Talking Point

Step on the gas

Sale of a stake in Sinopec’s retail empire is a game-changer for state firms

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Hard as ice: Fu Chengyu has a tough job steering Sinopec’s reform but is likely the only man for the job

The Chinese have a phrase for enduring hardship: ‘eating bitterness’. Fu Chengyu experienced just such a period during the Great Leap Forward, when food was scarce and his family in Heilongjiang province particularly poor. He reminisced to Global Enterprise magazine that whenever there wasn’t enough food, he ate ice.

Such a background inevitably breeds toughness. Perhaps that explains why Fu was given one of the toughest jobs in corporate China. The veteran oilman – whose career includes a stint in the nineties with ConocoPhilips’ China joint venture – was moved from running CNOOC to Sinopec in 2011.

As regular readers will know, the oil major was the problem child of the state sector, a magnet for public annoyance with the management of SOEs (state-owned enterprises). The image of excess and waste was regularly conveyed in the press. Recall the Rmb12 million ($1.95 million) chandelier purchased for the corporate HQ; the Guangdong general manager’s Rmb2.5 million bill for an evening of Chateau Lafite and Moutai; and even the strange discovery that the firm had built a luxury hotel for its top staff (see issues 26, 104 and 109 respectively).

Sinopec’s former boss, Chen Tonghai, was jailed for corruption in 2009, and it was evident that graft ran deep at this gargantuan firm. Only last year, Reuters got hold of a memo circulated to staff working at its $900 million refinery expansion project in Fujian province. “Project engineering and construction has been a main area for corruption at Sinopec,” it stated. “All members, especially those in key posts, must treasure their positions, stay guarded and resist temptation.”

But in more recent months Fu has achieved something close to the miraculous. He has put Sinopec in the vanguard of the country’s long-overdue SOE reforms. Investors have taken note, driving the oil major’s stock price in Hong Kong up by as much as 40% since early January.

“Sinopec’s reform is so fast that it is beyond my imagination,” was the verdict of Guan Qingyou, a professor at Tsinghua University, writing earlier this month. “We can see Sinopec improve its media image, which of course is inseparable from the measures taken by Fu. Sinopec employs more than one million workers, so the resistance to reform and transformation can be imagined. However, after analysing several aspects, I personally think the ongoing reform and transition will continue to be implemented during the tenure of Fu.”

So what are the key reforms?

Under Fu’s guidance, Sinopec has embraced the new reformist mantra of ‘mixed ownership’ – a concept introduced by Beijing in March (see WiC230). Broadly speaking this envisages improved management of SOEs through the introduction of private sector shareholders and outside expertise.

In Fu’s case he has undertaken one of the boldest ‘mixed ownership’ initiatives yet. Sinopec is in the final stages of spinning off its 30,000 petrol stations and 23,000 convenience stores, and will sell a stake in the new retailing arm known as Sinopec Sales. It plans to sell as much as 30% to a third party in a deal that could fetch $20 billion.

A total of 37 consortia have been shortlisted in the second round of bidding, but according to Nanfang Daily, five or so will make binding offers later this month. The newspaper reports that these include property-to-investment conglomerate Fosun, as well as Tencent, the country’s largest listed internet firm. It adds that Alibaba has decided not to proceed (perhaps owing to a more pressing preoccupation with its own New York IPO also scheduled for this month).

Investors think the move will unlock value at the erstwhile staid group. The hope is that outside shareholders will also help Sinopec Sales to broaden its revenue base. Currently sales of petrol account for 99% of revenues in the division. But at comparable firms overseas, the figure is more like 50%, with merchandise sales (snacks and beverages) and other services (for example, car washing) making a much greater contribution.

Sinopec has already been signing up partnership deals with the private sector. Late last month it announced it will work with Tencent to increase its sales via e-commerce. The ‘online-to-offline’ strategy envisages customers using their smartphones to order goods and services via Tencent that can then be picked up at a nearby Sinopec outlet.

Both sides are positioning it as a win-win. “The strategic partnership with Sinopec Sales allows us to leverage our respective strengths and jointly explore areas including mobile payment, online-to-offline services, map navigation, big data, and so forth in the future,” said a spokeswoman for Tencent.

Another important partner will be SF Express, the top local courier that has seen exponential growth thanks to e-commerce. Its delivery service will help Fu manage the logistics of getting the goods that have been ordered online to the relevant Sinopec retail outlets for collection.

Sinopec will also team up again with ENN, the biggest private-sector distributor of natural gas. The two had partnered in a failed takeover attempt of rival China Gas in 2011. ENN said last month that it had signed an accord to deepen cooperation. ENN is one of the potential investors in Sinopec Sales too.

Other partnerships have been agreed with retailer Ruentex Group, e-commerce firm YHD.com and Taiping Insurance. But Nanfang Daily reckons the Tencent alliance will become the most important of all – especially if it becomes a shareholder in Sinopec Sales. Last month the newspaper asked a Sinopec spokesperson about the upcoming bid, and he could not help betraying his enthusiasm: “We very much hope that Tencent is one of them.”

