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MoneyTreeTM China Renewable and Cleantech Investment Report Q2 2016

2 China Renewable and Cleantech Investment Report2 MoneyTreeTM

In Q2 2016, a great number of policies and regulations for the China renewable and cleantech industry were released, with about half focused on environmental protection. Policies and regulations have also been introduced to provide guidance on the “One Belt, One Road” initiative and the national strategy of “Made in China 2025,” which broaden the market and development prospects of the renewable and cleantech industry.

In early April, the National Energy Administration (NEA) issued Guiding Opinions on Energy Development for 2016 to clarify the direction of energy-related work and expedite the pace of energy restructuring as well as the promotion of industries that have smaller energy footprints. The Opinions outline 22 key tasks and objectives to be achieved in 2016, which cover energy consumption, supply, efficiency, institutional innovation, non-fossil energy sources, natural gas utilisation, clean and green development and utilisation of coal, prevention and control of atmospheric pollution, and more. This extensive list indicates the government is making great efforts to promote the development of renewable energy.

The Energy Technology Revolutionary Innovation Action Plan (2016-2030) (the “Action Plan”) was issued on 7 April to expound key tasks and primary targets in energy technology innovation for the near future. While adhering to the main policy line of supply-side structural reform, the Action Plan covers 15 key tasks involving solar power, wind

Policies and Regulations

electricity, hydrogen and fuel cell technology, the energy Internet and modern grid technology. It also lays out a specific roadmap for action on major innovations in the energy technology revolution, providing guiding plans for advanced energy storage and microgrid technology innovation.

In response to the national “Made in China 2025” strategy, the National Development and Reform Commission (NDRC), the Ministry of Industry and Information Technology, and the NEA jointly issued the Made in China 2025 – Energy Equipment Implementation Plan on 20 June. The Action Plan explicitly states that efforts should be focused on safeguarding energy supply security, promoting clean energy development and driving clean and efficient utilisation of fossil fuel-based energy. The Action will be launched in 15 areas of energy equipment innovation, with a focus on the most urgent areas of energy industry development: nuclear power equipment for third generation nuclear power, small modular reactors and advanced fuels, oil and gas exploration equipment for shale gas as well as deep water oil and gas, intelligent green coal mining and dressing equipment, gas turbines, intelligent grids, the energy Internet and other advanced electronic equipment. It also calls for expanding financial support and encouraging capital operations to drive transformation of the energy equipment manufacturing industry from simple technology

3China Renewable and Cleantech Investment ReportMoneyTreeTM

importing to one characterised by talent introduction, outbound M&A, and collaborative R&D. It further calls for supporting advanced technologies and top talents, studying the use of industry funds and proceeds from state-owned capital, promoting the expansion of energy equipment with superior production capacity into foreign markets, and supporting overseas investment and M&A.

Moreover, the NEA is actively encouraging social capital investment in the energy industry and promoting the Public-Private Partnership (“PPP”) approach. It is strengthening government investment and subsidies in underdeveloped areas and improving the level of public service in the energy area, all of which will help usher in a new era for the industry. On 13 April, the NEA issued a bulletin on Actively Popularizing the Public-Private Partnership Model in the Energy Field. Officials in charge of the initiative say that the PPP model is conducive to reforming the public services provision system in the new energy area, broadening investment and financing channels, fully mobilising social capital to participate in project construction in the energy sector, and improving the level of public services so as to meet the public’s needs for safe, reliable and clean supplies of energy.

Using renewable energy instead of fossil fuels helps reduce atmospheric pollution, improve the quality of life and generate widespread gains and social benefits for the public. On 16 May, the NDRC, along with eight relevant departments, issued Guidance on Promoting Substitution with Electrical Energy (the “Guidance”). Since the cost of switching to renewable energy is too high for ordinary investment returns to cover, policy support is required to change the status quo. In terms of equipment investment, the Guidance encourages different localities to use special air pollution prevention and control project funds and other funding channels to support replacement with electricity. The Guidance also encourages organisations undertaking electricity substitution projects to apply for enterprise bonds and low-interest loans as well as embrace the PPP model to solve the financing problem.

Special policies pertinent to other clean energy technology sub-sectors have been released one after the other by relevant departments. On 5 April, the NDRC issued Administrative Measures on Central Budgetary Investments in Construction of Urban Sewage and Waste Disposal Facilities. These Measures further enhance and standardise central budgetary investments in the construction of urban sewage and waste disposal facilities to ensure more efficient use of central funds. Subsequently, Measures for Cleaner Production Review were issued, detailing the scope, implementation, organisation management, rewards and penalties

associated with the regulatory review process.Compared with the Interim Measures for Cleaner Production Review, the new measures set higher requirements regarding which firms are subject to mandatory reviews of cleaner production. For instance, enterprises that exceed the quota for energy consumption per unit of product constitute high-energy-consumption enterprises and are subject to cleaner production review. The new measures will better guide local governments and enterprises carrying out cleaner production reviews, leading to reduced consumption of energy and materials and improved resource utilisation efficiency.

