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Transcript of Huaneng Power
MSc in Finance
Raising capital in Global marketsRomain Boujiot Jen Huki Jhon Hitterman
You have been hired as an international investment banker by a large U.S. institutional investor who is considering purchasing HPI stock. Provide an analysis of: i) China as an investment destination ii) key success factors iii) HPIs strengths and weaknesses.
World's largest country by population (nearly 1/5 of the world's population)Total Population (millions) Growth rate Source: EIU Country Report. September 9. 1994 1989 1,126 1990 1,139 1.15% 1991 1,156 1.49% 1992 1,173 1.47% 1993 1,185 1.02%
Largest country of Asia, one of the largest of the word: 9 596 961 km2 One of the largest economies in the world: since 1978, the Chinese economy had expanded at an average rate of nearly 9%.GNP at current market price (Rmb billion) Real GNP growth Source: EIU Country Report. September 9. 1994 1989 1,599 4.4% 1990 1,77 4.1% 1991 2,024 8.2% 1992 2,404 13,00% 1993 3,138 13.4%
Since the late 1970s, China set up reforms to open its market.
In the late 1970s: the government relaxed its control over many industries to move
from a centrally planned economy to more of a market-oriented one. In the 1980s: in order to facilitate modernization and encourage foreign investment and the import of advanced technology, China began establishing special zones for foreign investment: Special Economic Zones (SEZs) . The original four were Shenzhen, Zhuhai, Shandou, and Xiamen.
In the 1990s:
The government wanted to move toward a socialist market economy. Under the planned economic system, the state was determining production and pricing. In a market economy, the state creates a stable and competitive economic environment through the application of laws and regulations. The government allowed foreign investors to manufacture and sell a wide range of goods on the domestic market, eliminated time restrictions on the establishment of joint ventures, allowed foreign partners to become chairs of joint venture boards, and authorized the establishment of wholly foreign-owned enterprises. The government granted more preferential tax treatment for Wholly Foreign Owned Enterprises and contractual ventures and for foreign companies, which invested in selected economic zones or in projects encouraged by the state, such as energy, communications and transportation. The government authorized some foreign banks to open branches in Shanghai and allowed foreign investors to purchase special "B" shares of stock in selected companies listed on the Shanghai and Shenzhen Securities Exchanges.
Partly due to these reforms, since 1988, the amount of Direct Foreign Investments has almost been multiply by 10.Direct foreign investments (M$) Growth Source: Jetro, Financial Times, June 27, 1996 1988 3,194 1989 3,392 6.19% 1990 3,487 2.80% 1991 4,366 25.20% 1992 11,007 152.10% 1993 27,515 149.97%
To invest in China, a foreign investor needs to: Understand PRC main strategic goals and needs: Modern technology to improve the power's production Foreign capital to faster the growth in the economy Expand the capacity in the power sector to meet the increase in demand. Experience in dealing with foreign investors, Strong relationship with national and local governments A market leadership
Invest with the right partner which to have:
Be an investor of a powerful industrialized country in order to: Have a strong bargaining power Be protected from unfair treatment Gain from advantages from a strong currency and large stock exchanges
StrenghtsStrong connections with central and local authorities: -HPIDC, a Chinese government-foreign joint venture, is the major shareholder (54%) of HPI, -Local government investment companies own the remaining shares, -HPI's managers are former top management of HPIDC and Ministry employees Reliable plants: Using modern technology from abroad, more reliable than the average PRC power plant Fast-growing targeted market: 23% of the population, 31% of the national GDP
WeakenessesGeographical dispersion of HPI's power plants: -1,600 kilometers among five coastal provinces -Far from coalfields regions -Primitive transportation infrastructures
Insurance issue: -No business interruption insurance -No third-party liability insurance Allotments issue: -No guarantees that the company would continue to receive transportation, coal and oil allotments, and market prices are much more higher Skilled operational personnel issue: -If the expected rates of growth in electrical production materialize, the company could face a shortage of skilled operational personnel - High cost of foreign engineers
HPI increasing profitability and efficiency: Net profit margin has grown by 1.1 pts, Plant completed on time and within budget
Sustainable profitable activity: HPI as the exclusive developer of new planned plants in provinces in which it currently operates, Guaranteed rate of return on electrical generating assets
HPI wants to access financial markets. What are the options available to the firm? Provide pros and cons of available options in particular, deal with: a. Debt markets. b. Equity markets: i. In particular, what type of listing is suitable for Huaneng to pursue? i.e. domestically within China and internationally, listing in Hong Kong, London and the US. (In the US between different ADR levels) ii. What are the benefits for a non-US firm that decides to list on a US exchange?
