M&A

Hard sell

Slow progress for ‘Mixed ownership’ reforms

Wang-Xiaochu-w

Wang Xiaochu of Unicom

When China Unicom’s Shanghai-listed shares were suspended on April 5, the company said that details of a restructuring were “imminent”. Six weeks later they are stuck in trading limbo, while the restructuring plan waits for sign-off from regulatory bodies.

Rarely has the disconnect between the promise to allow the market to play more of a role in the state-owned sector and the government’s difficulties in ceding control been clearer. China Unicom is supposed to be a standard bearer for the mixed ownership reform programme. As we reported in WiC247, the plan is to improve corporate governance and operational performance by giving private capital a greater say. But as Beijing News concludes, “If the tangible hand of government won’t let go and intends to continue grasping hold of a company’s fate, then the reform process is meaningless.”

Instead, the newspaper urges the authorities to focus on loosening the relationship so that the SOEs can become “real market players”. But that’s no easy task, as China Unicom’s chief executive Wang Xiaochu has admitted to the Hong Kong Economic Times, acknowledging the challenges in overhauling the company, especially dealing with up to 10 government ministries and commissions at any one time.

“Changing the ownership structure is only one part of SOE reform,” Wang comments. “Much more important is making sure companies are market-oriented operations.”

The trading patterns in China Unicom’s shares in Shanghai and Hong Kong suggest that foreign investors are more sceptical about the impact of the mixed ownership proposals. Unicom’s stock rose 83% in Shanghai between confirmation of the mixed ownership drive in October 2016 and the suspension of trading in early April. Investor response in Hong Kong has been more muted, and the shares have risen just 6.9% over the same period,

There is also confusion about the entities being lined up to buy into Unicom. Commentators had thought the BAT troika (Baidu, Alibaba and Tencent) would be invited to invest and some analysts believe this is still the case, citing regulatory delays because of concerns about internet companies getting a meaningful stake in infrastructure assets.

Others believe the new investors will be Citic Beijing and China Broadcasting Network, a subsidiary of the State Administration of Press Publication Radio, Film and TV (SAPPRFT). Wang himself said recently that China Unicom is already cooperating with SAPPRFT, which holds the valuable 7000MHz spectrum that would make the telco’s jump to 5G considerably cheaper.

The second pioneer for mixed ownership is Sinopec, which launched its own reform programme in 2014 with the sale of a 30% stake in its fuel retail business (Sinopec Marketing) to a group of 25 strategic investors for Rmb105 billion ($15.24 billion). Sinopec’s former chairman Fu Chengyu spearheaded the deal and many thought that further initiatives would wither after he retired in 2015. However, earlier this year the group of investors appointed six banks to advise on a Hong Kong IPO for Sinopec Marketing and last week its board of directors approved the plan. Based on the 2014 valuation and a 25% free float, it could raise as much as $13 billion, making it one of the largest IPOs in recent years.

There is a sense that investors may have missed peak value, unless newer shareholders are prepared to bet on a major boost to retail sales at Sinopec’s petrol stations (which account for a few percentage points of profits, compared to as much as half in gas stations in developed markets). Fu (now retired) predicted as much when he said that “wool will come from the pigs” and that more profit would flow from convenience stores attached to the group’s 30,000-odd petrol stations than drivers simply filling up their tanks.

The government is also moving ahead with another group of candidates for ownership overhaul. According to reports, China National Aviation Corp may introduce private sector players such as Cathay Pacific into its cargo business, while train manufacturer CRRC Corp could invite Fosun and SDIC Fund Management into its investment unit.


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