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Sinopec's $17.4bn retail stake sale disappoints

The sale was long-awaited, but in the end the move failed to attract investors

Investors have been left disappointed after state-owned Sinopec's long-awaited sale of part of its fuel-marketing business brought in less cash than expected and failed to attract the sort of strategic investors needed to help boost the business. Sinopec sold a 29.99% stake in its retail division to a group of 25 companies for 107.1 billion yuan ($17.4bn).

The company billed the sale as a major step forward for the government's reform agenda, which aims to turn its large state-owned enterprises into more competitive market-oriented businesses. But this deal casts doubt over how deeply the reforms will change the company and how much the stake sale will help lift the company's fuel-marketing business.

Sinopec is by far China's largest fuel seller with a network of more than 30,000 service stations. But the company has not taken advantage of a shift that has been underway in the US and Europe for years, which has seen petrol station operators switch their focus from fuel sales to non-fuel sales, where profits are higher. Because of Sinopec's market dominance, it earns much higher margins on fuel sales than its Western peers, making the shift less urgent for the company. 

Nevertheless, retail sales remain a multi-billion dollar opportunity the company has yet to tap, even as China's growing middle class has started spending its wealth more freely. The company's marketing division earns less than 1% of its profits from non-fuel sales, compared with as much as 80% for station operators around the world. Analysts hoped Sinopec would bring in the sort of investors that would help it seize this opportunity. 

That looks unlikely. Most of the 25 buyers are Chinese financial firms more interested in steady cash flow than helping re-shape the business. The list of investors includes ICBC and Bank of China, two of the country's largest state-owned banks, as well as state-owned insurance companies, the state-owned tobacco monopoly, a major steel company and a host of private equity firms and asset managers. No major foreign investors took part in the sale.

Two notable potential strategic investors among the list are Tencent, a major Chinese tech company, and ENN Energy. Tencent could help bring mobile payments to Sinopec's petrol stations as well as offer the oil firm a way into China's booming e-commerce. ENN's expertise lays closer to home for Sinopec. It has a rapidly growing network of natural gas-fuelling stations and could bring that experience to Sinopec's much larger service-station network. Before the sale Sinopec also announced an agreement with one of China's largest logistic firms, SF Express, that could also help expand the business.  

Also worrying for investors is that the business, which also includes a network of fuel pipelines and storage tanks, sold for far less than many analysts had predicted. Bernstein Research, which had been positive on the reform, had estimated the company would bring in as much as $22bn from the sale. This valuation was based on a relatively optimistic view of the company's ability to ramp-up retail sales that not all investors shared. However, the price was more than the $15bn that analysts at Jefferies, an investment bank, had said the stake was worth.

Sinopec is likely to use proceeds from the sale to pay down debt racked up in recent years as the company bought up up oil- and gasfields around the world, as well as to accelerate investment in its domestic upstream projects, especially in unconventional gas. "Sinopec's sale of their fuel marketing business tilts the company towards the upstream, which is a key goal of management," Bernstein analyst Neil Beveridge wrote in a note to investors. 

Analysts at Jefferies warned clients that they view the stake sale as a 'stealth equity raising' in the guise of reform. They have argued that the company may be planning to use the funds to buy upstream assets at inflated prices from the non-listed Sinopec Group parent company.   

As the first major test of president Xi Jinping's state-owned enterprise reform drive the sale also disappoints. A key component of that reform is to expand the 'mixed-ownership' model, which aims to open China's huge state-owned businesses to outside investors. It also aims to allow more investment and competition into strategic sectors such as energy, where the government has held a tight grip. 

This sale achieves none of those aims. Sinopec has opened the retail division to more investors, but it is not giving up any control of the business. The largest single shareholder aside from Sinopec will hold a 2.8% stake and there are too many companies with too many diverse interests to effectively drive reform.  

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