State Grid to List Financial Services Business

Power transmission giant State Grid Corp. of China is preparing a backdoor listing for its finance unit, becoming the latest big state-run enterprise to spin off its financial services into a separate, publicly traded company.

News of the plan came Monday in a stock exchange announcement (link in Chinese) from Shanghai Zhixin Electric Co. Ltd., a money-losing electric transformer maker. Zhixin would become the vehicle for the listing using assets from State Grid’s financial unit, State Grid Yingda International Holdings Group Co. Ltd. Zhixin shares were suspended Monday pending an announcement within the next 10 trading days. 

State Grid is the world’s largest power grid operator and currently has nine listed units. But its growth has slowed in recent years with the cooling of China’s economy, resulting in a 14.3% profit drop last year to 78 billion yuan.

The transaction would make State Grid the latest in a growing number of state-owned companies from traditional sectors like steel and energy to spin off financial services businesses into separate listed units. Other listed companies that resulted from such spinoffs include CNPC Capital and Minmetals Capital.

Zhixin will issue new shares to buy Yingda’s trust and securities businesses, according to the announcement. In such a backdoor listing process, the listed business, often called a shell company, typically absorbs the larger, unlisted company’s main assets in exchange for a large amount of new shares that go to the larger company’s shareholders. Terms of the deal weren’t disclosed.

Sources at the State Grid parent and Yingda subsidiary said the planned backdoor listing is a top agenda item for the parent company this year and follows the introduction of a major new strategic partner into Yingda. China encourages the introduction of such strategic partners under its ongoing mixed-ownership pilot program aimed at making big state-owned enterprises more dynamic.

Yingda’s trust business dates back to 1987, and State Grid become its largest shareholder in 2006. Last year the trust unit took on China Southern Power Grid as an investor, expanding its registered capital by about a third to 4 billion yuan ($596 million). That process left China Southern Power with 25% of the Yingda trust business, while State Grid’s share dropped to 63.4% from 84.6%.

Yingda’s trust business revenue rose slightly to 1.07 billion yuan in 2017, while its profit fell 4% to 610 million yuan. The unit struggled to pay returns on some of its financial products starting last year because of cash flow problems at investments tied to those products. Other trusts across China have faced similar difficulties as a slowing economy puts higher-yielding investments at risk.

Yingda’s securities business was registered in 1996 and took on State Grid as a shareholder three years later. Yingda’s stake in the unit now stands at 66%. Its 2017 revenue slid 34% to 658 million yuan, while its profit that year tumbled an even larger 52% to 138 million yuan.

Contact reporter Yang Ge (geyang@caixin.com)