In 2014 there were two events that triggered a rethink on risk appetites in the Chinese financial markets. The authorities broke with the so-called ‘Beijing put’ by allowing bond issuers to default for the first time. And a lossmaking state-owned enterprise (SOEs) was booted out of the stock market.
The first SOE to suffer that fate was Nanjing Tanker. The bulk freight unit was part of the huge logistics firm Sinotrans, but that didn’t stop the Shanghai Stock Exchange from kicking it off the bourse after it posted consecutive years of losses (see WiC227).
Shanghai-listed Huadian Energy may now be heading for the same fate, should it fail to avert another consecutive year of hefty losses.
It was shackled with the inglorious “ST” tag by the Shanghai bourse after racking up losses of Rmb1.89 billion ($275 million) over the last two years. That implies “special treatment” is needed to return the company to profitability – or delisting beckons.
Formerly known as Heilongjiang Power, it was the first SOE from the electricity sector to go public in 1993. A decade later, it became a key unit of China Huadian, one of the top-five electricity conglomerates backed by the central government. But neither the powerful parent nor that early start in the capital markets has prevented it from running into financial trouble.
To a degree, the Heilongjiang-based firm’s fortunes have mirrored its struggling provincial economy in the northeast, which has registered the worst GDP growth in the country, because of its greater reliance on rustbelt industries.
The power firm’s profitability was also curtailed by stricter environmental rules, reckons news portal Jiemian, and its market value has plunged from a high of Rmb28 billion ($4.05 billion) in mid-2015 (at the height of a stock market bubble) to just over Rmb3.5 billion this week.
The company’s problems have also been attributed to poor managerial decisions – either by its own executives or those of its parent (in many SOEs the two are largely the same group of people).
A case in point, according to a financial blogger who publishes on the Baidu-run Baijiahao platform, was a connected transaction with China Huadian in 2012.
The acquisition in question saw Huadian Energy pay Rmb48.7 million to its parent for a 57% stake in Harbin Power, a lossmaking and debt-ridden unit that had net assets of less than Rmb5 million. That meant the deal was valued at more than 16 times Harbin Power’s book value, and Baijiahao says the addition of another lossmaking unit weighed heavily on Huadian Energy’s bottom line.
Huadian Energy’s sister firm is in better shape. Formerly known as Shandong Power, Huadian International has been the group’s strongest unit in recent years. The Shanghai and Hong Kong-listed firm is based in Shandong (the third biggest provincial economy after Guangdong and Jiangsu) and it has expanded nationally through the injection of better quality assets from its parent, including clean energy businesses involved in wind power. As of Wednesday, its market value was more than Rmb35 billion.
Having the ST tag hanging over it might help Huadian Energy get a little more love from its senior shareholder. Over the years a slew of powerful SOEs have undergone similar special treatment and survived, including the likes of Angang, China Cosco and Chalco.
In fact delistings are relatively rare in China. Based on the calculations of WallStreet.cn only 114 A-share firms have been delisted in the last 29 years (including those that have been taken private or merged with others). From 2001 to 2018, the delisting ratio was a tiny 0.38% of the total A-share firms, versus 9% on Nasdaq.
What’s more there was only a handful of SOEs among this group (admittedly, definitions of whether a firm is a state enterprise can be contentious).
And not all delistings are deadly either.
Even Nanjing Tanker made a comeback after Sinotrans put it through a major restructuring and returned it to profitability. That persuaded the Shanghai bourse to approve Nanjing Tanker’s relisting bid last year.
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