Banking & Finance

Filling the gap

China’s first ‘private sector petrol station’ IPO raises questions


Ready to welcome Heshun?

We all know the story of David and Goliath (though in Malcolm Gladwell’s version David was always the likelier victor). Over in China, Hunan Heshun Petroleum, a private sector petrol station operator, is the underdog that has sought to take on the state-owned giants CNPC and Sinopec.

Heshun Petroleum operates about 30 petrol stations in Hunan, a populous province with more than 7,000 filling stations. Yet after obtain regulatory approval last month to go public, Chinese media outlets reckon the minnow will become the first listed oil retailer to take on the state behemoths.

Heshun’s chairman Zhao Zhong certainly knows a thing or two when it comes to cultivating government relations. A few years back he admitted to bribing Zhao Wenbin, former deputy Party boss in Xiangtan city on behalf of his company. Government official Zhao was sentenced to 13 years in jail for corruption as a result. Heshun’s Zhao, however, seems unaffected by the trial as his company has just received approval from the China Securities Regulatory Commission (CSRC) to go public on the Shanghai Stock Exchange.

Local media have been debating the situation. To say that China’s press is sceptical about the Rmb927.6 million ($132 million) IPO would be putting it mildly. Firstly, most articles point out that Zhao, his wife and son own 84.47% of Heshun’s shares. As comments, “there’s a risk that the major shareholder will harm the company and minority shareholders’ interests by virtue of his controlling stake”.

There are also questions over how the petrol station operator managed to increase its net profits by a “miracle” twelvefold between 2014 and 2017. Its operating revenue only increased by 43% over the same period. Moreover, its IPO prospectus is still based on 2017 data.

The CSRC gave its stamp of approval for the listing after a pre-IPO audit hearing in December. Heshun was asked to address a number of issues. The CSRC’s list of questions queried not only Heshun’s concentrated ownership structure, but also its rapidly increasing profits. The stock market watchdog also questioned how it was able to report a gross profit margin higher than its competitors and why there was a simultaneous increase in revenues at all of its 30 petrol stations.

Yet according to Sina Finance, Heshun has been been positioning itself as the “first private-sector petrol station operator” to go public.

The majority of Heshun’s petrol stations are located in Changsha, the capital of Hunan province. Domestic newspapers find the profit increases especially odd, given that smaller operators tend to slash prices and report lower margins in order to compete against the state majors.

In 2018, CNPC and Sinopec controlled just over 50% of the filling station market between them. And that partly explains why the petrol station IPO that equity investors have been most eagerly waiting for is Sinopec Marketing (see WiC484). The spin-off received State Council approval to IPO in early 2019.

At the time, company officials suggested Sinopec Marketing might achieve a $60 billion valuation and go public in Hong Kong. The deal has yet to materialise, but the company itself continues to refine its business model, diversifying into areas like coffee sales. Last year, it hooked up with Yum China to open restaurants at its petrol stations too.

This year, Sinopec has expanded into food delivery via its EasyJoy app. Customers worried about the coronavirus can order online and then receive vegetables, touch-free, straight to their car boots when they fill up with petrol. If the experiment in Beijing and Hangzhou is successful, the scheme will be rolled out nationwide.

As for Heshun’s IPO, the level of scepticism it has triggered on social media is best summed up by a netizen who commented: “I run a 10 square foot stinky tofu stall in Hunan. I plan to raise Rmb80 billion from my IPO.”

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