine months, it added ¥10Bn debt, but leverage remained under 70%.

In fact, the high leverage risk facing these companies is far from a unique phenomenon but a systematic risk challenging the whole Chinese economy. [READ MORE on Beijing’s combat on the issue via deleveraging]

Manufacturing Up-cycle:

For Goldwind and Envision, the reason to improve liquidity may have more to do with a recent manufacturing upcycle, where a wind construction dash has begun and is expected to last till the end of 2020 for onshore projects and 2021 for offshore.[READ my two analysis on the background and reason of the installation dash, here and here, in Recharge News]

The upcycle may pressure the manufacturers first to harvest the equipment sale opportunity and thus sorted to sell part of its power asset to improve liquidity.

Notably, Goldwind this year announced to change the top executive of the firm. Wang Haibo, who is known for his effort in wind-farm investment and diversification, is replaced by Cao Zhigang, who is known for his role in turbine production.

[READ my interviews with Wang Haibo, and Cao Zhigang in Recharge News]

Risks in China’s Renewable Asset

A fundamental policy factor behind these asset sales is Beijing’s unfulfilled payments of renewable subsidy, due to an ever-expanding deficit in China’s renewable energy development fund (REDF)—current mounting to ¥200bn.

As the REDF in deep deficit, the Ministry of Finance recently announced only set to pay out wind, solar, and biomass subsidy totaling less than ¥5.9bn.

The unpaid subsidy has already been registered as profit (under account receivable) in the books. But renewable companies face growing cashflow issues. And as deficit amount in the REDF continues to balloon, more power plant owners would have to prepare for write off that subsidy “receivable”. That means, eventually, the value of these assets would shrink.

If anything, the asset sales are likely to continue, as subsidy remains an unsolved issue and between 2019-2021 a massive amount of renewable projects seek to come online.

More companies would seek internal and external buyers. It could be a good chance to buy into the Chinese market. But certainly, there are major risks.

We will provide more information on the policy issue leading to the asset risk as well as factors to consider in chipping in the asset sales in the next week’s analysis.