Energy & Resources, Talking Point

Nuclear reaction

What does CGN’s IPO reveal about China’s atomic ambitions?

To match feature Energy-China-Nuclear

Homer Simpsons with Chinese characteristics: workers leave a nuclear power plant in Zhejiang province

The people of Hong Kong have long been considered to be less interested in political campaigning, and more absorbed with making money. But in August 1986, a million locals signed a petition opposing China’s plan for a nuclear plant at Daya Bay. On mainland soil, it was just 30 miles north of Hong Kong.

For many Hongkongers, it was the first time that they had rallied against a policy from China. But the idea for the plant was not conceived in Beijing. Rather it was the brainchild of the Kadoorie family, which controls China Light and Power (CLP), one of the two utilities providing Hong Kong’s electricity.

In 1974 CLP’s then chairman Lawrence Kadoorie had first proposed building a nuclear plant in Guangdong as a means to foster trust between Hong Kong and the mainland. Negotiations got underway but few in Hong Kong paid much attention, even after Beijing approved the Daya Bay project in 1983. At the time, the $3.5 billion initiative near Shenzhen was the biggest Sino-foreign joint venture.

Then came the Chernobyl disaster in 1986. Suddenly Hong Kong residents wanted a rethink about the prospects of a Chinese-run nuclear facility on their doorstep and eight large boxes of signed petitions were conveyed to the Chinese capital.

But Beijing didn’t backtrack and the nuclear plant commenced commercial operations in 1994.

Two decades on and Hong Kong’s reputation for political apathy looks out-of-date. Hundreds of protesters have occupied key roads in the city since late September, challenging Hong Kong’s electoral arrangements. But in an ironic twist, the investing public seems a lot more confident in China’s nuclear energy producers than previously. Those million signatures opposing nuclear power are a distant memory, as tens of thousands of investors signed up instead for shares in the firm running the Daya Bay project: China General Nuclear Power (CGN), China’s leading producer of nuclear power.

How popular is CGN’s IPO?

“Explosively hot” was one of the tongue-in-cheek headlines in the Hong Kong newspapers about the offering from the reactor operator this week.

The slump in the crude oil price (see WiC262) may have taken some of the shine off alternative energy providers but that hasn’t stopped CGN from becoming one of the most sought-after stocks of the year. (It will IPO at a busy time – Hong Kong’s primary market will raise at least $10 billion in December).

CGN is selling 20% of its enlarged share capital in the offering. If the shares are priced at the top of the indicative range, and if a greenshoe option is exercised, the company will generate $3.6 billion from the sale. That looks likely: the Hong Kong Economic Times reports that CGN’s retail tranche may generate orders of close to $57 billion (receiving 100,000 applications). The overall deal was 286-times oversubscribed.

If so, CGN will start trading on Hong Kong’s stock exchange next Wednesday with a market value of $16 billion, or roughly 20 times its 2013 earnings. The valuation is more than double that of its coal-fired peers, but looks less demanding against new energy plays. For example, Longyuan Power and Datang Renewables, two state-controlled wind power firms, are both trading at more than 25 times earnings. According to Caijing, there is no real comparable for CGN in the market. Globally, many utility firms have ventured into nuclear power, the magazine notes, but it is unprecedented for a nuclear electricity generator to go public as a standalone company.

“Some will undoubtedly argue that as the world’s first, pure nuclear energy play seeking to float its shares, CGN should come at a premium to its peers,” FinanceAsia agreed.

Partly this explains why 18 institutional investors, including Singapore’s sovereign wealth fund GIC, the hedge fund Och-Ziff Capital and a slew of Chinese firms, have committed to take 40% of CGN’s planned offering. CGN’s long-term business partner CLP – which owns 25% of the Daya Bay nuclear plant (CGN owns the rest) – is also one of the cornerstone investors.

Another ‘new energy’ story?

The nuclear industry is a growth story in China. According to CGN’s prospectus, China only had 20 operational reactors as of June with a capacity of 18 gigawatts (GW). This ranks sixth globally. By comparison, the United States tops the charts with 100 nuclear plants in operation and 104 GW in installed capacity.

However, in terms of what is being built, no other country is adding nuclear capacity as aggressively as China. The State Council’s Energy Development Strategy Action Plan calls for 58 GW of nuclear power to be up-and-running by 2020, with at least 30 GW more under construction by that date too. The blueprint aims to get 15% of the country’s power from non-fossil fuels by 2020, up from 9.8% in 2013. (That commitment was published just a week after China agreed to an historic climate deal with the US, pledging to double the amount of energy it gets from zero-emission sources in the next 16 years.)

State news agency Xinhua commented that the international accord, combined with growing public awareness of air pollution, will spur the growth of alternative energy sources. Nuclear power, which last year accounted for 1.2% of total installed electricity generation capacity (versus 6.1% from wind and 22.4% from hydro power), looks set to prosper most.

The next big thing after bullet trains?

Of course, investors have been fed similar growth stories before. WiC’s regular readers will be familiar with China’s struggling solar sector, for instance. Wind power was also much-hyped as a new energy sector back in 2010. Since then many turbine makers have been plagued by overcapacity in the industry (see WiC196 for strains at Sinovel, for example).