Certainly there are synergies, thanks to the hundreds of millions of loyal mobile users of Tencent’s WeChat and QQ Messenger services. And as Tencent seeks to battle Alibaba for dominance in e-commerce, a stake in Sinopec’s retail network presents an obvious allure.

At Sinopec’s interim results meeting in Hong Kong last month, Fu went so far as to say that the growth potential of Sinopec Sales – in non-oil related products and services – was a “goldmine” and even predicted that petrol sales could soon become a “sideline”. He forecast the network’s sales could grow by 20 times as it expanded its offerings and capitalised on the expertise of partners like Tencent and SF Express.

Long overdue?

In an article in July, CBN noted that the largest SOEs had put in woeful performances in recent years. It calculated that the top dozen state firms had wiped almost Rmb10 trillion off their market capitalisations since 2007 (with PetroChina and Sinopec the worst two offenders).

However, the advent of the mixed ownership reforms has led some prominent investors to predict a new dawn.

Earlier this year Zhao Danyang said that he saw the changes as a “tipping point” that will usher in “China’s largest-ever bull market”. Having liquidated his entire A-share portfolio six years ago, Zhao announced his funds were buying again. This got a lot of attention, given Zhao’s reputation for financial savvy (he once donated $2.11 million to charity to have lunch with Warren Buffett, see WiC22).

Indeed, the Shanghai Morning Post reports that the example Zhao cited for the coming turnaround was Sinopec – the value of which he calculated (in March) to be “completely underestimated”.

All the noise suggests that a concerted effort is underway to change the way state firms are run. Another good example was the recent directive from President Xi Jinping that salaries of top SOE executives should be cut by half and their perks curtailed. There was political capital to be derived from this, admits Wang Xiangwei, editor of the South China Morning Post: “This will prove very popular with mainlanders who have long complained the executives are overpaid.” But he sees an economic dimension too: “It signals the start of what promises to be a difficult task to tackle the state sector and turn major state firms into modern enterprises with better oversight and more professional management.”

Indeed, the thrust is likely to be towards more independent boards and management with remuneration more greatly weighted towards share options and performance (see WiC234).

The hope? That the era in which the SOEs were associated with inefficient and corrupt bureaucratic fiefdoms will be replaced by corporate structures run by more able executives. What is happening at Sinopec could be an early indicator of the new stance on personnel policy, for instance. According to the standard rules, Fu shouldn’t be in charge of Sinopec – having already reached 60 in 2011, the mandatory retirement age for SOE bosses. But the reformers felt he was the candidate best able to shake things up, so instead had the rule waived.

Guan Qingyou of Tsinghua emphasises the importance of that decision. He reckons investors will remain confident of Sinopec’s reform direction while the forceful Fu remains in charge.

Any other signs of change in the oil sector?

Significant too was a recent decision to give an oil import quota to Guanghui Energy, a private sector firm based in Xinjiang (see WiC47). The move will allow it to bring 200,000 tonnes of oil into China from its fields in Kazakhstan.

The quota isn’t huge – less than a third of China’s daily oil imports, calculates Reuters – but it is another step towards cracking the stranglehold of the big state firms.

21CN Business Herald says it coincides with another trend – a reduction in overseas purchases by the state oil firms, and a stepping up in activity by private sector players. For example, in late August Rongsheng Heavy Industries spent HK$2.18 billion ($280 million) on oil rights in Kyrgzstan. 21CN points out that at least six other privately-owned entities – such as Fosun – have made similar purchases since the second half of last year, with the oilfields mostly in Central Asia.

Also noteworthy is that Brightoil bought Anadarko’s stakes in two Bohai Bay fields last month. Its partner in this China-based venture is state-owned CNOOC. Having spent just over $1 billion on both stakes, Brightoil has also earmarked $3 billion for future upstream oil and gas acquisitions.

More sceptical voices?

While the reformist agenda looks to be moving at a rapid clip, others are more cautious about whether the mixed ownership experiment will work as well as many seem to hope. Well-known financial writer Wu Xiaobo is one of the dissenting voices. He thinks that offering minority stakes to private sector players won’t be the silver bullet for state enterprise reform. Wu worries that the consortia will not have large enough shareholdings to overrule decisions and will generally remain beholden to the current managements at the SOEs. He thinks these shareholders will have an experience not unlike “being beaten up behind closed doors”. The new investors are likely to suffer in silence, he says, because complaining publicly might drive down the value of their holdings and harm their own interests.

Later this year we will find out which consortia will be sharing the new stake in Sinopec’s retailing arm but Wu is right that it will take far longer to assess whether the mixed ownership concept has succeeded.

The next couple of years could well be the toughest of Fu Chengyu’s career.


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