Brief Utlilities: China Three Gorges’ Rebuttable Presumption and more

In this briefing:

1. China Three Gorges’ Rebuttable Presumption
2. China Power New Energy To Be Delisted After SOE Injection Abandoned
3. Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score
4. Xinyi Energy IPO Preview: Second Time Lucky?
5. HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

1. China Three Gorges’ Rebuttable Presumption

In my initial insight on China Power New Energy Development Co (735 HK, “CPNED”)‘s privatisation by China Power New Energy Limited (the Offeror) by way of a Scheme, I concluded China Three Gorges, CPNED’s largest shareholder with 27.10%, will likely be required to abstain at the Court Meeting as it is presumed to be a connected party to the Offeror as per the Takeovers Code.

But the announcement states that CTG has given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

It seems illogical to mention in the irrevocable CTG will vote for the Scheme when in actuality it cannot vote. So, which one is it?

The short answer is: CTG cannot currently vote. 

But understanding this requires diving into the minutiae of Hong Kong’s Takeovers Code. So I do.

2. China Power New Energy To Be Delisted After SOE Injection Abandoned

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average.

A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available.

China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

However, China Three Gorges is presumably required to abstain from voting at the court meeting, as it is deemed to be acting in concert with the SPIC under class (1) of the definition of the acting in concert in the Takeovers Code. The announcement does not make this clear.

Assuming China Three Gorges does abstain, a 10% blocking stake at the court meeting is equivalent to 4.48% of shares out or 53mn shares.

This looks like a pretty clean deal. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.

The stock is currently trading at an attractive gross/annualised spread of 8.3%/28.9% conservatively assuming a late July completion, and inclusive of the final dividend. 

3. Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score

• Our proprietary corporate governance scoring system now covers over 1,800 stocks including 70 Electricity, Alternative Energy, Distribution, Water and Utilities companies in Emerging Markets.
• This report includes the Energy and Utilities names currently under coverage.
  The lowest score in this group is Korea Gas (44/100).
• We have found that scores below 50/100 indicate poor corporate governance and higher risk of fraud.
• Korean companies often have lower scores as a result of a lack of board independence and convoluted corporate structure.
• Of the groupings presented here Alternative Energy has the highest average score at 64/100.
  We welcome requests from clients of names they want to see added to the universe.

4. Xinyi Energy IPO Preview: Second Time Lucky?

Xinyi Energy Holdings Ltd (1671746D HK) has filed IPO prospectus once again to list its solar generation business that was spun-off from its parent company Xinyi Solar Holding Ltd. Xinyi Energy has 9 operational solar farms with a total capacity of ~950MW.

The company is set to acquire additional solar farms of 540MW capacity from its parent company in a separate transaction post IPO.

Xinyi Energy has not indicated the size and pricing of its offer, however, according to various media reports the company is expected to raise nearly HK$570M (around 12% of the previous offering of HK$4.5B). A significant portion of IPO proceeds is expected to be utilised towards upfront payment of 50% for acquiring solar farms from its parent company and the remainder for working capital and debt repayment. Although we have a positive view of the solar energy sector, the IPO pricing will determine our overall view of the company.

5. HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this insight, we highlight the WH Group, which led the inflows last week.