Sinopec Bullish Bets at Three-Year High on Stake SaleKana Nishizawa
Traders in China Petroleum & Chemical Corp. options are betting reforms to loosen restrictions on private investment in state enterprises will prove a boon for the shares of Asia’s largest refiner.
Investors expect Sinopec will extend this year’s 12 percent surge through yesterday as it sells assets after Chinese Premier Li Keqiang pledged to allow non-state funding in oil and power projects as part of the broadest reform package since the 1990s, according to Steven Leung, director of institutional sales at UOB-Kay Hian Holdings Ltd. in Hong Kong.
A 30 percent stake in Sinopec’s gas station unit could fetch as much as $30 billion should it be sold to private investors, people with knowledge of the matter have said. That would make it the biggest-ever asset sale by a Chinese-state enterprise and has helped push the cost of bullish options to the highest level since 2010 relative to puts, according to data compiled by Bloomberg.
“Investors are trying to gear up their positions, that’s why they’re going for call options,” Leung said on April 17. “People are waiting for more details of the restructuring plans to come out, so there should be a lot of investors trying to build up long positions.”
The company said on Feb. 19 that its board approved a plan to explore a restructuring of the retail unit, which operates a network of more than 30,000 fuel stations, the nation’s largest. Sinopec will start inviting outside investors by the end of June, Chairman Fu Chengyu said on a conference call with analysts last month.
Sinopec is working with Goldman Sachs Group Inc. on the sale of the retail-assets stake, people with knowledge of the matter said. The New York-based bank was the sole manager of the refiner’s $3.1 billion share offering in Hong Kong last year, according to data compiled by Bloomberg. Sinopec’s Beijing-based spokesman could not be reached for comment.
China’s government on Nov. 15 unveiled a broad slate of policy changes as part of its Third Plenum meeting of senior leaders, including a pledge to deepen market reforms such as increased private investment in state-controlled industries.
“The Third Plenum reforms promised to improve management at state-owned enterprises through shareholding reform,” said Laban Yu, a Hong Kong-based analyst at Jefferies Group LLC. “The idea is that broadening the shareholder base to include private and social capital will introduce stakeholders who will push for returns and efficiency. If this maneuver is part of Third Plenum reforms, shareholders will benefit.”
Call options cost the most since December 2010 relative to bearish wagers. Bullish contracts with an exercise price 10 percent above Sinopec’s share price cost 3.1 points more than puts betting on a 10 percent drop on April 16, according to two-month data compiled by Bloomberg.
Waning Chinese growth may limit stock gains, according to Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co. The nation last week reported first-quarter economic expansion that slowed to the weakest pace in six quarters, and preliminary data on April manufacturing released yesterday signaled a fourth month of contraction. New credit fell in March and money supply grew at the slowest pace on record, other reports showed.
“The big catalyst for Sinopec is reform” of the retail segment, Beveridge said in phone interview on April 16. “Spinning off this division is a way for Sinopec to unlock a lot of hidden value. The risk in the near term is that China’s economy remains weak.”
The HSI Volatility Index, which measures the cost of options on the Hong Kong gauge, slid 5 percent to 14.14 today, the lowest level since Jan. 22.
Traders hold more bullish Sinopec wagers than bearish ones. The ratio of outstanding puts giving the right to sell the stock versus calls to buy was at 0.79-to-1 yesterday, near the lowest since January 2006, according to data compiled by Bloomberg. The four most-owned contracts were bullish, with calls betting on a 2.3 percent gain by the end of May accounting for the largest open interest, the data show.
The 17 percent advance of Sinopec’s Hong Kong-listed shares since the restructuring announcement in February through yesterday compared with a 0.7 percent slide for the benchmark Hang Seng Index and a 1.5 percent decline for the Hang Seng China Enterprises Index. The stock trades at 8.9 times estimated earnings, compared with 13.4 for Exxon Mobil Corp. and 11.5 at Chevron Corp.
“There are expectations Sinopec’s valuation will surge,” Alex Wong, asset-management director at Ample Capital Ltd., said by phone on April 15. “The spinoff of its downstream oil business is the first step of China’s reforms” to open state-owned enterprises to private capital, he said.