Solar energy spinoff in spotlight

| 3 Dec 2018

Jeannie Tang

Xinyi Energy, a spinoff of Xinyi Solar (0968), a Chinese solar photovoltaic glass manufacturer, intends to list in Hong Kong.

Xinyi Energy sells the electricity to mainland subsidiaries of the State Grid, China's state-owned electric utility monopoly, to generate revenue through acquiring, owning and managing a portfolio of solar projects.

The group owns and operates utility-scale ground-mounted solar farm projects - initially developed and constructed by Xinyi Solar - with the approved capacity of 954 megawatts in its portfolio this year.

There are nine solar farm projects in the initial portfolio, all connected to the State Grid. About 68 percent of approved capacity is generated from the projects in Anhui province. Other projects are located in Hubei and Fujian provinces, and Tianjin municipality.

Xinyi Energy will acquire six more solar farm projects from its parent in Anhui, Hubei and Henan provinces, with the approved capacity of 540 MW.

All the solar farm projects under its initial portfolio have been listed in the seventh batch of the subsidy catalogue in June. The Chinese government provides subsidies to solar farm operators by way of tariff adjustment.

Those projects will receive the feed-in-tariff at the same applicable rate for about 17 years under the feed-in-tariff regime, then the group can obtain tariff adjustment as the subsidy, which is the difference between the feed-in-tariff and sale of electricity.

More than 60 percent of revenues were derived from tariff adjustment in 2017, with the rest coming from electricity sales.

However, the renewable energy fund has recorded a deficit due to the funding shortfall since 2009, which lead to the delay in receiving the tariff adjustment.

In 2017, the group's tariff adjustment receivables of two projects entitled under the sixth subsidy catalogue amounted to HK$210.3 million, while the remaining seven projects - which have not been included on the list - reported tariff adjustment receivables of HK$1.2 billion.

Therefore, Xinyi Energy says any significant and prolonged delay in receiving the tariff adjustment under the feed-in-tariff regime will have an adverse effect on its business.

In addition, the delay in enlisting the solar farm projects under its initial portfolio will harm the company.

Also, its business is subject to the risks associated with changes in such government policies, and any reduction in the feed-in-tariff rate may affect it as well.

Meanwhile, the group believes the funding deflect of the renewable energy fund will be eased, as the government stops to grant new approval for the construction of new solar farm projects under the national quota system in 2018.

The target portfolio, composed of the acquisition, reported a growth of 298.36 percent in net profit to HK$243 million in 2017 from 2016, while revenues soared 288.3 percent to HK$337.47 million in 2017.

Net proceeds arising from this listing will be used for an upfront payment to Xinyi Solar, which amounts to 50 percent of the acquisition's target price, with the rest earmarked as working capital.

Xinyi Energy intends to adopt a high dividend payout policy, with not less than 90 percent of distributable income as the interim and final dividend, since it regards providing the shareholders with stable distributions with sustainable long-term growth as the primary objective.

The company may also pay out all of its distributable income each year, according to the prospectus.

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