Propelled in part by the backing of powerful Beijing bureaucrats, green-themed Chinese companies are set to reap billions of dollars from public offerings to new investors in coming months.
Propelled in part by the backing of powerful Beijing bureaucrats, green-themed Chinese companies are set to reap billions of dollars from public offerings to new investors in coming months.

But investors may want to ask at what price are they willing to jump on the trend.

A spate of clean energy initial public offerings is set to come to market over the next few months. Chinese wind-turbine maker Xinjiang Goldwind Science & Technology Co., which scrapped a US$1.2 billion Hong Kong initial public offering in June, is reviving its plans with a US$1 billion Hong Kong IPO in the next few weeks. Mingyang Electric is planning to raise between US$300 million and US$500 million from a U.S. IPO later this year, as is China Suntien, the renewable energy division of Hebei provincial government's investment arm, which is seeking around US$500 million.

(This story and related background material will be available on The Wall Street Journal Web site, WSJ.com.)

Add to that Huaneng New Energy Industrial Co., China Huaneng Group's wind power unit, which is looking to tap markets for a US$1.5 billion IPO in October, and Chinese clean technology IPOs this year alone could reach record levels.

Wind-power generator China Longyuan Power Group Corp. (CLPXY, 0916.HK) already raised $2.2 billion in an IPO in Hong Kong in December last year, in one of the biggest clean energy deals in Asia. Many are hoping to follow the success of China battery and car maker BYD Co. (1211.HK), which won backing from U.S. billionaire Warren Buffett and has seen its shares surge in recent years.

The predominance of IPOs by China firms is a testament to Beijing 's push to support environmentally friendly energy sources. China wants to increase use of renewable-energy sources to 15% of its total by 2020, up from 9% in 2008. Many are subject to a preferential tax rate of 15% compared with a 25% tax on other corporations, as well as other benefits, including government power-purchase agreements that guarantee demand.

"The sector has strong growth potential given that the Chinese government policy is clearly supportive," said Derek Sulger, partner at Shanghai-based private equity firm Lunar Capital. "We have also observed that many public market investors have looked toward alternative energy as a way to gain exposure to China 's demand for cleaner, more diversified energy sources, particularly in an environment where concerns over the general economic environment have impacted more traditional industries."

But for the new alternative energy deals coming to the market, valuations are key. Hong Kong-listed China Longyuan, for instance, is trading at a multiple of 30 times net profit for the current year, above the MSCI China Index at 22.5 times, or the MSCI Global Index, at 17.5 times.

"With pre-IPO investment opportunities also unreasonably priced, we like so-called expansion stage companies that are one to two years away from IPOs," said Chris Rynning, chief executive officer of Origo Partners PLC (OPP.LN), a London listed private equity firm based in Beijing, noting that many publicly listed earlier stage clean technology firms are trading at between 10 and 20 times their sales. "Expansion-stage companies typically have commercially scaled their technologies, but need capital to grow and often are at a tipping point in terms of sales and profit."

There's no denying that renewable energy has promise. The cost per unit of electricity generated by solar panels is coming down 20% per year, meaning it could reach levels charged by coal-fired electric firms in around five years, said Tim Buckley, portfolio manager at Sydney-based clean energy fund house Arkx Investment Management.

"Grid parity should be reached even sooner if a price on carbon is introduced by the Chinese government," Buckley said.

"There's been a lot of hype around renewable energy IPOs, so we'd be interested only if the valuations warrant it, and the earnings aren't made up of some coal, for instance," said Geoff Evison, Sydney-based joint managing director of Arkx Investment Management, which counts in its portfolio of 22 renewable energy stocks China's BYD and China Wind Power, among others. "But with the needs for energy security and energy demand from countries like China , the move to renewables is unstoppable and you're increasingly seeing renewable energy companies that are good value."

That government tailwind could be key, say investment pros. For example, those who bought renewable stocks from coal-rich Australia , where the government doesn't back renewables in the same way as China , will find their investments there have fallen over the past 12 months by 31%. At the moment, China still faces pressure to push alternatives to fossil fuels, both to meet its own energy needs and to stay competitive and a hot global market. That means a strong and supportive policy and regulatory environment.

But that doesn't guarantee success, or necessarily justify high valuations. BYD, for example, has seen its shares fall 29% so far this year due because growth in mainland car sales is expected to slow as Beijing reduces incentives.

Investors would do well to remember that no ride lasts forever.

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