Utilities Sector

In this briefing:

1. Beijing Jingneng Clean Energy’s Potential Privatisation Bid
2. Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?
3. (Mostly) Asia M&A: June 2020 Roundup
4. GULF: Upside from Investment in INTUCH
5. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

1. Beijing Jingneng Clean Energy’s Potential Privatisation Bid

Beijing Jingneng Clean Energy (579 HK)/BJCE is the largest gas-fired heat and power supplier in Beijing and the leading wind power operator in China. On 6 July, it announced a possible privatisation bid from Beijing Energy Holding through a conditional voluntary cash general offer. Beijing Energy Holding and concert parties have a combined 71.40% stake (100% of domestic shares and 16.7% of H-shares). This potential privatisation joins a list of recent SOE privatisations of clean energy companies – Huadian Fuxin Energy Corp (816 HK),  Huaneng Renewables Corp H (958 HK) and CP Clean Energy and the potential privatisation of CGN New Energy Holdings (1811 HK).

2. Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?

Beijing Jingneng Clean Energy (579 HK), an SOE utility, was suspended Friday morning pursuant to the Code on Takeovers and Mergers. Should an Offer be tabled, this would be the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in a little over a year – and sixth in which interested parties have been circling:

3. (Mostly) Asia M&A: June 2020 Roundup

4. GULF: Upside from Investment in INTUCH

We revise up our target price to Bt45.4 (from previous Bt44.6)  incorporating the contribution of Bt0.9/sh from new investment in INTUCH. Our valuation is derived from sum-of-the-parts (SOTP) methodology, implying a 78x PE’21.

Story:

• Positive view on GULF’s investment in INTUCH considering the short term value accretive investment strategy.
• Upside of 0.9/sh from acquisition of 4.6% stake in INTUCH.

5. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

China Gas Holdings (384 HK) reported a marginally behind result with a 11.7% increase in reported profit to HK$9.19bn, primarily due to the negative impact of the COVID-19 on gas sales growth. Full-year DPS of HK$0.50 represents a 27.6% payout ratio.

In terms of outlook, the company guided for good gas volume recovery in Apr-Jun, expansion of dollar margin, improvement in receivable recovery and LPG micro pipeline network as key initiative in FY20/21. However, our concerns are continued high gearing, downtrend on connection fees, possibly slow receivable recovery and uncertainties on LPG micro pipeline.

Despite undemanding valuations (12x PER and 3.3x P/B), we still prefer our top two picks as analysed in China Infrastructure Deep Dive: Gas Utilities H & A Shares – ENN Energy (2688 HK) and China Resources Gas (1193 HK). 

In this briefing:

1. Quiddity M&A: Australia Foreign Investment Reforms
2. Infratil Placement – Better Balance Sheet Flexibility with Focus on Existing Assets

1. Quiddity M&A: Australia Foreign Investment Reforms

On the 5 June 2020, the Treasury of the Australian Government released a 34-page document titled Foreign investment reforms, outlining the “most comprehensive” reform to Australian foreign investment review framework since the Foreign Acquisition and Takeovers Act (FATA) was introduced in 1975.

The new powers afforded the government – a draft legislation for consultation will be released next month –  will primarily address:

• A new national security test that will require foreign investors (government or private), to inform the Foreign Investment Review Board (FIRB) if they are preparing to acquire a direct interest in a “sensitive national security business.”
• Streamlining the approval processes for certain privately controlled institutional investment funds that hold purely passive foreign government funds, alongside private capital in non-sensitive sectors.
• Stronger penalties and enforcement powers to ensure greater compliance.

Further comments below the fold …

2. Infratil Placement – Better Balance Sheet Flexibility with Focus on Existing Assets

Infratil Ltd (IFT NZ) is looking to raise US$197m (A$300m) in its fully underwritten institutional placement to strengthen its balance sheet.

In this note, we will look at the placement details, impact of the equity raise, and pipeline assets. We will also run the deal through our framework. 

In this briefing:

1. Infratil Placement – Better Balance Sheet Flexibility with Focus on Existing Assets

1. Infratil Placement – Better Balance Sheet Flexibility with Focus on Existing Assets

Infratil Ltd (IFT NZ) is looking to raise US$197m (A$300m) in its fully underwritten institutional placement to strengthen its balance sheet.

In this note, we will look at the placement details, impact of the equity raise, and pipeline assets. We will also run the deal through our framework. 

