bucking the trend: integrated, smart, sustainable energy ... · disclosed fund raising amount:...

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April 2020

Review and outlook of M&A activities in China’s

energy industry in 2019

Bucking the trend: Integrated, smart, sustainable energy investments

Methodology

1

Source of data (Power & Utilities Section)

• The data presented in this section is based on information collected from

ThomsonReuters, Mergermarket, ChinaVenture, Zero2IPO Research, public news and

PwC analysis unless stated otherwise.

The deal volume and value (Power & Utilities Section)

• The deal volume figures presented in this section refer to the number of

deals disclosed, regardless of whether or not the corresponding deal value

is disclosed.

• The deals mentioned in this section include those with a transaction size that is publicly

disclosed in detail. Values are rounded off; Lack of detailed information about transaction

size may affect the completeness of this analysis. For transaction size disclosed in the

form of divisors shown in the table below, we used the corresponding rounded figures in

our calculation and analysis.

• Deal values in the report are presented in Rmb billion unless stated otherwise. In order to

exclude foreign exchange impact, deal values are adjusted to the RMB mid-market

exchange rate announced by the Bank of China on the deal announcement dates.

Source of data (Oil & Gas Section)

• The data presented in this section is based on information compiled by Mergermarket,

public news and PwC analysis unless stated otherwise.

• The deal values in this section are presented in USD1 million unless stated otherwise.

• The deal volume figures presented in this report refer to the number of deals disclosed,

whether or not a value is disclosed for the deal

Investment types

• Deals are categorised as follows:

− “Domestic” means that the investor and the investee are both located in Mainland

China, Hong Kong or Macau

− “Outbound” relates to Chinese investors, including Hong Kong and Macau, investing

in overseas targets

− “Inbound” relates to overseas investors investing in targets located in Mainland

China, Hong Kong or Macau

Disclosed fund raising amount: Converted amount (Rmb)

Hundreds of thousands 500,000

Nearly a million 1,000,000

A few millions 5,000,000

Nearly ten millions 10,000,000

Tens of millions 50,000,000

Nearly a hundred of millions 100,000,000

Hundreds of millions 500,000,000

Industry description

2

Description of power industry sub-sectors

• This report categorizes the power industry into the following sub-sectors:

− Conventional: Includes thermal power (e.g. coal, gas and fuel oil) and

nuclear power

− Renewable: Includes hydropower, solar PV, wind power, new energy

batteries & energy storage, other new energy power generation (e.g.

biomass, waste to energy, geothermal energy and tidal energy), and

integrated power generation (i.e. the target company or asset package

operates multiple types of renewables)

− Transmission and distribution: Includes grid construction investment, and

R&D and manufacturing of power transmission and distribution equipment

Description of utilities industry sub-sectors

• This report categorizes the utilities industry into the following sub-sectors:

− Water: Includes raw water, water supply, water conservation, drainage,

sewage treatment and water resource recycling

− Gas: Includes gas production, transportation and supply. Details on this

sub-sector can be found in the coming report on Oil & Gas

− Heating: Includes the manufacture of urban heating and industrial heating

equipment and the construction and operation of thermal stations

− Other: Includes solid waste, hazardous waste, domestic waste treatment, and

other municipal public services

Description of Oil & Gas industry sub-sectors

• This report categorizes the Oil & Gas industry into the following sub-sectors:

- Upstream: exploration and production

- Midstream: transportation and storage of oil and gas products

- Downstream: oil refining and petrochemicals, gas purification, distribution and

sales of final products (incl. city gas)

- Supply chain: equipment/engineering services/technology related

The above classifications are based on PwC’s understanding of the industry’s

policies and regulations, deal characteristics, and future development trends of the

industry. They do not represent industry standard classifications.

Content

Section 1 — power industry

Overview of 2019 M&A in the power industry 5

Key data at a glance 6

Power M&A market review in 2019 7

Top 10 M&A deals by value in 2019 10

Domestic M&A 11

Outbound M&A 13

Inbound M&A 15

Investment outlook and insight 16

Conventional energy 17

Renewable energy 19

Power transmission and distribution 21

Investment outlook and hotspots 22

Section 2 — utilities industry

Overview of M&A in the utilities industry in 2019 24

Key data at A glance 25

Utilities M&A market review in 2019 26

Water 29

Heating 31


Section 3 — oil and gas industry

2019 overview of M&A in oil and gas industry 35

Key data at A glance 37

2019 oil and gas industry M&A market review 38

2019 top ten oil & gas deals 40

Domestic M&A 41

Outbound M&A 44

Inbound M&A 46

Natural gas 48


Contact us

3

4

Section 1

Power industry

M&A overview 2019

Integrated energy services that fulfil diversified

energy production and consumption became the

key area of investment in 2019

• With the acceleration of energy transformation and power

system reform, integrated energy services that fulfill

diversified energy production and consumption have

become the focus of energy investment in 2019, engaging

investors especially among state-owned and leading

international energy groups.

• According to deal data disclosed in 2019, two of the top

ten deals involve integrated energy services, signaling the

industry’s interest in exploring and deploying integrated

energy services.

• Integrated energy services blur the boundaries between

different energy sectors. They not only include

comprehensive supply of end products (air conditioning,

heat, electricity, steam, etc.), but also promote

complementarity among different energy types. At the

same time, they emphasize the integration of energy

internet, distributed energy technology, smart grid

technology and energy storage technology, enhancing the

flexibility and integrity of energy production, transmission,

storage, and consumption.

M&A activity soared in renewable energy, while

plunging in the conventional energy sector

• With the ongoing energy transformation, M&A in

renewable energy continues to rise. Disclosed deal

volume and value of renewable energy in 2019 accounted

for 84% and 70% of total deals in the power industry.

These were mainly photovoltaic, wind power and new

energy vehicle battery-related investments.

• As subsidies to the renewable energy sector in China

have gradually been phased out, the industry will shift

from a policy-driven to a market-driven model. In the short

term, the decrease in subsidies will incentivize cost

reductions through technology upgrades and business

scaling, while putting companies under capital and

operating pressure. In the long term, however, investors

will continue to be optimistic about the quality of China’s

renewables sector.

• The conventional energy industry has become less

attractive to investors due to marketization of the power

industry; policies and restrictions; rising environment

protection costs; and competition from wind and solar

power. As a result, deal value plummeted to the lowest

level of the past four years, from Rmb52.6 billion in 2018

to Rmb15.9 billion in 2019.

The COVID-19 epidemic has brought challenges to

the emergency response system of traditional

cities. This may encourage investment in smart city

construction relating to automation, digital

technologies and services

• More than 500 green smart city projects have been

proposed or are under construction as part of the

Government Work Report and the 13th Five-Year Plan, of

which around 290 cities have already been selected as

pilots.

• At the beginning of 2020, the outbreak of COVID-19

caused city shut-downs and regional isolation, which made

apparent the importance of stable and flexible power supply

in the event of disasters. At the same time, it reflected the

necessity of promoting smart city construction.

• In the process of constructing smart cities, technologies that

can improve the intelligence and automation of infrastructure,

such as the Internet of Things, advanced distributed and

energy storage, and big data will be prioritized.

• According to PwC’s recent M&A Market Review of 2019 and

Outlook of 2020, the overall M&A deal value of Chinese

companies in 2019 fell by 14% to USD558.7 billion, marking the

lowest level since 2015. Despite the slowdown in M&A activity in

most industries, deal value in the power industry soared 21% for

an approximate deal value of USD32 billion.

• In our analysis of deals data, we came across the following key

characteristics that surfaced from the recent M&A investment

activities in China’s power industry:

5

Overview of 2019 M&A in the power industry

Key data at a glance

Power industry

Renewable

energy

~84%

SOEs

~44%

20 7358

Domestic

M&A

Outbound

M&A

Inbound

M&A

(Rmb billion)

Note: The average deal value is calculated as the total disclosed deal value/number of deals with disclosed deal value

The deals volume by investor type does not reconcile with total deals volume because of a transaction with undisclosed investor type in

2019. This was therefore excluded from the investment type classification.

Most active sub-sector Renewable Energy

Most active investor State-owned enterprises (SOEs)

Deal value and volume by investment types in 2019

Rmb 222.9 billionTotal deal value in 2019

Up 21%Y.O.Y

386Total deal volume in 2019

Down12%Y.O.Y

Rmb 0.7 billionAverage deal value in 2019

Up 46%Y.O.Y

6

165.1

57.4

0.3

M&A in the power sector by deal value and volume (2016-2019)

(incl. domestic, outbound and inbound deals)

Power M&A market review in 2019

Power — Deal value and volume by energy type (2016-2019)

Source: ChinaVenture, ThomsonReuters, Zero2IPO Research, Mergermarket and PwC analysis

Note: The deal value figures refer only to those deals where a value has been disclosed

Note: In 2017, the total value of deals with a single size> Rmb10 billion was approximately Rmb174.6 billion; after excluding the impact of deals

with a single size> Rmb10 billion, the annual deal value was stable.

2019 Top 5 Power subsectors by deal volume 2019 Proportion of lead investors by deal volume

7

Solar PV

New energy batteries &

energy storage

Other new energy power

generation

Wind power

Thermal power 39

41

43

88

97

(Rmb billion)

51 28

53 16

162 252

122 155

6

66

10 52

476 455

438

386

-

50

100

150

200

250

300

350

400

450

500

-

50

100

150

200

250

300

350

400

2016 2017 2018 2019

Power — conventional Power — Renewable Power–Transmission and distribution Total deal volume

346

219184

223

0.5 0.9 0.5 0.7Avg. disclosed

Value:

Foreign

companies,

1%

SOEs,

44%

Private companies,

33%

PE/VC funds,

19%

Undisclosed,

3%


8

M&A activity at a glance

• M&As in the power industry outperformed the overall market: According to

PwC’s recent M&A market review for 2019 and outlook for 2020, the overall deal

value of Chinese companies’ M&A fell by 14% to USD558.7 billion, marking the

lowest point since 2015. The value of M&A deals in the power industry, however,

increased 21% with a total disclosed deal value of Rmb222.9 billion in 2019. This

is ahead of the entire M&A market (down 14% in 2019). The number of disclosed

deals for the year was 386, a drop of 12% compared to 2018

• The average deal size in the power industry climbed: In 2019, we saw multiple

M&A deals above RMB10 billion. Transactions included the acquisition of Sempra

Americas Bermuda Ltd.’s power grid assets in South America by China Yangtze

Power Co., Ltd. and State Grid China Co., Ltd.; and the privatization of Huaneng

Renewables Corporation Limited (listed in HK) of China Huaneng Group Co., Ltd.

