Reform of China’s sprawling state-owned enterprises is generating assignments for investment bankers, from restructuring advice to combing the globe for potential investors.
On Tuesday, Chinese officials named healthcare giant Sinopharm and conglomerate China National Building Materials among the next wave of SOEs seeking private investment, underlining how the government is now stepping up its efforts to reform the country's bloated state sector. Investment bankers seem only too ready to help.
Chinese banks such as China International Capital Corp. (CICC) have home advantage but foreign players also look set to land lucrative contracts.
“SOE reform means a more positive long-term outlook for investment bank activity in China,” Bill Nichol, head of Deutsche Bank’s Asia Pacific Financial Institutions Group and global head of insurance, told FinanceAsia in an interview.
China’s Communist Party is embracing private capital investment in its state-owned companies in the hope that mixed ownership will help make these linchpins of the Chinese economy more efficient, reduce leverage and keep the country growing at a steady clip.
President Xi Jinping first unveiled his plan to court private investment at the Communist Party leadership's Third Plenum in November. Asset sales at centrally governed industrial giants quickly followed – along with assignments for banks.
Asia’s biggest oil refiner Sinopec, for instance, picked Bank of America Merrill Lynch, CICC, Citic Securities and Deutsche Bank in April to help it find investors for 30% of its retail arm which operates over 30,000 petrol stations and 23,000 convenience stores. The stake could be worth more than $20 billion, according to researchers at Barclays.
Game changer
For banks, helping in the reform of SOEs could be a game changer after three consecutive years of falling fees in the Asia-Pacific region.
Bankers made millions of dollars advising on the last big wave of Chinese privatisations between 2003 and 2010, advising on such landmark deals as the $3.5 billion initial public offering of China Life shares in Hong Kong and New York and Warren Buffett’s $488 million investment into PetroChina.
“Chinese SOEs could become as important a client group as they were back in the noughties,” said Russell Julius, head of banking across Asia Pacific at HSBC, one of the most entrenched foreign banks in China.
The potential investment banking-fee pie from SOE reform is massive. There were 113 SOEs controlled by the State-owned Assets Supervision and Administration Commission (SASAC) at the end of 2013 and a further 145,000 or so are under local government control.
“Many smaller SOEs are about to enter a challenging and competitive world so [they] are reviewing their business models afresh,” Wei Sun Christianson, co-chief executive of Morgan Stanley in Asia excluding Japan, said in an interview with FinanceAsia.
Home advantage
International bankers hustling for M&A and capital-raising mandates face tough competition from Chinese institutions, which have long-standing lending relationships with SOEs and contacts at regulators.
Beijing-based conglomerate Citic Group accredited its own affiliates Citic Securities International and China Securities International with its share sale to 27 institutional investors.
“This could be Chinese banks’ moment in the sun,” said one foreign banker based in Hong Kong, who declined to go on the record promoting his competitors.
CICC was among the banks picked by Sinopec to help it find strategic investors for its retail arm.
“In short, we see the reform and restructuring of large industry players as our big opportunity and we are preparing for more roles,” a Beijing-based senior CICC executive told FinanceAsia in a phone interview.
Chinese bankers often charge less for advice than foreign bankers, so for simpler deals they are again the natural choice.
Chinese bankers also have another advantage – greater access to the fast-growing number of Chinese billionaires with money to invest. China had 157 billionaires in 2013, second only to the US. These nouveau riche have accumulated a total wealth of $384 billion, according to UBS, a private banker to the wealthy. UBS said that 89% of Chinese billionaires are self-made and 10% of their assets are liquid.
According to some bankers, many SOEs prefer this ready billionaire cash to the structured investments with built-in protection that foreign companies often demand.
“Compared to the last big wave of privatisations there is much more domestic wealth now, so the natural bias to use Chinese banks is reinforced by the fact that many potential investors are onshore,” Deutsche’s Nichol said.
Foreign bankers are working on overcoming this hurdle partly by explaining to SOEs that foreign strategic investors often come with industry expertise and could help their prospective Chinese partners expand overseas.
“Foreign banks can offer huge value,” said Morgan Stanley's Christianson. She noted that many of China’s SOEs are listed on overseas stock markets and therefore need to communicate their businesses to overseas investors and win their support.
No easy sell
To be sure, some industries such as the auto sector and some jurisdictions such as Shanghai are embracing change faster than others -- as are the country’s larger, centrally governed SOEs.
Bankers also face the challenge of overcoming investors’ worries about lumbering SOEs. Private sector company shares included in the MSCI China index have outperformed state-controlled firms’ stocks by 325 basis points since 2009, according to analysts at HSBC.
"Most of these projects are capital-intensive and likely to have low returns and long pay-back periods," David Cui, a strategist at BofA ML, said.
Bankers need to allocate resources carefully – as some reform plans could yet come to nothing.
If key decision makers retire or rotate jobs then restructuring could also grind to a halt. For example, Sinopec’s chairman Fu Chengyu is already over the usual retirement age in China of 60 and some bankers say reform could stall when he steps down. SASAC regularly rotates key people around senior management and party positions.
Also Beijing’s anti-corruption drive has many bankers complaining that their SOE contacts keep leaving. Among SOEs, 31 senior executives, including 20 chief executives, have been sacked due to losses or corruption during the latest purge, according to state-run daily newspaper the Beijing News.
However, bankers are confident that China's reforms are slowly gathering pace and will bring in extra revenues over time.
“Not so much a spike but steady growth across many areas; such as helping in the development of a fixed income capital market and advisory work on restructuring,” said Deutsche’s Nichol.
