In just two months, two Chinese new energy power developers announced to delist from the Hong Kong stock exchange (HKSE) and to become wholly state-owned again.
The duo delisting cases, however, are the most recent development of Chinese new energy companies’ “privatization” trend that started since last year.
The state-owned new energy companies have been seeking to—and some have succeeded in—purchasing back its equity shares traded in the Hong Kong market.
For most, the next steps after the delisting (so-called privatization) are to offer its shares again in the China mainland market, instead.
Chinese companies’ “privatization” is nothing new any more in other industries. Starting from ten years ago, a swarm of some 50 Chinese internet companies have issued privatization—mostly in the US stock exchange, setting the trend of Chinese companies’ privatization and returning to the domestic capital market.
Since last year, new energy companies traded in Hong Kong set off a new wave of privatization, driven by several policy factors.
While the perceived valuation gas between Hong Kong (or international) and domestic capital markets are the most direct reason, China’s shifting “go-global” dynamic, new energy subsidy policy and finance priority are critical reasons behind, too.
But the more important question is, what does it entail for the Chinese new energy market?
CGN New Energy Delisting from Hong Kong, A Reverse Effort
Exactly as we predicted, China General Nuclear New Energy (CGN New Energy) become another Chinese new energy company that seeks to delist from the HKSE.
CGN New Energy is a subsidiary of CGN Group, one of China’s “Four-Nobels” power generation conglomerates with nuclear, wind, solar, gas, and hydro portfolios. Many may know about the firm as China’s largest nuclear power develop, an investor of UK’s Hinkley Point C NPP, or the fact that it was “banned” by the US government via the “entity list.”
But besides all these, CGN is also a major wind power developer in China, ranked around 4th-5th.
It was only six years ago that CGN completed the IPO of CGN New Energy, then CGN Meiya, which serves as a “platform” for the Guangdong-based conglomerate to list its renewable assets to international investors via Hong Kong market.
By now, the New Energy firm controlled 20GW of CGN’s power new energy power assets encompassing wind, solar, hydro, and some CHPs.
CGN has taken some serious effort to list its energy assets separately in Hong Kong and mainland stock market. It has established three HK-listed subsidiaries and a Shenzhen-traded firm. While CGN New Energy serves as the “platform” to raise funding for its renewable assets, its nuclear power and uranium businesses each have their HK-listed subsidiaries—CGN Power and CGN Uranium.
But in recent years, the new energy developer is more eager than ever to relocate these fundraising platforms back to the domestic stock market. Last year, CGN completed a secondary offering of CGN Power in Shanghai stock exchange, making it tradable both in Hong Kong and mainland China.
Then it is widely expected to CGN New Energy to become “double-listed” as well. Or, as it now decides, to delist completely from Hong Kong—an international market—and return completely to the homeland.
State-owned New Energy Firm Swarm to “Privatization”
CGN is not alone. Just two weeks ago, China Huaneng Renewables announced to completed its “privatization” and delisting from HKSE.
HN Renewable is an affiliate of China Huaneng, the second placer among the five largest power generation utilities in China. [READ More on Who Are the Big-Five and Nobel-Four Chinese Power Utilities Companies]
Notably, since early 2019 several Chinese new energy subsidiaries express similar consideration to delist from the market. Four of these have taken actions, including State Power Investment Corp’s (SPIC) hydro and renewable unit China Power New Energy Development (CPNED).
CPNED become the first to complete a delisting. While manufacturer Harbin Electric made a similar attempt, it failed to meet the requirement to buy back its shares in Hong Kong. The failure of privatization also led to its sinking market caps.
Clearly, there are risks for the delisting, too. But more are likely to follow the footsteps.
All of China’s “Big-5” power utilities have (had) HK-trading new energy subsidiaries. While CPNED and HN Renewable succeed in returning to the mainland, three others are of high probability to follow suits, which are Datang Renewable Power, Huadian Fuxin Energy, and China Longyuan.
