China Nuclear IPO — Too Hot to Handle? 中国核能上市：烫手山芋？

By newsdoug on June 7, 2012

China plans nuclear power IPO I hope readers will excuse me for my headline calling an upcoming IPO by China’s top nuclear power company “too hot to handle,” but in all honesty that’s really what I think about this plan, which seems ill conceived and likely to highlight just how unpopular nuclear power is right now. The plan being discussed has just been approved by China’s environmental regulator, and would see China National Nuclear Power Co raise funds to develop $27 billion worth of projects in its pipeline. (English article) No fund-raising target was given, but the mention of the $27 billion figure suggests the offering would be rather large, perhaps bigger than $5 billion. New of the plan, which was disclosed on the environmental regulator’s website, suggests that China intends to soon resume construction of nuclear power plants, following a halt after the Japanese earthquake and tsunami of March last year that led to the world’s worst nuclear disaster since Chernobyl. Japan has turned off all of its nuclear power plants since then amid huge public distrust of nuclear energy. Based on my personal experience, many Chinese feel an equal or greater level of unease about nuclear power, since many suspect their government would do a far less effective job of damage control if a similar accident should happen on Chinese territory. So that naturally raises the question: who exactly does the government think would invest in this company when it makes its public offering? From a purely investment perspective, this kind of company seems to have a huge degree of risk, as reflected by the massive financial burden now being carried by the operator of the stricken Japanese nuclear plant. Even a small accident at a Chinese nuclear plant could easily bankrupt the plant’s operator, instantly wiping out all of the company’s shareholder value. From a more emotional level, most investors, both retail and institutional, are likely to avoid such an IPO due to personal concerns about nuclear energy. With no obvious buyers in sight, the most likely candidates to purchase shares in this offering will be cash-rich big state-run enterprises that take all their orders from Beijing. I wrote earlier this week that such big companies, such as China Mobile (HKEx: 941; NYSE: CHL) and Sinopec (HKEx: 386; NYSE: SNP), are often called on to execute government strategy in their sectors, but could soon be called to assist in outside areas such as the nation’s looming banking crisis. So they could also soon be called to purchase shares in this new unpopular IPO too, perhaps helping the offering to do well initially as the government seeks to ease public fears. In the end, I’m sure this offering will go forward and may initially have a decent trading debut. But don’t look for the company to be a strong performer over the longer term.

Bottom line: An upcoming IPO for China’s largest nuclear power operator will attract weak demand from real investors, and instead is designed to restore public confidence to the sector.

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