These large-scale deals drove the average deal value in the power industry up

from Rmb500 million in 2018 to Rmb730 million in 2019.

• Continuous transformation of energy structure: With the transformation of the

domestic energy structure, deals in the renewable energy sector have remained

active. The 2019 volume and value of deals in renewables accounted for 84% and

70% respectively of the overall power industry M&As. The activity of conventional

energy deals has decreased significantly, from Rmb52.6 billion in 2018 to

Rmb15.9 billion in 2019.

• SOEs have become the mainstay of M&A in the renewable energy sector:

small and medium-sized companies are facing cash flow challenges from grid

parity pressure and delays in subsidy payout. At the same time, SOEs have been

given more investment autonomy thanks to the issuance of the State Council’s

Notice on Printing and Distributing the List of Authorization and Decentralization of

SASAC of the State Council (Version 2019). SOEs with sufficient funds and

resources have successively upgraded their energy structure by investing in

domestic and foreign renewable energy power plants, moving a step closer

towards becoming international leaders in sustainable energy.


Note: The deal value figures refer only to deals with disclosed values

M&A activity at a glance (cont’d)

• Domestic M&A is the main investment type in the power sector, accounting for more than 90% of deal volume in 2019. The

scale of investment increased steadily in 2019, reaching its highest point in recent years. The renewable energy sector

continued to be in the investment spotlight — particularly new energy vehicle battery and solar PV.

• After excluding the outlier impact of two deals of over Rmb10 billion in power transmission and distribution, the volume and

value of outbound deals dropped significantly compared to previous years. Technical investments in new energy vehicle

batteries and energy storage took the lead. This shows that domestic energy companies have started to seek intellectual

property and brand acquisitions in addition to the traditional pursuit of overseas technology breakthroughs.

• With the partial lifting of the ban on foreign investments in China’s renewables sector since 2019, the deal volume of

inbound M&A grew significantly on previous years. Financial and cross-sector investors played a major role, in addition to

international energy companies.

Power — Deal value and volume (2016-2019) (by investment types)

9

M&A in the power sector by deal value and volume (2016-2019)

(incl. domestic, outbound and inbound deals)

Domestic

Outbound

Inbound


(Rmb billion)

61

197

3757

1

0

1

38

42 41

20

6

35

7

157 149 146

165

2016 2017 2018 2019

431 408 392

358

Deal value — Domestic Deal value — Outbound Deal value — Inbound Deal volume

Top 10 deals by value in 2019

Deal Date InvestorInvestor

typeTarget Industry

Investment

Type

Deal value

(Rmb Billion)

09/30/2019 China Yangtze Power Co., Ltd. SOEPower distribution and other assets

of Sempra Energy in Peru

Power

transmission and

distribution/

Renewable

energy

Outbound

25.4

12/10/2019

China Life Insurance Company Limited,

ICBC financial assets investment Co.,

Ltd, ABC financial assets investment

Co., Ltd,Guoxinjian credit equity

investment fund, State Power

Investment Corporation, Zhejiang

Yuneng Energy Development Co., Ltd,

Yunnan energy investment capital

investment Co., Ltd and Goldstone

Investment Limited

SOEQinghai Yellow River Hydropower

Development Co. Ltd.

Renewable

energyDomestic 24.2

10/14/2019 State Grid China Co., Ltd. SOEPower distribution assets of Sempra

Energy in Chilquinta Energía in Chile

Power

transmission and

distribution

Outbound 15.8

09/02/2019 China Huaneng Group Co., Ltd. SOEHuaneng Renewables Corporation

Limited

Renewable

energyDomestic 14.4

12/15/2019 State Grid China Co., Ltd. SOE Oman Electricity

Power

transmission and

distribution

Outbound 7.0

01/22/2019CGN Energy International Holdings

Co., LimitedSOE Enel’s new energy assets in Brazil

Renewable

energyOutbound 5.3

12/26/2019

State Grid Energy Saving Service Co.,

Ltd , Zhongtian Technology Group Co.,

Ltd. , Jiangsu Frontier Electric Power

Technology Co., Ltd. , Shenzhen

Jiyuan Integrated Energy Technology

Service Co., Ltd , Qingkong fanneng

(Jiangsu) Technology Development

Co., Ltd and Daqo Group Co., Ltd

SOE/

Private

State Grid Jiangsu integrated energy

service Co., Ltd

Integrated

energy serviceDomestic 5.1

12/30/2019 China Yangtze Power Co., Ltd. SOE

Yunnan Huadian Jinsha River

Midstream Hydropower Development

Co., Ltd.

Renewable

energyDomestic 4.9

04/20/2019 Zhejiang Huayou Cobalt Co., Ltd PrivateTianjin B&M Science and Technology

Joint-Stock Co., Ltd.

Renewable

energyDomestic 3.2

12/20/2019Guangdong Hengjian Investment

Holding Co., Ltd. SOE East Group Co.,Ltd

Integrated

energy serviceDomestic 3.1

10

• In 2019, large-scale deals were concentrated in the cross-border power transmission

and distribution sector and the renewable energy sector. Two deals involving

integrated energy services indicate growing interest on the part of investors.

• SOEs continued to be the main players in large-scale deals. China Yangtze Power

Co., Ltd. and State Grid China Co., Ltd. remained active in the M&A market in 2019.

Top 10 deals by value in 2019

40 21

37 16

113 122

106 146

3 6

2 3

431 408

392

358

-

50

100

150

200

250

2016 2017 2018 2019

Power — Conventional Power — Renewable Power — Transmission and distribution Total deal volume

Domestic M&A

Power — Domestic M&A by deal value and volume (2016-2019)

Domestic power M&A deal investors in 2019

(by deal volume)

2019 top 5 active sectors of domestic power M&A

by deal volume

Domestic M&A in the power sector by deal value and volume (2016-2019)

11


Note: The deal value figures refer only to deals with disclosed values

Investment in Power industry,

41%

Technology, 4%

Manufacturing, 9%

Real estate and construction, 3%

Business services, 13%

Others, 9%

37

38

38

81

88

Other new energy powergeneration

Thermal power

Wind power

Solar PV

New energy vehicle battery

Investors in

2019


value:

Financial,

21%

(Rmb billion)


1. Market activity

In 2019, there were 358 power-related domestic deals in

China, with a total value of Rmb165.1 billion, the highest

since 2016. In terms of sub-sector, investments in

conventional power, renewable energy, and power

transmission and distribution accounted for 11%, 84% and

5% respectively.

Average deal value in 2019 (Rmb570 million) was slightly

higher than in the past three years. The majority of deals

were in the Rmb100 million to Rmb1 billion range.

2. Investor type

41% of domestic power deals in 2019 were carried out by

investors from within the power industry, down from the

2018 level of 45%. At the same time, we observed that, with

the rise of integrated energy services, cross-sector

investors from the business service and technology

industry have shown growing interest in the supply side

of power distribution (such investments accounted for

17% of the total)

SOEs were the mainstay of domestic M&A, driven by

factors such as 1) cash flow challenges resulting from grid

parity pressure and delayed payout of subsidies faced by small

and medium-sized power plants; and 2) investment autonomy

of SOEs granted by newly established policies. SOEs with

sufficient resources have managed to successfully upgrade

their energy structure through M&As in the domestic market.

3. Major sub-sectors

Among power sub-sectors, new energy vehicle battery supply

was the most popular. Affected by the phase-out of subsidies

for new energy vehicles, the number of deals in 2019

decreased slightly compared to the previous three years (113

in 2016, 97 in 2017, and 92 in 2018). However, in January

2020, Minister of Industry and Information Technology Miao

Wei announced that the phase out of subsidies will

temporarily decelerate in 2020. Activity level in new energy

vehicle battery M&A, as a result, may pick up in 2020.

The deals market in solar PV and wind power remained

active in 2019 (a total of 119 deals), focused largely on power

plant deals. In the whole year, there were 83 deals made up

of 51 solar PV power stations and 32 wind power stations.

12

Domestic M&A

“Subsidies and the uncertainty of payment are the

biggest risks of power plant investment at present.

However, with the coming of ‘grid parity’ age, the

investment return on power plant will be more

predictable and stable, which will stimulate the

investment interest. Solar and wind power

industries will be completely transformed to market-

based competition in the future with enormous

growth prospect. Leading companies in the wind

power and solar industries are expected to further

expand their market share due to scale effects, and

backward capacity will be phased out after the

retreat of subsidies. ”

Sunshine Law Firm ERE Research Center

12

Source: ThomsonReuters, ChinaVenture, Mergermarket, Zero2IPO Research and PwC analysis

6

5

3

2

2

2019 outbound investment destination by deal volume 2019 Top 5 Outbound M&A subsectors by deal volume

Outbound M&A

13

New energy vehicle battery

Solar PV

Power transmission and

distribution

Wind power

Hydropower

11 6 15 -

48

130

15

9

3

61

7 48

38

42 41

20

-

50

100

150

200

250

2016 2017 2018 2019

Power — Conventional Power — Renewable Power — Transmission and distribution Total deal volume

Belt & road counties, 35%

USA, 10%

Brazil, 10%Germany,

5%

UK, 10%

Others, 30%


value:

Outbound M&A in the power sector by deal value and volume (2016-2019)

Power — Outbound M&A by deal value and volume (2016-2019)

(Rmb billion)


1. Market activity

In 2019, there were 20 outbound M&A deals in the power

industry, with a total deal value of more than Rmb57.4 billion.

The number of deals was less than half that in 2018. After

excluding the two megadeals (> 10bn), the total value of

disclosed deals (Rmb16.2 billion) in 2019 was more than

60% lower than 2018.

The volume and value of outbound deals declined

significantly. Amid political tensions on cross-border M&A

and Sino-US trade friction, the volume and value of outbound

M&A dropped significantly, especially in the conventional

power generation sector. However, this may not be the case

for outbound investment in the renewables sectors in the

years to come. As single deal transactions are small scale,

there is little political scrutiny. Also, Chinese companies have

been motivated to seek core technology, intellectual property

and brands in overseas markets in recent years to achieve

technological breakthroughs and leapfrog development.

