Date
12 December 2017
China has only recently restarted its nuclear energy program but whether its technology is up to international standards remains to be seen. Photo: Bloomberg
China has only recently restarted its nuclear energy program but whether its technology is up to international standards remains to be seen. Photo: Bloomberg

What Fukushima? Investors pile into CGN Power

CGN Power (01816.HK), China’s largest nuclear energy company by installed capacity, starts trading in Hong Kong Wednesday.

Given that its initial public offering was heavily oversubscribed (at least 280 times, according to reports) and allocations to institutional investors were limited, investors are expected to show strong demand in the secondary market.

Already, the stock traded as much as 23 percent above its IPO price in the grey market.

A local fund manager told Ming Pao Daily his company placed a HK$50 million (US$645,000) order in the HK$23.8 billion IPO but all it got was 100,000 shares worth HK$278,000.

A United States-based fund wanted US$20 million worth of stocks but ended up with nothing.

It is believed two or three major institutional investors cornered most of the quota, making it harder for other investors to get their orders filled.

Why are investors so excited about CGN Power?

One reason is China’s air pollution problem. The top nuclear power company is set to benefit from government efforts to curb environmental pollution by diversifying energy generation away from fossil fuels. Nuclear power is one solution.

Another reason is CGN’s ability to generate a steady and predictable return.

While nuclear power plants are expensive to build, once they are commissioned, they offer steady output all year round.

A nuclear power plant could operate for 8,000 hours a year. Fuel  makes up about 30 percent of the total cost, which is low compared with plants burning coal or fossil fuel.

Market participants believe CGN Power has a bright future as nuclear power is a long-term government strategy.

The company does not receive subsidies from the government, highlighting its ability to run a profitable business on its own. 

A third reason for CGN’s enormous appeal is the extremely high entry barrier in the nuclear power industry.

All this, however, is based on the assumption that a nuclear accident won’t happen.

People still remember Japan’s Fukushima disaster in 2011 when an earthquake and tsunami triggered triple meltdowns at Tokyo Electric Power’s nuclear plant.

Three years on, radioactive water is still flowing into the Pacific Ocean, causing serious pollution to the marine ecosystem.

In the wake of the disaster, the Japanese government shut down all 48 nuclear power reactors and began thinking about phasing out nuclear power plants by 2022.

Safety is the single biggest issue in operating a nuclear power plant.

China has only recently restarted its nuclear energy program but whether its technology is up to international standards remains to be seen.

No one can guarantee the absolute safety of a nuclear plant. That is a huge potential downside risk.

Any incident could result in simultaneous shutdowns of many plants of similar age or belonging to the same generation of technology, meaning substantial loss of income and heavy writedowns.

But for the time being, China is taking the risk and pushing ahead with the expansion of nuclear power.

In Japan, Prime Minister Shinzo Abe has been trying to restart idle reactors as the country grapples with costly imported fuel.

Between risk and other problems such as costs and pollution, nuclear energy is seen as the lesser evil.

Still, some people see it as a ticking time bomb, something that’s always in the back of investors’ minds.

– Contact us at [email protected]

RA

EJ Insight writer

EJI Weekly Newsletter

Please click here to unsubscribe