Ever since Sun Tzu wrote his Art of War, Chinese policymakers have tended to think of life as a series of military campaigns.
So when China began listing its key firms abroad a careful battle strategy was planned. Beginning with the Hong Kong IPO of China Mobile in 1997, it was decided to bring them to market in an orderly fashion – so as not to crowd each other out. That happened with the oil companies, the telcos and the banks. Indeed, often a gap of a year or two was left between each firm’s IPO, to ensure the success of each listing.
It was a tried and tested formula and it worked for more than a decade. So you have to wonder what happened this week at policy HQ. The tactical playbook was cast aside as two state firms – from the same industry – both sought to list in Hong Kong not only in the same year, but on the same day.
Datang Corporation Renewable Power and Huaneng Renewables (windpower subsidiaries of major state-owned power firms) were both supposed to list on the Hong Kong Stock Exchange this week. Predictably, going head-to-head for investor attention proved a disastrous mistake. Never divide your forces, Sun Tzu might have counselled. And in the event, Huaneng blinked first, and ended up pulling its $1.3 billion listing at the last minute citing “weak market conditions”.
That left China’s second largest wind power operator free to raise $644 million, albeit significantly less than the anticipated $1 billion.
Why, then, were the two firms so keen to list first? Part of the reason was the need to raise money fast to fund land purchases for wind farms. That’s because policymakers are already concerned that too much arable land is being eaten up by urbanisation. The windpower operators think this means that they need to get their hands on more land before it becomes more difficult to acquire. ”The listings will boost their war chests [for] taking up sites for wind projects,” Francis Lun, boss of Fulbright Securities told the South China Morning Post.
But with both deals coming simultaneously the rivals played into investors’ hands, making it easier to play one off against the other and dictate lower pricing. Datang’s offer launched at the very bottom of its HK$2.33 to HK$3.18 price range.
Another of the investor arguments: the wind power sector is a risky play. It seems counterintuitive (considering Beijing’s huge targets for wind power and the subsidies that it is making available), but China’s wind industry is also being criticised from within government circles for overcapacity. That’s because wind farm operators have been known to set up turbines faster than grid connections can be completed.
In the case of Huaneng and Datang, that could be less of a problem: the State Grid Corporation has committed to invest in both. But it might become a problem for the industry if it means that some of the state support is withdrawn.
Another investor concern is over shoddily-made turbines. Most turbines are designed to last 20 years with minimum maintenance, but some observers have voiced doubts about whether some of the new products reaching the marketplace will prove as reliable as their manufacturers claim.
That brings consolidation back onto the industry agenda (the idea being that quality will improve if there’s less pressure on prices). But, in the meantime, analysts are waiting to see if unanticipated maintenance costs could become a serious drag on the wind farm operators.
Even the industry’s green credentials have lately been called into question. Some experts have suggested that wind farms could interfere with weather patterns, and may be partly to blame for the current drought in Inner Mongolia. The idea is that the turbulence caused by large turbines mixes the air and changes its temperature. “Large-scale wind farms will almost definitely have an impact on regional climate,” Wang Hongqing, an atmospheric sciences professor at Peking University, warned the SCMP, “I think the wind energy companies and the government [have] a responsibility to give people an answer about the wind project’s possible impact on climate before putting up their turbines.”
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