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 deal value The deals volume by investor type does not reconcile with total deals volume because of a transaction with undisclosed investor type in 2019. This was therefore excluded from the investment type classification.
6 Power M&A market review in 2019
M&A in the power sector by deal value and volume (2016-2019) (incl. domestic, outbound and inbound deals)
Power — Deal value and volume by energy type (2016-2019)
(Rmb billion)
Avg. disclosed 0.5 0.9 0.5 0.7 Value:
476 400 455 500 438 450 350 386 400 300 66 350 250 300 6 200 52 250 346 10 150 252 200 162 150 100 219 122 223 184 155 100 50 50 53 51 28 - 16 - 2016 2017 2018 2019
Power — conventional Power — Renewable Power–Transmission and distribution Total deal volume
Note: In 2017, the total value of deals with a single size> Rmb10 billion was approximately Rmb174.6 billion; after excluding the impact of deals with a single size> Rmb10 billion, the annual deal value was stable.
2019 Top 5 Power subsectors by deal volume 2019 Proportion of lead investors by deal volume
Foreign companies, Undisclosed, New energy batteries & 97 1% 3% energy storage
Solar PV 88 PE/VC funds, 19%
Other new energy power 43 SOEs, generation 44% 41 Wind power Private companies, Thermal power 39 33%
Source: ChinaVenture, ThomsonReuters, Zero2IPO Research, Mergermarket and PwC analysis Note: The deal value figures refer only to those deals where a value has been disclosed
7 Power M&A market review in 2019
M&A activity at a glance
• M&As in the power industry outperformed the overall market: According to PwC’s recent M&A market review for 2019 and outlook for 2020, the overall deal value of Chinese companies’ M&A fell by 14% to USD558.7 billion, marking the lowest point since 2015. The value of M&A deals in the power industry, however, increased 21% with a total disclosed deal value of Rmb222.9 billion in 2019. This is ahead of the entire M&A market (down 14% in 2019). The number of disclosed deals for the year was 386, a drop of 12% compared to 2018
• The average deal size in the power industry climbed: In 2019, we saw multiple M&A deals above RMB10 billion. Transactions included the acquisition of Sempra Americas Bermuda Ltd.’s power grid assets in South America by China Yangtze Power Co., Ltd. and State Grid China Co., Ltd.; and the privatization of Huaneng Renewables Corporation Limited (listed in HK) of China Huaneng Group Co., Ltd. These large-scale deals drove the average deal value in the power industry up from Rmb500 million in 2018 to Rmb730 million in 2019.
• Continuous transformation of energy structure: With the transformation of the domestic energy structure, deals in the renewable energy sector have remained active. The 2019 volume and value of deals in renewables accounted for 84% and 70% respectively of the overall power industry M&As. The activity of conventional energy deals has decreased significantly, from Rmb52.6 billion in 2018 to Rmb15.9 billion in 2019.
• SOEs have become the mainstay of M&A in the renewable energy sector: small and medium-sized companies are facing cash flow challenges from grid parity pressure and delays in subsidy payout. At the same time, SOEs have been given more investment autonomy thanks to the issuance of the State Council’s Notice on Printing and Distributing the List of Authorization and Decentralization of SASAC of the State Council (Version 2019). SOEs with sufficient funds and resources have successively upgraded their energy structure by investing in domestic and foreign renewable energy power plants, moving a step closer towards becoming international leaders in sustainable energy.
8 Power M&A market review in 2019
M&A in the power sector by deal value and volume (2016-2019) (incl. domestic, outbound and inbound deals)
Power — Deal value and volume (2016-2019) (by investment types)
(Rmb billion) 431 408 392 165 157 149 146 358
Domestic
42 41
38 197 Outbound 20
61 57 37
6 7 5 3
Inbound 1 1
0
2016 2017 2018 2019
Deal value — Domestic Deal value — Outbound Deal value — Inbound Deal volume
Source: ChinaVenture, ThomsonReuters, Zero2IPO Research, Mergermarket and PwC analysis Note: The deal value figures refer only to deals with disclosed values
M&A activity at a glance (cont’d)
• Domestic M&A is the main investment type in the power sector, accounting for more than 90% of deal volume in 2019. The scale of investment increased steadily in 2019, reaching its highest point in recent years. The renewable energy sector continued to be in the investment spotlight — particularly new energy vehicle battery and solar PV.
• After excluding the outlier impact of two deals of over Rmb10 billion in power transmission and distribution, the volume and value of outbound deals dropped significantly compared to previous years. Technical investments in new energy vehicle batteries and energy storage took the lead. This shows that domestic energy companies have started to seek intellectual property and brand acquisitions in addition to the traditional pursuit of overseas technology breakthroughs.
• With the partial lifting of the ban on foreign investments in China’s renewables sector since 2019, the deal volume of inbound M&A grew significantly on previous years. Financial and cross-sector investors played a major role, in addition to international energy companies.
9 Top 10 deals by value in 2019
Top 10 deals by value in 2019
Investor Investment Deal value Deal Date Investor Target Industry type Type (Rmb Billion) Power Outbound transmission and Power distribution and other assets 09/30/2019 China Yangtze Power Co., Ltd. SOE distribution/ 25.4 of Sempra Energy in Peru Renewable energy
China Life Insurance Company Limited, ICBC financial assets investment Co., Ltd, ABC financial assets investment Co., Ltd,Guoxinjian credit equity investment fund, State Power Qinghai Yellow River Hydropower Renewable 12/10/2019 SOE Domestic 24.2 Investment Corporation, Zhejiang Development Co. Ltd. energy Yuneng Energy Development Co., Ltd, Yunnan energy investment capital investment Co., Ltd and Goldstone Investment Limited
Power Power distribution assets of Sempra 10/14/2019 State Grid China Co., Ltd. SOE transmission and Outbound 15.8 Energy in Chilquinta Energía in Chile distribution Huaneng Renewables Corporation Renewable 09/02/2019 China Huaneng Group Co., Ltd. SOE Domestic 14.4 Limited energy Power 12/15/2019 State Grid China Co., Ltd. SOE Oman Electricity transmission and Outbound 7.0 distribution CGN Energy International Holdings Renewable 01/22/2019 SOE Enel’s new energy assets in Brazil Outbound 5.3 Co., Limited energy
State Grid Energy Saving Service Co., Ltd , Zhongtian Technology Group Co., Ltd. , Jiangsu Frontier Electric Power Technology Co., Ltd. , Shenzhen SOE/ State Grid Jiangsu integrated energy Integrated 12/26/2019 Domestic 5.1 Jiyuan Integrated Energy Technology Private service Co., Ltd energy service Service Co., Ltd , Qingkong fanneng (Jiangsu) Technology Development Co., Ltd and Daqo Group Co., Ltd
Yunnan Huadian Jinsha River Renewable 12/30/2019 China Yangtze Power Co., Ltd. SOE Midstream Hydropower Development Domestic 4.9 energy Co., Ltd. Tianjin B&M Science and Technology Renewable 04/20/2019 Zhejiang Huayou Cobalt Co., Ltd Private Domestic 3.2 Joint-Stock Co., Ltd. energy Guangdong Hengjian Investment Integrated 12/20/2019 SOE East Group Co.,Ltd Domestic 3.1 Holding Co., Ltd. energy service
• In 2019, large-scale deals were concentrated in the cross-border power transmission and distribution sector and the renewable energy sector. Two deals involving integrated energy services indicate growing interest on the part of investors. • SOEs continued to be the main players in large-scale deals. China Yangtze Power Co., Ltd. and State Grid China Co., Ltd. remained active in the M&A market in 2019.
10 Domestic M&A
Domestic M&A in the power sector by deal value and volume (2016-2019)
Power — Domestic M&A by deal value and volume (2016-2019)
(Rmb billion)
Avg. disclosed 0.4 0.4 0.4 0.6 value:
250 431 408 392 200 358
3 3 6 150 2
100 113 106 122 146
50
40 37 21 16 - 2016 2017 2018 2019
Power — Conventional Power — Renewable Power — Transmission and distribution Total deal volume
Domestic power M&A deal investors in 2019 2019 top 5 active sectors of domestic power M&A (by deal volume) by deal volume
Others, 9%
Business services, 13% New energy vehicle battery 88 Investment in Power Real estate and industry, Solar PV 81 construction, 3% Investors in 41% 2019 Manufacturing, Wind power 38 9%
Thermal power 38 Financial, 21% Technology, Other new energy power 4% 37 generation
Source: ChinaVenture, ThomsonReuters, Zero2IPO Research, Mergermarket and PwC analysis Note: The deal value figures refer only to deals with disclosed values
11 Domestic M&A
M&A activity at a glance was the most popular. Affected by the phase-out of subsidies for new energy vehicles, the number of deals in 2019 1. Market activity decreased slightly compared to the previous three years (113 in 2016, 97 in 2017, and 92 in 2018). However, in January In 2019, there were 358 power-related domestic deals in 2020, Minister of Industry and Information Technology Miao China, with a total value of Rmb165.1 billion, the highest Wei announced that the phase out of subsidies will since 2016. In terms of sub-sector, investments in temporarily decelerate in 2020. Activity level in new energy conventional power, renewable energy, and power vehicle battery M&A, as a result, may pick up in 2020. transmission and distribution accounted for 11%, 84% and 5% respectively. The deals market in solar PV and wind power remained active in 2019 (a total of 119 deals), focused largely on power Average deal value in 2019 (Rmb570 million) was slightly plant deals. In the whole year, there were 83 deals made up higher than in the past three years. The majority of deals of 51 solar PV power stations and 32 wind power stations. were in the Rmb100 million to Rmb1 billion range.
2. Investor type “Subsidies and the uncertainty of payment are the 41% of domestic power deals in 2019 were carried out by biggest risks of power plant investment at present. investors from within the power industry, down from the 2018 level of 45%. At the same time, we observed that, with However, with the coming of ‘grid parity’ age, the the rise of integrated energy services, cross-sector investment return on power plant will be more investors from the business service and technology predictable and stable, which will stimulate the industry have shown growing interest in the supply side investment interest. Solar and wind power of power distribution (such investments accounted for industries will be completely transformed to market- 17% of the total) based competition in the future with enormous SOEs were the mainstay of domestic M&A, driven by growth prospect. Leading companies in the wind factors such as 1) cash flow challenges resulting from grid parity pressure and delayed payout of subsidies faced by small power and solar industries are expected to further and medium-sized power plants; and 2) investment autonomy expand their market share due to scale effects, and of SOEs granted by newly established policies. SOEs with backward capacity will be phased out after the sufficient resources have managed to successfully upgrade retreat of subsidies. ” their energy structure through M&As in the domestic market.