But atomic power looks set to be different. To start with, the barriers to entry mean that only three firms (so far) have been allowed controlling stakes in nuclear power stations. They are all state-owned. China National Nuclear Corp (CNNC) and State Nuclear Power Technology Corp (NPTC) are CGN’s two domestic rivals, although CGN is the dominant party, with 64% of the installed capacity.

One way of looking at the prospects for the nuclear sector, CBN has suggested, is to compare it with earlier investments in transport. It cites the state-driven spending spree on high-speed trains. After the 2008 global financial crisis, Beijing unleashed a $100 billion railway programme, providing a fillip for a slowing economy. CBN reckons economic planners are showing similar thinking with the nuclear sector today.

While Premier Li Keqiang has sometimes been dubbed as China’s top railway salesman, CBN notes that the leadership in Beijing has also been pitching Chinese nuclear technology around the world. During a trip to Europe last year Li boasted that the Chinese can build nuclear plants and high-speed rail faster – and cheaper – than any other country. Xi Jinping also helped to promote Chinese nuclear power during a trip to Latin America in July.

“Exporting one nuclear power plant is better than selling one million Santana sedans abroad,” Zhang Guobao, a former head of the National Energy Administration, told the newspaper.

In fact, a decision to allow Chinese firms to own and operate nuclear plants and railway lines in Britain formed part of the $24 billion of trade deals agreed between Premier Li and British Prime Minister David Cameron in June.

As part of these plans, CGN will cooperate with French giant EDF to invest in the Hinkley project in Somerset, the China Daily reported. CNNC will also be bidding to construct other nuclear reactors in the UK.

A fusion of China’s nuclear trio?

The trainmakers might hold other lessons for the nuclear giants too. Rivalry between the state-owned brethren derailed many of their efforts to succeed overseas. So much so that the central government has been engineering a merger of the two dominant bullet train companies, less than a year after one went public in Hong Kong (see WiC259).

Potential shareholders in CGN need to be aware of the same uncertainty. According to the Economic Observer, the three nuclear firms have adopted different industry standards and each of the trio wants to promote their own blueprints abroad. Competition between the three is already a fact of life, as evidenced by the bidding for a stake in Britain’s Horizon Nuclear Power in 2012. That had Beijing leaders “pounding the table angrily,” an insider told the Economic Observer.

“Both high-speed rail and nuclear power are important tech exports encouraged by the state. Both have been crippled by vicious competition among state firms. We have seen the proposed merger of the rail duopoly. This will become the path of Chinese nuclear plants too,” EO predicts. Of course, CGN may not favour consolidation in the sector as it has the largest market share and richer experience dealing with overseas partners like France’s EDF and Hong Kong’s CLP.

CNNC, meanwhile, has strong political influence. Formerly known as the Second Ministry of Machine Building, it was credited with developing China’s first atomic and hydrogen bombs, as well as its first nuclear submarine. CNNC also enjoys an integrated industrial supply chain, including uranium enrichment, nuclear fuel processing and equipment manufacturing.

The China Nuclear Industry magazine (a CNNC-run publication) has also called for a “grand unification” of the nuclear sector, indicating CNNC favours consolidation.

The creation of a single state giant could lead to greater success in the international market, but China Daily says that many observers opposed the idea, which would imply a return to domestic monopoly. “One solution would be to set up a general company to promote overseas business,” the newspaper suggests, “while the three companies would run [at home] as separate entities.”

So is CGN a safe bet?

China suspended approvals for new nuclear plants after the disaster at Japan’s Fukushima plant in March 2011. The moratorium was lifted in 2012 for inland plants (i.e. those not in danger of experiencing a tsunami) although opponents of nuclear power argue that there isn’t enough water at many of the proposed sites to cool a reactor if there was a serious accident. Regulators respond that $13 billion has been budgeted to improve safety standards across the sector, although Liu Baohua, the head of the nuclear office at China’s National Energy Administration, told a press briefing this week that more regulatory changes are necessary for nuclear power to be improved.

China’s policymakers are also counting heavily on the success of the third-generation AP1000 reactor, which has been co-developed with Westinghouse. The first model is due to go into operation at the end of next year in Zhejiang, two years later than scheduled. “The third generation reactors now under construction still have problems with the pumps and valves, and with the inflexibility of the design,” Liu admitted.”We are working to resolve these problems and the overall situation is still under control.” Of course, the fact that China has suffered 40 times more radioactive incidents than the US isn’t wholly reassuring (see WiC238). Opposition to nuclear construction in China is still limited, although protests did prompt the scrapping of plans to build a uranium processing plant in Guangdong’s Jiangmen. Proposals to build a nuclear plant in Jiangxi have also been a topic for debate (see WiC142). CGN also warned in its prospectus that anti-nuclear activism is a risk factor which could lead to its projects not being completed on time or on budget.

Nonetheless Hong Kong’s Standard newspaper believes CGN will stage a strong trading debut next week. It is hard to disagree, given the levels of oversubscription. Where CGN is concerned, fund managers seem much less focused on the risks for the stock than its potential for reward.

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