2. Major outbound market

Of the 20 outbound M&A deals that took place in 2019, seven

were investments in countries along the Belt and Road with

deal value totalingRmb10 billion. In addition, there were two

investments in the US market, all of which were in new

energy vehicle batteries and energy storage technologies.

3. Major sub-sectors

By sub-sector, new energy vehicle batteries and energy storage

were the most popular industries for outbound M&A. Overseas

solar PV and wind power stations were also hot spots for

investors’ overseas market expansion and resource allocation.

4. Megadeals

The two megadeals (>10bn) that occurred in the power

transmission and distribution sector in 2019 were the separate

purchases of Sempra Energy’s power distribution assets in

Peru and Chile by Yangtze Power and State Grid China Co.,

Ltd., respectively. Sempra Energy is listed on the New York

Stock Exchange in the US. The above two deals are

indications that SOEs are expanding into overseas markets.

After the initial layout of overseas power plants and integration

of power transmission, distribution and sales will follow.

14

Outbound M&A

Inbound M&A


Disclosure of inbound M&A activities was limited. There were seven deals in 2019, with a

disclosed value of Rmb321 million, a decline from 2018. Most of the inbound deals were in the

renewable energy sector, with a disclosed deal value of Rmb318 million.

Some of the medium and large sized deals include:

• Shah Capital Opportunities Fund’s increase of its holding of new shares of Renesola

Zhejiang Ltd. with Rmb78 million;

• ITOCHU Corporation’s investment in 20% of the shares to subscribe for the third-party

private placement of Shenzhen Pandpower Co., Ltd., a recycling technology service provider

for vehicle batteries;

• BP group’s investment in series-A financing of PowerShare, a start-up company for China’s

electric vehicle charging platform.

Compared with previous years, 2019 witnessed more direct and indirect participation by

foreign financial investors in inbound M&A deals. Of particular note is Powershare, the first

direct investment in China by BP using its venture capital platform, BP Ventures. This also

reflects foreign companies’ close attention to the domestic energy sector and the continuous

innovation in deal structures for them to realize desirable deals.

15

1. Key drivers

We believe that the gradual

implementation of policies in the

domestic renewable energy sector,

abundant renewable energy resources,

and international layout of overseas

companies and funds have driven

overseas companies’ mergers and

acquisitions in the Chinese market.

2. Policy review

• In order to promote the development

of renewable energy, the government

has been providing support through a

series of policies, including direct

investment subsidies or policy

preferences, tax incentives and

reductions, and low-interest loans.

The most direct and effective is the

national direct subsidy policy, which

has attracted many domestic and

foreign investors to the renewable

energy sector in recent years.

• On June 30, 2019, the National

Development and Reform

Commission (NDRC) and the

Ministry of Commerce published the

Catalogue of Industries for

Encouraging Foreign Investments

(2019 version), which significantly

lowered the threshold for foreign

investment. The new edition

encourages foreign companies to

invest in electric power-related

business listed in the new

industrial catalogue, which

includes various types of

renewable energy power stations;

district energy projects powered

by renewable energy; and

construction and operation of key

components, charging stations

and battery replacement stations

for new energy vehicles. The

revised policy not only shows the

government’s determination to

promote foreign investments, but

also significantly relaxes the

restriction on access for foreign

companies. The policies encouraged

foreign capital inflow into

environmental protection and energy

saving, advancing manufacturing and

high technologies.

• In July 2019, the NDRC and the

Ministry of Commerce issued the

Special Management Measures

(Negative List) for Foreign

Investment Access (Version 2019). In

the list, except for construction and

operation of nuclear power stations

which must be controlled by Chinese

companies, there are no limitations

on the power industry. This list

demonstrates China’s determination

to continue opening up the market.

• In December 2019, the Ministry of

Industry and Information Technology

(MIIT) issued the New Energy Vehicle

Industry Development Plan (2021-

2035) (draft), which outlines the goal of

fostering new advantages through

international cooperation and

competition while integrating global

industry into the domestic market. The

draft further encourages companies in

fields such as complete vehicles and

parts, the Internet, data and

communications to form alliances in

developing the full value chain of

power batteries.

3. Opportunities and challenges

• According to the state development

plan, China aims to achieve grid parity

and phase out subsidies for solar and

wind power by 2020. In January 2020,

the National Energy Administration

released a construction plan for wind

and solar PV power generation projects

in 2020. The plan will promote the

construction of affordable grid-

connected projects, prioritizing support

for voluntary conversion of wind power

projects that have been connected to

the grid or projects that require national

financial subsidy during the valid

period. This reform, in the short term,

will affect the profit margins of wind

power and solar PV power generation,

but in the long run it will set the market-

oriented new energy sector on a

sustainable path.

• Relaxation of regulations and

incentives from the government have

encouraged collaboration between

foreign and Chinese companies in

energy projects. For example,

É lectricité de France S.A. became

the first foreign company to invest in

China’s offshore wind power in April

2019. Oil and gas giants and non-

energy companies around the world

are actively seeking investment

opportunities in renewable energy as

part of their business transformation.

PwC Views“

Domestic M&A

Outbound M&A

We expect the following features in outbound M&A in 2020:

• In the context of the ongoing tension between China

and the US, the US continues to enforce security

scrutiny of Chinese companies’ investments in the

US, which may lead to rising uncertainties for Chinese

investments in technology-related industries in Europe

and US. This may further impact large-scale deals in the

energy industry.

• As an important promoter of the Belt & Road Initiative

(BRI), China has entered into energy partnerships with

30 member countries, indicating that transnational

energy cooperation is still a key focus. In the medium to

long term, the Chinese government will likely continue to

support domestic companies investing overseas.

Chinese enterprises may expand their market in

underdeveloped Belt & Road regions by promoting

power grid interconnectivity projects and providing

comprehensive solutions.

• In response to the pressure and challenges created by

grid parity, Chinese companies have not only been

building up their in-house R&D, but have also been

keen on importing core energy technology from

overseas. Companies have also been shifting the focus

of their overseas investments to brands and advanced

technologies in an aim to reduce cost.

• While SOEs continue to play an important role in

driving large to medium outbound M&As, diversified

investors such as private companies and industry

funds will also come into play. While SOEs are

usually better placed in terms of resources to engage in

high-barrier outbound M&As, private companies and

investment funds can share in investments in the wind

and solar energy sector, due to the moderate investment

size and considerable profitability in these areas.

• As the power transmission and distribution sector has

abundant power stations deployed overseas, we expect

subsequent M&A activities in integrating the

transmission and distribution along the upstream or

downstream segments of the industrial chain.

Investment outlook and insight

We expect that domestic M&A will grow steadily:

• Due to the outbreak of the COVID-19 epidemic,

businesses across the country have been suspended to

various degrees, which has resulted in considerable

losses for power and energy related industries. However,

we believe that the epidemic will enhance society’s

disaster awareness and preparedness, and the power

industry will further explore and innovate its current

heavy asset structure to become more risk resilient.

• Investments in sub-sectors, such as wind power and

solar PV, as well as new energy mobility will remain

active. The delayed payout of subsidies in the domestic

renewable energy sector might continue to be an issue.

It may create ongoing financing and cash flow

challenges for small to medium-sized investors, which

will further limit their investing activities in renewables. In

light of policy relaxation regarding SOEs’ investment

autonomy, we predict that they will continue to play a

leading role in future M&As in the renewable sector.

• From the top ten M&A deals in the power industry in

2019, we note the emergence of the power industry in

integrated energy services: the acquisition of East Group

Co., Ltd by Guangdong Hengjian Investment Holding

Co., Ltd.; the investment in State Grid Jiangsu

Integrated Energy Service Co., Ltd led by Zhongtian

Technology Group Co., Ltd. and Jiangsu Frontier

Electric Power Technology Co., Ltd. both signal the

power companies’ strategic rollout in integrated energy

services. At the same time, investors in the professional

services and Internet-related sector have also started

seeking opportunities in integrated energy services

thanks to the inclusive and multi-dimensional nature of

this sector. In line with the country’s advocacy of

energy efficiency, we expect a continued boom in

integrated energy services investments.

16

Due to geopolitical tensions, subsidy phase-out and grid

parity, we do not foresee a huge change in the total volume

and value of inbound deals in 2020. Foreign investors (both

strategic and financial) may show sustained interest in

China’s renewables sector, and therefore continue to

explore innovative deal structure and products/services

offering to enter the market. Examples include the

continued penetration by the Dutch oil giant Shell into

China’s hydrogen industry and hydrogen refueling stations;

and the energy funds established by Apple, Total, etc. in the

Chinese power M&A market.

Inbound M&A

60 56 55 39

Conventional Energy — Deal value and volume (2016-2019)

Conventional energy

Source: ThomsonReuters, ChinaVenture, Mergermarket, PE Data and PwC analysis

Note: The deal value figures refer only to deals where a value has been disclosed

M&A in Conventional Energy sector by deal value and volume (2016-2019)

17

1. M&A Overview

The conventional energy sector includes thermal and nuclear power. In the 13th Five-Year Plan for Power Development issued

by the NDRC and the National Energy Administration, it is clearly stated that in order to promote clean energy, coal-fired power

transformation will be carried out intensively and construction of new coal power plants will be strictly controlled. As the new

instalment of coal-fired power plants is restricted, M&A in existing installed capacity has been inactive.

Since 2016, the value and volume of deals in the conventional energy market have been on the decline. In 2019, deal value in

this sector hit the lowest level in the reporting period. Specifically, there were 39 M&A announced in the thermal power

sector, with deal value totalling Rmb15.2 billion in 2019. Two deals were announced in the nuclear power sector, with an

accumulated deal value of Rmb0.7 billion. Compared to 2018, the volume and value of M&A in the conventional energy sector

decreased by 29% and 70%, respectively.

Conventional

Energy M&A

deal volume

45

28 35

15

6

-

18

1

-

10

20

30

40

50

60

2016 2017 2018 2019

Thermal power Nuclear power

PwC Views“

(Rmb billion)

M&A Characteristics

In light of policy support for energy structure transformation,

there has been a strong buyer’s market for conventional

energy. Investors are less motivated to invest in conventional

energy assets and have higher quality standards. These

trends have led 2019 M&As in the conventional energy sector

to feature discounts in transaction price and concentration in

investor types:

1. The transaction price of deals in the conventional energy

sector has continued to decline; large state-owned

enterprises have been drawn to policy-incentivized

investment opportunities in the new energy power

generation sector. Apart from the policy orientation,

business performance in many conventional power

stations was not promising. Among listed thermal power

companies, the average PB ratio was only about 0.7x, with

further discounts offered in transactions involving

conventional energy after considering unfavorable factors

such as small power capacity and lack of market demand.