3. Major sub-sectors Sunshine Law Firm ERE Research Center Among power sub-sectors, new energy vehicle battery supply
12 12 Outbound M&A
Outbound M&A in the power sector by deal value and volume (2016-2019)
Power — Outbound M&A by deal value and volume (2016-2019)
(Rmb billion)
Avg. disclosed 1.9 6.0 1.2 4.8 value:
250 42 41 38
200
61 150 20
100
130 3 50 48 7 48 15 15 - 11 6 9- 2016 2017 2018 2019
Power — Conventional Power — Renewable Power — Transmission and distribution Total deal volume
2019 outbound investment destination by deal volume 2019 Top 5 Outbound M&A subsectors by deal volume
New energy vehicle battery 6
Others, Belt & road Solar PV 5 30% counties, 35% Power transmission and 3 distribution
Wind power 2
Hydropower 2
UK, 10% USA, 10% Germany, 5% Brazil, 10%
Source: ThomsonReuters, ChinaVenture, Mergermarket, Zero2IPO Research and PwC analysis
13 Outbound M&A
M&A activity at a glance 2. Major outbound market 1. Market activity Of the 20 outbound M&A deals that took place in 2019, seven In 2019, there were 20 outbound M&A deals in the power were investments in countries along the Belt and Road with industry, with a total deal value of more than Rmb57.4 billion. deal value totalingRmb10 billion. In addition, there were two The number of deals was less than half that in 2018. After investments in the US market, all of which were in new excluding the two megadeals (> 10bn), the total value of energy vehicle batteries and energy storage technologies. disclosed deals (Rmb16.2 billion) in 2019 was more than 60% lower than 2018. 3. Major sub-sectors
The volume and value of outbound deals declined By sub-sector, new energy vehicle batteries and energy storage significantly. Amid political tensions on cross-border M&A were the most popular industries for outbound M&A. Overseas and Sino-US trade friction, the volume and value of outbound solar PV and wind power stations were also hot spots for M&A dropped significantly, especially in the conventional investors’ overseas market expansion and resource allocation. power generation sector. However, this may not be the case for outbound investment in the renewables sectors in the 4. Megadeals years to come. As single deal transactions are small scale, The two megadeals (>10bn) that occurred in the power there is little political scrutiny. Also, Chinese companies have transmission and distribution sector in 2019 were the separate been motivated to seek core technology, intellectual property purchases of Sempra Energy’s power distribution assets in and brands in overseas markets in recent years to achieve Peru and Chile by Yangtze Power and State Grid China Co., technological breakthroughs and leapfrog development. Ltd., respectively. Sempra Energy is listed on the New York Stock Exchange in the US. The above two deals are indications that SOEs are expanding into overseas markets. After the initial layout of overseas power plants and integration of power transmission, distribution and sales will follow.
14 Inbound M&A
M&A activity at a glance Disclosure of inbound M&A activities was limited. There were seven deals in 2019, with a disclosed value of Rmb321 million, a decline from 2018. Most of the inbound deals were in the renewable energy sector, with a disclosed deal value of Rmb318 million. Some of the medium and large sized deals include: • Shah Capital Opportunities Fund’s increase of its holding of new shares of Renesola Zhejiang Ltd. with Rmb78 million; • ITOCHU Corporation’s investment in 20% of the shares to subscribe for the third-party private placement of Shenzhen Pandpower Co., Ltd., a recycling technology service provider for vehicle batteries; • BP group’s investment in series-A financing of PowerShare, a start-up company for China’s electric vehicle charging platform. Compared with previous years, 2019 witnessed more direct and indirect participation by foreign financial investors in inbound M&A deals. Of particular note is Powershare, the first direct investment in China by BP using its venture capital platform, BP Ventures. This also reflects foreign companies’ close attention to the domestic energy sector and the continuous innovation in deal structures for them to realize desirable deals.
business listed in the new industry into the domestic market. The industrial catalogue, which draft further encourages companies in includes various types of fields such as complete vehicles and renewable energy power stations; parts, the Internet, data and PwC Views district energy projects powered communications to form alliances in by renewable energy; and developing the full value chain of construction and operation of key power batteries. 1. Key drivers components, charging stations 3. Opportunities and challenges We believe that the gradual and battery replacement stations • According to the state development implementation of policies in the for new energy vehicles. The “domestic renewable energy sector, plan, China aims to achieve grid parity revised policy not only shows the and phase out subsidies for solar and abundant renewable energy resources, government’s determination to wind power by 2020. In January 2020, and international layout of overseas promote foreign investments, but the National Energy Administration companies and funds have driven also significantly relaxes the released a construction plan for wind overseas companies’ mergers and restriction on access for foreign and solar PV power generation projects acquisitions in the Chinese market. companies. The policies encouraged in 2020. The plan will promote the 2. Policy review foreign capital inflow into construction of affordable grid- environmental protection and energy • In order to promote the development connected projects, prioritizing support saving, advancing manufacturing and of renewable energy, the government for voluntary conversion of wind power high technologies. has been providing support through a projects that have been connected to series of policies, including direct • In July 2019, the NDRC and the the grid or projects that require national investment subsidies or policy Ministry of Commerce issued the financial subsidy during the valid preferences, tax incentives and Special Management Measures period. This reform, in the short term, reductions, and low-interest loans. (Negative List) for Foreign will affect the profit margins of wind The most direct and effective is the Investment Access (Version 2019). In power and solar PV power generation, national direct subsidy policy, which the list, except for construction and but in the long run it will set the market- has attracted many domestic and operation of nuclear power stations oriented new energy sector on a foreign investors to the renewable which must be controlled by Chinese sustainable path. energy sector in recent years. companies, there are no limitations • Relaxation of regulations and on the power industry. This list • On June 30, 2019, the National incentives from the government have demonstrates China’s determination Development and Reform encouraged collaboration between to continue opening up the market. Commission (NDRC) and the foreign and Chinese companies in Ministry of Commerce published the • In December 2019, the Ministry of energy projects. For example, Catalogue of Industries for Industry and Information Technology É lectricité de France S.A. became Encouraging Foreign Investments (MIIT) issued the New Energy Vehicle the first foreign company to invest in (2019 version), which significantly Industry Development Plan (2021- China’s offshore wind power in April lowered the threshold for foreign 2035) (draft), which outlines the goal of 2019. Oil and gas giants and non- investment. The new edition fostering new advantages through energy companies around the world encourages foreign companies to international cooperation and are actively seeking investment invest in electric power-related competition while integrating global opportunities in renewable energy as 15 part of their business transformation. Investment outlook and insight
Outbound M&A
We expect the following features in outbound M&A in 2020: building up their in-house R&D, but have also been • In the context of the ongoing tension between China keen on importing core energy technology from and the US, the US continues to enforce security overseas. Companies have also been shifting the focus scrutiny of Chinese companies’ investments in the of their overseas investments to brands and advanced US, which may lead to rising uncertainties for Chinese technologies in an aim to reduce cost. investments in technology-related industries in Europe • While SOEs continue to play an important role in and US. This may further impact large-scale deals in the driving large to medium outbound M&As, diversified energy industry. investors such as private companies and industry • As an important promoter of the Belt & Road Initiative funds will also come into play. While SOEs are (BRI), China has entered into energy partnerships with usually better placed in terms of resources to engage in 30 member countries, indicating that transnational high-barrier outbound M&As, private companies and energy cooperation is still a key focus. In the medium to investment funds can share in investments in the wind long term, the Chinese government will likely continue to and solar energy sector, due to the moderate investment support domestic companies investing overseas. size and considerable profitability in these areas. Chinese enterprises may expand their market in • As the power transmission and distribution sector has underdeveloped Belt & Road regions by promoting abundant power stations deployed overseas, we expect power grid interconnectivity projects and providing subsequent M&A activities in integrating the comprehensive solutions. transmission and distribution along the upstream or • In response to the pressure and challenges created by downstream segments of the industrial chain. grid parity, Chinese companies have not only been
Domestic M&A
We expect that domestic M&A will grow steadily: • From the top ten M&A deals in the power industry in • Due to the outbreak of the COVID-19 epidemic, 2019, we note the emergence of the power industry in businesses across the country have been suspended to integrated energy services: the acquisition of East Group various degrees, which has resulted in considerable Co., Ltd by Guangdong Hengjian Investment Holding losses for power and energy related industries. However, Co., Ltd.; the investment in State Grid Jiangsu we believe that the epidemic will enhance society’s Integrated Energy Service Co., Ltd led by Zhongtian disaster awareness and preparedness, and the power Technology Group Co., Ltd. and Jiangsu Frontier industry will further explore and innovate its current Electric Power Technology Co., Ltd. both signal the heavy asset structure to become more risk resilient. power companies’ strategic rollout in integrated energy services. At the same time, investors in the professional • Investments in sub-sectors, such as wind power and services and Internet-related sector have also started solar PV, as well as new energy mobility will remain seeking opportunities in integrated energy services active. The delayed payout of subsidies in the domestic thanks to the inclusive and multi-dimensional nature of renewable energy sector might continue to be an issue. this sector. In line with the country’s advocacy of It may create ongoing financing and cash flow energy efficiency, we expect a continued boom in challenges for small to medium-sized investors, which integrated energy services investments. will further limit their investing activities in renewables. In light of policy relaxation regarding SOEs’ investment autonomy, we predict that they will continue to play a leading role in future M&As in the renewable sector.
Inbound M&A
Due to geopolitical tensions, subsidy phase-out and grid offering to enter the market. Examples include the parity, we do not foresee a huge change in the total volume continued penetration by the Dutch oil giant Shell into and value of inbound deals in 2020. Foreign investors (both China’s hydrogen industry and hydrogen refueling stations; strategic and financial) may show sustained interest in and the energy funds established by Apple, Total, etc. in the China’s renewables sector, and therefore continue to Chinese power M&A market. explore innovative deal structure and products/services
16 Conventional energy
M&A in Conventional Energy sector by deal value and volume (2016-2019)
Conventional Energy — Deal value and volume (2016-2019)
(Rmb billion)
Conventional Energy M&A 60 56 55 39 deal volume
60
50 6 18 40
30 - 45 20 35 1 28 10 15 - 2016 2017 2018 2019
Thermal power Nuclear power
PwC Views
“1. M&A Overview The conventional energy sector includes thermal and nuclear power. In the 13th Five-Year Plan for Power Development issued by the NDRC and the National Energy Administration, it is clearly stated that in order to promote clean energy, coal-fired power transformation will be carried out intensively and construction of new coal power plants will be strictly controlled. As the new instalment of coal-fired power plants is restricted, M&A in existing installed capacity has been inactive.
Since 2016, the value and volume of deals in the conventional energy market have been on the decline. In 2019, deal value in this sector hit the lowest level in the reporting period. Specifically, there were 39 M&A announced in the thermal power sector, with deal value totalling Rmb15.2 billion in 2019. Two deals were announced in the nuclear power sector, with an accumulated deal value of Rmb0.7 billion. Compared to 2018, the volume and value of M&A in the conventional energy sector decreased by 29% and 70%, respectively.
Source: ThomsonReuters, ChinaVenture, Mergermarket, PE Data and PwC analysis Note: The deal value figures refer only to deals where a value has been disclosed
17 Conventional energy
M&A Characteristics 2. SOEs continue to play the major role in the conventional energy sector. Business integration has become the major In light of policy support for energy structure transformation, driving force for companies to buy and sell businesses in there has been a strong buyer’s market for conventional this sector. This can be explained by the top-down energy energy. Investors are less motivated to invest in conventional reform that has further reduced the room for additional energy assets and have higher quality standards. These conventional energy capacity. This makes it difficult for trends have led 2019 M&As in the conventional energy sector conventional energy companies to grow from within, to feature discounts in transaction price and concentration in therefore incentivizing them to either restructure or pursue investor types: vertical and/or horizontal integration. 1. The transaction price of deals in the conventional energy 3. Unlike typical cross-border deals in the conventional sector has continued to decline; large state-owned energy sector from 2016 to 2018, only a few took place in enterprises have been drawn to policy-incentivized 2019. Guangdong Yudean Group Co., Ltd. and YTL investment opportunities in the new energy power Power International Berhad invested in Attarat Power generation sector. Apart from the policy orientation, Company in 2016, Chow Tai Fook Group invested in an business performance in many conventional power Australian energy company called Anlinta in 2017, and stations was not promising. Among listed thermal power Taikang Life invested in a nuclear power project in the companies, the average PB ratio was only about 0.7x, with United Kingdom called Hinckley C in 2018. However, further discounts offered in transactions involving transaction volume dropped in 2019, possibly caused by conventional energy after considering unfavorable factors 1) SOEs, which had once been the main force behind such as small power capacity and lack of market demand. overseas conventional power deals, have gradually shifted their investment focus to renewable energy and Types of investors in Conventional Energy sector clean energy; and 2) developing countries that have by deal volume in 2019 become more environmentally conscious, making it more difficult to invest in thermal power green field projects. PE/VC funds, Others, 5% 5% 4. With the start of construction of the Guangdong Taipingling and Fujian Zhangzhou Plants, China’s nuclear power sector showed encouraging signs of activity after three sluggish years. However, M&A volume and value in this sector still remained low in 2019. Deals mainly covered SOEs’ internal asset reorganization. As Private barriers to entry are high in this subsector, and nuclear companies, power is not the focus of energy structure transformation, 27% we expect M&A activity in the nuclear sector to remain broadly stable in the future.
