Tuesday, January 16, 2007
Failed Speculation??? Then What???
Below is pure speculation, which has failed so far too, written for the sake of experience sharing.
During the correction last June when I was looking for bargains, one of the choices was between Sinopec (386) and Shanghai Petrochemicals (386), its 55% owned H-share subsidiary. The odds looked favorable after the prices of both had dropped some 30%, from $5.5 to $3.8 for Sinopec and from $5 to $3.4 for SP, in less than a month or so.
I had come to like refineries that time because I saw the bottleneck on their profitability (or should I say non-profitability), i.e. the arbitrary cap set on product price and consequently the share price, would ease in time. This odd example of 'Chinese characteristic capitalism' (the more you sell, the less money you make?) could not exist forever, as the government knew very well that over-investment and over-production in the economy could not be effectively curbed if energy costs were not fully reflected in the system.
China was obliged to open up the wholesale and retail market for petrochemicals under the WTO, so it's certain a reform in the pricing mechanism would happen. My guess was refineries would be entitled to earn a 'normal' profit, irrespective of crude oil price. This would be somewhat similar to the power industry where the tariff must eventually go up to reflect the coal price, making power plants a good buy too (note: at that time).
The crude oil price wasn't such a big concern to me as Sinopec had enough downstream operations to make use of that oil to lessen the impact.
For SP, I took comfort that it was the largest refinery group and had the most gas stations in Shanghai, two important strategic assets to all petrochemical players, local or foreign.
Now came the speculative part. It had long been rumoured that SP would be privatized as part of the Sinopec reorganization, and that the offer price would be around $5 and involve a share swap (to lessen the financial burden on Sinopec). My wishing thinking was that I'd buy SP and then wait for the privatization to happen, then I'd exchange it for Sinopec shares. That way I could earn both the takeover premium and then the appreciation from Sinopec.
And how wrong I was!
7 months later, Sinopec went up by 70% (against a drop in crude oil price), and SP, only 20%...and no privatization...need to say more?
Actually quite the opposite happened as SP announced in October it would instead undergo A-share reform, floating all domestic shares in Shanghai. I had no idea which egghead came up with the idea (that was 100% against market anticipation) but naturally it was voted down by the A-share minority shareholders, for most of them had bought the shares waiting for a buyout, not a receipt of more shares.
Then what?
It's anybody's guess. Sinopec still needs to simplify its group structure and do away multiple listings of its subsidiaries/associates (btw, the other usual suspects are Yizheng Chemicals (1033) and Sinopec Kantons (934), and especially the latter). The divergence in share price performance of Sinopec and SP has now made the share swap option more appealing to Sinopec and acceptable to its minority shareholders (lesser dilution). A much lower crude oil price may suggest timing is about right, which is more urgent now than 7 months ago, as any positive development in the pricing reform (which nevertheless will lift the price of Sinopec too) will lead to a higher offer. But again nothing may happen or the egghead may think of something ingenious again.
Meanwhile I can only wait. Speculation sometimes can be long and boring.
DISCLOSURE: Unfortunate or not, I still hold 338 at time of writing. I don't hold any 386, 1033, or 934 at time of writing.
During the correction last June when I was looking for bargains, one of the choices was between Sinopec (386) and Shanghai Petrochemicals (386), its 55% owned H-share subsidiary. The odds looked favorable after the prices of both had dropped some 30%, from $5.5 to $3.8 for Sinopec and from $5 to $3.4 for SP, in less than a month or so.
I had come to like refineries that time because I saw the bottleneck on their profitability (or should I say non-profitability), i.e. the arbitrary cap set on product price and consequently the share price, would ease in time. This odd example of 'Chinese characteristic capitalism' (the more you sell, the less money you make?) could not exist forever, as the government knew very well that over-investment and over-production in the economy could not be effectively curbed if energy costs were not fully reflected in the system.
China was obliged to open up the wholesale and retail market for petrochemicals under the WTO, so it's certain a reform in the pricing mechanism would happen. My guess was refineries would be entitled to earn a 'normal' profit, irrespective of crude oil price. This would be somewhat similar to the power industry where the tariff must eventually go up to reflect the coal price, making power plants a good buy too (note: at that time).
The crude oil price wasn't such a big concern to me as Sinopec had enough downstream operations to make use of that oil to lessen the impact.
For SP, I took comfort that it was the largest refinery group and had the most gas stations in Shanghai, two important strategic assets to all petrochemical players, local or foreign.
Now came the speculative part. It had long been rumoured that SP would be privatized as part of the Sinopec reorganization, and that the offer price would be around $5 and involve a share swap (to lessen the financial burden on Sinopec). My wishing thinking was that I'd buy SP and then wait for the privatization to happen, then I'd exchange it for Sinopec shares. That way I could earn both the takeover premium and then the appreciation from Sinopec.
And how wrong I was!
7 months later, Sinopec went up by 70% (against a drop in crude oil price), and SP, only 20%...and no privatization...need to say more?
Actually quite the opposite happened as SP announced in October it would instead undergo A-share reform, floating all domestic shares in Shanghai. I had no idea which egghead came up with the idea (that was 100% against market anticipation) but naturally it was voted down by the A-share minority shareholders, for most of them had bought the shares waiting for a buyout, not a receipt of more shares.
Then what?
It's anybody's guess. Sinopec still needs to simplify its group structure and do away multiple listings of its subsidiaries/associates (btw, the other usual suspects are Yizheng Chemicals (1033) and Sinopec Kantons (934), and especially the latter). The divergence in share price performance of Sinopec and SP has now made the share swap option more appealing to Sinopec and acceptable to its minority shareholders (lesser dilution). A much lower crude oil price may suggest timing is about right, which is more urgent now than 7 months ago, as any positive development in the pricing reform (which nevertheless will lift the price of Sinopec too) will lead to a higher offer. But again nothing may happen or the egghead may think of something ingenious again.
Meanwhile I can only wait. Speculation sometimes can be long and boring.
DISCLOSURE: Unfortunate or not, I still hold 338 at time of writing. I don't hold any 386, 1033, or 934 at time of writing.
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