Brief Utlilities: Tenaga Nasional Placement – Past Deals Have Done Ok but This One Might Not Be as Lucky and more

In this briefing:

1. Tenaga Nasional Placement – Past Deals Have Done Ok but This One Might Not Be as Lucky
2. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead
3. China Three Gorges’ Rebuttable Presumption
4. China Power New Energy To Be Delisted After SOE Injection Abandoned
5. Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score

1. Tenaga Nasional Placement – Past Deals Have Done Ok but This One Might Not Be as Lucky

Khazanah plans to raise around US$260m via selling 85m share in Tenaga Nasional (TNB MK). We have covered three such placements since 2015 and most have ended up doing ok, if not well. 

• US$440m in 2015: Tenaga Nasional (TNB MK) – Take the deal, strong earnings growth likely to continue
• US$290m in 2016: Tenaga Nasional Placement – Strong Track Record and a Potential Dividend Increase
• US$115m in 2017: Tenaga Nasional Placement – A Small Deal Size Relative to Previous Sell Down

Out of the three previous placement, Khazanah was the seller for the first two (2015 and 2016). Hence, this deal is unlikely to be a huge surprise. However, the stocks recent performance hasn’t been great and the replacement of the CEO seems to have raised more questions than it answers. 

2. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that in March, northbound inflows turned more cautious vs strong inflows in February (link to our Feb note) and January (link to our Jan note). Nevertheless we see strong inflows into Healthcare sector, led by Jiangsu Hengrui Medicine Co., (600276 CH). We also highlight Universal Scientific Industrial Shanghai (601231 CH 环旭电子) in the mid cap space that attracted strong northbound inflows.

3. 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.

4. 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. 

5. 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.