SOEs, 63%
18 Renewable energy
M&A in Renewable Energy sector by deal value and volume (2016-2019)
Renewable Energy — Deal value and volume (2016-2019)
(Rmb billion)
Renewable Energy M&A 300 388 370 362 326 deal volume
250 12 47 200 16 150 20 41 11 7 30 252 10 44 100 63 19 27 162 12 155 26 34 26 50 36 122 72 31 25 41 24 - 15 2016 2017 2018 2019
Hydropower Solar PV New energy vehicle battery Wind power Integrated power generation Other new energy power generation
PwC Views
“M&A Overview Renewable energy includes hydropower, solar PV, wind power, new energy vehicle battery and energy storage, other new energy power generation (biomass, waste to energy, geothermal energy, tidal energy etc.), integrated power generation (the target company or asset package operates multiple renewable energy types).
In 2019, there were 326 announced M&A deals in the renewable energy sector, with an accumulated deal value of Rmb155.4 billion, an increase of approximately 28% over 2018. By subsector, wind power and hydropower deals collectively accounted for 32% of the total deal value in renewables energy, marking an increase of 9% from 2018 and proving that the policy incentives under the 13th Five-Year Plan have been effective. Meanwhile, the new energy vehicle battery and energy storage subsector has also taken a major stake in the renewable energy sector. This subsector recorded 97 deals in 2019, with a deal value of about Rmb25.9 billion, accounting for 17% of total deal value in renewables.
Source: data from Thomson Reuters, Chinaventure, Mergermarket, PE Data and PWC analysis Note: Deal value is calculated on the basis of disclosed value.
19 Renewable energy
Amid continued cost reduction in the wind and solar power 2) The rise of electric vehicles has catalyzed the deals sector, grid parity, and government’s policies supporting energy market along the battery and energy storage value chain, transformation, conventional energy companies have resulting in noteworthy deal volume and values in successively made their way into the renewable energy sector. relevant subsectors. These include lithium batteries, charging pile manufacturing, hydrogen fuel cells, new 1) In 2019, SOEs were involved in 137 deals in this sector, energy charging stations, and used battery recycling. In accounting for 42% of the total deal volume. Specifically, 2017, deal value for this sector increased by 50% year- SOE investors were interested in hydropower stations on-year, followed by a plunge in 2018 due to license and wind farms, mainly in southwestern China such as restrictions and subsidy phase-out. In January 2020, Yunnan, Guizhou, and Sichuan. Major power enterprises however, the Ministry of Industry and Information have been actively rolling out the government’s energy Technology signaled a slowdown of subsidy phase-out, strategies, promoting energy reform from the supply side which is expected to boost the M&A activity in the sector. and expanding the capacity in renewable energy power generation through M&As. This was evidenced by 3) Although the integrated power generation subsector Yunnan Huadian Power Generation Co., Ltd.’s recorded a less significant number in deal volume, its acquisition of Yunnan Huadian Jinsha River Midstream deal value accounted for the highest share in the Hydropower Development Co., Ltd. for Rmb6.1 billion in renewable energy sector. This resulted from the 2019, and Huaneng Lancang Hydropower Co., Ltd.’s continued restructuring of assets and management by the Rmb2 billion payment for an 11% stake in Yunnan top five SOEs in power generation to be better positioned Huadian Jinsha River Midstream Hydropower in the renewables sector, and large outbound megadeals Development Co., Ltd. that usually cover multiple types of power generation.
4) As for the investment model of renewable energy, innovative models are continuously emerging, such as Types of investors in Renewable Energy sector by the “Public-Private-Cooperated” funds; through the deal volume in 2019 cooperation with private capital, SOEs are enabled to access to more projects, while private investors are benefiting from SOEs’ bankroll and technology strengths. Both parties are taking advantages from each other, Others, 25% securing not only the quality of project, but also the future exit path for private capital SOEs, 42%
“Through M&A activities in the renewable energy sector in 2019, we’ve seen SOEs, as the main force in the deal market, established new energy funds that cooperate with private capital… Both parties are enabled to fully display respective advantages and avoid their own disadvantages … In the future, similar structure will be copied and optimized in renewable energy investment.” Private companies, Brian Feng 33% Chief consultant of renewable energy from Tianfeng Tianrui (“TFTR”) Investment, Founder of the Renewable Alliance
20 Power transmission and distribution
M&A in power transmission and distribution sector by deal value and volume (2016-2019）
M&A in power transmission and distribution sector by deal value and volume (2016-2019）
(Rmb billion) 29 100 30 18 18 19 80 66 20 60 52 10 40 -
20 6 10 (10) - (20) 2016 2017 2018 2019 Power transmission and distribution Total deal volume
deal volume has been relatively stable group for Rmb15.8 billion. Large in the past two years, after peaking in state-owned enterprises entered 2017. There were 19 deals announced overseas markets through cross- in the sector, with an accumulated deal border M&A to achieve a PwC Views value of Rmb51.6 billion. Two comprehensive coverage of cross-border M&A deals by state-owned overseas markets. 1. M&A Overview enterprises were the largest deals in the 2) Vertical integration has become the sector this year. However, these were The 13th Five-Year Plan for Power main motivation of domestic “ extraordinary, and unlikely to reoccur in strategic investors. In 2019 Development emphasizes the need to: the coming years. After excluding them, 1) enhance the capacity of the power domestic transmission and the annual announced deal value in grid and build a west-to-east power distribution sector deals, strategic 2019 was about Rmb10.4 billion. transmission channel using both investors were mostly from Strategic investors continued to ultra-high voltage power transmission industries such as power, dominate the sector, accounting for and standard transmission infrastructure and engineering 71% of the 19 deals . technologies, with an additional construction. Through the merger capacity of 130 million kilowatts, to 2. M&A Characteristics and acquisition of power reach a total of 270 million kilowatts; M&A in the power transmission and transmission and distribution and 2) control construction costs and distribution sector, 2019: companies, investors could potentially benefit from the improve operation efficiency of the 1) SOE-led outbound M&A was far synergies of power generation and power grid. Following the larger than domestic deals. There distribution, realizing optimal announcement of the plan, China has were two cross-border M&A deals resource allocation and diversified added 92,000 kilometers of the in 2019: Yangtze Power’s purchase risk portfolios. transmission channel with 500 KV+ AC of distribution assets in Peru of lines and 920 million KVA capacity. Sempra Energy for Rmb25.4 From 2016 to 2019, M&A deals in the billion; and the State Grid’s power transmission and distribution acquisition of a 100% equity stake sector dipped but then recovered The in Chile’s third largest distribution
21 Investment hotspots
Outlook
Integrated energy services Electric automation and Internet
Along with developments in information technology, of things advances in renewables, and reform of energy structure, Collectively, the development of information technology, integrated energy services have become a solution to reduce stabilization of demand in substation equipment and policy cost and increase efficiency. State Grid and China Southern support in power grid automation have marked the dawning Power Grid, two major power grid SOEs, took the lead in of a golden age in the domestic power industry. This reflects launching the integrated energy service development plan in the importance of stable, flexible and automated power 2019, encouraged by government policies. Aside from power- supply. The construction of Ubiquitous Power Internet of related companies, Internet and commercial service Things has paved the way for safe operation, lean companies may also seek opportunities to invest in power- management and high-quality power transmission and related supply side assets that match their portfolios or distribution. In addition, the Internet of things can give full strategies, given the wide range of businesses in integrated play to the unique advantages of the power grid while energy services. opening up the digital economy.
Investment hotspots：Integrated energy supply and Investment hotspots: Power utilization (including electricity, heating, cooling and transformation/distribution/dispatching automation steam), Energy saving, Intelligent building system solutions Distributed energy + Energy storage Waste heat utilization and As required in Energy Production and Consumption co-generation Revolution Strategy (2016-2030), both centralized and distributed generation should be at the forefront of developing Along with the government’s support for energy efficiency, renewable energy. For distributed energy, energy storage is large thermal power companies have adopted approaches especially a challenge in ensuring the stability and security of such as waste heat utilization and heating concessions, given the power grid from the generation site. While centralized their continued losses and valuation discounts in energy generation (power plants) is relatively mature, the conventional energy. The co-generation of heat and power business model for distributed energy and energy storage is has won favor among investors due to its outstanding still at an early stage due to its high cost in China. As one of profitability. In particular, biomass co-generation and the important upper stream sectors of integrated energy companies in renewables have been facing cash flow services, distributed energy will grow in importance. challenges caused by subsidy arrears; therefore, we expect Investment hotspots: Auxiliary frequency modulation at the financing needs and investment activities in this area to grid side, Virtual power plant, distributed integrated continue to increase. station of photovoltaic power and storage energy, Investment hotspots: Coal-fired cogeneration, Biomass distributed combined cooling heating and power cogeneration, Thermal power with waste heat utilization
22 Section 2 Utilities industry
M&A activities overview in 2019
23 Overview of M&A in the utilities industry in 2019
Based on the announced deals of 2019 and our understanding of the market development, we’ve seen following major market trends in the utilities industry:
Integrated services prevail as industry continues to • We expect that utilities companies engaged in advanced consolidate cleaning technologies, applications and equipment, and sewage treatment technology will attract greater attention • At present, the utilities industry features low concentration from investors. and regional monopolies. Therefore, players within the industry buy and sell businesses to expand geographically Internet & IoT fueled sustainable development and achieve economies of scale. • The automation and utilities industry has successfully • With the progress of the energy structure reform, the once brought about unprecedented applications of smart grid, scattered and separate energy supplies have started to intelligent water, and intelligent heating. These newly merge into integrated energy services. Utilities companies invented business models, though in their early stages, have been keen to expand their value chain to cover more enable comprehensive utilization of energy, and fuel a types of energy services, and turn into comprehensive resource-efficient society. Emerging intelligent service providers. technologies such as the IOT and cloud computing, provide new angles to optimize business management • We expect that intra-industry M&A will continue. systems, improve overall efficiency and promote Meanwhile, the transition of large single energy suppliers industrial upgrade. to roles such as integrated energy service providers, environmental governance service providers, and water • We expect that the intelligence incorporated utilities operation providers will promote more cross-industry industry will bring development opportunities. Intelligent M&As. infrastructure & technologies may come under the investment spotlight. Energy structure in transit, renewables & low carbon became mainstream
• Renewables & low-carbon took the lead in reform of energy structure. Considered a major step in the transformation and prioritized in policies, distributed energy generation and clean energy consumption have attracted investors. SOEs have incorporated plans, while more and more listed companies have included it as one of their development strategies.