2. SOEs continue to play the major role in the conventional

energy sector. Business integration has become the major

driving force for companies to buy and sell businesses in

this sector. This can be explained by the top-down energy

reform that has further reduced the room for additional

conventional energy capacity. This makes it difficult for

conventional energy companies to grow from within,

therefore incentivizing them to either restructure or pursue

vertical and/or horizontal integration.

3. Unlike typical cross-border deals in the conventional

energy sector from 2016 to 2018, only a few took place in

2019. Guangdong Yudean Group Co., Ltd. and YTL

Power International Berhad invested in Attarat Power

Company in 2016, Chow Tai Fook Group invested in an

Australian energy company called Anlinta in 2017, and

Taikang Life invested in a nuclear power project in the

United Kingdom called Hinckley C in 2018. However,

transaction volume dropped in 2019, possibly caused by

1) SOEs, which had once been the main force behind

overseas conventional power deals, have gradually

shifted their investment focus to renewable energy and

clean energy; and 2) developing countries that have

become more environmentally conscious, making it more

difficult to invest in thermal power green field projects.

4. With the start of construction of the Guangdong

Taipingling and Fujian Zhangzhou Plants, China’s

nuclear power sector showed encouraging signs of

activity after three sluggish years. However, M&A volume

and value in this sector still remained low in 2019. Deals

mainly covered SOEs’ internal asset reorganization. As

barriers to entry are high in this subsector, and nuclear

power is not the focus of energy structure transformation,

we expect M&A activity in the nuclear sector to remain

broadly stable in the future.

18

Types of investors in Conventional Energy sector

by deal volume in 2019

SOEs, 63%

Others, 5%

Conventional energy

Private

companies,

27%

PE/VC funds,

5%

41 72

15 24

36

63

31 25

27

41

34 26

30

16

12 26

7

47

19 44

20

12

10

11

-

50

100

150

200

250

300

2016 2017 2018 2019

Hydropower Solar PV New energy vehicle battery

Wind power Integrated power generation Other new energy power generation

162

252

122

155

Renewable energy

Source: data from Thomson Reuters, Chinaventure, Mergermarket, PE Data and PWC analysis

Note: Deal value is calculated on the basis of disclosed value.

M&A in Renewable Energy sector by deal value and volume (2016-2019)

19

M&A Overview

Renewable energy includes hydropower, solar PV, wind power, new energy vehicle battery and energy storage, other new

energy power generation (biomass, waste to energy, geothermal energy, tidal energy etc.), integrated power generation (the

target company or asset package operates multiple renewable energy types).

In 2019, there were 326 announced M&A deals in the renewable energy sector, with an accumulated deal value of Rmb155.4

billion, an increase of approximately 28% over 2018. By subsector, wind power and hydropower deals collectively accounted for

32% of the total deal value in renewables energy, marking an increase of 9% from 2018 and proving that the policy incentives

under the 13th Five-Year Plan have been effective. Meanwhile, the new energy vehicle battery and energy storage subsector

has also taken a major stake in the renewable energy sector. This subsector recorded 97 deals in 2019, with a deal value of

about Rmb25.9 billion, accounting for 17% of total deal value in renewables.

Renewable Energy — Deal value and volume (2016-2019)

388 370 362 326

Renewable

Energy M&A

deal volume

PwC Views“

(Rmb billion)

Amid continued cost reduction in the wind and solar power

sector, grid parity, and government’s policies supporting energy

transformation, conventional energy companies have

successively made their way into the renewable energy sector.

1) In 2019, SOEs were involved in 137 deals in this sector,

accounting for 42% of the total deal volume. Specifically,

SOE investors were interested in hydropower stations

and wind farms, mainly in southwestern China such as

Yunnan, Guizhou, and Sichuan. Major power enterprises

have been actively rolling out the government’s energy

strategies, promoting energy reform from the supply side

and expanding the capacity in renewable energy power

generation through M&As. This was evidenced by

Yunnan Huadian Power Generation Co., Ltd.’s

acquisition of Yunnan Huadian Jinsha River Midstream

Hydropower Development Co., Ltd. for Rmb6.1 billion in

2019, and Huaneng Lancang Hydropower Co., Ltd.’s

Rmb2 billion payment for an 11% stake in Yunnan

Huadian Jinsha River Midstream Hydropower

Development Co., Ltd.

2) The rise of electric vehicles has catalyzed the deals

market along the battery and energy storage value chain,

resulting in noteworthy deal volume and values in

relevant subsectors. These include lithium batteries,

charging pile manufacturing, hydrogen fuel cells, new

energy charging stations, and used battery recycling. In

2017, deal value for this sector increased by 50% year-

on-year, followed by a plunge in 2018 due to license

restrictions and subsidy phase-out. In January 2020,

however, the Ministry of Industry and Information

Technology signaled a slowdown of subsidy phase-out,

which is expected to boost the M&A activity in the sector.

3) Although the integrated power generation subsector

recorded a less significant number in deal volume, its

deal value accounted for the highest share in the

renewable energy sector. This resulted from the

continued restructuring of assets and management by the

top five SOEs in power generation to be better positioned

in the renewables sector, and large outbound megadeals

that usually cover multiple types of power generation.

4) As for the investment model of renewable energy,

innovative models are continuously emerging, such as

the “Public-Private-Cooperated” funds; through the

cooperation with private capital, SOEs are enabled to

access to more projects, while private investors are

benefiting from SOEs’ bankroll and technology strengths.

Both parties are taking advantages from each other,

securing not only the quality of project, but also the future

exit path for private capital

20

Types of investors in Renewable Energy sector by

deal volume in 2019

SOEs, 42%

Others, 25%

Renewable energy

Private companies,

33%

“Through M&A activities in the renewable energy

sector in 2019, we’ve seen SOEs, as the main

force in the deal market, established new energy

funds that cooperate with private capital… Both

parties are enabled to fully display respective

advantages and avoid their own disadvantages …

In the future, similar structure will be copied and

optimized in renewable energy investment.”

Brian Feng

Chief consultant of renewable energy from

Tianfeng Tianrui (“TFTR”) Investment, Founder of

the Renewable Alliance

1. M&A Overview

The 13th Five-Year Plan for Power

Development emphasizes the need to:

1) enhance the capacity of the power

grid and build a west-to-east power

transmission channel using both

ultra-high voltage power transmission

and standard transmission

technologies, with an additional

capacity of 130 million kilowatts, to

reach a total of 270 million kilowatts;

and 2) control construction costs and

improve operation efficiency of the

power grid. Following the

announcement of the plan, China has

added 92,000 kilometers of the

transmission channel with 500 KV+ AC

lines and 920 million KVA capacity.

From 2016 to 2019, M&A deals in the

power transmission and distribution

sector dipped but then recovered The

deal volume has been relatively stable

in the past two years, after peaking in

2017. There were 19 deals announced

in the sector, with an accumulated deal

value of Rmb51.6 billion. Two

cross-border M&A deals by state-owned

enterprises were the largest deals in the

sector this year. However, these were

extraordinary, and unlikely to reoccur in

the coming years. After excluding them,

the annual announced deal value in

2019 was about Rmb10.4 billion.

Strategic investors continued to

dominate the sector, accounting for

71% of the 19 deals .

2. M&A Characteristics

M&A in the power transmission and

distribution sector, 2019:

1) SOE-led outbound M&A was far

larger than domestic deals. There

were two cross-border M&A deals

in 2019: Yangtze Power’s purchase

of distribution assets in Peru of

Sempra Energy for Rmb25.4

billion; and the State Grid’s

acquisition of a 100% equity stake

in Chile’s third largest distribution

group for Rmb15.8 billion. Large

state-owned enterprises entered

overseas markets through cross-

border M&A to achieve a

comprehensive coverage of

overseas markets.

2) Vertical integration has become the

main motivation of domestic

strategic investors. In 2019

domestic transmission and

distribution sector deals, strategic

investors were mostly from

industries such as power,

infrastructure and engineering

construction. Through the merger

and acquisition of power

transmission and distribution

companies, investors could

potentially benefit from the

synergies of power generation and

distribution, realizing optimal

resource allocation and diversified

risk portfolios.

M&A in power transmission and distribution sector by deal value and volume (2016-2019）

M&A in power transmission and distribution sector by deal value and

volume (2016-2019）

Power transmission and distribution

21

6

66

10

52

18

29

18 19

(20)

(10)

-

10

20

30

-

20

40

60

80

100

2016 2017 2018 2019

Power transmission and distribution Total deal volume

PwC Views“

(Rmb billion)

Integrated energy services

Along with developments in information technology,

advances in renewables, and reform of energy structure,

integrated energy services have become a solution to reduce

cost and increase efficiency. State Grid and China Southern

Power Grid, two major power grid SOEs, took the lead in

launching the integrated energy service development plan in

2019, encouraged by government policies. Aside from power-

related companies, Internet and commercial service

companies may also seek opportunities to invest in power-

related supply side assets that match their portfolios or

strategies, given the wide range of businesses in integrated

energy services.

Investment hotspots：Integrated energy supply and

utilization (including electricity, heating, cooling and

steam), Energy saving, Intelligent building system

solutions

Waste heat utilization and

co-generation

Along with the government’s support for energy efficiency,

large thermal power companies have adopted approaches

such as waste heat utilization and heating concessions, given

their continued losses and valuation discounts in

conventional energy. The co-generation of heat and power

has won favor among investors due to its outstanding

profitability. In particular, biomass co-generation and

companies in renewables have been facing cash flow

challenges caused by subsidy arrears; therefore, we expect

the financing needs and investment activities in this area to

continue to increase.

Investment hotspots: Coal-fired cogeneration, Biomass

cogeneration, Thermal power with waste heat utilization

Electric automation and Internet

of thingsCollectively, the development of information technology,

stabilization of demand in substation equipment and policy

support in power grid automation have marked the dawning

of a golden age in the domestic power industry. This reflects

the importance of stable, flexible and automated power

supply. The construction of Ubiquitous Power Internet of

Things has paved the way for safe operation, lean

management and high-quality power transmission and

distribution. In addition, the Internet of things can give full

play to the unique advantages of the power grid while

opening up the digital economy.