The trio is clean power affiliate of China Datang, China Huadian, and China Energy Investment Corp (CEIC), respectively.
The Listed New Energy Firms Remain State-Owned
Why? Policy Dynamics Behind the Privatization Trend
What is the reason behind the trend?
The most critical reason is the different valuation of the Chinese companies between the international and the domestic market—also referred to as the “premium of A-shares.”
A perfect example is the two nuclear power developers of China—China National Nuclear Corp(CNNC) and CGN Power, which went public in Shanghai and Hong Kong about the same time. Back at 2018 when CGN Power has yet to return China A share, the firm had a much lower market value compared to CNNC (1/3 of the latter’s PE ratio), while CGN Power’s not only has a larger asset but registered double the amount of net profit compared to CNNC.
The large valuation gap spurs more and more state-owned energy companies to return to the domestic market.
The premium, however, reflects China’s strict capital control, under which many Chinese investors do not have access to invest abroad and resort to the limited options in China. New energy companies owned by the government and backed by Beijing’s policy, therefore, become the preferred target.
Cheaper to Borrow
Beijing’s fundamental shift of its financial policy priority is a direct trigger for the recent privatization trend.
Moving back two years, Beijing emphasized on state-owned banks and companies to “deleverage” (meaning: to lower the portion of the debt in companies’ financial structure). Then, companies face more restriction and higher cost to borrow. [READ More on Beijing’s Pressure on Energy Companies to Deleverage]
But that has been changed. The nation struggled with the slow-down economy and has been strike by the trade war and the recent coronavirus. Against the backdrop, Beijing has already loosened its stands, hoping to boost economy viability by allowing higher debts.
Naturally, it becomes an option for Chinese state-owned firms to increase debt to buy back their shares.
Beijing’s Requirement on the Listed State Assets
Sasac’s new and stricter policy requirement introduced last year is another factor.
The regulator aims to improve the performance of its assets by introducing stricter metrics of companies’ performance. One of the requirement is the price to book ratio (PB).
As international investors remain concerned about China’s policy risks, many Chinese new energy companies in Hong Kong are traded in low PB rate, suggesting the discounted asset value.
These metrics serve as KPI for the executives. It is not surprising to see the speedy push for delisting to cope with the issue of low PB.
Shifting Policy Dynamics
China’s fundamental strategy shift may have played a role in the trend.
Two decades ago, Chinese industrial companies swarmed to the international capital market, against a backdrop of China’s policy of state-owned enterprise “Going Global.”
Going listed in the US (and a smaller scale, Hong Kong) is highly regarded—not only because of the access to global investors but also the status that it entails. The branding of an “internationally” list company is critical for many Chinese energy companies to expand global footprints.
But that has changed as well, as many state-owned enterprises are now supported by funding under the Belt & Road Initiative (BRI). China’s own financing capacity makes it less of a necessity to secure access to international capital or international branding.
The Rushing Domestic Market
For new energy developer, the immediate reason to return and seek higher market caps are related to the domestic renewable policy.
China sets to shelve national subsidy to solar, onshore and offshore wind projects from 2021 and 2023 on. The timeline results in a collective project installation frenzy, where developers are under pressure to grid-connect as many projects as possible to lock in a higher 20-year binding price.
This pushes most renewable developers to put their energy solely on the domestic market in the coming 2-3 years.
What Does the Trend Signal?
As more have left the international market. The trend point to some concerns:
- less efficient and transparent in the Chinese power companies: although current set-up in which only a minority position of equity is traded in the international market does not change the “state-owned” nature of these firms. However, leaving the international market does not help to push for efficiency and transparency.
- more challenges in the overseas market: any future attempt to expand in the international market—especially the “first-tier” market, would be more difficult, after the “decoupling” from the global market
- higher risk for international partners: although the changes could be minor, foreign firms to seek to work with the Chinese firms may face higher risks
Energy Iceberg will follow closely on the future development of the energy privatization trend.