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Last week, the central government offered intensive instructions on state-owned enterprises (SOEs) reform, including laying out the tasks and ways of reform and detailed timetable. It has paved the way for further accelerating the reform. Relevant instructions and arrangements recently have also been reiterated in the ten sorts of pilot reforms.
Central SOEs’ M&A and restructure to accelerate
“This year, we will further advance restructure of central SOEs one by one whenever conditions are mature for them. At present, we plan to dispose 345 zombie enterprises within 3 years,” said Zhang Xiwu, deputy head of the State-owned Assets Supervision and Administration Commission (SASAC), at the State Council’s policy briefing held on May 20. Earlier, the Work Plan for Central SOEs to Deepen Reform and Streamline Structure was approved at the State Council executive meeting chaired by Premier Li Keqiang.
“The central government’s frequent instructions on SOEs reform over the last week demonstrated its steadfast determination to promote reform and overcome difficulties. It also means that central SOEs now have clear timetables for the plan of streamlining their structures. And the implementation of SOEs’ M&A and restructure is expected to accelerate,” said Wang Jun, analyst with China Securities. “The 106 central SOEs directly subordinate to the SASAC are the backbones of the national economy, playing major roles in and providing strong support for the economy. Driven by the supply-side reform, M&A and restructure of these 106 central SOEs is expected to speed up.”
Recently, equity transfers of central SOEs are frequently seen in the A-share market. For instance, in less than half a year after China Minmetals Corporation and China Metallurgic Group Corporation announced to merge, China Tungsten and Hightech Materials Co., Ltd. (000657.SZ) and Kingray New Materials Science & Technology Co., ltd. (600390.SH), two companies under China Minmetals Corporation, have pushed forward reform. Kingray New Materials Science & Technology announced on May 19 that China Minmetals Corporation would inject over 18 billion yuan financial assets in the company for restructure; China Tungsten and Hightech Materials on May 13 revealed at the investors’ interactive platform that the company was actively advancing various works for restructure.
On May 20, China Real Estate Corporation Limited (000736.SZ) released its scheme for stock allotment and restructure. The company proposed to purchase part of the equities of six real estate companies under CCCG Real Estate Group Co., Ltd. and China National Real Estate Development Group Corporation at the total valuation of 6,433 million yuan.
On May 23, Jikai Equipment Manufacturing Co., Ltd. (002691.SZ) announced that it will continue to suspend trading, and the target assets for its major assets restructure are assets (equities) of member companies under China Shipbuilding Industry Corporation.
Wang believes that central SOEs’ restructure has shown a trend of combined mode, where merging between key industries, transformation of shell companies and zombie enterprises and combination of extensional M&A and internal reform are the major forms.
With the progress of” three batches”, namely a batch of pillar industries, a batch of large scale groups and a batch of famous brands, the securitization ratio of state-owned assets will be improved significantly. To dispose 345 zombie enterprises within three years expressed China’s determination to cut excessive production capacity. It is extremely urgent to obsolete outdated production capacity and ensure healthy economic development.
Integration of local SOEs carried out constantly
Local supply-side reform and state-owned assets reform have been implemented simultaneously. Most local governments have launched comprehensive approach for supply-side reform and detailed scheme and pilot plan for SOEs reform, specifying the tasks, target and timetable for de-capacity, restructure and securitization ratio of state-owned assets.
In the A-share market, equity transfer of local SOEs becomes extremely intense, like a rising wind and scudding clouds. For example, two listed SOEs in Shanghai recently announced their new moves. According to statement of Shang Gong Group Co., Ltd. (600843.SH) on May 19, it received Notice on Shang Gong’s Calling for Intended Transferee for Its 60 Million A Shares and Related Comprehensive Assessment on May 17 from SASAC of Shanghai Pudong New Area People's Government. Up to April 25, 2016, the deadline of open invitation, there has been one intended transferee in total named as Shanghai Pudong Science & Technology Investment Co., Ltd., which has provided related application materials required in the open invitation announcement, and paid corresponding earnest money. On the same day, Shanghai Material Trading Co., Ltd. (600822.SH) suspending the trading for nearly two months stated that it received a notice from its controlling shareholder Bailian Group. Approved by State-owned Assets Supervision and Administration Commission of Shanghai Municipal Government, Bailian Group proposes to transfer its 29.00 percent equity of Shanghai Material Trading through open call for intended transferee, and the bottom price for transfer is 18.22 yuan per share. The largest shareholder of Shanghai Material Trading will alter after the equity transfer.
Jiangsu Guotai International Group Guomao Co., Ltd. (002091.SZ) in trading suspension launched major asset restructure pre-scheme on May 7. The company will acquire some or all equities of 12 targeted companies under its controlling shareholder Jiangsu Guotai International Group through share issuance and cash. The transaction price is 5,313 million yuan.
In North China, Taiyuan Lionhead Cement Co., Ltd. (600539.SH) on May 29 issued its major asset restructure statement. Suzhou Hairongtian Investment Co., Ltd. and Shanxi Luan Engineering Co., Ltd. are determined as formal transferees by the controlling shareholder Taiyuan Lionhead Group. The two transferees will jointly hold the equity of the listed company held by Taiyuan Lionhead Group.
Zhongtai Securities believed that it is an inevitable way for local state-owned assets to inject and integrate the listed platforms with a purpose of improving asset securitization. Some enterprises eager to listing but not meeting the requirements can only realize listing through shell and asset integration. Referring to injection platform for reform assets of local SOEs, it is worthy to pay attention to the followings: 1) the only listed company belonging to a group; 2) the only listed company in a certain industry of a group, although this is not the only listed platform under the group; 3) subsidiaries, mainly engaged in the same business under a group and having horizontal competition or synergistic effect, need to be integrated.
State-owned assets securitization brings in investment opportunities
Zhongtai Securities also pointed out that, along with constantly deepening reform, the market-oriented merging & restructuring of the SOEs will speed up, and overall listing, integration and restructuring will be a main road for local SOEs. The SOEs reform is likely to achieve substantial progress this year. The central and local SOEs will also step into deep reform, likely to exceed the expectation. In the future, state-owned assets securitization will accelerate, and that of local and central SOEs will be promoted, releasing a huge market space. Based on preliminary estimation, state-owned assets with a scale of 30 trillion yuan will enter in the stock market during the coming years. Opportunities for M&A and restructure, assets injection as well as overall listing introduced by the state-owned assets securitization will attract the market attention.
Based on Guo Fanli, CIConsultingit research director, the SOEs reform will further accelerate, and more zombie enterprises will exist from the market. In the coming years, the SOEs’ blindly seeking for large scale may be solved to some extent. During the restructuring, they will focus more on target quality, not only quantity or scale. Therefore, the overall quality of the central SOEs will possibly improve a lot. In the second half year, de-stock, disposing zombie enterprises, reform pilot will become the key points of the said reform, and investors could invest related listed companies. To this respect, investors can also keep a close eye on listed SOEs in the fields of building materials, cement, steel, coal and shipping. Referring to pilot implementation, attention should be paid to the listed SOEs in Beijing, Shanghai, Guangzhou and Shenzhen.
(APD/XH FINANCE)
