To : Professor dr.

Joseph mcCahery
Instructor/Banking & Securities Regulation

From : Gartor Tate
ANR:584295/ U1266434

In Re : Banking & Securities Regulation Assignment
Case Study: Huaneng Power Inc.

Date : November 21, 2014

You asked us to address the aforementioned regarding the below listed issues and respectfully
submit same to you for your appraisal. The issues encompass the following:

1. HPI want to access the international capital markets-what are its options and what are
the pros and corns of each option?
PROs
The Sec announced that it would require HPI and other PRC companies to submit only
two yrs. audited earnings instead of the usual three yrs.
The listing on a US stock exchange meant broader international exposure and access to
more institutional investors
The Chinese economy has expanded at an average annual rate of about 95 since 1978, in
line with the governments long term goal target of 7-9%.
The local government investment companies agreed to assign all voting right to attached
to shares of HPIDC, so that the parent company would maintain managerial control. The
control would continue even after the new share issue since the new share would
represent 25% of the company.
HPIDC would continue to control elections of all members of the board of directors and
global issues would consist of foreign class shares in HPI, for sale only outside the PRC
to non-PRC citizens.
The five plants under operation by HPI are assets of the company since 1987 and located
in five of Chinas fastest growing provinces which represents 25% of the population, but
31% of the GDP.
Additionally, HPI would acquire the rights of three additional plants currently under
development with planned capacity of 2,000 MW by December 1994.
HPI was also developing other Plants with an installed capacity of 3,900 MW.
HPI and HPIDC agreed that HPI would be the exclusive developer of all new greenfield
coal-fired plants throughout the PRC that the company was in position to develop.
All planned and projected plants of HPI would be located in provinces current operated
and would use the same distribution channels.
The company was in compliance of all the environmental protection laws or regulations

ADVANTAGES:
The company presented an attractive investment opportunity for international investors
due to its relationship with HPIDC which was one of the leading power developers in
the PRC.
The Ministry of Electrical Power has persuaded central government to pass legislation
authorizing HPI, Shandong and certain other companies in high electricity usage growth
areas to earn a guaranteed rate of return on electrical generating assets as an incentive to
attract foreign investors concerned about the risk of investing in the PRC
The policy allowed HPI to adjust its rates to recover higher input costs such as fuel, fuel
transportation and labor, and these returns were net of taxes. Effectively, this meant that
HPI was entirely an equity financed company.
HPI was the leading power company in the PRC and one of the largest independent
power producers (IPP) in the world.
Company management was confident that that HPI could sell the amount of power
necessary to earn the guarantee return. This optimism had some merit due to the
shortage of power in the provinces in which HPI operated, the support from the central
government for the arrangement and HPI relationship with the networks.



All of the plants currently in operation use used foreign equipment and technology
successfully.
All of the plants had a profitable operating history and all were completed on time and
within the budget.

CONs
The US market had been battling with inflation and it wasnt yet clear whether the
inflation has been brought under control.
By mid-1994 the inflation rate in China was dangerously high and GNP growth of
greater than 12% was simply not sustainable because the government lacked control of
the monetary growth.
There was a looming social unrest due to SOEs been threatened with bankruptcies and
risked a worsening unemployment problem, while the privately owned businesses were
booming by over 40% per annum. This eroded the competitiveness of PRC firms and
growth of this nature was unsustainable due to the inflation it caused.
There was no guarantees that the currency could maintain its recent stability, especially
in light of continued high inflation.(Political, legal and economic climate)
Although a tax treaty existed between the US and China, observers believed there was
no guarantee that the tax holiday would be continued indefinitely in as much as the
government appreciated a climate that was conducive to foreign investment.
Legal history suggests that the courts of the PRC would most likely not recognize or
enforce against the company or its directors, judgments in U.S. or foreign courts. This
would affect the ability of shareholders to successfully bring litigation against the
company or its board for breach of fiduciary responsibilities.
The pace of the planned and projected expansions meant that HPI would have to raise
capital internationally to finance this expansion, which was the rational for the
formation of the company
DISADVANTAGES:
Because HPI would require additional capital to finance the construction of these plants,
the ultimate source and type of financing of these plants would depend on company
performance and the market conditions at the time the capital was required, in as much
as some of this capital could be raised through internally generated funds and debt
issues.
Power plant operation involve risks which could not always be anticipated or
controlled, but HPI did not carry business interruption insurance to protect it from such
occurrences, nor did the company carry any third party liability insurance coverage for
accidents on company property, except during the construction of the plants.
There could be no guarantee that if the local environmental laws or regulations are
tightened in the future, HPI would be in the position to comply due to the expenditures
associated with ensuring compliance.
The plants geographical dispersion of 1,600 km were among five coastal provinces with
relatively primitive infrastructure which posed logistical and control problems.
The was no guarantee that the allotments for coal and oil supply that HPI was receiving
to run its plants according to government plan and preset prices would continue.
Transportation compromised approximately 50% of the total cost of coal to the plants
with the exception of Shandong power Plant. Although HPI had strong relationship
with the local and central government which enabled it to secure sufficient
transportation, there was no guarantee of the availability of the transportation, nor
would the price the company pay for it.
The company risked the shortage of skilled operational personnel if the expected rate of
growth in electrical production materialized.


There were several options available to HPI. These options include:

I. The Hong Kong markets were more familiar with the PRC companies and had been a
reliable source of capital for the past 14 months and their stock generally traded at a
price /earnings ratio in the nine to ten range. In addition to that, HPI could list a class of
shares on the Hong Kong directly on the Hong Kong exchange if it met the reporting
and regulatory requirements; however the Hong Kong market seemed to be a murky
area to invest into by the PRC because the market was getting saturated with PRC
companies which had received mixed receptions, with some issues heavily subscribed,
while other attracted little attention. Additionally, there had been reports of some
haggling over price between the investment bankers and buyers, with the investment
banker sometimes lowering the proposed issue price in order to fully sell the issue. This
led to some markets participant apprehension regarding good PRC companies; hence
absorbing additional Chinese companies in the Hong Kong market could have been a
challenge.

II. National Association of Securities Dealers Automated Quotations (NASDAQ) being
on the US and international markets offered much potential in terms of size, higher
valuation and thirst for emerging market investments, but NASDAQ had a reputation
for being a technology-oriented stock exchange; hence PRC was reluctant to deal with
NASDAQ.

III. New York Stock Exchange (NYSE) The recent deregulation of utilities in the US, which
had decreased their profitability, and may have made HPI and Shandongs guaranteed
rather than more attractive.
IV. London Stock Exchange (LSE)
V. American Depository Receipts (ADR) if HPI wanted to raise equity capital globally, it
had to use ADRs, since they were the vehicle that facilitated the purchase and sale of
foreign companies.




2. Implementation strategy for HPI: Present your recommendation on whether and why
HPI should proceed with the ADR.








3. Explain whether you would recommend investors to buy this stock.







4. Explain whether the existing securities regulations are sufficient to protect
investors exposed to the risks from a Huaneng power ADR listing on the
NYSE.