24 Key data at A glance
Utilities industry
Total deal value of 2019 Total deal volume of 2019 Average deal value of 2019
Rmb 19.7 billion 72 Rmb 0.3 billion
Compared Compared Compared with 2018 Up 128% with 2018 Up 29% with 2018 Up 71%
Note: The average deal value excludes undisclosed deals Deal value and volume by investment type in 2019 Most active sub-sector
(Rmb billion) Domestic Outbound M&A M&A Water 71 1 ~69%
196.719.7 Most active investor: State-owned enterprises (SOEs)
SOEs ~47%
0.10.6
Note: The average deal value is calculated as the total disclosed deal value/number of deals with disclosed deal value (excluding undisclosed deals)
25 Utilities M&A market review in 2019
Utilities deal value and volume (2016-2019)
Utilities — Deal value and volume by sectors (2016-2019)
(Rmb billion)
Avg. disclosed 0.4 0.4 0.2 0.3 Value
72 30 56 51 56 70 25 50 0.0 1.0 0.3 30 20 2.7 10 1.6 15 1.3 (10) 10 21.7 20.7 0.1 19.6 (30) 16.3 1.2 16.8 13.4 (50) 5 8.7 7.4 (70) - (90) 2016 2017 2018 2019 Water Heating Others Total deal volume
Utilities — Deal value and volume (2016-2019) 2019 Proportion of investors by deal volume (by investment types)
Avg. deal value (Rmb billion)
71 47% 29% 25 80 51 53 20 46 60 15 Domestic 40 10 20 5 11.0 14.2 8.2 19.7 Private - - companies 2016 2017 2018 2019 5 4% 6 16% 3 3 Undisclosed Outbound 5 4 1 5.2 7.5 0.5 2 4% - 0.1 - SOEs PE/VC funds Others 2016 2017 2018 2019
Source: ThomsonReuters,ChinaVenture, Mergermarket, Zero2IPO Research and PwC analysis Note: The deal value figures refer only to deals with disclosed values. Numbers do not include the two large deals related to the Luenmei Quantum Co., Ltd. in the heating supply industry in 2016 and 2017, with values of Rmb2.39 billion and Rmb3.87 billion, respectively.
26 Utilities M&A market review in 2019
M&A activity at a glance
• Utilities transactions have been steadily increasing: After experiencing a relatively slow year in 2018, total M&A deal value in the utilities industry related to Chinese companies increased in 2019. The total disclosed M&A deal value in 2019 exceeded Rmb19.7 billion, an increase of 128% over 2018; the disclosed deal volume in 2019 was 72, an increase of 29% over 2018.
• Led by SOEs, M&As in utilities continued to drive industry integration: At present, the utilities industry is characterized by its low concentration, insufficient scale and regional dispersion. We found that the deal volume of SOE investors accounted for 47% in 2019. Large SOEs have been seeking to achieve value chain integration through M&A; Luenmei Quantum Co., Ltd. expanded its market share through horizontal integration in the heating subsector and China Urban and Rural Holding Group Co., Ltd. acquired shares of Beijing OriginWater Technology Co., Ltd. (BOW) in the water subsector.
• The domestic market is the main arena for utilities M&A: The deal volume of domestic investors stepped up from 46 in 2016 to 71 in 2019. In contrast, the deal value for overseas targets has fallen year after year since reaching Rmb7.5 billion in 2017. Macro factors have also made a contribution, including domestic macroeconomic downturns and credit tightening, which posed challenges for small players in the water sector, creating conditions for takeover and integration of the domestic market.
27 Utilities M&A market review in 2019
M&A activity at a glance
• M&A activities in water subsector were more active: Consistent with the trend for sustainable development, the water subsector, especially sewage treatment, has maintained a high level of activity. The deal value and volume of the water subsector in 2019 accounted for 85% and 69% respectively of the total M&A market in the utilities industry. Gas, power and clean energy companies in the heating subsector were also actively involved in M&A, paving the way for future promotion of clean heating.
• Large-scale utilities deals took place in the water subsector: Among the utilities deals in 2019, deals with a value of Rmb1 billion and above were all water subsector M&As. Examples include China Urban and Rural Holding Group Co., Ltd. (CCCC) acquired shares of Beijing Origin Water Technology Co., Ltd. (BOW) and China Yangtze Power Co., Ltd. (China Three Gorges Corporation) subscribed the newly issued common shares of Beijing Enterprises Water Group Limited. Driven by large-scale deals, the average value of deals for utilities industry in 2019 (excluding undisclosed deals) jumped from Rmb190 million in 2018 to Rmb330 million, marking an increase of 71%.
• Financial investors started showing interest in utilities: The utilities industry deals were characterized by large transaction amount and long investment cycles, which is also the reason why the industry has been less attractive to financial investors in previous years. However, the stable nature of the utilities industry has become advantageous in attracting financial investors’ interest amid a slowdown in the economy. 2019 witnessed several financial investment cases in the market; for example, Agricultural Bank Financial Assets Investment Co., Ltd. increased the capital of Beijing Enterprises Water (Guangxi) Group Co., Ltd. with Rmb1 billion.
28 Water
Water — Deal value and volume (2016-2019)
Water — Deal value and volume (2016-2019)
(Rmb billion)
Avg. disclosed 0.3 0.5 0.2 0.3 value: 30 60 50 25 45 45 50 40 20 0.2 40 4.5 0.1 15 1.6 30 1.4 7.9 10 20 7.9 0.1 14.0 1.1 5 10 8.2 4.4 4.1 - 1.8 1.1 - 2016 2017 2018 2019
"WaterWater Supply supply" S"Sewageewage Treatment treatment" Integrated water Others Total deal volume
PwC Views
“Industry Overview China’s total water consumption reached a peak in 2013, after which the growth rate slowed down or even declined, which indicates that the water supply has stabilised. Sewage treatment, on the other hand, is in growing rapidly with the introduction of environmental laws and regulations, such as the Action Plan for Prevention and Control of Water Pollution issued by the State Council in April 2015, 13th Five-Year Plan Water Environment Comprehensive Environmental Governance Construction Plan for Key River issued by the National Development and Reform Commission in August 2016 and Action Plan for the Yangtze River Protection and Restoration jointly issued by Ministry of Ecological Environment and the National Development and Reform Commission in January 2019. Given the stricter requirements in environmental protection, sewage treatment companies now have to be equipped with stronger technical capabilities. The total M&A deal value of water supply was relatively small at only Rmb1.1 billion in 2019. After excluding China Gezhouba Group’s acquisition of Brazil’s Sao Paulo San Lorenzo Water Supply System Company for approximately Rmb5.8 billion in 2017, the annual deal amounts of water supply were less than Rmb5 billion during the 2016-2019 period. M&A deals in sewage treatment were more active, with deal value hitting Rmb14 billion in 2019, a surge of 215% from the Rmb4.4 billion in 2018. In 2016 and 2017, the deal values of sewage treatment also reached Rmb7.9 billion.
Source: ThomsonReuters, ChinaVenture, Mergermarket, Zero2IPO Research and PwC analysis Note: The deal value figures refer only to deals where a value has been disclosed. It does not include the two large deals related to the Luenmei Quantum Co., Ltd. in the heating supply industry in 2016 and 2017, with a value of Rmb2.39 billion and Rmb3.87 billion, respectively.
29 Water
M&A Characteristics Joint Stock Co., Ltd. (which has a technological advantage in M&A in the water subsector, 2019: small and medium-sized sewage treatment in second and third tier cities) both garnered investors’ attention due to their 1) SOEs and private companies have started to join hands. In technological outperformance. 2019, the deal volume of SOEs as investors accounted for 62% of total deal volume. The deal volume of private In addition, the popularity of IoT technology has enabled the water companies as targets accounted for 70% of the total, showing sector to develop from centralized information management to the attempts by SOEs and private companies to form decentralized smart water grid. In 2019, Mianyang Investment alliances in the water sector. Examples of this cooperation in Holding (Group) Ltd. invested in Kingland Technology and 2019 included China Urban and Rural Holding Group Co., Ltd Zhejiang Yongan took a stake in Beijing Tepia Technology. The (CCCC)’s acquisition of Beijing Origin Water Technology Co., main businesses of these targets are both platforms created by Ltd. (BOW)’s shares for approximately Rmb2.9 billion. After IoT and cloud computing. CCCC’s investment in BOW, it made full use of BOW’s core 3) Strategic investments to jointly develop or operate projects advantages in membrane treatment technology to quickly were the main type of deals. During 2016-2019, strategic build a leading water treatment platform in China. Meanwhile, investors completed approximately 88% of the total deal BOW is expected to benefit from the credit and resource of volume. Among them, strategic investors from within the SOEs, collaborating with CCCC’s group companies in issues industry and cross-industry accounted for 59% and 29% of surrounding environmental protection, water, urban the deal volume, respectively. environment construction and other related projects. Because of the asset-intensive and thin margin nature of the In the water subsector, the advantages of private companies water sector, financial investors tended to overlook include experienced and stable management teams and investments in this sector. However, as economic growth advanced technology, while the advantages of SOEs include slowed down, financial investors have started to seek long-term development strategies and funding. Therefore, the opportunities in this relatively stable sector. Financial complementary traits of SOEs and private companies allow investors showed more interest in sewage treatment and for a win-win under an environment of de-leveraging and leading companies in this subsector. In 2019, Agricultural increasingly strict environmental assessments in China. Bank Financial Assets Investment Co., Ltd. completed its capital injection in Beijing Enterprises Water (Guangxi) Group 2016-2019 Proportion of investors by deal volume Co., Ltd. of Rmb1 billion.
Financial investors, 2016-2019 Proportion of investors and investees 12% by deal volume
By type of investors Strategic Non-water investors in Water 9% 4% 10% 6% industry strategic industry, 40% 32% investors, 59% 49% 38% 29% 62% 42% 56% 53%
2016 2017 2018 2019
SOEs Private companies Others 2) Technology-driven M&A has become another trend in the By type of investors water sector. Different sub-processes in the sewage 9% treatment value chain — such as sewage treatment asset 2% 0% 2% 5% 2% operation, EPC project construction, and core equipment for 9% 16% 49% 58% sewage treatment technology — have all presented 38% 70% technological barriers of some sort. Top performing 40% 38% 38% 26% companies in each subsector are all technology leaders, 2016 2017 2018 2019 indicating the essential role of IP in the water sector. Therefore, technology-driven M&A is regarded as an effective SOEs Private companies Foreign companies Others means to break the technical barriers. In 2019, BOW (which boasts core advantages in membrane treatment technology) and Anhui Guozhen Environmental Protection Technology
30 Heating
Heating — Deal value and volume (2016-2019)
Heating — Deal value and volume (2016-2019)
(Rmb billion)
Avg. disclosed 0.3 0.1 0.1 0.1 value
19 3.0 14 20 9 15 2.5 4 2.7 10 2.0 5 - 1.5 (5) (10) 1.3 1.0 1.2 (15) 1.0 0.5 (20) (25) - (30) 2016 2017 2018 2019 Deal value(exclude Justin Holding Limited) Deal volume(exclude Justin Holding Limited)
PwC Views
“M&A Overview By end-user, the heating subsector can be further divided into residential and industrial heating. At present, heat is sourced mainly from coal-fired boilers and waste heat of power plants. Deal volume in the heating market continued to grow from 2016 to 2019, at an annualized growth rate of 68%. Deal value, on the other hand, after a continued slide from 2016 to 2018, surged 123% in 2019 over 2018. Average deal value has also increased slightly. Nineteen M&As took place in the heating subsector in 2019, with a deal value of Rmb2.67 billion. The heating sector saw some large deals in the past four years: • In 2019, Xinjiang East Universe (Group) Gas Co., Ltd. acquired 80% of Yining Heat Supply Company, a supply provider under SASAC, for Rmb698 million. • In 2017, Ruifeng Fund, Lhasa Hetai and Golden Eagle Asset acquired 22.71% of a listed urban heating company, Luenmei Quantum Co., Ltd., for Rmb3.87 billion. • In 2016, Yibin Paper Industry Co., Ltd. acquired a domestic cross-province central heating investment & operation leader, Zhonghuan Huanhui, for Rmb900 million.
