China Guangdong: the nuclear option

China is caught between a lump of coal and a nuclear reactor. Over the past decade, it has favoured the coal. More recently, nuclear power has been shunned in the aftermath of Japan's 2011 Fukushima earthquake. But the reactor's pull is increasing.

Not before time: China needs to cut pollution. The country is responsible for 30 per cent of the world's CO2 output. Last year, China's emissions per capita overtook those of the EU for the first time. This is untenable: pollution is an increasing cause of social unrest as people worry about the impact on health. So this month, China - with the US - outlined new emissions targets. Balancing these against its energy needs, China aims to source one-fifth of its power from non-fossil fuels by 2030 - the year slated for peak emissions.

To help it reach these goals, China's nuclear capacity is expected to hit 58GW in 6 years, more than trebling from this year. At that level, 2020 nuclear generation will still equate only to a mere 5 per cent of China's total 2013 capacity - and only just over half of the US's current nuclear capacity.

With so much room for growth, it is good timing for China's largest nuclear power company, China Guangdong Nuclear, to come to market. CGN (which will be the world's first listed pure-play nuclear generation company) manages almost two-thirds of China's current 18GW. It has asset purchases lined up, more than doubling capacity by 2019. Parent company China General Nuclear Power Corp, a state owned enterprise, will sell about one-fifth of the enlarged company on the Hong Kong stock exchange, raising up to $3.6bn to fund asset purchases and repay debt. With net debt of more than $12bn before the listing, any repayment will barely dent the near-200 per cent net debt to equity ratio. Still, this is comparable with China-listed peers, if not US ones.

The story relies on continued state support for tariff pricing, expansion and, given tax rebates, profitability. And priced at up to 16 times 2015 forecasts, it does not come especially cheaply. But, with Christmas coming, it beats a lump of coal in a festive stocking.

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