China Builds an Empire of Electricity With Australia as Target – Bloomberg

Source: By James Paton, Bloomberg • Posted: Monday, April 4, 2016

It generates more revenue than Apple Inc. and Boeing Co. combined and serves one in seven people on the planet. Meet State Grid Corp. of China, a company that may be buying power assets near you.

While State Grid is hardly a household name, its geographic footprint extends from South America to Australia, where it’s a contender to acquire a stake in Sydney-based power network Ausgrid. Hungry to grow outside China, the company plans to develop a $50 trillion global energy network that could enable electricity to be transmitted beyond continental boundaries.

“If railway, road and Internet can link the whole world, why can’t an energy network be built?” Chairman Liu Zhenya said last week in an interview in Beijing. “The problem right now is just that people need to embrace new ideas and not let the old thinking stand in the way of new innovation.”

State Grid’s expansion ambitions will be limited only by the opportunities available to it, not by cash, Liu said. The Beijing-based company, which is wholly owned by the government of China, can help upgrade electricity grids and other infrastructure, and bring new power-transmission technology to the countries it’s targeting, he said.

‘Significant Company’

The company’s interest in Ausgrid comes amid a wave of Chinese investment in Australia, from cattle ranches to natural gas. Buyers from China announced about A$8.5 billion ($6.5 billion) in acquisitions of Australian companies last year, the most in at least 12 years, according to data compiled by Bloomberg. While such investment is vital as Australia seeks new growth drivers following a decade-long mining boom, it’s stoked security concerns and community unease, particularly over sales of farmland and real estate.

State Grid, which says it has about 1.9 million employees and 1.1 billion customers, generated more than $50 billion in cash from operations in its latest fiscal year, according to data compiled by Bloomberg. Its annual sales of more than $330 billion make it the world’s biggest utility and put it ahead of Toyota Motor Corp. and Exxon Mobil Corp.

“It’s an increasingly significant company and making some extremely sizable investments,” said Joseph Jacobelli, an analyst at Bloomberg Intelligence in Hong Kong.

Australian Assets

Countries in which State Grid has bought power assets include BrazilAustralia, the Philippines and Italy, where it bought a stake in CDP Reti in a $2.8 billion deal in 2014. “You’ve got a brand new player in town and a new capital injection source, which you didn’t have five or 10 years ago,” Jacobelli said.

In Australia, State Grid owns stakes in electricity companies Jemena Ltd, AusNet Services and ElectraNet Pty. The 50.4 percent holding in Ausgrid, which the New South Wales state government is selling, could fetch more than A$10 billion, people with knowledge of the matter said in February.

State Grid will actively bid for Australia’s power assets, Chairman Liu told a briefing in Beijing on Wednesday, without identifying any targets.

“Australia ticks an enormous number boxes for State Grid,” said Jacobelli, adding that the company would be a logical buyer of Ausgrid.

Negotiating Force

With the world’s second-biggest economy behind it, State Grid is an intimidating force at the negotiating table. Last year, it was part of a group that competed for TransGrid, an electricity network in New South Wales. Another consortium that included investors from Canada and the Middle East won the bidding contest after agreeing to pay at least A$1 billion more than the asset was estimated to be worth.

Unions and some lawmakers raised concern at the time that foreign ownership of strategic infrastructure might pose a threat to Australia’s security.

“It’s absolutely guaranteed that any investment from State Grid is going to be closely scrutinized,” said James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology in Sydney. “Companies like State Grid are bidding up these infrastructure assets overseas and I don’t see how that can be a bad story for the countries, the companies and the state governments that are selling.”

Mitigating Risk

Power is among the industries in President Xi Jinping’s drive to overhaul the nation’s bloated state-owned businesses and allow market forces to play a bigger role. China’s government said in November it will end the monopoly that power distributors have over electricity sales by letting consumers negotiate prices directly with generators. As part of the plan, companies including State Grid will carry electricity for a government-set fee.

Those reforms will “put competitive pressure” on State Grid and make investment in some regions overseas more attractive, said Philip Andrews-Speed, a China energy specialist at the National University of Singapore.

“Like the other Chinese state-owned energy companies, State Grid’s long-term future growth and profitability requires it to move overseas,” Andrews-Speed said in an e-mail. “This is set to continue for as long as it has access to capital.”

South America, Africa

Besides the investments in Brazil, Australia, Italy and the Philippines, State Grid is looking for more opportunities in South America, Africa and neighboring countries near China, Vice President Wang Yimin said in an interview in Houston in February.

Three years ago, the company targeted as much as $50 billion in international assets by the end of the decade. State Grid estimated in late 2012 that it had made only $5 billion in overseas investment. While that spreads the company’s geographic risk and allows its staff to gain a broader experience and acquire new ideas, the businesses it targets also stand to gain, including by partnering with a world leader in ultra high-voltage transmission technology.

Based on the company’s research, it would be feasible to send power from China’s wind-power rich Xinjiang province to Germany through a 6,000-kilometer network and still sell it at competitive prices, Liu said in January.

Getting Comfortable

“They’re a lot bigger than anybody else, so that shows how much they could deploy in terms of R&D and technology,” said Edwin Lam, an analyst at Fitch Ratings Ltd. in Hong Kong. “They’re not behind the developed world. They’re actually on par or, in some cases, they do have technological advantages, such as ultra high-voltage.”

State Grid’s pace of expansion will depend on the availability of opportunities, Lam said, adding the company has a strong balance sheet and access to capital.

In the coming years, Australians will become increasingly familiar with State Grid, Laurenceson said.

“Chinese investment may provoke stronger feelings because of this connection with the Chinese government,” he said. “But I’m fairly confident after 10, 15 years, these big players we’re going to become quite comfortable with.”