Sinopec Buys, Investors Pay 中石化并购 投资者买单

China’s oil and resource companies have been on a buying binge over the last year, snapping up global assets at what look like relative bargains from cash-strapped global companies under pressure to raise money. Beijing has been paying the bills for most of the purchases so far, but the latest announcement from oil refining giant Sinopec (HKEx: 386; Shanghai: 600028; NYSE: SNP) indicates that China may be testing the waters to see if investors are willing to help pay some of the bill in this global buying binge. If that’s the case, Beijing may soon face some major resistance from its major resource companies’ shareholders, who are likely to question whether Sinopec and other Chinese resource firms are getting good value for their money.

The latest news has seen Sinopec announce it will flood the Hong Kong market with a massive volume of H-shares worth about HK$24 billion, or roughly $3 billion. (company announcement) The new placement of 2.8 billion H-shares is being handled by global investment banking giant Goldman Sachs (NYSE: GS), and is the equivalent of about 17 percent of Sinopec’s current H-share count.

Sinopec said it will sell shares under the placement at a discount of 7.4 percent to Sinopec’s average price over the last 30 days before the announcement, equating to HK$8.45 per share. It said money from the sale would be used for general corporate purposes; but clearly some of the funds will go to help pay for some of its recent string of acquisitions, including its latest deal struck in November to pay $2.5 billion for Nigerian oil assets from France’s Total SA (Paris: FP).

Investors were clearly worried about the new placement, bidding down Sinopec shares 3.4 percent in trading after the news came out, and another 6.4 percent the next day. At their Tuesday close of HK$8.74, the stock actually now trades just slightly above the placement price, and is likely to come under additional pressure as investors fret about future similar placements.

So what’s going on here, since the buying binge by Chinese resource firms is hardly new and has been going on for much of the last 2 years? The trend has seen the size of deals growing increasingly bigger, with oil exploration major CNOOC (HKEx: 883; NYSE: CEO) recently breaking records with its $15 billion agreement to purchase Canadian rival Nexen (Toronto: NXY).

In my view, this latest deal seems to indicate that Beijing may be tiring of paying tens or even hundreds of billions of dollars for all these acquisitions, and wants to see if foreign and even Chinese investors may be willing to shoulder some of the burden. Historically, most of these purchases have been done by the state-run parents of major listed resource companies. Thus even though Sinopec, CNOOC and PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR) often make headlines as the buyers of global assets, it’s really their non-listed, state-run parents that are doing the actual buying and therefore forking out billions of dollars and cash and taking all the risk.

Such deals are great for shareholders of the listed companies, since those shareholders face minimum risk and often benefit if the investments are successful in the future, since the non-listed parents often often end up “selling” such assets to their listed units at very advantageous prices. This new placement by the publicly listed Sinopec may indicate that Beijing wants shareholders to shoulder more of the risk for these resource companies’ global asset purchases in the future, which clearly has investors worried.

China previously tried such a strategy with its major banks, attempting to tap global investors to help recapitalize the banks after their balance sheets became overstretched after a lending binge in 2008 and 2009 during the global financial crisis. In that case, investors rebelled by dumping shares in the banks, forcing Beijing to abandon the policy and to recapitalize the lenders directly through other means.

I suspect that in this case investors will also quickly rebel if China’s major energy and other resource firms try to do more major share placements to fund their global M&A. If that’s the case, look for more new placements from PetroChina, CNOOC and other resource firms in the next few months, putting big pressure on share prices for the entire sector. Beijing will finally realize its mistake when share prices plummet, and resumes its older practice of financing these global M&A deals at the state-run parent company level.

Bottom line: A potential wave of new share placements will put Chinese resource stocks under pressure, as investors balk at the prospect of having to pay for the companies’ global M&A.

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