KDI School of Public Policy and Management

Global Business Management Professor: KIM, Ji-Hong Students: Munoz, Eduardo Hagos, Yared Vujovic, Natasa

1. 2. 3. 4. 5. 6.

Executive Summary Industry Overview
‡ PRC 1994: Country Analysis

Company Snapshot Current Situation
‡ International Capital Markets

Case Questions Post-Case Analysis
‡ Exhibits

Two stock exchanges in infancy. control inflation Shandong Huaneng Power goes Public in NYSE HPI Announces NY SE HPI goes public at $20 Thursday. NY August 1994. Economic reforms encouraged private ownership of state-run enterprises. relatively low capitalization and liquidity. 1994. uncertain success. Outside financing as domestic sources insufficient. 2011 3 . NY Aug 1994 October1994. NY Tsingtao Brewery US Interest rate jump. July 07. The Hong Kong Exchange offered mixed reception.        Raising capital for the construction of new power plants. more institutional investors.$860 million. Hong Kong April 1994. July 1993. US stock exchange offered warm reception. equity issue to raise $700 . Financing $4.5 billion. Listed at the New York Stock Exchange (NYSE) on October 6. broader international exposure.

July 07. Thursday. 1970s started experimenting with limited free-market reform. State Council.      Established in 1949.Socialist Market Economy. 2011 4 . State Owned Enterprises expected to make profit. changes continued in 1980s and 1990s. Communist Party the only legal party from 1994. the highest administrative authority of the state. including the power industry. National People s Congress (NPC) set economic policy . supervised and coordinated all ministries and commissions. NPC appointed the Premier of the State Council and other high ranking officials.

reducing demand. July 07. inflation in double digits. Thursday. Reduced control in 1992. Soft correction necessary for attracting and maintaining domestic and foreign investors.1% in 1990 and 1991. GNP and inflation at 2. while the government eased the control. SOEs had the largest slowdown.  Rapid growth fueled problems in 1980s and 1990s. Greater demand caused increase in prices.      Tight control of capital. resulting in national unrest. Privately owned businesses increasing at 40% per year. 2011 5 .

Thursday. FX rate. Almost no trade deficit. but no guarantee for the future.         Stable but ageing leadership of Deng Xiaoping. Government foreign currency reserves increased by more than 50% in 1994. No withholding tax on dividends or capital gains earned by foreigners. July 07. Possibly 20% withholding tax in the future. Legal history shows no acceptance of international court decisions. No guarantee of successor and government orientation. 2011 6 . 10% withholding tax warranted by a treaty with the US. rapid decrease (40%) due to discrepancy between official and spot rate.

No direct competition. HPIDC was to develop power plants and distribute power in the fastest growing provinces. Scarce commodity in industrialized parts. China Huaneng Group to oversee power generation and distribution. July 07.       Organized under the Ministry of Electrical Power. The Group formed joint venture with foreign investors Huaneng Power International Development Corporation (HPIDC). 2011 7 . with the local government. Many new plants needed to accommodate the growing demand. PRC Energy Growth Thursday.

Five largest power producers in China: It engages in the development.          Type: Public Founded: 1994 Industry: Power generation Headquarters: Beijing.23% Holders of International Shares . China Area served: People's Republic of China Parent: China Huaneng Group Employees: 22.25% Local Government & investment Co 34. 2011 8 . July 07.77% HPI Inc. construction and operation of large power plants Ownership after IPO Current Owners Huaneng International Power development Co (HPIDC) 40.899 Administrated by the State Council of the People's Republic of China. Thursday.

Profitable history and a LIP producer.  Offers attractive investment due to its success  ( HPI & HPIDC).  No business interruption insurance.  Uses foreign equipment and technologies.  Had a profitable operations history.  Transportation problems (coal to plant).  No third party liability insurance. July 07. An extensive developer of power plants.  Priority in the allotment of coal and oil supply.  Lack of skilled personnel. producers.  Has full government support. Unsafe operational practices Thursday.  One of the world s largest independent power  Lacks supply chain control (distribution). 2011 9 .

 High demand for HPI securities at NYSE.  Access to many international and institutional  The business involves uncontrollable risks: Natural disaster Labor disrupt Equipment break down  Plants are geographically dispersed (logistics and control problem).  Government support may not last long.  Exception for Chinese companies to present only 2 year audited financial reports.  Broader international exposure.  Environmental protection laws and investors . 2011 Uncontrollable risks and Environmental factors 10 . Thursday. regulations. Exception for Chinese companies to present only 2 year audited financial reports. July 07.

2011 Instability of stock prices 11 .  Thursday. Investment banks and buyers negotiate stock prices. The Hong Kong security market: ‡ ‡ ‡ ‡ The market saturated with PRC companies. Investment banks problem  Commitment of the Hong Kong stock exchange (1994):  Established Hang Seng China Enterprise Index . The market may not absorb the issued security.  Hong Kong stocks firms stock price increases. The fluctuating demand of companies security.  PRC stocks fell 20% in Hong Kong market. July 07.  Target the announcement of 20 new PRC firms.