Soil pollution tends to be a hidden problem. Moreover, soil pollution control has suffered from a late start and weak foundation. To address the problem, the State Council issued Action Plan on Soil Pollution Prevention and Control on 31 May. Prepared in light of China’s national conditions and stage of development, it seeks to improve soil quality and safeguard agricultural product quality and human habitation safety; it adheres to the principles of protection first, prevention foremost, and controlling risks. The Action Plan focuses on key areas, industries and pollutants, implements governance according to categories, uses and stages, strictly controls the new addition of pollutants and gradually reduces their stocks, and forms a soil pollution control system that is government-led, participated in by the public and supervised by society, with responsibilities borne by enterprises. The Action Plan also states that budgetary funds should be fully leveraged by means of the PPP model to mobilise more private sector funds for soil pollution control. It further calls for the intensive development of green finance to fully exploit the guidance provided by financial institutions. In addition, it provides support for significant soil pollution control projects, and encourages eligible soil pollution control and restoration enterprises to issue shares. In addition, the plan recommends exploring bond issues and pilot projects in regions pioneering in comprehensive soil pollution control, as well as conducting pilots regarding mandatory liability insurance for environmental pollution on the part of key industries and enterprises.


Scale of InvestmentIn Q2 2016, there were a total of 35 investment deals in the China renewable and cleantech industry, with a disclosed investment value of USD 396 million. Of the 33 deals that disclosed the investment amount, the average investment value was USD 12.01 million. The companies that succeeded in obtaining financing included five traditionally listed companies and 14 companies listed on the National Equities Exchange and Quotations (NEEQ). The number of investment deals declined by 5.4% on a year-on-year basis, but was up 12.9% on a quarter-on-quarter basis. On the other hand, investment value soared by 315.9% on a year-on-year basis, but was down 40.0% on a quarter-on-quarter basis.

PE-backed company listings saw a market boom in Q2 2016, with five A-share companies in the environmental protection or new energy sector completing private placements. Meanwhile, PE investments seemed to be increasingly popular in the NEEQ market. Although the number of investment deals in Q2 remained the same as in Q1, investment value soared by 89.4%.

Investment Round Statistics In terms of deal numbers, private placement in enterprises listed on the relatively mature NEEQ and mainboard accounted for 54.3% of the Q2 2016 investment rounds in China renewable and cleantech, reflecting investors’ great confidence in growth-oriented firms in the renewable and cleantech industry. In addition, since a larger number of deals were not disclosed in Q2 and all the target enterprises were non-listed companies, one cannot conclude that investors’ interest in seed stage renewable and cleantech enterprises is cooling down.

Analysis of PE/VC Investment in the China Renewable and Cleantech Industry

Investment value(US$M) Number of investment deals

2016Q2

2014Q1

2014Q2

2014Q3

2014Q4

2015Q1

2015Q2

2015Q3

2015Q4

2016Q1

250.62 246.57

530.56

213.12

125.12 95.29 106.59

773.57 656.75

396.33 30

22 2420

15

37 37

54

3135

0

10

20

30

40

50

60

0100200300400500600700800900

Chart 1 Investment in the China renewable and cleantech industry from 2014 to Q2 2016

In terms of investment value, PIPE accounted for 64.4% of China renewable and cleantech investment rounds in Q2, due to the high value of private placement into A-share listed companies, which reached USD 51.02 million, and to the large number of private placements in the quarter, during which five listed companies completed their private placements. In contrast, the proportions taken by A, B and C rounds of investment presented a gradually declining trend (without considering undisclosed deals in the investment round).

B

C

PIPE

Undisclosed

NEEQ PE

A

411.4%

25.7%

12.9%

5 14.3%

925.7%

1440.0%

Chart 2 Investment round in the China renewable and cleantech industry in Q2 2016 (by number of deals)

B

C

A

27.05 6.8% 4.50

1.1% 1.50 0.4%

58.61 14.8%

255.11 64.6%

,

49.56 12.5%

PIPE

Undisclosed

NEEQ PE

Chart 3 Investment round in the China renewable and cleantech industry in Q2 2016 (by investment value, US$ M)


Investment Stage AnalysisIn Q2 2016, investment in the China renewable and cleantech industry was mainly in the expansion and mature stages, much the same as in Q1. From the perspective of both deal number and investment value, relatively mature enterprises listed on NEEQ and mainboard were the main targets of investments in the renewable and cleantech industry in Q2. Note that funds raised by these relatively mature enterprises were primarily invested in new projects and new businesses focusing on areas like sewage treatment, construction of solar photovoltaic plants, and kitchen waste processing.

