I spent about three hours reading the NexGen [XG 1.68 pre-IPO] prospectus [link], which is enough (for me) to begin to feel a sense of comfort with what is on offer and the risks associated with it, but it’s not yet enough (again, for me) to feel confident. This write-up represents my initial impressions. Here are my thoughts:
> The players: XG is owned by Pure Energy Holdings Corporation [PEHC], the parent company that also owns Repower Energy Development [REDC]. PEHC is owned by Dexter Tiu. Chinabank Capital [CBC] is the sole issue manager and is a joint lead underwriter with ICCP.
MB note: Sister companies in the same industry? That has great comparison potential that I will address in a follow-up.
> The business: XG is a wind and solar energy developer. It has three subsidiary companies: SPARC, 5hour Peak Energy, and Airstream Renewables. SPARC owns and operates three operating solar plants in Zambales, Bataan, and Bulacan. XG owns 77.8% of SPARC, with the remaining 22.2% owned by a Singapore-based company. XG has eight WESCs (wind energy service contracts with the DoE) and one SEOC (solar energy operating contract) under Airstream. 5hour has one SOEC application in process. XG is in the process of transferring an additional four WESCs from REDC to Airstream. XG has a total generational capacity of 13.86 MW.
MB note: XG lost money in FY21 and FY22 (more on that in "risks"), and bought all of its power plants after they'd already been constructed (also more on that later in "risks".)
> The pipeline: Between its three subsidiaries, XG has 17 projects in its pipeline with a potential generational capacity of 1,683 MW and a total estimated required capex of P134 billion. Of these, all are listed as “for funding” except for three wind projects (240 MW total) and one solar project (5 MW) which are listed as “partially funded”. There are no pipeline projects with an anticipated commercial start in 2025. XG expects 25 MW of capacity to start commercial operations in 2026, with 360 MW in 2027, 598 MW in 2028, 400 MW in 2029, and 300 MW in 2030. Over 79% of XG’s pipeline projects are wind, with 75% of that coming from offshore wind and 25% from onshore. Of the remaining 21% of the pipeline earmarked for solar projects, 85% of the capacity comes from a single “floating solar” project slated for 2030 commercial operations.
MB note: There's a lot here to unpack. Not a fan of the dry span between IPO and the first commercialization in 2026. More reading is needed to see if the expansion of their existing facilities will help fill that gap. Not a fan of the reliance on 1,000 MW of offshore wind. Offshore anything is more expensive and complicated, and this team hasn't built onshore wind yet let alone anything that is objectively more difficult. PH has undeniable offshore wind assets and there is a future here for offshore wind, but does XG have the team to do it? They're engaging with foreign contractors to assist, but that's not a guarantee of success.
> The deal: XG is selling 300,000,000 primary common shares as part of its firm offer, with an additional 45,000,000 secondary common shares coming from PEHC as part of an over-allotment option, for a total of 345,000,000 (23.15% public float) assuming full exercise of the option. The price per share is P1.68 [link], which values the company at P2.5 billion. The shares will be listed on the PSE’s SME board.
MB note: Never consider a price reduction as a discount. Whatever the price is now is the maximum price PEHC and its financial advisors feel will sell all the shares. In this case, there was no discount at all, so PEHC and CBC must feel confident in their ability to sell the lot at the highest price. Remember that the vast majority of this deal will be sold to institutional buyers, so how we think about this as retail investors might not matter to PEHC’s ability to fully sell this deal.
> Use of Proceeds: The biggest line item in the Use of Proceeds section is “Fund the development and/or acquisition of RE projects” at ?150 million (31% of proceeds). XG plans to spend a combined 47% of the proceeds in partially funding three projects (two wind and one solar), with 18.6% going to fund operating and working capital needs. XG has 3% of the proceeds going to fund a “climate-controlled indoor farm”.
MB note: The development-heavy focus is good, but I’m concerned that such a huge chunk of money will just sit in escrow as XG waits to find a target to acquire. It reads to me like the PSE version of a SPAC [link], like the IPO is really just to raise enough money to buy a proper business. If acquisitions are such an important angle to XG’s development, then the pipeline plan becomes less relevant from a planning perspective. This feels a little bit like a black box situation that XG could morph into anything. I really dislike the farm bit, but it’s just 3% of the total. Still, I don’t like the lack of focus here.
> Primary/secondary split: The deal is 87% primary. Money from the primary portion of the total offer will go to XG for the company to use in accordance with its Use of Proceeds section. Money from the exercise of the secondary shares option will go to the selling shareholder, PEHC, and will not benefit XG shareholders in any way.
MB note: Readers will know that I’m a big fan of primary-heavy deals, and this is one of those deals. That doesn’t mean that it is a good deal, but it does mean that XG will start its life with enough capital to do something that could benefit shareholders in the future.
> Risks: Aside from all of the regular risks that apply to almost every other renewable energy company in the Philippines (permitting issues, political problems, natural disasters, etc), the one that stands out to me is the one that I see between the lines of this plan: XG has no direct experience in renewable development of any kind.
