Through its geographically diverse portfolio of operating assets, China Hydroelectric (CHC) generates and sells electric power to local power grids. CHC currently owns 26 hydropower stations operating in China with a collective installed capacity of 547.8 MW. Of the 26 stations, CHC acquired 22 and constructed four. These hydroelectric power projects are located in four provinces: Zhejiang, Fujian, Yunnan and Sichuan.
The GeoTeam has performed some initial due diligence on CHC. It is no secret that CHC faces serious liquidity issues with a current ratio of only 18.6. As of June 30, 2012, CHC’s total current assets were USD 29.2 million and its current liability was more than USD 156.7 million. Therefore, CHC is desperately looking for financing and/or to sell some of its assets to solve the liquidity issues. The company has claimed to have:
- Sold the Yuanping project (see release).
- An agreement to sell the Yuheng project (see release).
We have confirmed that CHC:
- Has sold its Yuanping project.
- Will close the Yuheng project in January 2013.
- Is actively attempting to sell the Wangkeng project.
Upon completing some channel checks, we have:
- Verified that CHC does own the assets it claims to own as disclosed in its SEC filings.
- Confirmed that CHC has been paid the appropriate tariffs by its customers, which indicates that CHC’s reported revenues in SEC documents are accurate.
- Compared CHC to its Hong Kong-traded competitor (Haitian Hydropower International Ltd. (HKG 8261)) (“Haitian Hydropower”) that is trading at a similar valuation as CHC despite being a much smaller player (26.25 MW installed capacity) than CHC (547.8 MW installed capacity).
- Learned that Haitian Hydropower reported a 24% increase in revenue and 31% increase in gross profit for the third quarter of 2012. Some 66.3% of CHC’s installed capacity (363 MW, 15 projects) is in Zhejiang and Fujian provinces, places that put the company’s projects very close to Haitian Hydropower’s projects. Based upon the weather conditions (the more rain, the more profitable the operations), these 15 projects are expected to report a similar revenue increase as Haitian Hydropower’s revenue increase.
- Found that NewQuest Capital (Private Equity) is involved in the CHC story and has the means to help CHC resolve its liquidity problems.
While CHC’s business is heavily influenced by weather conditions that could potentially limit its broad investment appeal, we are looking at CHC purely as an undervalued asset play. Recent moves by the company to sell its assets give us some confidence that the company has a good chance to solve its liquidity problems. If we value the company on its assets and apply a generous 25% discount, we derive a minimum value of $2.76 to $5.00. If we consider its peers’ (Haitian Hydropower) stock performance in Hong Kong and if the market begins to legitimize CHC operations, we believe the stock could exceed $5.00.
Please be advised that we plan to release a full article on CHC detailing our on-the-ground due diligence.
Disclosure: Long CHC
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