Sinopec asset plan shows Hong Kong regulators are as meek as ever

When Sinopec's asset acquisition plan leaked, regulators did not push the matter, but a local firm would expect much sterner treatment

PUBLISHED : Saturday, 16 February, 2013, 12:00am
UPDATED : Saturday, 16 February, 2013, 6:47am

When it comes to the mainland or any major state-owned enterprise, it is amazing how slow our Hong Kong regulators can be.

I cut and pasted that lead paragraph from one of my 2009 columns.

Given what we have seen with China Petroleum & Chemical Corporation's recent share placement, I think there's a good chance it will continue to apply in the future.

On January 31, The Wall Street Journal reported that the Hong Kong-listed company, also known as Sinopec, would buy upstream oil and gas assets from its state-owned parent, quoting "two people familiar with the matter".

The report is specific on the time - April. It is specific on details - the price of US$8 billion and the fact that the targeted assets are in Britain, Russia, Colombia and Kazakhstan.

The company, however, remained silent.

Then, at 10.54pm on February 4, one trading day after the Journal's report, Sinopec announced it had made a private placement.

The refinery giant had sold 2.8 billion shares, or 17 per cent of its H-share total, to raise HK$23.9 billion for "general working purposes".

Investors were shocked, puzzled and disappointed. This is because instead of a general offering of shares, in which all shareholders could take part, the company had chosen to make a private placement to no more than 10 investors.

These privileged few also enjoyed a deep discount. The stake was sold at a discount of 9.5 per cent from the last closing price, or 7.5 per cent from its 30-day average price.

As a result, each existing shareholder suffered a 3 per cent dilution of the value of his or her holdings.

There are many questions to be answered.

Why now? Given Sinopec's improving cash position over the past six months, the timing seems unusual.

Why HK$23.9 billion for general working purposes?

Why a private placement? A limited number of buyers results in poor price discovery and a deep discount.

Who are the lucky few? They have pocketed a chunk of state assets at the largest discount seen in the placement of state-owned enterprises in the past 10 years.

Naturally, at an 8.30am conference call with analysts the following day, company management was bombarded with all these questions.

Their answer was that they wanted a quick deal.

Interestingly enough, the analysts' concerns have not been translated into a downgrading of the stock.

Of six research reports issued by international brokerage firms after the placement, five rated Sinopec a buy, with target prices ranging from HK$9.50 to HK$10. Sinopec's shares closed at HK$8.72 yesterday.

All eyes are on the asset injection to come.

"Sinopec's decision to make a selective offering at a large discount is a major disappointment to minority shareholders and us alike," one analyst said. "Nevertheless, the key question is what to do with the stock going forward … The asset injection should be a positive catalyst."

That's the tone in all six reports.

Why did the analysts take the asset injection as a given when the company announcement said the funds raised were for general working purposes? None of them cited any confirmation from the conference call.

One of the reports said under the heading of "Conference call take-away": "General purposes, but asset injection is part of the consideration … Sinopec may acquire the parent's assets in due time after the placement."

The rest referred to the asset injection as their expectation, forecast or belief. Will it happen? Nobody knows.

It has been more than a week since these speculations. Sinopec has so far stayed silent.

The only thing for sure is that whoever leaked the plan to the press has provided support to the firm's share price, which fell for five trading days, losing 7.7 per cent before rebounding 1.2 per cent yesterday.

The lucky few who secured shares in the placement are sitting on an HK$800 million paper profit, or a return of 3.3 per cent.

It is hard to imagine a mid-cap company being allowed to say nothing under similar circumstances. The regulator would call the company as soon as the press leaks information about a deal, and request an announcement that day.

Why was the response so different in the case of Sinopec? Is it because our regulators dare not call up a state-owned giant with a boss who is of ministerial grade?

Or has everybody now accepted the notion that "this is the Chinese way", despite Hong Kong's pledge to be an open international financial market?

My favourite explanation is this one from an investment banker: "I guess the acquisition has been so widely reported by the press that the regulators no longer consider it price-sensitive or insider information."