China is looking to boost returns in its state-run businesses by selling pieces to investors. It’s a move that opens these companies up to market forces, but likely doesn’t signal a loosening of the grip by the government.
Bloomberg had this story, with no byline, about the details of the sale:
China Petroleum & Chemical Corp. (386), Asia’s top refiner, agreed to sell a 107 billion yuan($17.5 billion) stake in its retail business to a group of investors including China Life Insurance Co.
Sinopec, as the company is known, said the unit will sell a combined 29.99 percent stake to 25 investors including Fosun International Ltd. (656), run by billionaire Guo Guangchang. China Life will buy 10 billion yuan of shares while gas supplier ENN Energy Holdings Ltd. (2688) committed 4 billion yuan, Sinopec said in a Hong Kong stock exchange filing yesterday. A fund backed by Tencent Holdings Ltd., Asia’s biggest listed Internet company, is investing 10 billion yuan, according to the filing.
The deal comes amid a push by the Chinese government to restructure state-run companies and allow markets greater sway in resource allocation. The Sinopec retail business runs the country’s biggest network of fuel stations, with more than 30,000 locations, as well as 23,000 convenience stores.
“The retail business is a big cash cow with the potential to increase margins,” Gordon Kwan, head of oil and gas research at Nomura International Hong Kong Ltd., said by phone yesterday. “There is a lot of scope to make the business better.”
Jennifer Hughes, Demetri Sevastopulo and Lucy Hornby wrote for the Financial Times that the sale isn’t much in the way of reforms:
But the deal, announced on Sunday, is far from the opening of the oil sector to outside forces that reformers had sought. Sinopec has ceded no control of its lucrative business while raising funds from a sprawling club of state-owned enterprises, leading private groups, pension funds and other Chinese investors.
The list of investors also includes Haier, a Chinese white goods maker; Hopu, a Chinese private equity group; Bank of China and ICBC, the giant state-owned banks; CICC, a domestic investment bank; and Cinda Asset Management, the state-controlled “bad bank” asset manager.
RRJ, a fund owned by Malaysian dealmaker Richard Ong, stands out as the only non-Chinese direct investor.
About two years ago China said outside capital would be allowed to invest in strategic state sectors – an announcement welcomed by some as opening the door to more private investment in closely held industries.
Sinopec has billed this sale as a prime example of that reform.
Reuters wrote that the oil company is trying to boost its margins:
The deal will boost the value of the low-margin marketing business, bolster the group’s finances and reinforce investment in exploration and production.
Sinopec’s chairman, Fu Chengyu, has previously said the investors are expected to bring in expertise and ideas to improve non-fuel sales at its petrol stations.
Unlike in Western markets, where non-fuel businesses – convenience stores and things like fast food or car washing – can account for more than half of a station’s profits, more than 99 percent of Sinopec’s retail sales come from petrol.
In the past few months Sinopec has signed agreements with multiple Chinese companies to make more use of its petrol stations and provide more services to consumers.
In August the company signed a preliminary deal with internet giant Tencent to introduce digital commerce to the retail arm.
Wayne Ma wrote for The Wall Street Journal that Sinopec’s investors come from a variety of industries:
The investors run the gamut of industries: life insurance, technology, appliance making and juice production, among others. They include a number of companies that already have been announced as Sinopec’s “strategic partners.” One investor is a fund that counts Chinese Internet company Tencent Holdings Ltd. among its shareholders.
More than half of Sinopec’s 25 newest investors are incorporated in China, with the balance incorporated offshore but ultimately related to Chinese entities. Sinopec Chairman Fu Chengyu said earlier this year that the stake would be open to both foreign and domestic investors.
The announcement caps a process that began in February, when Sinopec said it was following directives laid out in November as part of China’s landmark overhaul plan, which called for private companies to play a larger role in a mixed-ownership economy. Sinopec has the largest petroleum sales-and-distribution network in China, based on the number of its fuel stations, which the company pegged at 30,532 at the end of last year. The associated convenience-store network is the biggest in the country, with a footprint 12 times as large as 7-Eleven’s, according to brokerage firm Bernstein Research.
Although Sinopec’s primary operations are in oil refining and sales, those segments aren’t as attractive as other parts of the oil and natural-gas industry. Sinopec could use proceeds from the divestiture to invest in businesses with higher returns such as exploration and production, some analysts have said. Additional funds would come at a crucial time for Sinopec, which is expected to trim spending this year because of a global slowdown in oil demand.
While this might seem like trivial news, anytime a Chinese state-run company changes ownership is interesting. The influx of capital could be seen as moving Sinopec closer to being aligned with market forces. But the Chinese government would likely prop it up if necessary, making it a fairly safe investment. But the risk lies in trying to understand the whims of the Chinese government, which could be a large gamble.