Investment hotspots: Power

transformation/distribution/dispatching automation

Distributed energy + Energy storage

As required in Energy Production and Consumption

Revolution Strategy (2016-2030), both centralized and

distributed generation should be at the forefront of developing

renewable energy. For distributed energy, energy storage is

especially a challenge in ensuring the stability and security of

the power grid from the generation site. While centralized

energy generation (power plants) is relatively mature, the

business model for distributed energy and energy storage is

still at an early stage due to its high cost in China. As one of

the important upper stream sectors of integrated energy

services, distributed energy will grow in importance.

Investment hotspots: Auxiliary frequency modulation at

grid side, Virtual power plant, distributed integrated

station of photovoltaic power and storage energy,

distributed combined cooling heating and power

Investment hotspots

22

Outlook

23

Section 2

Utilities industry

M&A activities overview in 2019

Integrated services prevail as industry continues to

consolidate

• At present, the utilities industry features low concentration

and regional monopolies. Therefore, players within the

industry buy and sell businesses to expand geographically

and achieve economies of scale.

• With the progress of the energy structure reform, the once

scattered and separate energy supplies have started to

merge into integrated energy services. Utilities companies

have been keen to expand their value chain to cover more

types of energy services, and turn into comprehensive

service providers.

• We expect that intra-industry M&A will continue.

Meanwhile, the transition of large single energy suppliers

to roles such as integrated energy service providers,

environmental governance service providers, and water

operation providers will promote more cross-industry

M&As.

Energy structure in transit, renewables & low

carbon became mainstream

• Renewables & low-carbon took the lead in reform of

energy structure. Considered a major step in the

transformation and prioritized in policies, distributed

energy generation and clean energy consumption have

attracted investors. SOEs have incorporated plans, while

more and more listed companies have included it as one

of their development strategies.

• We expect that utilities companies engaged in advanced

cleaning technologies, applications and equipment, and

sewage treatment technology will attract greater attention

from investors.

Internet & IoT fueled sustainable development

• The automation and utilities industry has successfully

brought about unprecedented applications of smart grid,

intelligent water, and intelligent heating. These newly

invented business models, though in their early stages,

enable comprehensive utilization of energy, and fuel a

resource-efficient society. Emerging intelligent

technologies such as the IOT and cloud computing,

provide new angles to optimize business management

systems, improve overall efficiency and promote

industrial upgrade.

• We expect that the intelligence incorporated utilities

industry will bring development opportunities. Intelligent

infrastructure & technologies may come under the

investment spotlight.

Overview of M&A in the utilities industry in 2019

24

Based on the announced deals of 2019 and

our understanding of the market development,

we’ve seen following major market trends in

the utilities industry:

196.7

0.6

Key data at A glance

Utilities industry

Deal value and volume by investment type in 2019

Rmb 19.7 billionTotal deal value of 2019

Up 128%Compared

with 2018

72Total deal volume of 2019

Up 29%Compared

with 2018

Rmb 0.3 billionAverage deal value of 2019

Up 71%Compared

with 2018

Note: The average deal value excludes undisclosed deals

171

Domestic

M&A

Outbound

M&A

Water

~69%

SOEs

~47%

Most active sub-sector

Most active investor: State-owned enterprises (SOEs)

25

Note: The average deal value is calculated as the total disclosed deal value/number of deals with disclosed deal value

(excluding undisclosed deals)

(Rmb billion)

0.1

19.7

Source: ThomsonReuters,ChinaVenture, Mergermarket, Zero2IPO Research and PwC analysis

Note: The deal value figures refer only to deals with disclosed values. Numbers do not include the two large deals related to the Luenmei Quantum

Co., Ltd. in the heating supply industry in 2016 and 2017, with values of Rmb2.39 billion and Rmb3.87 billion, respectively.

Utilities M&A market review in 2019

Utilities — Deal value and volume by sectors (2016-2019)

Utilities — Deal value and volume (2016-2019)

(by investment types)

2019 Proportion of investors by deal volume

Utilities deal value and volume (2016-2019)

26

47% 29%

16%

4%

4%

SOEs

Private

companies

PE/VC funds

Undisclosed

Others

5.2 7.5 0.50.1

5

3 3

1

-

2

4

6

-

5

2016 2017 2018 2019

11.0 14.2 8.2 19.7

46 51 53

71

-

20

40

60

80

-

5

10

15

20

25

2016 2017 2018 2019

Domestic

Outbound

13.4

20.7

7.4

16.8

1.3

1.0

1.2

2.71.6

0.0

0.1

0.3

51 56 56

72

(90)

(70)

(50)

(30)

(10)

10

30

50

70

-

5

10

15

20

25

30

2016 2017 2018 2019

Water Heating Others Total deal volume

21.7

16.3

8.7

19.6


Value

(Rmb billion)

(Rmb billion)Avg. deal value

27


• Utilities transactions have been steadily

increasing: After experiencing a relatively slow year

in 2018, total M&A deal value in the utilities industry

related to Chinese companies increased in 2019.

The total disclosed M&A deal value in 2019

exceeded Rmb19.7 billion, an increase of 128%

over 2018; the disclosed deal volume in 2019 was

72, an increase of 29% over 2018.

• Led by SOEs, M&As in utilities continued to

drive industry integration: At present, the utilities

industry is characterized by its low concentration,

insufficient scale and regional dispersion. We found

that the deal volume of SOE investors accounted for

47% in 2019. Large SOEs have been seeking to

achieve value chain integration through M&A;

Luenmei Quantum Co., Ltd. expanded its market

share through horizontal integration in the heating

subsector and China Urban and Rural Holding

Group Co., Ltd. acquired shares of Beijing

OriginWater Technology Co., Ltd. (BOW) in the

water subsector.

• The domestic market is the main arena for

utilities M&A: The deal volume of domestic

investors stepped up from 46 in 2016 to 71 in 2019.

In contrast, the deal value for overseas targets has

fallen year after year since reaching Rmb7.5 billion

in 2017. Macro factors have also made a

contribution, including domestic macroeconomic

downturns and credit tightening, which posed

challenges for small players in the water sector,

creating conditions for takeover and integration of

the domestic market.



• M&A activities in water subsector were more active:

Consistent with the trend for sustainable development, the water

subsector, especially sewage treatment, has maintained a high

level of activity. The deal value and volume of the water subsector

in 2019 accounted for 85% and 69% respectively of the total M&A

market in the utilities industry. Gas, power and clean energy

companies in the heating subsector were also actively involved in

M&A, paving the way for future promotion of clean heating.

• Large-scale utilities deals took place in the water subsector:

Among the utilities deals in 2019, deals with a value of Rmb1

billion and above were all water subsector M&As. Examples

include China Urban and Rural Holding Group Co., Ltd. (CCCC)

acquired shares of Beijing Origin Water Technology Co., Ltd.

(BOW) and China Yangtze Power Co., Ltd. (China Three Gorges

Corporation) subscribed the newly issued common shares of

Beijing Enterprises Water Group Limited. Driven by large-scale

deals, the average value of deals for utilities industry in 2019

(excluding undisclosed deals) jumped from Rmb190 million in

2018 to Rmb330 million, marking an increase of 71%.

• Financial investors started showing interest in utilities:

The utilities industry deals were characterized by large transaction

amount and long investment cycles, which is also the reason why

the industry has been less attractive to financial investors in

previous years. However, the stable nature of the utilities industry

has become advantageous in attracting financial investors’

interest amid a slowdown in the economy. 2019 witnessed several

financial investment cases in the market; for example, Agricultural

Bank Financial Assets Investment Co., Ltd. increased the capital

of Beijing Enterprises Water (Guangxi) Group Co., Ltd. with

Rmb1 billion.

28


Industry Overview

China’s total water consumption reached a peak in 2013, after which the growth rate slowed down or even declined, which

indicates that the water supply has stabilised. Sewage treatment, on the other hand, is in growing rapidly with the introduction of

environmental laws and regulations, such as the Action Plan for Prevention and Control of Water Pollution issued by the State

Council in April 2015, 13th Five-Year Plan Water Environment Comprehensive Environmental Governance Construction Plan

for Key River issued by the National Development and Reform Commission in August 2016 and Action Plan for the Yangtze

River Protection and Restoration jointly issued by Ministry of Ecological Environment and the National Development and Reform

Commission in January 2019. Given the stricter requirements in environmental protection, sewage treatment companies now

have to be equipped with stronger technical capabilities.

The total M&A deal value of water supply was relatively small at only Rmb1.1 billion in 2019. After excluding China Gezhouba

Group’s acquisition of Brazil’s Sao Paulo San Lorenzo Water Supply System Company for approximately Rmb5.8 billion in

2017, the annual deal amounts of water supply were less than Rmb5 billion during the 2016-2019 period.

M&A deals in sewage treatment were more active, with deal value hitting Rmb14 billion in 2019, a surge of 215% from the

Rmb4.4 billion in 2018. In 2016 and 2017, the deal values of sewage treatment also reached Rmb7.9 billion.

Water

Water — Deal value and volume (2016-2019)

Water — Deal value and volume (2016-2019)

29


Note: The deal value figures refer only to deals where a value has been disclosed. It does not include the two large deals related to the Luenmei

Quantum Co., Ltd. in the heating supply industry in 2016 and 2017, with a value of Rmb2.39 billion and Rmb3.87 billion, respectively.

4.18.2

1.8 1.1

7.9

7.9

4.4

14.0

4.5

1.1

1.6

1.4

0.2

0.1

0.1

45 45 40

50

-

10

20

30

40

50

60

-

5

10

15

20

25

30

2016 2017 2018 2019

"Water supply" "Sewage treatment" Integrated water Others Total deal volume

PwC Views“

(Rmb billion)


value:

Water Supply Sewage Treatment

2) Technology-driven M&A has become another trend in the

water sector. Different sub-processes in the sewage

treatment value chain — such as sewage treatment asset

operation, EPC project construction, and core equipment for

sewage treatment technology — have all presented

technological barriers of some sort. Top performing

companies in each subsector are all technology leaders,

indicating the essential role of IP in the water sector.

