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Concerns sink Sinovel stock prices in Shanghai IPO debut

Excessive expansion and turbine quality issues have led to a crisis in faith over the long-term profitability of Chinese wind power.

The Chinese capital market is showing concern about the underlying health and long-term profitability of local wind power companies following rapid expansion in recent years. The latest sign of this malaise was the plummet in stock prices for Sinovel, China's largest wind turbine manufacturer, on the flotation of its shares on January 13. On the first day of its initial public offering (IPO) on the Shanghai Stock Exchange, Sinovel saw its stock prices drop by 9.59%. The slump continued into the following two days of trading, with shares falling another 8.6% to close at CNY77.87 ($11.87) on January 17.

Industry observers say the stock fell below the offer price of CNY90 largely because of market concerns over the quality of Sinovel's turbines. In early January, three workers died from electric shock in Hebei Province when installing Sinovel turbines, although the company denies any quality problems. Sinovel's IPO was scheduled to take place months earlier. But in October, just before the China Securities Regulatory Commission (CSRC) was to examine Sinovel's application, CSRC suspended the process because Sinovel shares are held by six different shareholders, none of whom has a large enough stake to control the company.

Financial institutions have become cautious about extending loans to wind turbine manufacturers since the sector started suffering from surplus production levels. Turbine manufacturers have instead sought financing on the stock market to take advantage of the sector's predicted fast expansion over the next decade, says Li Shengmao, senior researcher at China Investment Consultant.

Postponing flotation

Last year, many Chinese wind power companies experienced problems when trying to float shares on the stock market. Huaneng Renewables, the new energy branch of China Huaneng, was scheduled to issue an IPO on the Hong Kong Stock Exchange on December 16. But it failed to interest a sufficient number of subscribers and decided to postpone the IPO as it was unwilling to issue shares at the bottom end of the price range.

Datang Renewables, the new energy branch of Datang Group, managed to float shares as scheduled on December 17. It raised HKD5.67 billion ($730 million) by offering the bottom end of the price range to win enough subscriptions.

Companies were eager to get listed before the end of 2010 to raise funds from the stock market and lower their debt ratios ahead of producing annual reports.

According to the IPO documents, Datang Renewables aimed to reduce its debt ratio from 77% to 63% and Huaneng Renewables from 81% to 56%.

Little interest

Goldwind had a similar subscription crisis in June, though it finally issued an IPO in October. Its stock has continued to plummet since then. Two other electric power groups, Huadian and China Power Investment, are also planning to list their renewables branches on the stock market.

China's installed wind power capacity is estimated to grow at a less rapid pace in the future, resulting in fewer sales opportunities for turbine manufacturers. Over the past five years, the country's installed wind power capacity has increased by more than 100% per year. At the end of 2010, China claims to have replaced the US as the country with the highest installed capacity, standing at 41.8GW.

The government's vigorous support has been key to China's wind power industry's formidable success. However, such rapid expansion has resulted in problems that now threaten to restrict further development.

Grid problems

Integrating wind turbines to the grid has become one of the toughest problems to overcome, as China needs to upgrade its transmission infrastructure.

Last year, China connected 13.99GW of wind power to the grid. Industry officials say further progress is necessary to improve the chances of Chinese companies in the sector doing well on the stock market.

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