Source: ThomsonReuters, ChinaVenture, Mergermarket, Zero2IPO Research and PwC analysis Note: The deal value figures refer only to deals where a value has been disclosed. It does not include the two large deals related to the Luenmei Quantum Co., Ltd. in the heating supply industry in 2016 and 2017, with the value of Rmb2.39 billion and Rmb3.87 billion, respectively. 31 Heating
M&A Characteristics Investors M&As in the heating sector, 2019: SOEs were the main participants in the heating subsector • At present, the heating subsector still relies on coal as the M&As, while private companies outcompeted SOEs in main heating source, while energy structure transformation deal volume in 2019. With the introduction of a number of and sustainable development have prompted the sector to national policies, companies and social capital have been search for alternative heating sources. According to the encouraged to invest in the heating subsector, and this has Clean Heating Plan for Winter in the Northern Region since lessened the dominance of SOEs in the heating sector. (2017-2021), the development of central heating was given Among the disclosed M&As in 2019, most of the SOEs’ M&As priority and the clean heating rate in 2019/2021 is expected were local heating companies. They were focused largely on to reach 50%/70%. Subsequently, more than 30 provinces increasing their local market share and promoting the grid- and cities have put forward relevant requirements, adopting connected transformation of small heating boilers. clean coal, “coal to gas”, “coal to electricity”, and renewable Private companies, especially listed companies, have come energy heating projects. Therefore, clean investments has into play by investing in areas where the competition in become a major trend in the heating industry. In 2019, heating is less intense. The same strategy also applied to Zhejiang Fuchunjiang Environmental Thermoelectric Co., cross-sector investors such as gas and power companies. For Ltd. acquired Zhongmao Shengyuan Industry, which uses example, Luenmei Quantum Co., Ltd. in Shenyang merged solid waste disposal for heating and power supply in the with Shandong Heze Thermal Power Company and Xinjiang papermaking process. East Universe (Group) Gas Co., Ltd. merged with Yining Heat • Industrial heating is believed to have greater investment Supply Company, expanding from gas to heating supply prospects over residential heating. Industrial heating is business and transforming to an integrated utilities service generally distributed in or around the industrial campus to provider. Therefore, the deal volume of private companies as meet the needs of all the users. Therefore, the deployment investors far exceeded that of SOEs in 2019. of integrated, efficient and clean energy has become the main focus in the development. Integrated energy services 2016-2019 Proportion of investors and investees have gained attention as they enable simultaneous supply by deal volume of various energy sources such as power, gas, cooling and heat, and adds value in services by combining the Internet By type of investors and technology. In June 2019, State Grid China Co., Ltd. 13% 20% launched the “China Comprehensive Energy Service 50% 56% Industry Innovation and Development Alliance” jointly with 67% 45% 50% 21 upstream and downstream head companies alongside 33% 20% 35% the integrated energy service industry chain. State Grid 2016 2017 2018 2019 China Co., Ltd. and China Southern Power Grid Co., Ltd. SOEs Private companies Others have successively established integrated energy service companies, and other companies in the industry are By type of investors expected to follow suit. In 2019, Harbin Jiuzhou Electrical 22% 7% 5% Co.,Ltd acquired Qiqihar Xingda Investment Group Tailai 50% 50% 53% County Xingda Thermal Co., Ltd., and Guangzhou 67% 50% 43% 42% Zhiguang Electric Co., Ltd. acquired Pinglu County 11% Heating Company, both attracted by the heating assets 2016 2017 2018 2019 held by the targets and planned for upgrading to form a strategic layout in integrated energy development. SOEs Private companies Foreign companies
• In terms of heating method, both distributed heating supply We further noticed that financial investors have become more and concentrated heating supply — such as the interested in the heating sector due to its stable and low risk development of traditional boiler to cogeneration — have nature in times of uncertainties. The deal value of financial been popular in recent years. For example, Yantai’s use of investment in 2019 increased by 33% over that in 2018. air-source heat pump combined with off-peak power thermal storage system, and Binhu District’s use of ground-source heat pump combined with other clean energy sources have 2016-2019 comparison of investors brought rewarding results. Although government pilot projects still dominate distributed heating generations, (Rmb billion) related technology has attracted the attention of investors. 2019 0.6 2.1 In 2019, companies in the clean energy subsector, such as 2018 0.4 0.8 Hepu Energy, State Power Investment Corporation (SPIC), 2017 - 1.0 and China Geothermal Industry Development Group 2016 - 1.3 Limited, have all received interest from investors. Financial investors Strategic investors
32 Investment hotspots
Outlook
Water, heating and other utilities are inelastic in demand due Heating Subsector to their close connection with livelihood. M&As in these areas Large companies are expected to continue to take over small are expected to continue steadily and progressively. ones in 2020. Under the driving policies of “dismantling small We expect research and development in technology related to boilers and connecting large ones” and the implementation of pollution control and clean energy to become the main trend cogeneration, the heating sector will continue to integrate in industry development. Technology driven M&As are, through M&As. therefore, more likely to dominate the deals in utilities in the At the same time, increasing awareness of the carbon coming years. footprint of large corporations will also drive the transition from Water Subsector traditional heating to clean heating service providers. We expect that areas such as clean heating technology and We expect to see increasing cooperation between SOEs and equipment will continue to receive investors’ attention in 2020. private companies in sewage treatment in 2020. Cash flow will remain a challenge for private companies in this sector, encouraging the leverage of resources from SOEs. As mentioned in the earlier sections, the major factors contributing to the cash flow challenges are the downturn of the economy, slowdown of demand and tightening of credit in the domestic market.
In addition, we expect financial investors to play a greater role in water sector M&As. As mentioned, financial investors will more likely to be drawn to the water sector by its stable and low risk nature in times of uncertainties.
We further expect that the mobile water treatment service and the third-party governance business will have more opportunities than their industry peers, and may become an investment hotspot in the near future.
33 Section 3 Oil and gas industry
2019 review and analysis of M&A activities
34 2019 overview of M&A in oil and gas industry
From the perspective of M&A, along with deals data since urban gas market is much more scattered in tier 2 and tier 2019 and the judgment on future market dynamics, we have 3 cities and county-level regions, and therefore, seen the following trends in China’s oil and gas industry: competent companies can increase their scale and consolidate the market through acquisition. Oil & Gas companies are actively seeking low-carbon transition, and the deal volume and value related to gas • With the restructuring of the Gas industry’s competitive industry have steadily increased. landscape, we expect more M&A activities to take place in the fields of unconventional gas, urban gas • Driven by increased environmental protection and public distribution/operation/maintenance, and relevant health awareness, China’s gas consumption has engineering and equipment manufacturing companies. increased rapidly in recent years. M&A activities on the Gas (incl. LNG) value chain are becoming increasingly The development mode of refinery and petrochemical active. In 2019, the disclosed volume and value of deals sector tends to be large scale-led and the industrial in gas industry accounted for 39% and 47% of the total Oil value chain is becoming more integrated. & Gas deals respectively, with a main focus on urban gas distribution & sale and upstream gas fields.
• The official establishment of China Oil & Gas Pipeline Network Corporation in December 2019 marks a key step for China to deepen the reform of the oil and gas system, and it will also have a long-term and significant impact on the main players in the market. National Oil Companies rely on their upstream resource advantages to actively expand in the urban gas distribution and retail market. Nationwide leading city gas companies and SOEs at provincial level are further expanding their scale advantage in the domestic market by securing low-cost overseas gas sources. The competitive landscape of the
35 2019 overview of M&A in oil and gas industry
• In 2019, deal volume in the downstream sector increased COVID-19 has had a huge impact on the recent oil and significantly (by 26%) compared to that in the previous gas market, but it might not affect the fundamentals of year. which are mainly in the refinery & petrochemical and China’s long-term demand for oil and gas. urban gas areas. Many companies have extended their • The outbreak of epidemic since the beginning of 2020 business lines towards upstream and downstream on the caused a delay in the operation of domestic factories after value chain and enhanced the overall competitiveness the Spring Festival, nationwide traffic restrictions as well through M&A activities. as a sharp decline in industrial and commercial services, • In the “Great Petrochemical Age”, the integration of greatly affecting the consumption of oil and gas. refinery and petrochemical technologies is becoming Assuming the epidemic is successfully contained in the more technically mature, which can help companies short time, domestic consumption of oil and gas might reduce operational costs and excessive refined oil increase in a compensatory manner afterwards. production, also increase production of high value-added • The epidemic also put forward higher requirements for petrochemicals to meet the demand brought by intelligent and unmanned management in the oil and gas consumption and industrial upgrade (e.g. energy, industry. Adopting advanced digital technology in construction, and transportation). production and operation can effectively reduce • Meanwhile, multinational companies remain confident unnecessary interaction, improve safety, and reduce about the huge potential of the China market, and actively costs. Automated oil drilling platform, IOT smart gas expand in China to be closer to raw material resources meters, unmanned gasoline stations might increasingly and local consumption markets. attract investors’ attention in the future.
36 Key data at a glance
Oil and Gas Industry 石油天然气行业
Total deal value of 2019 Total deal volume of 2019 Average deal value of 2019
15.5 bnUSD 65 239 mnUSD
Compared with 2018 Increased by 44% Compared with 2018 Stable Compared with 2018 Increased by 44%
Deal value and volume by investment types Most active sub-sector (by volume) in 2019 (USD in millions)
Domestic Outbound Inbound Downstream
53 10 2 ~66%
13,891 Most active investor (by volume)
Private companies
827 797 ~65%
Note: The average deal value is calculated as the total disclosed deal value/deal volume (excluding undisclosed deals)
37 2019 oil and gas industry M&A market review
M&A in Oil & Gas industry by deal value and volume (2017-2019) (incl. outbound/domestic/inbound deals)
(USD in millions)
average deal value 168 165 239
15,515
10,744 10,744
2017 2018 2019
Upstream-Total deal value Midstream-Total deal value Downstream-Total deal value
Supply Chain-Total deal value Total
Note: We divided the oil and gas industry value chain into four segments: Upstream — exploration and production; Midstream — transportation and storage of oil and gas products; Downstream — oil refining and petrochemical, gas purification, distribution and sales of final products (incl. urban gas); Supply chain — equipment/engineering services/technology related
Deal volume
2019 14 2 43 6
2018 24 5 34 2
2017 14 2 34 14
Upstream Midstream Downstream Supply Chain
Source: Data from Mergermarket, public news and PwC analysis Note: Deal value is calculated based on the disclosed deal value information
38 2019 oil and gas industry M&A market review
M&A activity at a glance estimated Rmb11 billion (about USD1.59 billion). As a new material platform of Shenghong Petrochemical, From 2017 to 2019, 194 China-related oil and gas deals took Sailboat Petrochemical mainly uses methanol as raw material place, which was worth more than USD37billion. to produce ethylene, propylene and high value-added The deal volume has remained steady around 65 per year. downstream derivatives. Through this acquisition, Danhua The total deal value was stable at around USD10.7 billion per Chemical (focusing on the coal-to-chemical business) will year in 2017-18 and increased to USD15.5 billion in 2019. place more profitable petrochemical assets to enrich its product types. Danhua Chemical has coal-chemical projects Both the total deal value and average value in 2019 have in its coal resources abundant area, and has certain increased significantly compared with that in the previous two experience and geographical advantages in developing coal- years, mainly due to the contribution of several mega deals to-methanol projects, which is able to generate synergy with related to corporate restructuring and mixed ownership reform Sailboat. of SOEs:
1. Downstream – ENN Ecological Holdings Co., Ltd. purchased 32.8% of ENN Energy Holdings Limited for Rmb25.9 billion (about USD3.67 billion);
ENN Ecological Holdings is the A-share listing platform of ENN group energy sector, whose main business covers from domestic/outbound gas production and sales, energy engineering and other upstream business. ENN Energy is engaged in urban gas distribution and sale nationwide. This acquisition promoted ENN Ecological to transform from an upstream gas supplier into the integrated natural gas company, and further enhance its overall competitiveness for market expansion.
