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Sinohydro becomes face of China expansion

January 5, 2012

As China’s state-owned enterprises expand across the globe, few are leaving a more indelible mark than Sinohydro Corp. Although hardly a household name, the infrastructure group has built more than half the dams in China and is increasingly active overseas, with projects in 55 countries from Africa to South America.

With $19bn in assets, Sinohydro’s concerns range from potash in Laos and airports in Botswana to high-speed rail in China. In 2010, Sinohydro poured enough concrete to fill 20,000 Olympic-sized swimming pools and moved enough dirt to fill London’s Royal Albert Hall 184 times.

Sinohydro’s October listing in Shanghai, in which it raised $2.1bn – China’s biggest initial public offering last year – offered a rare glimpse under the bonnet of the opaque, state-owned conglomerate. According to the IPO prospectus, in 2010 Sinohydro reported international revenue of more than $4bn – a quarter of total revenue – primarily from Africa and the Asia-Pacific, and $21bn in overseas projects. In the first three quarters of this year, total revenue had grown to Rmb77.6bn ($12bn) while net profit was Rmb2.9bn.

In the IPO, eager investors snapped up Sinohydro’s shares, betting not only on China’s hydroelectric future but also on the seemingly unstoppable momentum of a state-backed company operating in a strategic sector.

But while it is now publicly traded, Sinohydro is still an arm of the state, with 70 per cent of its equity held by its state-owned parent corporation. The remaining 30 per cent is traded in Shanghai.

Sinohydro is a descendant of China’s now-defunct Hydropower ministry – it once employed Hu Jintao, China’s president, shortly after he graduated from university. “The state is the biggest investor in infrastructure construction and the biggest client of our company,” proclaims the company prospectus.

Today, Sinohydro’s most important state role is overseas, where it represents the face of China in hydroelectric power and infrastructure projects.

Along with other state-owned enterprises, Sinohydro has followed Beijing’s directive to “go out” – a policy begun more than a decade ago, encouraging state-owned groups to expand overseas to improve business practices, generate revenue and capture resources.

Its projects are financed largely by loans from Chinese state-owned banks such as China ExIm Bank. They are often linked to diplomatic initiatives by Beijing.

But, with the push abroad, the company has found itself exposed to unfamiliar diplomatic and security risks. “The methods that are proven effective in our operation and practice domestically, to a large extent cannot meet the needs of cross-border operations,” Sinohydro notes.

Last year, it was forced to pull out of Libya in a hurry, cancelling most of its $1.8bn in projects there because of the civil war and transition. Its programme included housing works and infrastructure, and the cancelled contracts accounted for some 12 per cent of its overseas projects at the time.

“After Libya, Sinohydro is becoming more conservative as they choose overseas projects,” says Kathy Liu, Beijing-based analyst with Global Water Intelligence.

Recent elections in Zambia also put Sinohydro on the back foot. Newly elected president, Michael Sata, campaigned partly on an anti-China platform, accusing Chinese companies of using “slave labour”. His time in office threatens to delay Sinohydro projects in the country, including two dams.

Moreover, questions linger over whether Sinohydro and its peers are transforming into profit-driven businesses. Small changes are emerging as Sinohydro adjusts to being listed, among them a promise of a comprehensive environmental policy against a backdrop of controversial projects in Sudan, Burma, Ghana and Indonesia.

“[They] have more pressure from shareholders and from the investment community so, at the margin, they will try to improve their reporting system,” says Manop Sangiambut, an analyst at CLSA in Shanghai. “However, when we come to the way SOEs [state-owned enterprises] are run in China, market share and the size of the company is still the priority, generally.”

Analysts say listing typically has limited impact on how the SOEs do business and that the political considerations still win out over the commercial.

“All of China’s power companies are public institutions, even though they may be selling shares on a stock exchange,” says Patricia Adams, executive director at advocacy group Probe International and a specialist in the Chinese hydroelectric sector.

“Their first priority is to their political masters, and their political masters have a political agenda, not a business agenda.”

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