Go “green” in China = preferential tax rate of 15% compared to 25% on other companies…

Look what China can do with government control! Bet this makes Obama jealous!

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

And while the fees for handling the share sales should keep investment bankers happy, investors may want to ask at what price are they willing to jump on the trend.

Among a spate of clean-energy initial public offerings heading to market in the next few months is Chinese wind-turbine maker Xinjiang Goldwind Science & Technology, which scrapped a $1.2 billion Hong Kong IPO in June. It is reviving its plans with a $1 billion Hong Kong offering in the next few weeks. Mingyang Electric plans to raise $300 million to $500 million from a U.S. IPO this year. China Suntien, the renewable-energy division of Hebei provincial government’s investment arm, is seeking about $500 million in Hong Kong.

Add to that Huaneng New Energy Industrial, China Huaneng Group’s wind-power unit, which is looking to tap markets for a $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 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, which won backing from U.S. billionaire Warren Buffett and has seen its shares surge in recent years.

The predominance of IPOs by Chinese companies 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, from 9% in 2008. Many such firms 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, a partner at Shanghai 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 is trading at a multiple of 30 times net profit for the current year, above the MSCI China Index at 22.5 times and 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 of Origo Partners, a London-listed private-equity firm based in Beijing, noting that many publicly listed earlier-stage clean-technology firms are trading 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 is no denying the promise of renewable energy. The cost per unit of electricity generated by solar panels is falling 20% a year, meaning it could reach levels charged by coal-fired electric providers in about five years, said Tim Buckley, portfolio manager at Sydney 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,” he said.

Geoff Evison, Arkx’s joint managing director, 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.” Arkx 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,” Evison said.

The government tailwind could be key, investment pros said. For example, those who bought renewable-energy 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 31% in the past 12 months. At the moment, China still faces pressure to push alternatives to fossil fuels, both to meet its own energy needs and to stay competitive in 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’s shares have fallen 29% this year amid expectations of slowing growth in mainland car sales as Beijing reduces incentives.

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