China Unicom share sale to set the ball rolling for China’s state-owned firms

The 78 billion yuan (HK$91.5 billion) share sale by China United Network Communications Group, or China Unicom, the country’s second-largest mobile carrier by subscribers, marks the first step in the government’s efforts to rejuvenate State firms with private capital and create investment opportunities through mixed-ownership, say experts.

And judging by the response, the government could not have asked for anything better. It managed to line up 14 big shareholders to inject funds to the State-owned firm. Among those who queued up for the 35.2 per cent stake in Unicom, were industry bigwigs like Alibaba Group Holding, Tencent, Baidu, Suning and JD.com, five companies that have a combined market valuation of almost US$1 trillion between them. Alibaba owns the South China Morning Post.

Despite the brouhaha about the share sale and China’s successful launch of the mixed-ownership reforms, some analysts expressed doubts about the plan.

At issue is how the National Development and Reform Commission, China’s top planner, plans to execute the step-by-step restructuring of a phone company with more than 250,000 employees for the 21st century.

“This is yet another example of crossing the river by touching stones, and a comprehensive plan has not been set in stone yet,” says Aidan Yao, senior emerging Asia economist at AXA Investment Managers in Hong Kong. “Hence, the transparency is low. But as the reform reaches the implementation stage, more information will come forth. And as more companies are being reformed, a process will gradually formulate and become apparent to the market. Right now, they are probably only just dipping their feet in the water, and have not even started crossing the river yet.”

Meanwhile shares of China United Network Communications and its Hong Kong listed entity China Unicom, both surged by more than 10 per cent on Monday, as the group cleared the final regulatory hurdle for its restructuring plan.

The Shanghai listed CUNC surged by its daily limit of 10 per cent to 8.22 yuan, while Hong Kong listed China Unicom closed 3.5 per cent higher at HK$12.4, after giving up some gains in the afternoon.

Part of the reason why some analysts are sceptical about the success of plan could be due to the huge number of ailing state-owned enterprises in China and their colossal debt burden.

At the third Plenum of the Chinese Communist Party’s 18th Congress, it was decided to reform sick state enterprises with a view to making them robust once again. Last year the government came up with the idea of introducing private capital into state-owned sectors to create stronger conglomerates capable of competing on the global stage. As part of this it was decided that China Unicom would pilot the mixed ownership restructuring.

“Restructuring of a telecom firm is a very special case, in which I see more chances of profit increase, rather than decrease, because of the expected synergies with China’s best technology companies,” said Iris Pang, an economist for the Greater China region with ING in Hong Kong.

“In the case of downstream industries, it would be difficult to attract interest from investors. In some cases, even the injection of private capital and technological know-how would not be enough to stage a turnaround.”

Chine United Network Communications and China Unicom had both announced their restructuring plan to the bourses last Thursday. However, China United Network Communications withdrew its filings on the same day citing technical reasons, which it did not elaborate.

Analysts, however, said such a move was necessitated as there were chances of a potential violation of the China Securities Regulatory Commission’s requirement that private placement of shares should be capped at 20 per cent of a company’s original total equity ahead of the placement and that the placement price should not be decided ahead of the placement issuance.

China Unicom’s plan entailed a placement ratio of 42.63 per cent of the original total equity and set the offer price at 6.83 yuan per share.

But on Sunday night, the CSRC said it would make China Unicom “an exceptional case” and exempt it from the rigid requirements.

“The CSRC has carefully studied the decision and arrangement made by the Party’s leadership and State Council regarding pushing forward state-owned enterprise reform, and has deeply understood the pilot significance of China Unicom’s restructuring.”

After fulfilling related legal procedures, authorities will make the private placement deal proposed by China Unicom an exceptional case, and amend the rules,” the statement said.

Though the CSRC move on Unicom has faced flak from investors, analysts said the mixed ownership reform is an unprecedented task, which makes transparency low at this stage, regarding the decision making on specific restructuring structure, and the selection of private investors.

State firms engaged in power generation, ship building, equipment manufacturing and energy are next expected to come up with their reform plans, according to a timetable issued by the National Development and Reform Commission late last year.