2. Downstream – Danhua Chemical Technology acquired Jiangsu Sailboat Petrochemical’s 100% share for an
39 2019 top ten oil & gas deals
2019 Top 10 mega deals
Deal Value Target Investor Date Type (USD in millions)
Sinopec Group Wuhan Branch (35% stake) SK Global Chemical Co., Ltd. April 2019 667 Downstream
Jiangsu Shenghong Petrochemical Jiangsu Honggang Petrochemical Co., Ltd. Industry Development Co., Ltd. April 2019 297 Downstream
Hubei Xingrui Silicon Material Co., Ltd. Hubei Xingfa Chemicals Group Co., (50% stake) Ltd. March 2019 265 Downstream
Jinhong Holding Group Co., Ltd. — 17 subsidiaries PetroChina Kunlun Gas Co.,Ltd. August 2019 235 Downstream
Taixing Sunke Chemicals Co. Ltd. (45% stake) Arkema Asie SAS April 2019 130 Downstream
Ningbo Haiyue New Material Co., Ltd. (51% stake) Kingfa Sci. and Tech. Co., Ltd. March 2019 104 Downstream
September Range Resources Trinidad Limited LandOcean Energy Services Co., Ltd. 2019 93.5 Upstream
Tibet Wojin Energy Development Co., Ltd. (41% stake) Shanghai Worth Garden Co., Ltd. April 2019 91 Upstream
Qingdao Sinoenergy Group Co., Ltd. (49.23% stake) Senyu Chemical Oil and Gas Co., Ltd. August 2019 84 Downstream
Yinchuan China Oil Jingcheng Gas Company Limited; Zichang Huacheng Natural Gas Co., Ltd. (65% stake) Dalian Energas Gas-System Co., Ltd. November 2019 76 Downstream
Note: Deals above are based on the disclosed information, excluding deals related to corporate restructuring and mixed ownership reform
40 Domestic M&A
Domestic M&A by deal value (2017-2019) Domestic M&A by deal value and volume (2017-2019) Total deal value (USD in millions) Total deal value Deal volume 27 5 102 16 (USD in millions)
25,000 16,000 45 21,833 14,000 40 20,000 12,000 35 30 10,000 15,000 25 8,000 20 6,000 10,000 15 4,000 10 5,000 2,221 2,000 5 186 355 - - - 2017 2018 2019 U上游pstream Midstream中游 Downstream下游 供应链Supply Chain Upstream- Midstream- Downstream- 上游Deal-交易额 value 中游Deal-交易额 value 下游Deal-交易额 value Source: Mergermarket, public news and PwC analysis Supply Chain- Upstream- 供应链-交易额 上游-交易量 中游Midstream-交易量 - Note: Deal value is calculated based on the disclosed value. Deal value Deal volume Deal volume 下游Downstream-交易量 - 供应链Supply-交易量 Chain- Deal volume Deal volume
2019 Type of investment entities (by volume)
Financial investors, 6%
Other SOEs, 21%
Three NOCs, 7%
Private companies, 66%
41 Domestic M&A
M&A activity at a glance 1) Three NOCs — In August 2019, 4) Other SOEs — In December 2019, CNOOC acquired a 100% equity of Hangzhou Iron & Steel Group Co., 1. Market activity China United Coalbed Methane Ltd. purchased a 15.01% share of Corp., Ltd.. The target company is Zhejiang Juhua Co., Ltd. for From 2017 to 2019, 150 deals took engaged in exploration & Rmb700 million. The target place in the domestic market, with a production, transportation, sales company is engaged in total value of approximately USD24.7 and utilization of coal-bed methane. manufacturing fluorine chemical, billion. Most deals (102) took place in chlor alkali chemical and the downstream. 2) Private companies — In November comprehensive set. 2019, Dalian Energas Gas-System Deal volume remained broadly stable in Co., Ltd. acquired a 100% equity of 5) Other SOEs — Beijing Gas Blue 2017-18 (about 48 deals per year), but Yinchuan Zhongyou Jingcheng Gas Sky planed to acquire Zhejiang Bo saw a slight increase to 54 deals in Co., Ltd. and 65% share of Zichang Xin (engaged in LNG supply and 2019. Total deal value, on the other Huacheng Gas Co., Ltd. for trade) for Rmb205 million (about hand, fell to USD4.6 billion in 2018 from Rmb530 million (about USD76 USD31 million) in April 2019. USD6 billion in 2017, but rebounded million). The target companies are sharply in 2019, reaching over USD14 3. Range of deal size engaged in the natural gas pipeline billion. transmission & distribution and retail Deal size varied significantly in 2019, 2. Investment entities and their key as well as pipeline installation, etc. ranging from several million US dollars interests to several billion USD. 3) Private companies — In March M&A by private companies accounted 2019, Kingfa Sci. and Tech. Co., Among these deals, over 70% were for more than 66% of the total domestic Ltd. acquired a 51% share of small and medium-sized deals with a deal volume in 2019. Their investments Ningbo Haiyue New Material Co., value of below USD100 million. 22% focused on refinery & petrochemical Ltd. for Rmb699 million (about USD were large deals with a value between and urban gas distribution/sales 104 million). Through this deal, USD100 million and USD1 billion, while (including operation and maintenance), Kingfa entered upstream raw 7% were mega deals with a value oil and gas engineering services and material industry such as propylene, above USD1 billion (based on the equipment manufacturing. M&A by strengthened the control of raw analysis of deals with disclosed value). other SOEs (excluding Three NOCs) materials needed for its product accounted for 21% of the total domestic (modified polypropylene). deal volume and the target companies were mainly in the downstream areas, such as petrochemical/new materials and city gas distribution. For example:
42 Domestic M&A
Key deals at a glance
• In April 2019, Beijing Gas Blue Sky Holdings Limited • In March 2019, Kingfa Sci. and Tech. Co., Ltd. acquired acquired Zhejiang Bo Xin for Rmb205 million. Its 51% share of Ningbo Haiyue New Material Co., Ltd. for business cover from LNG direct supply to commercial & Rmb699 million. Kingfa is a supplier for high performance industrial users and LNG trading. Boxin secures stable gas new materials, and one of its main products is modified supply from Ningbo LNG receiving terminal, and polypropylene. In the past Kingfa used to rely on external distributes and sells gas mainly to large industry users in suppliers for the purchase of polypropylene. Since 2016, the Yangtze River Delta region, where there is a strong the price fluctuation of polypropylene has increased its demand. Through this deal, Beijing Gas Blue Sky purchase cost. But the company was unable to fully (comprehensive gas supplier and operator) is able to make transfer the raw materials costs to the downstream up the market share of the midstream and downstream customers due to the stable price of its product (modified LNG business in the Yangtze River Delta region. With its polypropylene). Through the acquisition of Ningbo Haiyue established distribution network in Beijing-Tianjin-Hebei (a producer of propylene, isooctane, etc.) , Kingfa area, Beijing Gas Blue Sky is striving to achieve its successfully entered its upstream sector and thereby tried objective to develop new markets and import more to develop the entire value chain of “propane-propylene- overseas gas sources in the future, which allows the polypropylene-modified polypropylene”. As such, it was company to capture growth opportunities of domestic gas able to avoid the impact of raw materials price fluctuations market development. and increase its influence on raw materials control. It can also supply hydrogen, a by-product of propane dehydrogenation, to other users after purification, and help the company develop new business growth areas.
43 Outbound M&A
Outbound M&A by deal value (2017-2019) Outbound M&A by deal value and volume (2017-2019)
Total deal value Total deal value Deal volume (USD in millions) 23 4 4 6 (USD in millions)
6,000 12 7,000 6,177 6,000 5,000 10
5,000 4,000 8 4,000 3,000 6 3,000 2,318 2,000 2,000 4 819 1,000 461 1,000 2 - - - Upstream上游 Midstream中游 Downstream下游 Supply供应链 Chain 2017 2018 2019 Upstream-Deal value Midstream-Deal value Source: Mergermarket, public news and PwC analysis Note: Deal value is calculated based on the disclosed information. Downstream-Deal value Supply Chain-Deal value Upstream-Deal volume Midstream-Deal volume
Supply Chain-Deal volume Downstream-Deal volume
2019 Type of 2019 Distribution of 2019 Investment Entities & Target type investment entities investment destination (by total deal value) (by volume) (by volume)
Total deal value (USD in millions) 2 2 1 5
Kazakhstan, 700 Financial Others, 10% investors 20% 600 20% Russia, 500 Private UK, 20% 400 companies Three 10% 50% NOCs 300 20% Other North America, Singapore, 200 SOEs 20% 20% 100 10% - Financial The NOCs Other SOEs Private Investors Companies
Upstream Midstream Downstream Supply Chain Total
44 Outbound M&A
M&A activity at a glance 2. Investment entities and targets Oil & Gas; Among the ten disclosed deals in 2019, 4) Private companies — In Sep 2019, 1. Market activity private companies accounted for the LandOcean Energy Services From 2017 to 2019, a total of 37 majority of the deal volume (about acquired Range Resources outbound deals took place, with a total 50%), but the deal value was relatively Trinidad Limited, which owns oil value of over USD9.7billion. Among small; the target companies covered blocks in Trinidad & Tobago. these deals, 23 took place in upstream upstream, downstream and supply 3. Range of deal size E&P, and were worth more than chains. NOCs continue to focus on the USD6.1 billion. 4 deals were involved in purchase of upstream assets while In 2019, outbound deals with a the midstream and downstream financial investors tend to opt for value of below USD100 million respectively, and 6 deals took place on minority stakes in overseas mid-stream accounted for 83% of the total the supply chain. assets, whose deal value is large. For outbound deals (by volume). Deals example: within the range of USD100 million Since the end of 2016, the Chinese and USD1 billion accounted for government has been exercising stricter 1) Three NOCs — In July 2019, 17% of the total by volume (based control on capital outflow, which has CNOOC and CNPC subsidiaries on the analysis of deals with affected the outbound M&A in the Oil purchased a 10% stake in the disclosed value) and Gas industry. The total deal value Arctic LNG 2 in Russia has steadily rebounded from 2017 respectively; 4. Key outbound markets (USD3.7 billion) to USD5.3 billion in 2) Financial investors — In June Russia, North America, and Central 2018, and decreased to USD 800 2019, China Investment Asia have been popular among the million in 2019. Considering the value of Corporation took a stake in the Chinese enterprises that have two mega deals (CNOOC’s and midstream natural gas pipeline gone abroad. CNPC’s respective purchase of a 10% distribution business of UK stake in Arctic LNG 2 project) was not National Grid; disclosed to the public (the total deal value in this report is calculated based 3) Other SOEs — In June 2019, on disclosed available information), the ZEPC purchased 18.95% of actual deal value in 2019 is estimated Kazakhstan’s TNG Group for to be far greater than USD800 million. USD30 million. TNG holds a 100% equity of the local blocks of Tenge
45 Inbound M&A
Inbound M&A at a glance
• Public disclosure of inbound deals is very limited. Deals disclosed in 2019 include:
1) SK Chemicals’ acquisition of 35% of Sinopec Wuhan Oil Refinery for USD667 million;
2) Arkema Asie SAS’ acquisition of a 45% share of Taixing Sunke Chemicals Co., Ltd. for USD130 million.
