Exclusive: China’s State Grid Mulls Divesting Equipment-Making Units
State Grid Corp. of China, the state-owned electric utility, is mulling whether to divest several equipment-manufacturing subsidiaries, according to people close to the matter.
The assets include electrical equipment makers XJ Group Corp., Pinggao Group Co. Ltd., Shandong Electrical Engineering and Equipment Group Co. Ltd. and NARI Group Corp., the sources disclosed. Potential buyers may include other state-owned electrical equipment makers, these people said.
The divestment plan, under discussion for more than a year according to the sources, could resume momentum in a stalled power-industry restructuring launched in 2002. Under that plan, the former State Power Corp. was split into State Grid and China Southern Grid, splitting the electrical generating assets from the power grid assets. But the plan’s goal of separating the auxiliary sector ― such as power design, equipment manufacturing and power construction ― from the power grid companies, was delayed.
Spinning off the state-owned manufacturers will not be easy. XJ Group and Pinggao Group have been struggling financially, even though they have stable orders from their parent companies. A source in the power industry told Caixin an expected boom in power grid construction has not materialized, which will continue to put pressure on the equipment makers.
XJ Group’s listed unit, XJ Electric Co., has a market cap of 7.8 billion yuan ($1.1 billion). The listed unit of Pinggao’s market cap is 9.5 billion yuan, and of NARI Group, 81.1 billion yuan. Shandong Electrical, which remains unlisted, has a registered capital of 1 billion yuan.
State Grid acquired XJ Group and Pinggao Group 10 years ago. The acquisitions were controversial as some experts said they violated fair competition in the industry and contradicted the intention of the power industry reform.
In 2008, citing snow disasters in southern China, State Grid proposed to keep the power design, transmission and distribution engineering assets, further stalling the reform. Retaining the manufacturing assets under the monopolies hinders competition in the industry, a researcher in the power industry told Caixin.
XJ Group, a maker of transformers, transmission towers and cable, recorded a net loss of 47 million yuan ($6.66 million) in 2018 on revenue of 9.7 billion yuan. Its Shenzhen-listed subsidiary XJ Electric posted a net profit of 200 million yuan in 2018, down 70% from the previous year. State Grid and its subsidiaries are XJ Electric’s biggest clients, accounting for 67% of total revenue in 2018. The company attributed the decline in earnings to increased competition and a slowdown in project construction.
As of the end of 2018, XJ Group had total assets of 20.5 billion yuan. The parent company owns a 41.28% stake in its listed unit.
Henan-headquartered Pinggao Group’s business focuses on manufacturing of power transmission and distribution equipment and contracting of supply services and engineering. The company posted a net loss of 760 million yuan in 2018, 233% wider than the year-earlier loss. Its Shanghai-listed subsidiary Pinggao Electric Co. posted a net profit of 290 million yuan last year, down 55% from 2017.
As of the end of 2018, Pinggao Group had total assets of 26.8 billion yuan. The parent company owns a 40.5% stake in the listed unit.
Whether Nanjing-based NARI Group would be included in the divestment is unclear. A power industry veteran told Caixin that NARI Group holds certain core technologies that State Grid would like to retain. NARI provides hardware and software products related to the power industry. Its main products include power grid automation gear, power generation and new-energy products, and industry control products. Its core technologies involve grid security, system protection and power dispatch control.
NARI Group is also doing much better than the other equipment manufacturers. The company’s Shanghai-listed NARI Technology Development Ltd. unit posted a net profit of 4.2 billion yuan in 2018, up 28% from the previous year.
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