In this briefing:

1. Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?
2. (Mostly) Asia M&A: June 2020 Roundup
3. GULF: Upside from Investment in INTUCH
4. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call
5. ACE: Great Growth Opportunities, but the Stock Is Overpriced

1. Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?

Beijing Jingneng Clean Energy (579 HK), an SOE utility, was suspended Friday morning pursuant to the Code on Takeovers and Mergers. Should an Offer be tabled, this would be the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in a little over a year – and sixth in which interested parties have been circling:

2. (Mostly) Asia M&A: June 2020 Roundup

3. GULF: Upside from Investment in INTUCH

We revise up our target price to Bt45.4 (from previous Bt44.6)  incorporating the contribution of Bt0.9/sh from new investment in INTUCH. Our valuation is derived from sum-of-the-parts (SOTP) methodology, implying a 78x PE’21.

Story:

• Positive view on GULF’s investment in INTUCH considering the short term value accretive investment strategy.
• Upside of 0.9/sh from acquisition of 4.6% stake in INTUCH.

4. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

China Gas Holdings (384 HK) reported a marginally behind result with a 11.7% increase in reported profit to HK$9.19bn, primarily due to the negative impact of the COVID-19 on gas sales growth. Full-year DPS of HK$0.50 represents a 27.6% payout ratio.

In terms of outlook, the company guided for good gas volume recovery in Apr-Jun, expansion of dollar margin, improvement in receivable recovery and LPG micro pipeline network as key initiative in FY20/21. However, our concerns are continued high gearing, downtrend on connection fees, possibly slow receivable recovery and uncertainties on LPG micro pipeline.

Despite undemanding valuations (12x PER and 3.3x P/B), we still prefer our top two picks as analysed in China Infrastructure Deep Dive: Gas Utilities H & A Shares – ENN Energy (2688 HK) and China Resources Gas (1193 HK). 

5. ACE: Great Growth Opportunities, but the Stock Is Overpriced

We initiate coverage on ACE with a SELL recommendation based on a target price of Bt2.64, implying a downside of 36% from the current price. We derive the target price from a de-rating to a 25% premium to the sector PE ratio, meaning a 2020E 29.4x PE.

Investment thesis:

• Power producer with high growth potential, but already priced in
• Long-term contracts and supply control drive high profitability
• Government driven demand can pose a risk

Risks: Adverse regulatory changes, reliance on a few customers, volatility in fuel prices, unexpected disruptions in production, delays in project execution, change in political leadership can sometimes impact companies.

In this briefing:

1. Infratil Placement – Better Balance Sheet Flexibility with Focus on Existing Assets
2. GULF: Fastest Growing Utility Player in Thailand

1. Infratil Placement – Better Balance Sheet Flexibility with Focus on Existing Assets

Infratil Ltd (IFT NZ) is looking to raise US$197m (A$300m) in its fully underwritten institutional placement to strengthen its balance sheet.

In this note, we will look at the placement details, impact of the equity raise, and pipeline assets. We will also run the deal through our framework. 

2. GULF: Fastest Growing Utility Player in Thailand

We initiate coverage of GULF with a BUY rating, based on a 2021E target price of Bt44.6, derived from a sum-of-the-parts (SOTP) methodology. Our valuation implies 1.8x PEG for 2021E, lower than its World peers’ 2.1x PEG.

The story:.

• Steady EPS growth at 20% CAGR in 2020-24E, outperforming sector peers
• Upside from overseas power-generation business expansion
• New S curve from gas & infrastructure business
• Topline growth outlook justifies valuation

Risks: 

• New project delays and cost overruns
• Foreign exchange rate fluctuations 

Background: GULF is a holding company with a portfolio of electricity, steam, chilled water and other businesses. Currently, GULF engages in electricity generation and sales with various national regulatory bodies and industrial users, both domestically and internationally, with a total 2.7 GWe (5.9GW gross) in operation. GULF’s power projects are spread over the IPP (50%), SPP (46%) and renewable (4%) segments and are of various types/sizes. Ninety-six percent of GULF’s operating projects are in Thailand with the remainder in Vietnam. The company’s other business interests include infrastructure projects in Thailand and natural gas trading businesses both domestically and abroad.

In this briefing:

1. Zenith Energy: PEP Cuts In OPTrust and ICG
2. SET50 Rebalance Preview: The Final Cut

1. Zenith Energy: PEP Cuts In OPTrust and ICG

2. SET50 Rebalance Preview: The Final Cut

The Stock Exchange of Thailand (SET) will announce the results of the semi-annual review of the SET50 index in June and the changes will be effective from 1 July 2020. Passive funds and index arb desks will need to trade at (or by) the close on 30 June 2020.