HPI has limited internal source of capital due to tight controls on credit. HPI can access financial markets through debt or equity markets.Advantages Equity markets DisadvantagesNeed to reach a certain rate of return in order to obtain enough cash to pay dividends; Additional costs due to reporting requirements registration costs and listing fees; Dilution of the old investors control.
Equity raised do not have to be reimburse; No obligation to pay dividends; Increase the number of investors: opportunity to raise new capital; Access to international investors.
Debt marketsDeductible interests; Bonds are generally a safer investment Interest payments (unlike dividends, even in difficulties, the company must pay them); Increase in the company's risk of default; Fixed interest rate (opportunity cost).
AdvantagesChinese Stock ExchangesCompletely familiar with PRC companies
DisadvantagesLow liquid and low capitalized internal stock exchanges => the amount HPI wants to raise is too high for these markets
Hong Kong Stock ExchangeFamiliar with PRC companies for more than one year. Index for PRC firms Has never absorbed such Chinese large issue Mixed reception for PRC firms issuance => the market could be saturated to absorb all the HPI equity raising. Competitive for small issuances No listing premium for firms asking for large issuance => HPI issuance may be undersubscribed.
London Stock ExchangeOne of the world's largest stock exchange. Has always been focused on international trades
US Stock ExchangeNYSE and NASDAQ: promoting themselves as the best place for PRC firms to raise international capital. The SEC requires from PRC Companies only tow years audited earnings instead of the usual three years. NYSE: has already Chinese funds and companies among its listing. NASDAQ: Technology-oriented stock exchange and market guaranteed by its market maker. NYSE: mixed reception of Shandong issuance.
One of the largest and more efficient market in the world for trading stocks Strong regulatory environment Governance model which prevents controlling shareholders to extract private benefits from the corporation Ability to raise more funds internationally in the future and at lower cost Highly liquid secondary market for company shares Attraction of a listing premium: often, benefits of being listed in NYSE offset listing costs
ADR: A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange.Program type RequirementsFiling of an F-6 registration statement, but allows for exemption under Rule12g 3-2(b) from full SEC reporting requirements. Filing an F-6 and 20-F registration statements Complying with the SEC's other disclosure rules: submission of its annual report (prepared in accordance with US GAAP) Same requirement than for Level II Submitting a Form F-1 to the SEC to be allowed to raise money.
CommentsCan only be traded over-thecounter and cannot be listed on a national exchange in the US. Does not allow the issuer to raise new capital. Does not allow the issuer to raise new capital.
Allow a foreign company to have its shares traded on the OTC US market. (unlisted)
Allow a foreign company to be listed on major US exchanges. (listed)
Allow a foreign company to be listed on major US exchanges and to raise capital through a public offering of ADRs. (listed) Allow a foreign company to create restricted shares to be privately placed with institutional investors. (unlisted)
Allows the issuer to raise capital through a public offering of ADRs in the US.
Not registered with the US Securities and Exchange Commission Not subject to US reporting requirements.
Allows to raise capital but only from Qualified Institutional Buyers (not from Retail investors).
US investors are eager to expand their horizons in search of new opportunities for capital growth. The appetite for foreign equities continues to increase as investors seek geographic and sector diversification. The level of US investment in foreign equities now exceeds more than $2 trillion, reflecting 100-fold growth since 1980, with a strong growth between 1992 and 1999.
What is the right