Therefore, technology-driven M&A is regarded as an effective

means to break the technical barriers. In 2019, BOW (which

boasts core advantages in membrane treatment technology)

and Anhui Guozhen Environmental Protection Technology

M&A Characteristics

M&A in the water subsector, 2019:

1) SOEs and private companies have started to join hands. In

2019, the deal volume of SOEs as investors accounted for

62% of total deal volume. The deal volume of private

companies as targets accounted for 70% of the total, showing

the attempts by SOEs and private companies to form

alliances in the water sector. Examples of this cooperation in

2019 included China Urban and Rural Holding Group Co., Ltd

(CCCC)’s acquisition of Beijing Origin Water Technology Co.,

Ltd. (BOW)’s shares for approximately Rmb2.9 billion. After

CCCC’s investment in BOW, it made full use of BOW’s core

advantages in membrane treatment technology to quickly

build a leading water treatment platform in China. Meanwhile,

BOW is expected to benefit from the credit and resource of

SOEs, collaborating with CCCC’s group companies in issues

surrounding environmental protection, water, urban

environment construction and other related projects.

In the water subsector, the advantages of private companies

include experienced and stable management teams and

advanced technology, while the advantages of SOEs include

long-term development strategies and funding. Therefore, the

complementary traits of SOEs and private companies allow

for a win-win under an environment of de-leveraging and

increasingly strict environmental assessments in China.

Water

2016-2019 Proportion of investors by deal volume

2016-2019 Proportion of investors and investees

by deal volume

By type of investors

Joint Stock Co., Ltd. (which has a technological advantage in

small and medium-sized sewage treatment in second and

third tier cities) both garnered investors’ attention due to their

technological outperformance.

In addition, the popularity of IoT technology has enabled the water

sector to develop from centralized information management to

decentralized smart water grid. In 2019, Mianyang Investment

Holding (Group) Ltd. invested in Kingland Technology and

Zhejiang Yongan took a stake in Beijing Tepia Technology. The

main businesses of these targets are both platforms created by

IoT and cloud computing.

3) Strategic investments to jointly develop or operate projects

were the main type of deals. During 2016-2019, strategic

investors completed approximately 88% of the total deal

volume. Among them, strategic investors from within the

industry and cross-industry accounted for 59% and 29% of

the deal volume, respectively.

Because of the asset-intensive and thin margin nature of the

water sector, financial investors tended to overlook

investments in this sector. However, as economic growth

slowed down, financial investors have started to seek

opportunities in this relatively stable sector. Financial

investors showed more interest in sewage treatment and

leading companies in this subsector. In 2019, Agricultural

Bank Financial Assets Investment Co., Ltd. completed its

capital injection in Beijing Enterprises Water (Guangxi) Group

Co., Ltd. of Rmb1 billion.


42% 56% 53% 62%

49%40% 38% 32%

9% 4% 10% 6%

2016 2017 2018 2019

SOEs Private companies Others

40% 38% 38% 26%

49% 38%58% 70%

9%16%

5% 2%

2% 9% 0% 2%

2016 2017 2018 2019

SOEs Private companies Foreign companies Others

Strategic investors in Water

industry, 59%

Non-water industry strategic

investors, 29%

30

Financial investors,

12%

Heating

Heating — Deal value and volume (2016-2019)

Heating — Deal value and volume (2016-2019)

(Rmb billion)


Note: The deal value figures refer only to deals where a value has been disclosed. It does not include the two large deals related to the Luenmei

Quantum Co., Ltd. in the heating supply industry in 2016 and 2017, with the value of Rmb2.39 billion and Rmb3.87 billion, respectively.

M&A Overview

By end-user, the heating subsector can be further divided into residential and industrial heating. At present, heat is sourced

mainly from coal-fired boilers and waste heat of power plants.

Deal volume in the heating market continued to grow from 2016 to 2019, at an annualized growth rate of 68%. Deal value, on

the other hand, after a continued slide from 2016 to 2018, surged 123% in 2019 over 2018. Average deal value has also

increased slightly. Nineteen M&As took place in the heating subsector in 2019, with a deal value of Rmb2.67 billion.

The heating sector saw some large deals in the past four years:

• In 2019, Xinjiang East Universe (Group) Gas Co., Ltd. acquired 80% of Yining Heat Supply Company, a supply provider

under SASAC, for Rmb698 million.

• In 2017, Ruifeng Fund, Lhasa Hetai and Golden Eagle Asset acquired 22.71% of a listed urban heating company, Luenmei

Quantum Co., Ltd., for Rmb3.87 billion.

• In 2016, Yibin Paper Industry Co., Ltd. acquired a domestic cross-province central heating investment & operation leader,

Zhonghuan Huanhui, for Rmb900 million.


value

1.3

1.0

1.2

2.7 4

9

14

19

(30)

(25)

(20)

(15)

(10)

(5)

-

5

10

15

20

-

0.5

1.0

1.5

2.0

2.5

3.0

2016 2017 2018 2019

Deal value(exclude Justin Holding Limited) Deal volume(exclude Justin Holding Limited)

PwC Views“

31

Heating

M&A Characteristics

M&As in the heating sector, 2019:

• At present, the heating subsector still relies on coal as the

main heating source, while energy structure transformation

and sustainable development have prompted the sector to

search for alternative heating sources. According to the

Clean Heating Plan for Winter in the Northern Region

(2017-2021), the development of central heating was given

priority and the clean heating rate in 2019/2021 is expected

to reach 50%/70%. Subsequently, more than 30 provinces

and cities have put forward relevant requirements, adopting

clean coal, “coal to gas”, “coal to electricity”, and renewable

energy heating projects. Therefore, clean investments has

become a major trend in the heating industry. In 2019,

Zhejiang Fuchunjiang Environmental Thermoelectric Co.,

Ltd. acquired Zhongmao Shengyuan Industry, which uses

solid waste disposal for heating and power supply in the

papermaking process.

• Industrial heating is believed to have greater investment

prospects over residential heating. Industrial heating is

generally distributed in or around the industrial campus to

meet the needs of all the users. Therefore, the deployment

of integrated, efficient and clean energy has become the

main focus in the development. Integrated energy services

have gained attention as they enable simultaneous supply

of various energy sources such as power, gas, cooling and

heat, and adds value in services by combining the Internet

and technology. In June 2019, State Grid China Co., Ltd.

launched the “China Comprehensive Energy Service

Industry Innovation and Development Alliance” jointly with

21 upstream and downstream head companies alongside

the integrated energy service industry chain. State Grid

China Co., Ltd. and China Southern Power Grid Co., Ltd.

have successively established integrated energy service

companies, and other companies in the industry are

expected to follow suit. In 2019, Harbin Jiuzhou Electrical

Co.,Ltd acquired Qiqihar Xingda Investment Group Tailai

County Xingda Thermal Co., Ltd., and Guangzhou

Zhiguang Electric Co., Ltd. acquired Pinglu County

Heating Company, both attracted by the heating assets

held by the targets and planned for upgrading to form a

strategic layout in integrated energy development.

• In terms of heating method, both distributed heating supply

and concentrated heating supply — such as the

development of traditional boiler to cogeneration — have

been popular in recent years. For example, Yantai’s use of

air-source heat pump combined with off-peak power thermal

storage system, and Binhu District’s use of ground-source

heat pump combined with other clean energy sources have

brought rewarding results. Although government pilot

projects still dominate distributed heating generations,

related technology has attracted the attention of investors.

In 2019, companies in the clean energy subsector, such as

Hepu Energy, State Power Investment Corporation (SPIC),

and China Geothermal Industry Development Group

Limited, have all received interest from investors.

Investors

SOEs were the main participants in the heating subsector

M&As, while private companies outcompeted SOEs in

deal volume in 2019. With the introduction of a number of

national policies, companies and social capital have been

encouraged to invest in the heating subsector, and this has

since lessened the dominance of SOEs in the heating sector.

Among the disclosed M&As in 2019, most of the SOEs’ M&As

were local heating companies. They were focused largely on

increasing their local market share and promoting the grid-

connected transformation of small heating boilers.

Private companies, especially listed companies, have come

into play by investing in areas where the competition in

heating is less intense. The same strategy also applied to

cross-sector investors such as gas and power companies. For

example, Luenmei Quantum Co., Ltd. in Shenyang merged

with Shandong Heze Thermal Power Company and Xinjiang

East Universe (Group) Gas Co., Ltd. merged with Yining Heat

Supply Company, expanding from gas to heating supply

business and transforming to an integrated utilities service

provider. Therefore, the deal volume of private companies as

investors far exceeded that of SOEs in 2019.

32

2016-2019 comparison of investors

(Rmb billion)

2016-2019 Proportion of investors and investees

by deal volume



We further noticed that financial investors have become more

interested in the heating sector due to its stable and low risk

nature in times of uncertainties. The deal value of financial

investment in 2019 increased by 33% over that in 2018.

50%11%

43% 42%

50%67%

50% 53%

22% 7% 5%

2016 2017 2018 2019

SOEs Private companies Foreign companies

50% 33% 20% 35%

50% 56%67% 45%

13% 20%

2016 2017 2018 2019SOEs Private companies Others

1.3

1.0

0.8

2.1

-

-

0.4

0.6

2016

2017

2018

2019

Financial investors Strategic investors

Water, heating and other utilities are inelastic in demand due

to their close connection with livelihood. M&As in these areas

are expected to continue steadily and progressively.

We expect research and development in technology related to

pollution control and clean energy to become the main trend

in industry development. Technology driven M&As are,

therefore, more likely to dominate the deals in utilities in the

coming years.

Water Subsector

We expect to see increasing cooperation between SOEs and

private companies in sewage treatment in 2020. Cash flow

will remain a challenge for private companies in this sector,

encouraging the leverage of resources from SOEs. As

mentioned in the earlier sections, the major factors

contributing to the cash flow challenges are the downturn of

the economy, slowdown of demand and tightening of credit in

the domestic market.

In addition, we expect financial investors to play a greater role

in water sector M&As. As mentioned, financial investors will

more likely to be drawn to the water sector by its stable and

low risk nature in times of uncertainties.

We further expect that the mobile water treatment service and

the third-party governance business will have more

opportunities than their industry peers, and may become an

investment hotspot in the near future.

Heating Subsector

Large companies are expected to continue to take over small

ones in 2020. Under the driving policies of “dismantling small

boilers and connecting large ones” and the implementation of

cogeneration, the heating sector will continue to integrate

through M&As.

At the same time, increasing awareness of the carbon

footprint of large corporations will also drive the transition from

traditional heating to clean heating service providers. We

expect that areas such as clean heating technology and

equipment will continue to receive investors’ attention in 2020.