We expect TTW Pcl (TTW TB) and Banpu Power PCL (BPP TB) will be included in the SET50 index replacing Banpu Public (BANPU TB) and WHA Corp Pcl (WHA TB).

This Insight covers the SET50 index methodology, our expected changes and the impact, the recent stock performance, and suggested trades for this rebalance.

In this briefing:

1. (Mostly) Asia M&A: June 2020 Roundup
2. GULF: Upside from Investment in INTUCH
3. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call
4. ACE: Great Growth Opportunities, but the Stock Is Overpriced
5. China Yangtze Power (600900 CH): Pre-GDR Initial Thoughts

1. (Mostly) Asia M&A: June 2020 Roundup

2. GULF: Upside from Investment in INTUCH

We revise up our target price to Bt45.4 (from previous Bt44.6)  incorporating the contribution of Bt0.9/sh from new investment in INTUCH. Our valuation is derived from sum-of-the-parts (SOTP) methodology, implying a 78x PE’21.

Story:

• Positive view on GULF’s investment in INTUCH considering the short term value accretive investment strategy.
• Upside of 0.9/sh from acquisition of 4.6% stake in INTUCH.

3. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

China Gas Holdings (384 HK) reported a marginally behind result with a 11.7% increase in reported profit to HK$9.19bn, primarily due to the negative impact of the COVID-19 on gas sales growth. Full-year DPS of HK$0.50 represents a 27.6% payout ratio.

In terms of outlook, the company guided for good gas volume recovery in Apr-Jun, expansion of dollar margin, improvement in receivable recovery and LPG micro pipeline network as key initiative in FY20/21. However, our concerns are continued high gearing, downtrend on connection fees, possibly slow receivable recovery and uncertainties on LPG micro pipeline.

Despite undemanding valuations (12x PER and 3.3x P/B), we still prefer our top two picks as analysed in China Infrastructure Deep Dive: Gas Utilities H & A Shares – ENN Energy (2688 HK) and China Resources Gas (1193 HK). 

4. ACE: Great Growth Opportunities, but the Stock Is Overpriced

We initiate coverage on ACE with a SELL recommendation based on a target price of Bt2.64, implying a downside of 36% from the current price. We derive the target price from a de-rating to a 25% premium to the sector PE ratio, meaning a 2020E 29.4x PE.

Investment thesis:

• Power producer with high growth potential, but already priced in
• Long-term contracts and supply control drive high profitability
• Government driven demand can pose a risk

Risks: Adverse regulatory changes, reliance on a few customers, volatility in fuel prices, unexpected disruptions in production, delays in project execution, change in political leadership can sometimes impact companies.

5. China Yangtze Power (600900 CH): Pre-GDR Initial Thoughts

China Yangtze Power Co, Ltd. (600900 CH) (CYPC), the world’s largest hydropower company, will put forward its GDR issuance proposal for shareholder voting in an EGM on 30 Jun. We take a look on this proposal which may raise up to ~US$3.3bn based on the current share price. We believe the key merits for CYPC are: 1.) largest hydropower company globally with protected franchise; 2.) benefit from government’s clean energy initiatives; 3.) track record of stable earnings; and 4.) solid support from parent company.

Key risks, however, are: 1.) CYPC relies on one single type of generation mode; 2.) capex on acquisitions may further elevate gearing; 3.) slowdown in power demand; and 4.) overseas investment risks. The stock now trades on 17.9x FY20F PER, not excessive relative to the 5-year range of 13-27x, and upside will come from further asset injections from parent China Three Gorges Corporation (CTG).

In this briefing:

1. Zenith Energy: PEP Cuts In OPTrust and ICG
2. SET50 Rebalance Preview: The Final Cut
3. Adani Power Delisting – Going Off The Grid

1. Zenith Energy: PEP Cuts In OPTrust and ICG

2. SET50 Rebalance Preview: The Final Cut

The Stock Exchange of Thailand (SET) will announce the results of the semi-annual review of the SET50 index in June and the changes will be effective from 1 July 2020. Passive funds and index arb desks will need to trade at (or by) the close on 30 June 2020.

We expect TTW Pcl (TTW TB) and Banpu Power PCL (BPP TB) will be included in the SET50 index replacing Banpu Public (BANPU TB) and WHA Corp Pcl (WHA TB).

