HONG KONG: State-controlled oil giant Sinopec Corp on Sunday unveiled a plan to sell a $17.5 billion stake in its retail business, marking the country's biggest privatisation push since President Xi Jinping came to power almost two years ago.
The sale is a reflection of the government's wish to restructure the country's many sprawling state-owned enterprises.
PetroChina, the nation's No.1 energy producer, has divested part of its pipeline business, raising billions of dollars from domestic institutional investors.
The sale also highlights Sinopec's hope that the presence of outside investors would be a catalyst for growth and reform at its currently low-margin retail business.
Sinopec's retail unit will issue new shares to a group of 25 largely deep-pocketed financial companies like insurers and funds and raise 107.1 billion yuan ($17.5 billion), the company said in a filing with the Hong Kong and Shanghai bourses.
The investors will get a combined 29.9 percent stake in the unit, which comprises a wholesale business, more than 30,000 petrol stations, over 23,000 convenience stores, as well as oil-product pipelines and storage facilities.
Each investor would not hold a stake exceeding 2.8 percent.
Sinopec has vowed to use the sale to bring in expertise and ideas to boost its non-fuel businesses which include convenience stores and services such as fast food and car washes.
Unlike the West, where non-fuel revenue can account for more than half of a filling station's profits, over 99 percent of Sinopec's retail sales come from petrol.
Some analysts say a lack of retail names on the investor list highlights the challenge of achieving any quick turnaround in Sinopec's non-fuel business.
The presence of private equity firms also presents a risk in which they may exit the business when Sinopec lists the subsidiary in a couple of years.
Leading investors on the deal include one of China's biggest asset managers Harvest Fund Management Co Ltd, which will pay 15 billion yuan for a joint stake with its subsidiary Harvest Capital Management. China Life Insurance and a consortium including People's Insurance Group of China Co Ltd and Tencent Holdings Ltd are each taking 10 billion yuan stakes.
Other investors include Fosun International, China gas supplier ENN Energy Holdings Ltd and white goods maker Haier Electronics Group Co Ltd.
Asia private equity firm RRJ Capital, founded by former Goldman Sachs and Hopu Investment Management dealmaker Richard Ong, is among the foreign investors in the deal with a 3.6 billion yuan stake.
THE SCEPTICS
"The addition of private-sector capital is highly complementary to a state-owned business," Sinopec Chairman Fu Chengyu said, adding that the investors would help "accelerate the reform" of the retail unit.
Sinopec has signed agreements with multiple Chinese firms this year to expand the spectrum of services offered by its petrol stations.
The companies include Tencent Holdings, delivery service firm S.F. Express, retailer Ruentex Group, e-commerce firm YHD.com and Taiping Insurance Group.
But it is no easy task.
While Sinopec boasts the world's largest single-country retail network, analysts say the profitability of the Chinese convenience market is hindered by fierce competition as well as rising labour and rental costs.
The stake sale plan has been viewed by sceptics as largely a response to Beijing's policy drive to scale down the monopolies controlled by state-owned enterprises and promote private investment in the world's second-largest economy.
Some also view it as an attempt by Chairman Fu to cash in on a volume-driven, low-margin, and perhaps, deteriorating business and raise capital to repair the firm's battered balance sheet.
Sinopec's marketing business has been a relatively stable and major source of profit for the group.
But the division has suffered a decline in earnings in recent years due to slowing fuel demand growth and cost inflation.
Sinopec needs capital to bolster its finances and reinforce investment in exploration and production, analysts say.
Shares of Sinopec tumbled in Hong Kong and Shanghai on Monday morning on profit-taking after the announcement of the stake sale, which Sinopec said represented a more than 20 percent premium to the book value of the business.
The shares have gone up sharply since late February when Sinopec announced its stake sale plan. (Reuters)
