Escaping China's Parent Trap
A myth about Chinese state firms is that their closeness to Beijing means they have little incentive to stray beyond the Middle Kingdom.
That's far from the case. Britain's utilities hold special allure for Chinese overseas expansion, as demonstrated first by the Hinkley Point nuclear deal, and now the interest in National Grid's asset sales.
Despite the Brexit vote that hammered the pound and investment returns, National Grid is finding no shortage of foreign bidders in the sale of its gas-distribution networks. In the fray along with Macquarie, Allianz and the Hong Kong tycoon Li Ka-shing are the acquisitive Shanghai conglomerate Fosun and, interestingly, China Resources Gas, a state company that to date has been mainly domestic.
The gas distributor, part of the giant China Resources state-owned enterprise, is hoping to get from these networks what everyone else is seeking amid the global hunt for yield: stable cash flows.
There's more at stake, though. The Chinese bids, including China General Nuclear Power's involvement in the first U.K. nuclear project in 20 years, also get state utilities away from the vagaries of their home market. A $15 billion-plus British acquisition would offer China Resources Gas risk-adjusted returns.
Utilities like National Grid; Li Ka-shing's existing electricity network (acquired from France's EDF six years ago); and the Hinkley project are governed by regulations that determine long-term payouts. In the nuclear deal, for example, Britain has agreed to guarantee twice the current market rate for every megawatt-hour of electricity for as long as 35 years.
Even Hong Kong, the base for Li's Power Assets electricity provider, has a so-called scheme of control that stipulates the level of returns. (Whether his Cheung Kong Infrastructure, which already controls gas distribution in Northeast England, will be allowed to win the National Grid battle is quite a different matter.)
In China, however, there are what one U.S. analyst dubbed schemes of no control. Utilities, like other state companies, are called to national service when it suits the government. Benefits can change suddenly -- as famously illustrated more than a decade ago when Citic Pacific, part of state-owned Citic Group, had a guaranteed annual return of 15 percent on its Shanghai toll roads scrapped as the government decided to boost traffic.
Last month it was the turn of CGN, the investor in Hinkley: Its Hong Kong-listed unit struck a deal to buy two nuclear plants and an engineering unit from the parent for 9.92 billion yuan ($1.47 billion) in cash. Citigroup said that with debt included the price rose to 22.6 billion yuan, or 20 times projected earnings, and reiterated its sell call on CGN, which currently trades under 14 times.
Although China Resources Gas has done well out of Beijing's push away from coal, sales are tapering off at home. The firm also could be called on to do its duty.
With state backing for funds, returns ultimately are less important for Chinese state buyers of U.K. utility assets than their lack of risk.
Some U.K. politicians have accused the Chinese of a Trojan Horse strategy. With the utilities, though, most of the hiding is from their own government.
To contact the author of this story:
Nisha Gopalan in Hong Kong at firstname.lastname@example.org
To contact the editor responsible for this story:
Paul Sillitoe at email@example.com