• Compared with 2017 and 2018, deal volume remained flat in 2019 (3 in 2017 and 2 in 2018), whereas deal value increased compared with that of 2017 (over USD300 million in 2017) and was largely unchanged from that of 2018 (about USD800 million).
1) Oil & gas exploration and - Key components’’ development, and mine gas manufacturing of ethylene utilization complete sets of equipment with 1 million tones/year PwC Views 2) Development and application of and above enhanced oil recovery (in the form of engineering services) and - Offshore oil spill recovery 1. Driving factors “ related new technologies equipment manufacturing We believe foreign companies are lured 3) New technology related to oil 6) Construction and operation of oil to making investment in the domestic exploration and development, such (gas) pipeline and storage facilities market by: China’s abundant as geophysical exploration, drilling, unconventional oil and gas reserves, 7) Construction and operation of logging, and underground growing energy demand, increasingly regional energy supply (cooling operation strict environmental and safety and heating) projects fired by regulations, the policy of opening-up to 4) Oil processing, coking, etc. natural gas. the outside world and the international 5) Special equipment manufacturing expansion of multinational corporations. - Oil exploration, drilling, 2. Policies and regulations collection and transportation On June 30, 2019, the NDRC and the equipment manufacturing: Ministry of Commerce issued the 2019 floating drilling with water version of the “Catalogue of Industries depth over 1500 meters. that Encourage Foreign Investment”, in Floating production system, which the negative list of foreign subsea oil recovery and investment was revised. The following collection equipment oil-gas-related industries are being - Shale gas equipment encouraged: manufacturing
46 Inbound M&A
3. Prospect analysis energy service station which integrates the services of gasoline, hydrogen In recent years, China’s economy and supply and electric charging. PwC Views energy demand have grown steadily amid tightening supply & demand, The 2019 version of the negative list for On December 31, 2019, the Ministry of resulting in greater dependence on foreign investment access removes the “Natural Resources released the foreign imports. With the opening of the restriction that urban gas of a city with a “Opinions of the Ministry of natural whole industry value chain of the population over 500,000 has to be resources on several issues concerning domestic oil & gas industry, more controlled by the Chinese side. With the the promotion of mineral resource foreign companies will be attracted to official establishment of China Oil & management reform”. With China fully the field of oil & gas exploration and Gas Pipeline Network Corporation opening its oil & gas exploration and production in China and increase the (December 2019), the domestic gas production market, private and foreign country’s self-sufficiency. Including market is expected to undergo investors are now allowed to enter this conventional onshore oil and gas significant changes. Competent foreign field. Domestic and foreign companies development, foreign companies have companies can now enter China’s city registered in China with a net asset of interest in unconventional oil & gas gas market through M&A, and bring no less than Rmb300 million are now resources as well. their comprehensive service ability eligible for oil & gas mining right in (operation and maintenance, etc.) to With the further opening-up of China’s accordance with the regulations. The domestic end-users. market, foreign oil and gas giants are opinions touch upon the reform of considering expanding their retail In addition, foreign companies with mining right transfer, oil & gas (gasoline) stations here, through joint overseas gas sources can approach exploration and production ventures, M&A, wholly foreign-owned more local customers here by investing management and reserves enterprises, etc. At the same time, they in domestic LNG receiving terminals. management. might be also interested in exploring the business model of the comprehensive
47 Natural gas
M&A in natural gas (incl. LNG) sector by deal value and volume (2019)
By deal volume By deal value
Non gas, 47% Gas, Gas, 39% 47% Non gas, 52%
Mixed, 1% Mixed, 14%
Source: Data from Mergermarket and PwC analysis Note: Deal value is calculated based on the disclosed value
Natural gas related deal volume (2017-2019) 1. Market activity
15 As the second largest consumer of natural gas in the world, 14 China’s natural gas consumption has grown rapidly in recent years. According to the “Opinions on Accelerating the Use of 12 Natural Gas” issued by the NDRC, by 2020 and 2030, the 11 10 proportion of natural gas in the primary energy consumption will be increased to about 10% and 15%. Compared with 8 other fossil fuels (coal/oil), natural gas is generally regarded as a cleaner energy, which might become one of the main supplies of China’s modern clean energy system.
2017 H1 2017 H2 2018 H1 2018 H2 2019 H1 2019 H2 We found that the natural gas related deals (including LNG) accounted for 39% and 47% of the total deal volume and Natural gas related deal value (2017-2019) value respectively (a total of 25 deals with disclosed value of USD6.3billion). If taking into account wider gas related USD in millions deals (including mixed oil & gas fields), the volume accounted for 53%. 5,302 The deal volume and deal value related to natural gas
3,138 (including LNG) showed a steady upward trend from 2017 to 2019. Total deal value increased from USD1.1 billion in 2017 to USD4.2 billion in 2018, and further to USD6.3 billion in 1,091 968 659 510 2019; deal volume increased from 19 in 2017 to 26 in 2018, and remained largely unchanged in 2019. 2017 H1 2017 H2 2018 H1 2018 H2 2019 H1 2019 H2
48 Natural gas
2. Investment entity For a long time, the construction and operation of China’s oil and gas pipeline network has been dominated by national oil Investors in the natural gas sector are diversified, which companies. According to publicly available data, “as at the include the three NOCs, provincial natural gas pipeline end of 2018 the three national oil companies had 96,000 network companies, private urban gas suppliers, and kilometers of main oil and gas pipeline network, with CNPC, financial investors. Sinopec and CNOOC accounting for 63%, 31% and 6% 1) Three NOCs – In August 2019, PetroChina Kunlun respectively. At the same time, the provincial pipeline Gas purchased 17 subsidiaries of Jinhong Holding network was 25,000 kilometres long, of which three NOCs Group with Rmb1.65 billion (about USD235 million); and other stakeholders accounted for a 50% stake respectively.” 2) Provincial pipeline network company – In January 2019, Shaanxi Natural Gas acquired 100% of the The newly established China Oil & Gas Pipeline network shares of Wuqi Baoze Natural Gas; Corporation will be responsible for the investment and construction of national oil and gas pipeline network and 3) Private city gas supplier – In January 2019, some gas storage facility, as well as the pipeline Zhongyu Gas acquired 100% of the shares of transportation of crude oil, refined oil, and natural gas. This Mengzhou City Gaoyuan Natural Gas Co., Ltd and will effectively solve problems such as low interconnectivity of Wen County Gaoyuan Natural Gas Co., Ltd; pipeline network, and the lack of unified planning and 4) Financial investor – In June 2019, China Investment regulatory, as well as ensure the stable market supply and took a stake in Cadent Gas (a subsidiary of National fair open access to all the third parties. Grid); The establishment of China Oil & Gas Pipeline Network 5) Other investor – In May 2019, Beijing Sanju Corporation is expected to restructure the competitive Environmental Protection & New Materials acquired landscape of the natural gas industry. In the long run, it will 49% of the shares of Inner Mongolia Sanju Jiajing help accelerate the transition to a new market pattern: The New Energy for Rmb190.61 million (about USD28 upstream is dominated by Three NOCs, supplemented by a million). variety of gas sources, the midstream is transported by a 3. The establishment of China Oil & Gas Pipeline unified pipeline network, and the downstream sales market is Network Corporation fully competitive (x+1+x).
On December 9, 2019, China Oil & Gas Pipeline Network Corporation was officially established in Beijing, marking a key step in deepening the reform of oil and gas system in China.
49 Natural gas
We think that the long-term and far-reaching impact on the 4. Potential Challenge entities of the sector includes: With the gradual opening-up of the domestic gas industry and 1) For NOCs, the separation of pipeline network will break the the introduction of social capital, more investment integrated operation model of upstream, midstream and opportunities have emerged, but accompanied by challenges: downstream. The loss of the monopoly advantage of the The asset integration of China Oil & Gas pipeline network midstream through the pipeline network, leaving only two corporation might lag behind: After the establishment of business units of upstream production and downstream China Oil & Gas pipeline network corporation, the details of sales, will have an impact on its own profitability. However, the assets involved are yet to be finalized. It will also take a the NOCs can change their development strategies, better considerable amount of time, manpower and material rely on their upstream resource advantages, actively enter resources to integrate the pipeline business of each the city gas sale market, and find new profit growth model; company. The slower-than-expected asset integration would 2) For other upstream companies, with the separation of lead to the lag in the reform of the natural gas industry. pipeline network business and the liberalization of Natural gas consumption grew below expectations: To upstream competition, capital expenditure is expected to prevent the COVID-19 from spreading, most regions in the be more inclined to the exploration and production, thus country have issued traffic restrictions since early 2020. helping to increase natural gas production. Many enterprises and factories also postponed the date of Unconventional gas companies and equipment & work after the Spring Festival. Public places and engineering companies related to exploration and entertainment/catering industries were closed for a while. production are likely to benefit. These led to a sharp decrease in the demand for natural gas 3) For midstream companies, the establishment of China in the short term and a decrease in the growth rate of annual Oil & Gas Pipeline Network Corporation promotes the consumption. It is unlikely for the natural gas consumption interconnection of the pipeline network. Pipeline this year to meet the objective of “13th five-year” plan (10% investment and construction companies will likely be of total primary energy consumption in 2020). among the first to reap the benefits.
4) For the downstream, large city gas companies operating nationwide will be keen to facilitate the integration of value chain and further secure more potential customers.
50 Natural gas
Key deals at a glance
• In August 2019, PetroChina Kunlun Gas purchased 17 • In January 2019, Zhongyu Gas acquired 100% of the subsidiaries of Jinhong Holding Group for Rmb1.65 shares of Mengzhou City Gaoyuan Natural Gas Co., billion (about USD235 million). Kunlun Gas is a Ltd and Wen County Gaoyuan Natural Gas Co., Ltd. As professional company in charge of urban gas business a professional gas operation service provider, Zhongyu under CNPC. With its advantages in upstream resources, Gas operates in 11 provinces and cities including Henan, Kunlun Gas actively expands in the urban gas market. Shandong, Hebei, Beijing, and Jiangsu, and distributes Jinhong Holding is headquartered in Jilin City. Its main pipe gas to residential and industrial and commercial users. business is the construction and operation of long-distance Mengzhou City Gaoyuan Natural Gas and Wen County natural gas pipeline and urban gas pipeline network. Gaoyuan Natural Gas, located in Henan Province, have Among the 17 target companies, all except Tai’an Port, are signed franchise agreements with Mengzhou and Wen engaged in city gas supply and management. We believe County local governments respectively, and are mainly that through this acquisition, Kunlun would be able to engaged in the sales of pipe gas and gas appliances. This increase its market share in the urban gas market in acquisition is in line with Zhongyu’s development strategy: Hengyang, Tai’an and Hengshui. It would also contribute “that is, entering the surrounding developed areas by to the integration of the company’s gas business and the accelerating the acquisition of high-quality projects”. achievement of gas sale targets. Zhongyu Gas has not carried out any large business in the target company’s business operation areas (Mengzhou and Wen County), but owns several urban gas projects in the nearby regions. Through the acquisition, Zhongyu can expand the coverage of its products and services, and further increase its market share in the region.