Investment Industry Analysis In Q2 2016, the environmental protection sector, a sub-sector of the renewable and cleantech industry, continued to attract the most investors: 20 firms in this sector received investments, nine of which completed NEEQ private placements and three of which succeeded in attracting PIPE. In Q2, CECEP Capital Holding Co., Ltd. invested RMB 787 million, the highest investment value in Q2, in Beijing Water Business Doctor Co., Ltd., an environmental protection enterprise. Among the 13 investment deals in the new energy sector, the most noteworthy was the subscription of shares of CECEP Solar Energy Technology Co., Ltd. made by Beijing Fengshi Co-investment Fund (Limited Partnership) for a consideration of RMB 206 million used to construct a solar photovoltaic plant.

2 5.7%

12 34.3%

1440.0%

720.0%

Expansion stage

Mature stage

Undisclosed

Start-up stage

Chart 4 Investment stages in the China renewable and cleantech industry in Q2 2016 (by number of deals)

Chart 6 Investment in sub-sectors of the China renewable and cleantech industry in Q2 2016 (by number of deals)

Chart 7 Investment in sub-sectors of the China renewable and cleantech industry in Q2 2016 (by investment value, US$ M)

Chart 5 Investment stages in the China renewable and cleantech industry in Q2 2016 (by investment value, US$ M)

18.784.7%

144.1236.4%

195.9349.4%

37.509.5%

Expansion stage

Mature stage

Undisclosed

Start-up stage

2057.1%

25.7%

1337.1%

EnvironmentalprotectionNew materials

New energy

242.0661.1%

1.500.4%

152.7638.5%

EnvironmentalprotectionNew materials

New energy


Analysis of Investment RegionsIn Q2 2016, the renewable and cleantech industry saw a trend toward regional concentration of investment. In terms of the number of investment deals, Jiangsu Province continued to rank at the top with six successful deals, followed by Beijing with five successful deals.

Beijing Water Business Doctor Co., Ltd. made a private placement of RMB 787 million to CECEP Capital Holdings Limited , which brought Beijing to the top in investment value. Guangdong Province (excluding Shenzhen), Jiangsu Province and Chongqing formed the second tier, with an average financing level of only half of Beijing’s. The remaining provinces and cities had relatively little in financing.

6

5

3

1

1

2

6

3

2

1

2

3

0 1 2 3 4 5 6 7

Undisclosed

Beijing

Guangdong (Excluding Shenzhen)

Henan

Hubei

Hunan

Jiangsu

Shandong

Shaanxi

Shanghai

Xinjiang

Chongqing

34.5

135.6

69.9 6.1

1.5

12.5

53.6

4.4

22.3

6.4

12.1

37.5

0 50 100 150

Undisclosed

Beijing

Guangdong (Excluding Shenzhen)

Henan

Hubei

Hunan

Jiangsu

Shandong

Shaanxi

Shanghai

Xinjiang

Chongqing

Chart 8 Investment region distribution in the China renewable and cleantech industry in Q2 2016 (by number of deals)

Chart 9 Investment region distribution in the China renewable and cleantech industry in Q2 2016 (by investment value, US$ M)


Analysis of M&A activity in the China Renewable and Cleantech Industry

There were 27 mergers and acquisitions (M&As) in the China renewable and cleantech industry in Q2 2016, with a total disclosed sum of USD 700 million and an average transaction size of USD 30.43 million. Among the 27 deals, only four deals were overseas M&A, all denominated in EUR; the remaining 23 deals were domestic M&A, denominated in RMB. In addition, there were four deals with support from PE/VC and 10 deals involving related party transactions.

The statistics indicate that the renewable and cleantech industry experienced an increase in activity after having seen declining M&As for three consecutive quarters since Q2 2015. Compared with Q1 2016, the total number of M&A in the renewable and cleantech industry increased by 28.6%, though M&A value slipped slightly. Compared with the same period historically, the renewable and cleantech industry shows a year-on-year decrease of 50% in the number of deals and a dramatic 75.59% fall in M&A value. This large-scale decline in M&A value in Q2 2016 is understood to be due largely to the overall contraction of the domestic M&A market. Even the average transaction value experienced a clear decrease to just USD 18.49 million.

