how to lose money in china

  1. 6,931 Posts.
    From today's South China Morning Post. You'd reckon that supplying power would be a sure thing. Note how "guaranteed rates of return turned out not to be so guaranteed". More lies.



    Thursday, February 13, 2003

    Power industry reverses foreign investment flow


    Next Story


    China is enjoying unprecedented inflows of foreign direct investment into almost every industrial and service sector. Its power industry, however, is unique in that the flow is entirely the other way.
    As exemplified by China Resource Power's (CRP's) recent acquisitions of Sithe's entire mainland power portfolio and Mirant's 33 per cent stake in Dongguan's Shajiao C power plant, foreign investors are fleeing the sector en masse. Factors include fatigue after years of reneged contracts - as guaranteed rates of return turned out not to be so guaranteed - augmented by fears about the implications of industry reform on the mainland, with its emphasis on power pooling, competitive bidding and lower tariffs.

    "It hasn't been a smooth ride in China. Everyone has experienced haircuts on [previously agreed] tariffs or lower output than their guaranteed minimum take," said a Hong Kong-based industry analyst, who asked not to be identified.

    A Hong Kong industry executive with years of experience on the mainland added: "Reform has created a lot of uncertainty - the next step is even worse. Rates of return used to be good in China. But now it's not competitive with other places."

    But, for all the bumps along the way, another factor looms even larger for many foreign investors on the mainland - Enron.

    Since the now infamous energy company's precipitous collapse, companies with substantial operations in the United States - such as AES, Mirant and Sithe - are facing a harsh new operating environment and onerous debt obligations.

    The industry analyst said: "US players are racing against time to pay off debt. Everyone is either in asset management or asset sale mode. They're all looking for liquidity."

    Mirant's December sale of its 33 per cent stake in Shajiao C - and the sale of its 10 per cent stake in listed Shandong International Power Development last May - stemmed from the Enron-related pressures some overseas investors are feeling.

    "In the mid-1990s Mirant was very active in the region. People thought they were committed to Asia," said the analyst. Today it has no assets in China.

    After Enron's demise Mirant's debt rating was cut, forcing it to shore up its financial position.

    A source close to the transaction said: "Mirant wanted a cash deal [for Shajiao C]. They had a very tight schedule." Mirant has to pay US$1.6 billion in debts by July.

    That Mirant was willing to offload a power plant in Guangdong - one of the few areas in China where undersupply guarantees high prices for producers - is a measure of Mirant's desperation and CRP's opportunism.

    "Mirant still made money on the Shajiao C sale," an industry executive said. But he added that Mirant could have gotten another US$80 million for Shajiao C if the same unit rate paid for its sister facility - Shajiao B - had been used. Aware of the seller's distress, CRP held out for a better deal that, in the end, Mirant could not refuse.

    AES, with interests in 10 mainland power assets with a total generating capacity of 1,906 megawatts, is in better shape.

    Hit by losses in Latin America and the US, the company's 2001 net profit fell 65 per cent to US$273 million after 16 consecutive years of earnings growth. And in the first nine months of last year it lost US$743 million.

    But the company was able to refinance US$5 billion of short-term debt, pushing it back to 2005 or beyond. Sithe's travails had more to do with its troubled parent, Vivendi, than a tougher post-Enron operating environment in the US. When Vivendi decided to become a new economy media company - on the back of Vivendi Universal - most of its infrastructure assets were ploughed into Vivendi Environment.

    Bizarrely, however, Sithe was left with Vivendi Universal - a bunch of power plants sticking out like a sore thumb in what was supposed to be a media company and therefore ripe for disposal.

    "We're still part of Vivendi Universal," said Sithe (Asia) senior vice-president John Giraudo. "I honestly don't know why that's the case. It's a historic anomaly." After Sithe's plants in the US and Latin America were sold, disposal of its China assets was just a matter of time. Little by little we're doing exactly what Vivendi wants of us, which is to translate these assets into cash."

    Whatever the reason for foreign power investors' distress on the mainland, it all translates into a buying opportunity for local companies such as CRP. A US industry executive whose company still has plants in China said: "A lot of people are in financial trouble and you don't have a whole lot of buyers. The volume of assets for sale still greatly exceeds buyer capacity."

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