51 Natural gas
Expert opinion
Xi Wei, Assistant General Manager of Shanghai Petroleum & Gas Exchange (Strategic Investment)
With the rapidly increasing natural gas consumption, national Oil & Gas Pipeline Network Corporation, China has been the major driving force for the growth LNG terminals will be playing an increasingly of global natural gas market. Considering natural gas important role. Also because the distribution of LNG infrastructure development in China relatively lag terminals around coastal provinces/cities is not even, behind, it is more important to consider the some regions might still have the room for further investment on the entire industrial value chain other development, particularly the provinces where there than purely upstream gas assets. Meanwhile, foreign are high demands for natural gas and pipeline companies are paying closer attention to combine infrastructure is better established, such as Jiangsu, the strengths of their overseas gas supply together Zhejiang and Guangdong provinces. with the enormous customer group in China market. 2) City gas is another area worthwhile for further For example, South Korea SK Group recently study. Along with China urban redevelopment and announced their plan to jointly develop and construct battle for blue sky, the future gasification rate among LNG receiving station in Weihai in collaboration with city dwellers will be gradually increased. Heating CNPC Shandong Branch. supply in some of Northern and Central cities will We believe the key investment themes in the future heavily reply on the natural gas, and large mainly include the areas below: Commercial & Industrial customers are also being encouraged to switch from burning coal to using gas. 1) LNG receiving terminals – including the existing Stable cash inflow and huge consumers group make operational 22 LNG terminals in China, over 30 LNG the city gas more attractive for investors. terminals will be expected to be in operation in 3-5 years, which means there might be an excessive capacity by then. However with the establishment of
52 Natural gas
Expert opinion
Xi Wei, Assistant General Manager of Shanghai Petroleum & Gas Exchange (Strategic Investment)
In the short term, many small private city gas surplus imported LNG, and newly built LNG-fired companies are on the offer for sale. Under the power stations can also contribute to the local background of national oil & gas pipeline network economy development, which is the strategic growth corporation’s establishment, gas companies are direction currently being explored by many medium moving towards both upstream and downstream on and small costal cities. the value chain. Nationwide operational city gas The outbreak of COVID-19 since early 2020 has led companies and regional leading players are more to travel restriction and reduced commercial & capable of achieving expansion and building the industrial activities. Natural gas consumption in 2020 entire value chain through green-field investment and is hard to predict at this moment. Provided the M&A. On the other side, some small private city gas pandemic in Europe and America is under control by companies are willing to be sold due to the pressure end of Q2 2020, we expect China’s exports to bring on profits. This might become an opportunity for recovery and economy development and energy M&A of city gas industry. consumption to rebound. In the long run, we are also positive about the prospect of gas-fired power. Power industry will become one of the important channels to consume
Shanghai Petroleum & Gas Exchange (SHPGX) was set up approved by Shanghai government with the purpose to become a national energy trading platform, under the guidance by NDRC and NEA.
53 Investment outlook and hotspots
Restructure of natural gas industry stimulating M&A activities
With the establishment of China Oil & Gas Pipeline Network 3. At present, most of the regional gas franchise rights of Corporation, the distribution pattern of interests in natural the second-tier, third-tier and the county-level cities are gas industry chain will change. Market players can seek new owned by local companies, and the competition pattern business opportunities through M&A: is relatively scattered. Local private city gas companies are small and relatively passive because they lack the 1. Three NOCs with upstream resources in hand might ability to negotiate with upstream and it is difficult to actively enter and integrate downstream city gas obtain overseas gas sources through using LNG markets through M&A. In addition, the fair access of receiving terminals. This may lead to opportunities for China Oil & Gas pipeline network corporation to third merger and consolidation of the city gas industry. parties will also benefit non-conventional natural gas companies (coalbed methane/shale gas/tight gas, etc.) In addition, the establishment of China Oil & Gas by alleviating problems, such as the lack of gas Pipeline Network Corporation will promote the pipelines in development zones which will affect their independence of oil and gas pipelines, separate pipeline enthusiasm for expanding production; transmission and sales, and accelerate the construction of pipeline infrastructure. Engineering and equipment 2. Nationwide city gas companies and local leading companies in the natural gas industry might also attract companies will invest in and secure low-cost overseas gas investors’ attention, such as steel pipe manufacturing, sources by entering LNG receiving terminals to further storage and transportation services. expand their scale advantages in the domestic market;
Survival of the fittest in the refinery industry; stepping into the period of integration
In the next two years, the expansion of China’s refining and refined oil production and increase the output of high value- chemical industry will continue to be released, competition added petrochemicals. will become fierce, and some products may have excess In addition, increasingly stringent environmental regulations capacity (such as refining and PTA). On the other hand, will affect SMEs substantially. Only companies with high China still heavily reply on the imports for high-end environmental performance can survive, while those with low petrochemical products. efficiency and environmental protection will be eliminated or In the great Petrochemical age, “refinery and petrochemical merged. The industry has entered the survival-of-the-fittest integration” will become the long-term development trend. A phase and is moving towards a high-quality development new model is being adopted in refining and petrochemical stage. integration to promote companies to reduce the proportion of
54 Investment outlook and hotspots
Technological innovation leads to the change
China at present depends largely on foreign oil and gas forward higher requirements for emergency management imports (72% oil and 43% natural gas in 2018). Although in the oil and gas industry. Adopting advanced China has the resource base to achieve stable oil and gas unmanned and intelligent production operation production, the probability of discovery of large conventional management technology can effectively reduce oil and gas fields is uncertain. To accelerate the realization unnecessary personnel contact and improve safety of resources, more advanced technologies would be needed performance. For example, automated (unmanned) oil to serve old oilfields or unconventional oil and gas fields. rigs, LOT smart gas meters, self-service gasoline refuelling stations, etc. Technologies that help reduce costs and increase operational efficiency will be favoured by more companies • Enhanced Oil Recovery – At present, several and investors. mainstream methods, such as the injection of water˴ polymer˴ and carbon dioxide, have been formed around • Digital Technology – Information technology is used as a the world to enhance oil recovery in oil fields. In recent means to fully realize digitization, networking, intelligence years, the proportion of China’s difficult-to-recover oil and and visualization of oilfield entities and companies. The gas reserves has increased year by year. To prolong the application of digital and intelligent technologies in the lifespan of old oil fields, further development and field of oil and gas production can help companies application of enhanced oil recovery technology (EOR) reduce costs and improve their overall competitiveness. are needed. In addition, the recent COVID-19 epidemic has also put
Opportunities in the hydrogen era
• As a clean and efficient energy source, hydrogen has petrochemical industry is relatively low, which could turned the heads of many investors and policy makers at become a stable and cheap source of hydrogen. home and abroad in recent years. hydrogen production • In addition, more conventional refuelling stations will be by natural gas (one of the paths) has mature technology, expected to be transformed into integrated energy high output, and moderate cost, which is suitable for service stations (gasoline + hydrogen + electric charging) large-scale hydrogen production. In the future, further to meet the needs of different types of consumers integration may occur between the natural gas and (vehicles). For example, the Foshan Station built by hydrogen energy industries. For example, the joint Sinopec in Guangdong is the first new outlet that construction of liquid hydrogen LNG receiving terminals, integrates gasoline˴ hydrogen energy˴ EV charging and and the blended hydrogen into natural gas pipeline convenience chain services in China. The integrated network for transportation. energy station model saves related costs such as land • The rapid development of China’s hydrogen energy and labor, and contributes to the better use of different industry also provides opportunities for petrochemical energy resources. companies. The cost of by-product hydrogen in the
55 Investment outlook and hotspots
Outbound, domestic and inbound deals
The COVID-19 has had a large impact purchase “good and cheap” • Regarding M&A in the domestic on the M&A market recently, and some upstream assets worldwide when market, we believe that they are still planned deals have been delayed. international oil prices are low. The concentrated in areas such as urban Assuming the epidemic is successfully NOCs and local SOEs with deep gas and refinery & petrochemicals. contained in the short time, M&A pockets remain important forces for Urban gas companies have carried activities might rebound in the next 1-2 outbound M&A; out horizontal M&A activities of “big years. Seeking growth opportunities and eats small” in order to continuously • When the epidemic is over, oil and breakthroughs in an uncertain expand their coverage and achieve gas demand and consumption might environment will be an important issue expansion. Refinery and resume their previous vitality, and quality investors and companies must petrochemical companies are keen overseas strategic investors will consider. to extend their upstream and again be paying close attention to downstream businesses through • Affected by the COVID-19 outbreak the Chinese market. Multinational vertical M&A, to achieve the since the beginning of 2020, travels companies will consider establishing integration of the industrial value due to traffic regulations are closer partnerships with Chinese chain. Investors will also have a reduced, factory resumption is companies to seize opportunities more diversified distribution. In delayed, and the easing of global oil and advantages, especially in the addition to SOEs, private companies and gas supply and demand will fields of high-end refining and will play an important role. continue. With China being a major petrochemical, unconventional and importer of oil and natural gas, it is a offshore oil and gas field good time for Chinese investors to development, and comprehensive energy service stations；
Future trend in the period of low oil price
Since the beginning of this year, M&A activities. Some small/medium gas and gas-fired power industry. affected by geopolitical factors, and also size oil & gas operators with high costs Meanwhile, in the future, oil and gas because of the demand slowdown and and incompetent performance are likely storage facilities/infrastructure will global economy downturn caused by to face the risks of reducing or probably attract more attention from COVID-19 outbreak, international oil suspending production. Some refinery & investors. prices have plunged sharply. Price of petrochemical companies might benefit In the middle to long term, there is WTI future contracts for May 2020 because the prices of their products do uncertainty on the future trend of oil before expiration date even fell below not fall as much as the price of raw price which might need more zero (also due to the lack of available materials (crude oil). Given the fact that observation. The corresponding impact storage capacity). During the period of imported gas price here is related to on each subsector development and low oil prices, investment entities on the international crude oil price to some associated investment/M&A activities market tend to take a more rational and extent, gas prices might go lower, which will need further understanding and pragmatic attitude towards green-field might benefit the development of city comprehensive study. investment and
56 Contact us
Franklin Zhai Sammy Lai EUM (Energy/Utility/Mining) Power and Utilities Deals Industry Deals Lead Partner Lead Partner PwC China PwC China +86 (21) 2323 2957 +86 (10) 6533 2991 [email protected] [email protected]
Steve Cheng Bing Lu Energy Oil and Gas Industry Deals Deals Strategy & Lead Partner Operation Partner PwC Hong Kong PwC China +852 2289 2568 +86 (10) 6533 2118 [email protected] [email protected]
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