Overseas market M&A by the China renewable and cleantech industry saw an expansion in the types of M&A in Q2 2016. Chengdu Techcent Environment Co., Ltd. (“Techcent Environment”) acquired 100% equity interest in the German water treatment company Bilfinger Water Technologies GmbH (BWT) for a consideration of up to RMB 1.7 billion. BWT is a German provider of industrial filtration, water treatment equipment and solutions, with seven businesses including water treatment equipment, water well equipment and water intake equipment. The share of each business in the global market ranks in the top six. The acquisition of BWT will allow Techcent Environment to leverage its advanced water treatment technology and internationally advanced management experience. After the acquisition, Techcent Environment will raise matching funds for its plans to initiate BWT China projects in environmental protection equipment manufacturing and environmental engineering services, as well as a BWT China environmental protection technology innovation R&D centre construction project. Three other overseas M&A deals were transacted this quarter in

Italy, Austria and the UK, respectively.

In terms of sub-sectors, the environmental protection sector led other industries in M&A deals with a total of 20 deals in Q2, accounting for 74.1% of the total number of deals. There were three and four M&A deals this quarter in the new energy sector and new materials sector, respectively. With regard to M&A value, the new energy sector accounted for 36.8% of the total for the renewable and cleantech industry in Q2. However, the average M&A value in the sector reached 73.4% of the average value in the renewable and cleantech industry, which is characterised by “a few cases with large amounts.” This was mainly due to a large M&A case in the domestic new energy sector—Shenzhen Jiawei Photovoltaic Lighting Co., Ltd.’s acquisition of 100% equity interest in Jinchang Guoyuan Power Co., Ltd. (Guouyuan Power) for a consideration of RMB 1,105 million. This M&A case was the second largest M&A case by value in Q2. Guoyuan Power is a photovoltaic power plant company. Jiawei completed the acquisition of Guoyuan Power and, at the same time, raised RMB 600 million to invest in the construction of a photovoltaic power plant. M&A in the new energy sector was still popular in Q2. However, while there were more M&A transactions this quarter compared to last quarter, the lower average size of the deals brought down the overall value of M&A activity this quarter.

2016Q2

2014Q1

2014Q2

2014Q3

2014Q4

2015Q1

2015Q2

2015Q3

2015Q4

2016Q1

1,127.1

1,903.2

1,958.6

1,334.1

2,867.3

769.1 700.0

3033

60 60

37

54

40

2821

27

0

10

20

30

40

50

60

70

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1,805.9 1,735.5

1,015.3

Investment value (US$M) Number of investment deals

Chart 10 M&As in the China renewable and cleantech industry from 2014 to Q2 2016


2074.1%

311.1%

414.8%

Environmental ProtectionNew Material

New Energy

423.4660.5%

18.822.7%

257.6936.8%


New Energy

24.9121.3%

6.275.4%

85.9073.4%


New Energy

Chart 11 Sub-sector M&As in the China renewable and cleantech industry in Q2 2016 (by number of deals)

Chart 13 Sub-sector M&As in the China renewable and cleantech industry in Q2 2016 (by average M&A value, US$ M)

Chart 12 Sub-sector M&As in the China renewable and cleantech industry in Q2 2016 (by total M&A value, US$ M)


Analysis of IPOs in the China Renewable and Cleantech Industry

In Q2 2016, the China renewable and cleantech industry saw no IPO activity. However, there were companies in sub-sectors queuing to go public. On top of Shenzhen Hongxiao Energy Conservation Co., Ltd., Ningxia Jiaze New Energy Co., Ltd., Jiangsu Kuangshun Photosensitivity New-material Stock Co., Ltd., etc. in Q1, another ten companies were already in pre-announcement, including Poten Environment Group Co., Ltd., Shenzhen Coolead Energy Conservation Technology Co., Ltd., Xin guang Lvhuan Recycling Resource Co., Ltd., Dynagreen Environmental Protection Group Co., Ltd. and Jiangsu Landian Environmental Protection Co., Ltd. in the environmental protection sector, joined by Xuzhou Hootech New Materials Science & Technology Co., Ltd., Zhejiang Huazheng New Material Co., Ltd. and Bichamp Cutting Technology (Hunan) Co., Ltd. in the new energy sector.

Furthermore, 39 renewable and cleantech industry enterprises went public on the NEEQ in Q2 2016, a decrease of 15.2% on a month-on-month basis. All of them were involved in environmental protection business.

2016Q2

2014Q1

2014Q2

2014Q3

2014Q4

2015Q1

2015Q2

2015Q3

2015Q4

2016Q1

0500

1,0001,5002,0002,5003,0003,5004,000

0.00 327.63 343.65

3,477.14

69.16

2,469.19

0.00 314.71

0.00 0.00 0

3

5

4

2

5

0

3

0 00

1

2

3

4

5

6

Investment value(US$M) Number of investment deals

Chart 14 IPOs in the China renewable and cleantech industry from 2014 to Q2 2016

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