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ANALYSIS

China Gas boss braces for board row

Liu Minghui is again facing pressure, this time from BJH, which wants more seats at top table

PUBLISHED : Thursday, 01 August, 2013, 12:00am
UPDATED : Thursday, 01 August, 2013, 5:07am

Barely a year since his reinstatement at the helm of China Gas Holdings after a prolonged board power struggle, Liu Minghui again faces the tricky task of handling a prospective fight over management control, balancing the interests of major stakeholders in the firm he co-founded in 2002.

Liu, through his own investment and purchases via China Gas Group - a joint venture between Liu and London-listed energy firm Fortune Oil - has since 2004 been the largest shareholder of China Gas, the nation's largest city natural gas distributor by number of projects.

Liu, who became chairman in April, has raised his stake to 21.1 per cent from 13.4 per cent in the past 30 months, largely via the formation last year of the joint venture partly backed by Daniel Chiu Tat-jung, a son of tycoon Deacon Chiu Te-ken.

State-owned Beijing Enterprises Group (BJG), the sole gas distributor in the city via its Hong Kong-listed unit Beijing Enterprises Holdings (BJH), has also been investing in China Gas as a way to expand its lucrative gas business beyond the nation's capital. China Gas operates 184 city piped gas projects in 21 provinces and municipalities. BJG's investment raises the prospect of a tussle for management control.

BJH has a monopoly in Beijing, selling 7.94 billion cubic metres (bcm) of gas last year to the city that has ambitious goals to raise gas usage and phase out coal to combat air pollution.

BJH also has a 40 per cent-owned joint venture with PetroChina - the nation's dominant gas producer and importer - that operates long-distance pipelines to move gas from fields in the northwest to regions around the Bohai Bay economic rim. They moved a total of 23.72 bcm last year, or 16.5 per cent of the nation's total gas consumption. This relationship gives BJH long-term access to gas resources, a big advantage versus rival distributors in developing new projects.

Since April last year, BJG has been aggressively accumulating China Gas shares, raising its stake from 3.28 per cent to 22 per cent last month, unseating Liu as the largest shareholder. BJG on Tuesday agreed to sell the 22 per cent interest to energy-to-brewery conglomerate BJH, triggering speculation this could be a prelude to a possible injection by BJG of its Beijing gas distribution operations into China Gas in a move that could make it BJH's gas flagship.

Peter Yao Sheng, head of utilities and clean energy research at BOC International, estimated BJH could raise its stake in China Gas to 44 per cent if the Beijing operations were injected into BJH at 14 times their last year's earnings, in exchange for BJH shares. But such a deal will require approval from independent shareholders including Liu.

BJH chief financial officer Jimmy Tam Chun-fai said it would demand more board seats in China Gas, including some "important positions". Currently, only one of six China Gas executive directors came from BJG. Liu and people close to him make up the rest.

Meanwhile, before BJH's move to gain more control over China Gas, China Gas has been in talks to sell more shares to PetroChina's rival, China Petroleum & Chemical (Sinopec) - the nation's second-largest gas producer and the largest fuel stations operator. Sinopec currently owns 4.39 per cent of China Gas. China Gas and Sinopec have also signed a prospective deal to run gas refuelling stations at Sinopec's petrol stations. If realised, China Gas could rapidly roll out gas refuelling stations, one of the fastest-growing segments of its business.

BJH remains tight-lipped on its intentions. Liu declined to comment on whether he has been consulted on BJH's business plan for China Gas and any management control sharing.

"If BJH starts to get aggressive in wanting control over China Gas, Liu may ally with Sinopec to counter BJH's influence," said a gas industry official familiar with China Gas. "Liu is a smart guy, he will try to balance the influence of key shareholders to maximise gains for China Gas."

Just 30 months ago, Sinopec and China Gas' rival ENN Energy jointly launched a US$2.2 billion hostile takeover bid for China Gas, which strongly objected it. The offer lapsed 10 months later.

The bid came a year after a power struggle on China Gas' board, which led to Liu's detention by Shenzhen police on alleged embezzlement of the firm's assets, and his removal from the board. The police found no evidence for a prosecution.

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