    Is a technology oriented stock exchange. July 07. A market system guaranteeing investor for the stock once listed.  NASDAQ: National Association of Security Dealers Automated Quotation. Ensure guaranteed returns. Best for emerging market investment (IPOs). London stock exchange Thursday. 2011 12 . US dealers promoting NYSE and NASDAQ in PRC. American Depository Receipts (ADRs).‡ ‡ ‡ ‡ ‡ Offers greater potential in terms of size & valuation. Large market and an alternative.

and will foreign investors be interested in investing in this company? Alternatives to a stock offering at this time? What is a reasonable value for 25% of this company? What criteria are important in determining the market for this firm s stock? Thursday.Is this the right time for HPI to raise capital overseas. 2011 13 . July 07.

Prospective growth of stock value (Driven by PRC s energy needs) 4. Project Return overpowers the Country Risk 6. Tax Holiday: Reduced withholding tax to US investors for dividends and capital gains 5. Latest foreign equipment and technologies use in plants. Thursday. 2011 14 . 1. Ownership Structure (HPIDC majority control) 3. July 07. Healthy Financials and Profitability of HPI 2.Financial need for growth strategy In need of $4.5 billion (equity $700-860 million) Project expansion: Construction of 6 new power plants Raise cost-efficient funds Economic reform and growth of industry Oversaturation of HK Market Domestic financing issues Inefficient Self financing Difficulties in International debt capital Banks incapable to meet capital needs Infancy stage of local security market Oversaturation of HK Market International Investors: YES.

due to the following reasons :  Alternatives: Debt Financing (Corporate Bonds. Thursday. international banks may not accept the risk. NO. Term loans. Bank Loan.)    Increases leverage. Cash Liquidity issues and Risk of Bankruptcy Local banks do not have capital needed. The company already is using the maximum amount of internal generated funds and debt. 2011 15 . and changes company debt structure. Private placements. The funds necessary to finance the expansions will require a stock offering.  The alternatives to stock. July 07. but not apply to the current conditions of this company. are listed below.

Note in Exhibit 12 33% (Average of Implied growth rate of cash flows) 8% (Average of 1989-1994 Hyperinflation) 20% (Growth Rate . Delta of MRP of HK vrs US .56 PI i 1.46 17.10% 19.Inflation Average) 17.10% .Pro-Forma Cash Flows WACC Present Value of Cash Flows Total Operating Value Sensitivity Analysis Assumptions Cash Flows CAPEX Working Capital Growth Rate Inflation Rate Continuing Value Tax Rate Country Risk Company Beta Foreign Currency Case writers estimated based on Exhibit 12 Exhibit 8 (Initial Assets Final Assets + Depreciation) No Changes in WC from sales. Cho Lecture) 1. FX Risk included in country risk Discount Rate (Exhibit 12 & 13) Rf Rm-Rf 8. 2.37% 8% 15% 8% Tax Country Risk Ke K ¡ WACC WACC + CR   11.09 (US Gvmt LT Bond Oct 1994) 4.37% Long Term Effective tax rate 8% (1.73% (S&P 500 LT Market Premium 1926 to 1993 0.46 (Calculated from given Re of 15%) Case writers converted financials into USD $ from RMB. M&A Course Prof.

829.42 358.232.CV 556.562.013.495.725.00) 1996 186.785.835.175.00 411.204.00 25.00) 1998 334.115.429.128.00 298.00 225.84 .692.00 421.00 (583.00) 1995 162.599.535.753.086.636.924.00 1997 248.00 181.305.00 (43.215.00 (366.00 842.00 76.000.521.00 451.Pro-Forma Cash Flows WACC Present Value of Cash Flows Total Operating Value Sensitivity Analysis PROFORMA CASH FLOWS 1994 EBIT (+) Depreciation (-) Taxes Operating Cash Flow (-) Delta in NWC (-) Capital Expenditures OFCF 114.00 2000.688.295.00 76.809.657.316.00 8.00 191.243.00 224.00 29.120.931.00 282.01 30.00 112.00 1999 462.278.463.00 (431.00 577.725.00) 590.00 125.00 862.00 20.225.589.00 20.72 339.751.58 507.00 14.954.32 865.478.728.723.00 719.00 278.00 262.

812.617.28 $1.827.65 $2.769.864.33 $1.827.912.83 $3.10% 15.10 $929.942.771.10% 20.657.514.98 .Continued Value $9.Pro-Forma Cash Flows WACC Present Value of Cash Flows Total Operating Value Sensitivity Analysis Sensitivity Analysis WACC 11.677.66 $2.88 Total Operating Value $8.695.702.900.429.00% 16.07 $1.72% 19.47 $1.00% 2000.268.185.133.

ADR Price: $15.Pro-Forma Cash Flows WACC Present Value of Cash Flows Total Operating Value Sensitivity Analysis The Value of 25%: $475 Million.21 to $22.50 .

Future Prediction and Forecast Internal controls . 2011 20 .company and performance of existing companies.corporation must have internal controls. Thursday. July 07. Share structure issues . systems and procedures.amount of security offered as IPO. Market Size -large enough to attract institutional investors. Market competitive . Sector Performance .consistent record of growth over several years.strengths and weaknesses.Factors to consider in raising capital overseas ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Company Potential .equality and debt capital. Management and board of directors Corporate structure and governance Percentage subscription .

2011 21 .97 Thursday. July 07.  One year after IPO 1995: Less than $10 Current Stock price: $21.

Thursday. 2011 22 . July 07.

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