Sinopec to keep control of marketing unit after stake sale

Focus story by Nurluqman Suratman

SINGAPORE (ICIS)–Sinopec’s sale of a stake worth $17.5bn in its marketing arm will not have any significant impact on the petrochemical maker’s control on its key downstream sales unit or its linkages with the government, analysts said on Tuesday.

The company on 14 September announced that it plans to sell 29.99% its stake in its marketing unit to some 25 investors for yuan (CNY) 107.1bn as part of Beijing’s push to increase private-sector participation in the economy.

Sinopec is China’s largest producer and distributor of refined oil and petrochemical products, with a share of more than 50% in domestic refining capacity and more than 60% in petrochemicals.

Upon completion of the transaction, the petrochemicals major will hold 70.01% of the unit. This sale could be followed by a public listing of the unit which generated CNY35.6bn, or 37% of Sinopec’s overall operating profit in 2013.

The investors in the deal will comprise Chinese technology group Tencent, private conglomerate Fosun and China Life Insurance, according to Zacks Investment Research.

Other investors include Haier, a Chinese white goods maker; Hopu, a Chinese private equity group; Bank of China and ICBC, the giant state-owned bank; CICC, a domestic investment bank; and Cinda Asset Management, the state-controlled bad bank asset manager, the firm said.

The only non-Chinese direct investor is RRJ, a fund owned by Malaysian dealmaker Richard Ong, according to Zacks.

“The deal is believed to set an example as China works toward realising value in its state owned enterprises and improving their performance. However, the deal has not opened up the oil sector to outside forces as reformers had wanted,” it said.

“Even Sinopec has not surrendered any control over its productive business, while raising funds from an extended bunch of state-owned enterprises, leading private groups, pension funds and other Chinese investors,” Zacks added.

Fitch Ratings, meanwhile, said that the transaction does not have any negative impact on Sinopec’s close linkage with the state.

The sale adheres to the government’s directives to increase private-sector participation in the economy and Sinopec will remain strategically important to China through the supply of over 60% of domestic oil products, operation of an extensive domestic refined oil products retail network with 30,351 outlets, and maintenance of substantial oil products storage and logistics facilities, Fitch said.

“In addition, refined oil product prices are still controlled by the state (at refinery-gate level), and Sinopec plays a key role in fuel price control in the country,” it added.

“The sale also does not weaken Sinopec’s control on this key downstream sales unit, as the company still maintains majority ownership and management control. The financial results of the unit will continue be consolidated into Sinopec’s accounts,” Fitch added.

Moreover, the sale of the marketing unit will result in substantial cash inflow for the company that would help fund its ongoing significant capital expenditure, according to the firm.

A public listing of the marketing unit would bring in additional capital, it said.

The Sinopec group has been diversifying its ownership, its subsidiaries and funding sources in recent times.

Sinopec Engineering was spun off last year, while Sinopec has also announced earlier this month that it will inject its oil engineering and oilfield technical services, Sinopec Oilfield Service Corp, into the public listed Sinopec Yizheng Chemical Fibre Co through an asset and share swap transaction involving Sinopec.

This transaction, if approved, will be an effective public listing of Sinopec Group’s oilfield services unit, according to Fitch.

“Transactions of such nature are in line with the government’s overall objective of moving towards a market-oriented economy, but Fitch does not expect the state to relinquish control over strategically important assets in this process,” it added.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections