Review and outlook of M&A activities in China’s energy industry in 2019 Bucking the trend: Integrated, smart, sustainable energy investments April 2020 0 Methodology Source of data (Power & Utilities Section) • The data presented in this section is based on information collected from ThomsonReuters, Mergermarket, ChinaVenture, Zero2IPO Research, public news and PwC analysis unless stated otherwise. The deal volume and value (Power & Utilities Section) • The deal volume figures presented in this section refer to the number of deals disclosed, regardless of whether or not the corresponding deal value is disclosed. • The deals mentioned in this section include those with a transaction size that is publicly disclosed in detail. Values are rounded off; Lack of detailed information about transaction size may affect the completeness of this analysis. For transaction size disclosed in the form of divisors shown in the table below, we used the corresponding rounded figures in our calculation and analysis. Disclosed fund raising amount: Converted amount (Rmb) Hundreds of thousands 500,000 Nearly a million 1,000,000 A few millions 5,000,000 Nearly ten millions 10,000,000 Tens of millions 50,000,000 Nearly a hundred of millions 100,000,000 Hundreds of millions 500,000,000 • Deal values in the report are presented in Rmb billion unless stated otherwise. In order to exclude foreign exchange impact, deal values are adjusted to the RMB mid-market exchange rate announced by the Bank of China on the deal announcement dates. Source of data (Oil & Gas Section) • The data presented in this section is based on information compiled by Mergermarket, public news and PwC analysis unless stated otherwise. • The deal values in this section are presented in USD1 million unless stated otherwise. • The deal volume figures presented in this report refer to the number of deals disclosed, whether or not a value is disclosed for the deal Investment types • Deals are categorised as follows: − “Domestic” means that the investor and the investee are both located in Mainland China, Hong Kong or Macau − “Outbound” relates to Chinese investors, including Hong Kong and Macau, investing in overseas targets − “Inbound” relates to overseas investors investing in targets located in Mainland China, Hong Kong or Macau 1 Industry description Description of power industry sub-sectors • This report categorizes the power industry into the following sub-sectors: − Conventional: Includes thermal power (e.g. coal, gas and fuel oil) and nuclear power − Renewable: Includes hydropower, solar PV, wind power, new energy batteries & energy storage, other new energy power generation (e.g. biomass, waste to energy, geothermal energy and tidal energy), and integrated power generation (i.e. the target company or asset package operates multiple types of renewables) − Transmission and distribution: Includes grid construction investment, and R&D and manufacturing of power transmission and distribution equipment Description of utilities industry sub-sectors • This report categorizes the utilities industry into the following sub-sectors: − Water: Includes raw water, water supply, water conservation, drainage, sewage treatment and water resource recycling − Gas: Includes gas production, transportation and supply. Details on this sub-sector can be found in the coming report on Oil & Gas − Heating: Includes the manufacture of urban heating and industrial heating equipment and the construction and operation of thermal stations − Other: Includes solid waste, hazardous waste, domestic waste treatment, and other municipal public services Description of Oil & Gas industry sub-sectors • This report categorizes the Oil & Gas industry into the following sub-sectors: - Upstream: exploration and production - Midstream: transportation and storage of oil and gas products - Downstream: oil refining and petrochemicals, gas purification, distribution and sales of final products (incl. city gas) - Supply chain: equipment/engineering services/technology related The above classifications are based on PwC’s understanding of the industry’s policies and regulations, deal characteristics, and future development trends of the industry. They do not represent industry standard classifications. 2 Content Section 1 — power industry Overview of 2019 M&A in the power industry 5 Key data at a glance 6 Power M&A market review in 2019 7 Top 10 M&A deals by value in 2019 10 Domestic M&A 11 Outbound M&A 13 Inbound M&A 15 Investment outlook and insight 16 Conventional energy 17 Renewable energy 19 Power transmission and distribution 21 Investment outlook and hotspots 22 Section 2 — utilities industry Overview of M&A in the utilities industry in 2019 24 Key data at A glance 25 Utilities M&A market review in 2019 26 Water 29 Heating 31 Investment outlook and hotspots 33 Section 3 — oil and gas industry 2019 overview of M&A in oil and gas industry 35 Key data at A glance 37 2019 oil and gas industry M&A market review 38 2019 top ten oil & gas deals 40 Domestic M&A 41 Outbound M&A 44 Inbound M&A 46 Natural gas 48 Investment outlook and hotspots 54 Contact us 3 Section 1 Power industry M&A overview 2019 4 Overview of 2019 M&A in the power industry • According to PwC’s recent M&A Market Review of 2019 and Outlook of 2020, the overall M&A deal value of Chinese companies in 2019 fell by 14% to USD558.7 billion, marking the lowest level since 2015. Despite the slowdown in M&A activity in most industries, deal value in the power industry soared 21% for an approximate deal value of USD32 billion. • In our analysis of deals data, we came across the following key characteristics that surfaced from the recent M&A investment activities in China’s power industry: Integrated energy services that fulfil diversified reductions through technology upgrades and business energy production and consumption became the scaling, while putting companies under capital and key area of investment in 2019 operating pressure. In the long term, however, investors will continue to be optimistic about the quality of China’s • With the acceleration of energy transformation and power renewables sector. system reform, integrated energy services that fulfill diversified energy production and consumption have • The conventional energy industry has become less become the focus of energy investment in 2019, engaging attractive to investors due to marketization of the power investors especially among state-owned and leading industry; policies and restrictions; rising environment international energy groups. protection costs; and competition from wind and solar power. As a result, deal value plummeted to the lowest • According to deal data disclosed in 2019, two of the top level of the past four years, from Rmb52.6 billion in 2018 ten deals involve integrated energy services, signaling the to Rmb15.9 billion in 2019. industry’s interest in exploring and deploying integrated energy services. The COVID-19 epidemic has brought challenges to the emergency response system of traditional • Integrated energy services blur the boundaries between cities. This may encourage investment in smart city different energy sectors. They not only include construction relating to automation, digital comprehensive supply of end products (air conditioning, heat, electricity, steam, etc.), but also promote technologies and services complementarity among different energy types. At the • More than 500 green smart city projects have been same time, they emphasize the integration of energy proposed or are under construction as part of the internet, distributed energy technology, smart grid Government Work Report and the 13th Five-Year Plan, of technology and energy storage technology, enhancing the which around 290 cities have already been selected as flexibility and integrity of energy production, transmission, pilots. storage, and consumption. • At the beginning of 2020, the outbreak of COVID-19 M&A activity soared in renewable energy, while caused city shut-downs and regional isolation, which made plunging in the conventional energy sector apparent the importance of stable and flexible power supply in the event of disasters. At the same time, it reflected the • With the ongoing energy transformation, M&A in necessity of promoting smart city construction. renewable energy continues to rise. Disclosed deal volume and value of renewable energy in 2019 accounted • In the process of constructing smart cities, technologies that for 84% and 70% of total deals in the power industry. can improve the intelligence and automation of infrastructure, These were mainly photovoltaic, wind power and new such as the Internet of Things, advanced distributed and energy vehicle battery-related investments. energy storage, and big data will be prioritized. • As subsidies to the renewable energy sector in China have gradually been phased out, the industry will shift from a policy-driven to a market-driven model. In the short term, the decrease in subsidies will incentivize cost 5 Key data at a glance Power industry Total deal value in 2019 Total deal volume in 2019 Average deal value in 2019 Rmb 222.9 billion 386 Rmb 0.7 billion Y.O.Y Up 21% Y.O.Y Down12% Y.O.Y Up 46% Deal value and volume by investment types in 2019 Most active sub-sector Renewable Energy (Rmb billion) Domestic Outbound Inbound M&A M&A M&A Renewable energy 358 20 7 ~84% 165.1 Most active investor State-owned enterprises (SOEs) SOEs 57.4 ~44% 0.3 Note: The average deal value is calculated as the total disclosed deal value/number of deals with disclosed