Outlook

Investment hotspots

33

34

Section 3

Oil and gas industry

2019 review and analysis of

M&A activities

From the perspective of M&A, along with deals data since

2019 and the judgment on future market dynamics, we have

seen the following trends in China’s oil and gas industry:

Oil & Gas companies are actively seeking low-carbon

transition, and the deal volume and value related to gas

industry have steadily increased.

• Driven by increased environmental protection and public

health awareness, China’s gas consumption has

increased rapidly in recent years. M&A activities on the

Gas (incl. LNG) value chain are becoming increasingly

active. In 2019, the disclosed volume and value of deals

in gas industry accounted for 39% and 47% of the total Oil

& Gas deals respectively, with a main focus on urban gas

distribution & sale and upstream gas fields.

• The official establishment of China Oil & Gas Pipeline

Network Corporation in December 2019 marks a key step

for China to deepen the reform of the oil and gas system,

and it will also have a long-term and significant impact on

the main players in the market. National Oil Companies

rely on their upstream resource advantages to actively

expand in the urban gas distribution and retail market.

Nationwide leading city gas companies and SOEs at

provincial level are further expanding their scale

advantage in the domestic market by securing low-cost

overseas gas sources. The competitive landscape of the

urban gas market is much more scattered in tier 2 and tier

3 cities and county-level regions, and therefore,

competent companies can increase their scale and

consolidate the market through acquisition.

• With the restructuring of the Gas industry’s competitive

landscape, we expect more M&A activities to take place in

the fields of unconventional gas, urban gas

distribution/operation/maintenance, and relevant

engineering and equipment manufacturing companies.

The development mode of refinery and petrochemical

sector tends to be large scale-led and the industrial

value chain is becoming more integrated.

2019 overview of M&A in oil and gas industry

35

• In 2019, deal volume in the downstream sector increased

significantly (by 26%) compared to that in the previous

year. which are mainly in the refinery & petrochemical and

urban gas areas. Many companies have extended their

business lines towards upstream and downstream on the

value chain and enhanced the overall competitiveness

through M&A activities.

• In the “Great Petrochemical Age”, the integration of

refinery and petrochemical technologies is becoming

more technically mature, which can help companies

reduce operational costs and excessive refined oil

production, also increase production of high value-added

petrochemicals to meet the demand brought by

consumption and industrial upgrade (e.g. energy,

construction, and transportation).

• Meanwhile, multinational companies remain confident

about the huge potential of the China market, and actively

expand in China to be closer to raw material resources

and local consumption markets.

COVID-19 has had a huge impact on the recent oil and

gas market, but it might not affect the fundamentals of

China’s long-term demand for oil and gas.

• The outbreak of epidemic since the beginning of 2020

caused a delay in the operation of domestic factories after

the Spring Festival, nationwide traffic restrictions as well

as a sharp decline in industrial and commercial services,

greatly affecting the consumption of oil and gas.

Assuming the epidemic is successfully contained in the

short time, domestic consumption of oil and gas might

increase in a compensatory manner afterwards.

• The epidemic also put forward higher requirements for

intelligent and unmanned management in the oil and gas

industry. Adopting advanced digital technology in

production and operation can effectively reduce

unnecessary interaction, improve safety, and reduce

costs. Automated oil drilling platform, IOT smart gas

meters, unmanned gasoline stations might increasingly

attract investors’ attention in the future.

2019 overview of M&A in oil and gas industry

36

石油天然气行业

Key data at a glance

Oil and Gas Industry

~66%

Downstream

~65%

Private

companies

10 253

Domestic Outbound Inbound

(USD in millions)

Note: The average deal value is calculated as the total disclosed deal value/deal volume

(excluding undisclosed deals)

Most active sub-sector (by volume)

Most active investor (by volume)

Deal value and volume by investment types

in 2019

15.5 bnUSD

Total deal value of 2019

Increased by 44%Compared with 2018

65Total deal volume of 2019

239 mnUSD

Average deal value of 2019

37

13,891

827 797

StableCompared with 2018 Increased by 44%Compared with 2018

Source: Data from Mergermarket, public news and PwC analysis

Note: Deal value is calculated based on the disclosed deal value information

Deal volume

2019 oil and gas industry M&A market review

14

24

14

2

5

2

34

34

43

14

2

6

2017

2018

2019

Upstream Midstream Downstream Supply Chain

M&A in Oil & Gas industry by deal value and volume (2017-2019) (incl. outbound/domestic/inbound deals)

(USD in millions)

Note: We divided the oil and gas industry value chain into four segments: Upstream — exploration and production; Midstream — transportation

and storage of oil and gas products; Downstream — oil refining and petrochemical, gas purification, distribution and sales of final products

(incl. urban gas); Supply chain — equipment/engineering services/technology related

38

average deal value 168 165 239

10,744 10,744

15,515

2017 2018 2019

Upstream-Total deal value Midstream-Total deal value Downstream-Total deal value

Supply Chain-Total deal value Total

2019 oil and gas industry M&A market review

39


From 2017 to 2019, 194 China-related oil and gas deals took

place, which was worth more than USD37billion.

The deal volume has remained steady around 65 per year.

The total deal value was stable at around USD10.7 billion per

year in 2017-18 and increased to USD15.5 billion in 2019.

Both the total deal value and average value in 2019 have

increased significantly compared with that in the previous two

years, mainly due to the contribution of several mega deals

related to corporate restructuring and mixed ownership reform

of SOEs:

1. Downstream – ENN Ecological Holdings Co., Ltd.

purchased 32.8% of ENN Energy Holdings Limited for

Rmb25.9 billion (about USD3.67 billion);

ENN Ecological Holdings is the A-share listing platform of

ENN group energy sector, whose main business covers

from domestic/outbound gas production and sales,

energy engineering and other upstream business. ENN

Energy is engaged in urban gas distribution and sale

nationwide. This acquisition promoted ENN Ecological to

transform from an upstream gas supplier into the

integrated natural gas company, and further enhance its

overall competitiveness for market expansion.

2. Downstream – Danhua Chemical Technology acquired

Jiangsu Sailboat Petrochemical’s 100% share for an

estimated Rmb11 billion (about USD1.59 billion).

As a new material platform of Shenghong Petrochemical,

Sailboat Petrochemical mainly uses methanol as raw material

to produce ethylene, propylene and high value-added

downstream derivatives. Through this acquisition, Danhua

Chemical (focusing on the coal-to-chemical business) will

place more profitable petrochemical assets to enrich its

product types. Danhua Chemical has coal-chemical projects

in its coal resources abundant area, and has certain

experience and geographical advantages in developing coal-

to-methanol projects, which is able to generate synergy with

Sailboat.

2019 top ten oil & gas deals

2019 Top 10 mega deals

40

Target Investor DateDeal Value

(USD in millions)Type

Sinopec Group Wuhan Branch

(35% stake) SK Global Chemical Co., Ltd. April 2019 667 Downstream

Jiangsu Honggang Petrochemical Co., Ltd.

Jiangsu Shenghong Petrochemical

Industry Development Co., Ltd. April 2019 297 Downstream

Hubei Xingrui Silicon Material Co., Ltd.

(50% stake)

Hubei Xingfa Chemicals Group Co.,

Ltd. March 2019 265 Downstream

Jinhong Holding Group Co., Ltd. — 17

subsidiaries PetroChina Kunlun Gas Co.,Ltd. August 2019 235 Downstream

Taixing Sunke Chemicals Co. Ltd.

(45% stake) Arkema Asie SAS April 2019 130 Downstream

Ningbo Haiyue New Material Co., Ltd.

(51% stake) Kingfa Sci. and Tech. Co., Ltd. March 2019 104 Downstream

Range Resources Trinidad Limited LandOcean Energy Services Co., Ltd.

September

2019 93.5 Upstream

Tibet Wojin Energy Development Co., Ltd.

(41% stake) Shanghai Worth Garden Co., Ltd. April 2019 91 Upstream

Qingdao Sinoenergy Group Co., Ltd.

(49.23% stake) Senyu Chemical Oil and Gas Co., Ltd. August 2019 84 Downstream

Yinchuan China Oil Jingcheng Gas

Company Limited; Zichang Huacheng

Natural Gas Co., Ltd. (65% stake) Dalian Energas Gas-System Co., Ltd. November 2019 76 Downstream

Note: Deals above are based on the disclosed information, excluding deals related to corporate restructuring and mixed ownership reform

Domestic M&A

Total deal value

(USD in millions)

27 5 102 16

Total deal value

(USD in millions)Deal volume

Source: Mergermarket, public news and PwC analysis

Note: Deal value is calculated based on the disclosed value.

Domestic M&A by deal value (2017-2019) Domestic M&A by deal value and volume

(2017-2019)

2019 Type of investment entities (by volume)

41

2,221 186

21,833

355

-

5,000

10,000

15,000

20,000

25,000

上游中游下游供应链

-

5

10

15

20

25

30

35

40

45

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2017 2018 2019

上游-交易额中游-交易额下游-交易额

供应链-交易额上游-交易量中游-交易量

下游-交易量供应链-交易量

Financial investors,6%

Private companies,

66%

Other SOEs, 21%

Upstream Midstream Downstream Supply Chain Upstream-

Deal value

Supply Chain-

Deal value

Downstream-

Deal volume

Midstream-

Deal value

Upstream-

Deal volume

Supply Chain-

Deal volume

Downstream-

Deal value

Midstream-

Deal volume

Three NOCs,

7%


1. Market activity

From 2017 to 2019, 150 deals took

place in the domestic market, with a

total value of approximately USD24.7

billion. Most deals (102) took place in

the downstream.

Deal volume remained broadly stable in

2017-18 (about 48 deals per year), but

saw a slight increase to 54 deals in

2019. Total deal value, on the other

hand, fell to USD4.6 billion in 2018 from

USD6 billion in 2017, but rebounded

sharply in 2019, reaching over USD14

billion.

2. Investment entities and their key

interests

M&A by private companies accounted

for more than 66% of the total domestic

deal volume in 2019. Their investments

focused on refinery & petrochemical

and urban gas distribution/sales

(including operation and maintenance),

oil and gas engineering services and

equipment manufacturing. M&A by

other SOEs (excluding Three NOCs)

accounted for 21% of the total domestic

deal volume and the target companies

were mainly in the downstream areas,

such as petrochemical/new materials

and city gas distribution. For example:

1) Three NOCs — In August 2019,

CNOOC acquired a 100% equity of

China United Coalbed Methane

Corp., Ltd.. The target company is

engaged in exploration &

production, transportation, sales

and utilization of coal-bed methane.

