China's Hydropower Assets Injection Opportunity Coming Soon

China Power Construction Group recently announced that the State Council has approved the overall restructuring plan of its controlling shareholder. As part of this plan, the hydropower survey and design business is expected to be injected into the listed company within two years. This move was initially outlined when the company went public on October 18, 2011. However, despite the promise to enhance earnings per share through asset injection, the timeline for the process remains unclear. The company's stock has been underperforming, partly due to its low valuation and a net loss in recent quarters. Although the deadline for fulfilling commitments has passed, no official schedule has been released, causing uncertainty among investors. The company’s long-term strategy involves integrating the entire hydropower value chain, from upstream survey and design to midstream equipment manufacturing and construction, as well as downstream investment in power stations and wind farms. This comprehensive approach aims to strengthen market position and reduce internal competition. Notably, China Water Consultants, a key subsidiary, holds over 50% of the wind power design market and an impressive 80% share in hydropower design. It is considered the global leader in water conservancy and hydropower engineering. Analysts estimate that the injection of its assets could boost earnings by 15%-20%. In 2012, its net profit reached over RMB 2 billion, nearly half of the parent company’s total. Despite these positive indicators, the asset injection and capital increase plan faces challenges. Delays have raised concerns about responsibility, and the current low stock price complicates the process. If additional shares are issued at a discount, it may harm minority shareholders and raise questions about the transfer of state assets. Recent stock price improvements are encouraging, but the timing for the injection remains uncertain. China Power Construction has grown significantly over the past two years, becoming a multinational corporation with diverse operations in engineering contracting, hydropower, wind energy, international projects, and real estate. It holds a dominant 65% market share in large and medium-sized water projects in China and has built iconic dams like the Three Gorges. Internationally, it controls 50% of the global hydropower construction market. In addition to its core hydropower business, the company has expanded into non-hydroelectric infrastructure, including high-speed rail projects. In 2012, around two-thirds of new contracts were in non-hydropower sectors. It also participates in real estate development, with Nanguo Real Estate contributing approximately RMB 3 billion in revenue in 2013. With significant growth in real estate income, the company is diversifying its revenue streams. Moreover, China Water Advisors, one of the largest shareholders, has locked its shares twice a year, showing confidence in the company’s future. As of October 14, it committed to holding 63 million shares until October 2014. These actions suggest that the company’s stock has potential for upward movement, especially if the asset injection proceeds smoothly. While the success of the injection depends on a higher share price, it could further drive the stock’s performance.

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