This Insight covers the SET50 index methodology, our expected changes and the impact, the recent stock performance, and suggested trades for this rebalance.

3. Adani Power Delisting – Going Off The Grid

On 29 May, post India market close, Adani Power Ltd (ADANI IN) informed the Exchanges that Adani Properties Private Limited (a member of the Promoter Group) had expressed its intention to acquire all shares of Adani Power Ltd (ADANI IN) held by the public shareholders and, if successful, delist the company from the Stock Exchanges.

The Promoter Group holds 74.97% of the equity share capital of the company with the public shareholders holding the remaining 25.03%. However, the public shareholders may not really be ‘public’ after all. The same shareholder names appear in a lot of Adani group companies leading us to believe that there is more than meets the eye.

The floor price (VWAP over the last 60 trading days prior to the company announcement of the delisting) works out to INR 33.8078 and is at a premium to the stock price over the last month but at a big discount to longer term prices and VWAPs.

We feel that the Promoter Group has this almost sewn up and there will not be a massive premium to the current market price. Investors can buy stock up to INR 36-38 per share expecting to tender their shares around the INR 42-44 per share range.

In this briefing:

1. SET50 Rebalance Preview: The Final Cut
2. Adani Power Delisting – Going Off The Grid
3. Adani Power – The Next Delisting/Exit Offer?

1. SET50 Rebalance Preview: The Final Cut

The Stock Exchange of Thailand (SET) will announce the results of the semi-annual review of the SET50 index in June and the changes will be effective from 1 July 2020. Passive funds and index arb desks will need to trade at (or by) the close on 30 June 2020.

We expect TTW Pcl (TTW TB) and Banpu Power PCL (BPP TB) will be included in the SET50 index replacing Banpu Public (BANPU TB) and WHA Corp Pcl (WHA TB).

This Insight covers the SET50 index methodology, our expected changes and the impact, the recent stock performance, and suggested trades for this rebalance.

2. Adani Power Delisting – Going Off The Grid

On 29 May, post India market close, Adani Power Ltd (ADANI IN) informed the Exchanges that Adani Properties Private Limited (a member of the Promoter Group) had expressed its intention to acquire all shares of Adani Power Ltd (ADANI IN) held by the public shareholders and, if successful, delist the company from the Stock Exchanges.

The Promoter Group holds 74.97% of the equity share capital of the company with the public shareholders holding the remaining 25.03%. However, the public shareholders may not really be ‘public’ after all. The same shareholder names appear in a lot of Adani group companies leading us to believe that there is more than meets the eye.

The floor price (VWAP over the last 60 trading days prior to the company announcement of the delisting) works out to INR 33.8078 and is at a premium to the stock price over the last month but at a big discount to longer term prices and VWAPs.

We feel that the Promoter Group has this almost sewn up and there will not be a massive premium to the current market price. Investors can buy stock up to INR 36-38 per share expecting to tender their shares around the INR 42-44 per share range.

3. Adani Power – The Next Delisting/Exit Offer?

On Friday 29 May, late-ish in the afternoon, the Board of India’s largest private sector IPP, Adani Power Ltd (ADANI IN), released a statement that said the promoter group wanted to propose a Delisting Offer to the remaining 25.03% of the shareholder base not linked to the promoter group. 

The board meeting to consider the Delisting Proposal is on 3 June 2020.

This notice creates the reference date for the Floor Price, which I expect will be communicated shortly, but for which rough calculations are provided below. 

This is the first time that the Adani promoter group has sought to delist one of its many listed enterprises (which also include Adani Gas Ltd (ADGAS IN), Adani Transmission (ADANIT IN), Adani Ports & Special Economic Zone (ADSEZ IN), Adani Green Energy, and Adani Enterprises (ADE IN)).

This looks like a straightforward delisting offer situation of a widely-known stock. It may not be so straightforward. And that would have an effect on the likely Reverse Book Building process. 

As always, more below the fold.

In this briefing:

1. GULF: Upside from Investment in INTUCH
2. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call
3. ACE: Great Growth Opportunities, but the Stock Is Overpriced
4. China Yangtze Power (600900 CH): Pre-GDR Initial Thoughts
5. Infigen’s White Knight on a Charger

1. GULF: Upside from Investment in INTUCH

We revise up our target price to Bt45.4 (from previous Bt44.6)  incorporating the contribution of Bt0.9/sh from new investment in INTUCH. Our valuation is derived from sum-of-the-parts (SOTP) methodology, implying a 78x PE’21.