MB note: All three of its operating solar projects were purchased as operating assets back in 2018. While XG’s parent company, PEHC, has experience developing infrastructure utility projects and run-of-river hydropower facilities (REDC), it doesn’t have any greenfield-to-operations experience developing wind or solar (that I can see). They’re planning to outsource some of the technical burden of planning, development, and engineering, but it’s not clear from the prospectus how much of this burden is being outsourced and how much is staying with XG.
MB bottom-line: So that’s what I saw after a three-hour reading. I got comfortable with the “deal” and I gained a decent understanding of what the business has done, what it is currently doing, and what it says it will do. Even so, I’m not confident enough in my understanding to make a recommendation on the stock or to take any action of my own on it. I haven’t even spent any real time in XG’s financials. I looked for long enough to see that it lost money in FY21 and FY22, but made money in FY23, and that the discrepancies are largely due to unrealized forex losses. I haven’t taken any time to consider the impact of the IPO funding round and how that might filter down into XG’s FY24 and FY25 financial statements. I’d need to do that before I can get a reasonable feel for the price of the offer. That said, here are the things I saw that I would need to spend more time with before I could even consider buying the IPO.
Experience risk
Aside from IPO price performance issues, my main problem with this prospectus as a business plan is the huge grey area that I see from the combination of XG’s clear intent to buy projects or partner with other players and its lack of experience in building greenfield projects. Unlike Citicore Renewable Energy [CREC], which has a massive pipeline of projects and a long list of completed projects similar to those shown in its pipeline, XG has just ~14 MW of operating solar plants that it bought pre-made and 1,683 MW of planned development with no track record of delivering wind or solar projects that I can see, let alone offshore wind projects or floating solar. I worry that XG’s management team might focus too much on trying to find something juicy to buy if it encountered unexpected difficulties in the development of its pipeline, or that its inexperience with these projects could cause dates to slip resulting in lower annual revenues for shareholders. This is a worry that I would ordinarily quantify with a review of the management team’s or company’s track record, but here I don’t have much to hold on to. Perhaps more time in the prospectus would give me evidence of that track record, but after my quick reading, I came away empty-handed.
Forex risk
The company’s FY21 and FY22 income statements were dominated by unrealized forex losses relating to US$-denominated advances from PEHC, resulting in net losses for both of those years. As of December 31, 2023, the advances amounted to $10.6 million. The peso fell 6.25% through FY21 and fell a further 8% in FY22. FY23 was largely flat, but FY24 is looking like another year of peso weakness as it’s already down 5.5% and the forex market is bracing for what might happen to the peso if the BSP pivots before the Fed. While these are unrealized losses (they didn’t touch cash flow) and the charges are related to an advance from the owner, the risk is real that XG’s net income could be derailed again in FY24 by unrealized forex losses. It’s always possible for the company to convert the advances to common shares at some point in the future, but that conversion is going to be based on XG’s share price and the prevailing PHP/USD exchange. I’m not saying that this is a huge problem, but it is something that stands out when you review the financials. It’s hard to completely ignore those net losses. It’s easy to overlook them briefly because they’re unrealized losses that don’t impact the operations of the company, but that $10.6 million isn’t free money and it could impact shareholders in the future depending on how they handle it.
Related party risk
PSE investors are no strangers to related party risk, which is the risk that a shareholder assumes when buying a company that may have business dealings with other companies that are owned by the same ownership group. Conflicts of interest are so common here that one can almost become blind to their existence, but these conflicts are real and they can have consequences. For example, will the huge chunk of money set aside for acquisitions be used to buy additional assets from REDC, PEHC, or any other company controlled by the same group? If so, will the price paid be in the best interest of XG shareholders? If acquired, what will the opportunity cost of that acquisition be for XG shareholders? Again, we encounter these conflicts all the time, but we resolve the uncertainty using past performance, and here, I just don’t see a great deal of “history” on display in the prospectus to tell me how these companies will work together. To any XG managers or XG bulls reading this, please note that I’m only raising this risk as a potential problem that shareholders need to consider. I’m not alleging any misconduct on XG’s part or any plan to do anything to harm investors, I’m only pointing out the gaps in the plan that all IPO buyers need to be aware of before they give money to an IPO issuance.
More to come
I’ve never been trained on how to read a prospectus, so my process of gaining familiarity with a company and the opportunity it presents may be significantly different from yours or the generally accepted best practice. I tried to give readers a feel for what I’m looking at and how I think and feel based on what I read. I’m also trying to give readers a sense of where I am in my process: It’s important to remember that I’m not done. I still have to consider the company’s financials and do some comparisons with PSE-listed renewable energy producers, but these are the thoughts that will be in my head as I start my process of going deeper. I’m likely doing it backward compared to how lots of others might approach consuming a prospectus, but I enjoy getting to know a business first before I submerse myself in its financial data. If you like starting with the financials that’s not wrong if it works for you, but the company’s prospectus has to be considered required reading if you’re thinking about buying during the IPO period. Stay tuned for the follow-up on the company’s financials!
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