Story:

• Positive view on GULF’s investment in INTUCH considering the short term value accretive investment strategy.
• Upside of 0.9/sh from acquisition of 4.6% stake in INTUCH.

2. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

China Gas Holdings (384 HK) reported a marginally behind result with a 11.7% increase in reported profit to HK$9.19bn, primarily due to the negative impact of the COVID-19 on gas sales growth. Full-year DPS of HK$0.50 represents a 27.6% payout ratio.

In terms of outlook, the company guided for good gas volume recovery in Apr-Jun, expansion of dollar margin, improvement in receivable recovery and LPG micro pipeline network as key initiative in FY20/21. However, our concerns are continued high gearing, downtrend on connection fees, possibly slow receivable recovery and uncertainties on LPG micro pipeline.

Despite undemanding valuations (12x PER and 3.3x P/B), we still prefer our top two picks as analysed in China Infrastructure Deep Dive: Gas Utilities H & A Shares – ENN Energy (2688 HK) and China Resources Gas (1193 HK). 

3. ACE: Great Growth Opportunities, but the Stock Is Overpriced

We initiate coverage on ACE with a SELL recommendation based on a target price of Bt2.64, implying a downside of 36% from the current price. We derive the target price from a de-rating to a 25% premium to the sector PE ratio, meaning a 2020E 29.4x PE.

Investment thesis:

• Power producer with high growth potential, but already priced in
• Long-term contracts and supply control drive high profitability
• Government driven demand can pose a risk

Risks: Adverse regulatory changes, reliance on a few customers, volatility in fuel prices, unexpected disruptions in production, delays in project execution, change in political leadership can sometimes impact companies.

4. China Yangtze Power (600900 CH): Pre-GDR Initial Thoughts

China Yangtze Power Co, Ltd. (600900 CH) (CYPC), the world’s largest hydropower company, will put forward its GDR issuance proposal for shareholder voting in an EGM on 30 Jun. We take a look on this proposal which may raise up to ~US$3.3bn based on the current share price. We believe the key merits for CYPC are: 1.) largest hydropower company globally with protected franchise; 2.) benefit from government’s clean energy initiatives; 3.) track record of stable earnings; and 4.) solid support from parent company.

Key risks, however, are: 1.) CYPC relies on one single type of generation mode; 2.) capex on acquisitions may further elevate gearing; 3.) slowdown in power demand; and 4.) overseas investment risks. The stock now trades on 17.9x FY20F PER, not excessive relative to the 5-year range of 13-27x, and upside will come from further asset injections from parent China Three Gorges Corporation (CTG).

5. Infigen’s White Knight on a Charger

Spanish renewables juggernaut Iberdrola SA (IBE SM) has launched a friendly white knight takeover bid for the Australian renewables company Infigen Energy (IFN AU) , valued at AUD 840.6 million (EUR 510 million), or AUD 0.86 per stapled security, 9.6x EV/2021e EBITDA (Capital IQ consensus).

• Infigen is trading at AUD 0.88-0.90 (a three-year high), as the market attaches some probability to an improved bid, with 26.3 million shares traded in the last session vs. a 30-day average of 8.2 mn shares.

The offer is superior to that of Ayala, with just a minimum acceptance condition (50% plus one stapled security, on a fully diluted basis). The TCI Funds have agreed to sell 20% of Infigen stapled securities to Iberdrola, subject to FIRB’s approval and the offer being declared unconditional.

Iberdrola should have no problem to finance the bid from available cash & equivalent balances (EUR 2,868 million at 31 March 2020).

Iberdrola has the unanimous backing of the Board of Infigen “in the absence of a superior offer”. Infigen Energy had previously received an AUD777m offer from UAC Energy, a fully-owned subsidiary of Philippines-based conglomerate Ayala. The Board dubbed that offer as “opportunistic” and “highly conditional”. (See Infigen Energy’s Off-Market Takeover Offer ).  Infigen Energy’s Board has unanimously recommended shareholders to reject UAC Energy’s offer.

Iberdrola has the right to match any rival bid, therefore any competing bid will have to offer a significantly higher price.

There is a break fee of 1% of the offer, i.e. AUD 8.4 million (EUR 5.1 million). The offer is not subject to further due diligence or refinancing.

Iberdrola (S&P BBB+, stable) has the firepower to acquire Infigen and even increase the bid, although the interloper risk seems low.

While the offer from Iberdrola may not be overly generous, in my view, it is certain to complete and it is difficult to think of a competing bid.