2) Private companies — In November

2019, Dalian Energas Gas-System

Co., Ltd. acquired a 100% equity of

Yinchuan Zhongyou Jingcheng Gas

Co., Ltd. and 65% share of Zichang

Huacheng Gas Co., Ltd. for

Rmb530 million (about USD76

million). The target companies are

engaged in the natural gas pipeline

transmission & distribution and retail

as well as pipeline installation, etc.

3) Private companies — In March

2019, Kingfa Sci. and Tech. Co.,

Ltd. acquired a 51% share of

Ningbo Haiyue New Material Co.,

Ltd. for Rmb699 million (about USD

104 million). Through this deal,

Kingfa entered upstream raw

material industry such as propylene,

strengthened the control of raw

materials needed for its product

(modified polypropylene).

4) Other SOEs — In December 2019,

Hangzhou Iron & Steel Group Co.,

Ltd. purchased a 15.01% share of

Zhejiang Juhua Co., Ltd. for

Rmb700 million. The target

company is engaged in

manufacturing fluorine chemical,

chlor alkali chemical and

comprehensive set.

5) Other SOEs — Beijing Gas Blue

Sky planed to acquire Zhejiang Bo

Xin (engaged in LNG supply and

trade) for Rmb205 million (about

USD31 million) in April 2019.

3. Range of deal size

Deal size varied significantly in 2019,

ranging from several million US dollars

to several billion USD.

Among these deals, over 70% were

small and medium-sized deals with a

value of below USD100 million. 22%

were large deals with a value between

USD100 million and USD1 billion, while

7% were mega deals with a value

above USD1 billion (based on the

analysis of deals with disclosed value).

Domestic M&A

42

Key deals at a glance

Domestic M&A

43

• In April 2019, Beijing Gas Blue Sky Holdings Limited

acquired Zhejiang Bo Xin for Rmb205 million. Its

business cover from LNG direct supply to commercial &

industrial users and LNG trading. Boxin secures stable gas

supply from Ningbo LNG receiving terminal, and

distributes and sells gas mainly to large industry users in

the Yangtze River Delta region, where there is a strong

demand. Through this deal, Beijing Gas Blue Sky

(comprehensive gas supplier and operator) is able to make

up the market share of the midstream and downstream

LNG business in the Yangtze River Delta region. With its

established distribution network in Beijing-Tianjin-Hebei

area, Beijing Gas Blue Sky is striving to achieve its

objective to develop new markets and import more

overseas gas sources in the future, which allows the

company to capture growth opportunities of domestic gas

market development.

• In March 2019, Kingfa Sci. and Tech. Co., Ltd. acquired

51% share of Ningbo Haiyue New Material Co., Ltd. for

Rmb699 million. Kingfa is a supplier for high performance

new materials, and one of its main products is modified

polypropylene. In the past Kingfa used to rely on external

suppliers for the purchase of polypropylene. Since 2016,

the price fluctuation of polypropylene has increased its

purchase cost. But the company was unable to fully

transfer the raw materials costs to the downstream

customers due to the stable price of its product (modified

polypropylene). Through the acquisition of Ningbo Haiyue

(a producer of propylene, isooctane, etc.) , Kingfa

successfully entered its upstream sector and thereby tried

to develop the entire value chain of “propane-propylene-

polypropylene-modified polypropylene”. As such, it was

able to avoid the impact of raw materials price fluctuations

and increase its influence on raw materials control. It can

also supply hydrogen, a by-product of propane

dehydrogenation, to other users after purification, and help

the company develop new business growth areas.

Total deal value

(USD in millions) 23 4 4 6

Total deal value

(USD in millions) Deal volume

Outbound M&A

Source: Mergermarket, public news and PwC analysis

Note: Deal value is calculated based on the disclosed information.

Outbound M&A by deal value (2017-2019) Outbound M&A by deal value and volume

(2017-2019)

2019 Type of

investment entities

(by volume)

2019 Investment Entities & Target type

(by total deal value)

2019 Distribution of

investment destination

(by volume)

Total deal value

(USD in millions) 2 2 1 5

44

6,177

2,318

461 819

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

上游中游下游供应链 -

2

4

6

8

10

12

-

1,000

2,000

3,000

4,000

5,000

6,000

2017 2018 2019Upstream Midstream Downstream Supply Chain

-

100

200

300

400

500

600

700

FinancialInvestors

The NOCs Other SOEs PrivateCompanies

Upstream Midstream Downstream

Supply Chain Total

Kazakhstan, 10%

Russia, 20%

Singapore, 20%

North America, 20%

UK, 10%

Others, 20%

Financial investors

20%

Three NOCs20%

Other SOEs10%

Private companies

50%

Supply Chain-Deal valueDownstream-Deal value

Midstream-Deal valueUpstream-Deal value

Upstream-Deal volume

Supply Chain-Deal volume

Midstream-Deal volume

Downstream-Deal volume

Outbound M&A


1. Market activity

From 2017 to 2019, a total of 37

outbound deals took place, with a total

value of over USD9.7billion. Among

these deals, 23 took place in upstream

E&P, and were worth more than

USD6.1 billion. 4 deals were involved in

the midstream and downstream

respectively, and 6 deals took place on

the supply chain.

Since the end of 2016, the Chinese

government has been exercising stricter

control on capital outflow, which has

affected the outbound M&A in the Oil

and Gas industry. The total deal value

has steadily rebounded from 2017

(USD3.7 billion) to USD5.3 billion in

2018, and decreased to USD 800

million in 2019. Considering the value of

two mega deals (CNOOC’s and

CNPC’s respective purchase of a 10%

stake in Arctic LNG 2 project) was not

disclosed to the public (the total deal

value in this report is calculated based

on disclosed available information), the

actual deal value in 2019 is estimated

to be far greater than USD800 million.

2. Investment entities and targets

Among the ten disclosed deals in 2019,

private companies accounted for the

majority of the deal volume (about

50%), but the deal value was relatively

small; the target companies covered

upstream, downstream and supply

chains. NOCs continue to focus on the

purchase of upstream assets while

financial investors tend to opt for

minority stakes in overseas mid-stream

assets, whose deal value is large. For

example:

1) Three NOCs — In July 2019,

CNOOC and CNPC subsidiaries

purchased a 10% stake in the

Arctic LNG 2 in Russia

respectively;

2) Financial investors — In June

2019, China Investment

Corporation took a stake in the

midstream natural gas pipeline

distribution business of UK

National Grid;

3) Other SOEs — In June 2019,

ZEPC purchased 18.95% of

Kazakhstan’s TNG Group for

USD30 million. TNG holds a 100%

equity of the local blocks of Tenge

Oil & Gas;

4) Private companies — In Sep 2019,

LandOcean Energy Services

acquired Range Resources

Trinidad Limited, which owns oil

blocks in Trinidad & Tobago.

3. Range of deal size

In 2019, outbound deals with a

value of below USD100 million

accounted for 83% of the total

outbound deals (by volume). Deals

within the range of USD100 million

and USD1 billion accounted for

17% of the total by volume (based

on the analysis of deals with

disclosed value)

4. Key outbound markets

Russia, North America, and Central

Asia have been popular among the

Chinese enterprises that have

gone abroad.

45

Inbound M&A

Inbound M&A at a glance

• Public disclosure of inbound deals is very limited. Deals disclosed in 2019 include:

1) SK Chemicals’ acquisition of 35% of Sinopec Wuhan Oil Refinery for USD667 million;

2) Arkema Asie SAS’ acquisition of a 45% share of Taixing Sunke Chemicals Co., Ltd.

for USD130 million.

• Compared with 2017 and 2018, deal volume remained flat in 2019 (3 in 2017 and 2 in

2018), whereas deal value increased compared with that of 2017 (over USD300 million

in 2017) and was largely unchanged from that of 2018 (about USD800 million).

1. Driving factors

We believe foreign companies are lured

to making investment in the domestic

market by: China’s abundant

unconventional oil and gas reserves,

growing energy demand, increasingly

strict environmental and safety

regulations, the policy of opening-up to

the outside world and the international

expansion of multinational corporations.

2. Policies and regulations

On June 30, 2019, the NDRC and the

Ministry of Commerce issued the 2019

version of the “Catalogue of Industries

that Encourage Foreign Investment”, in

which the negative list of foreign

investment was revised. The following

oil-gas-related industries are being

encouraged:

1) Oil & gas exploration and

development, and mine gas

utilization

2) Development and application of

enhanced oil recovery (in the form

of engineering services) and

related new technologies

3) New technology related to oil

exploration and development, such

as geophysical exploration, drilling,

logging, and underground

operation

4) Oil processing, coking, etc.

5) Special equipment manufacturing

- Oil exploration, drilling,

collection and transportation

equipment manufacturing:

floating drilling with water

depth over 1500 meters.

Floating production system,

subsea oil recovery and

collection equipment

- Shale gas equipment

manufacturing

- Key components’’

manufacturing of ethylene

complete sets of equipment

with 1 million tones/year

and above

- Offshore oil spill recovery

equipment manufacturing

6) Construction and operation of oil

(gas) pipeline and storage facilities

7) Construction and operation of

regional energy supply (cooling

and heating) projects fired by

natural gas.

46

PwC Views“

Inbound M&A

47

On December 31, 2019, the Ministry of

Natural Resources released the

“Opinions of the Ministry of natural

resources on several issues concerning

the promotion of mineral resource

management reform”. With China fully

opening its oil & gas exploration and

production market, private and foreign

investors are now allowed to enter this

field. Domestic and foreign companies

registered in China with a net asset of

no less than Rmb300 million are now

eligible for oil & gas mining right in

accordance with the regulations. The

opinions touch upon the reform of

mining right transfer, oil & gas

exploration and production

management and reserves

management.

3. Prospect analysis

In recent years, China’s economy and

energy demand have grown steadily

amid tightening supply & demand,

resulting in greater dependence on

foreign imports. With the opening of the

whole industry value chain of the

domestic oil & gas industry, more

foreign companies will be attracted to

the field of oil & gas exploration and

production in China and increase the

country’s self-sufficiency. Including

conventional onshore oil and gas

development, foreign companies have

interest in unconventional oil & gas

resources as well.

With the further opening-up of China’s

market, foreign oil and gas giants are

considering expanding their retail

(gasoline) stations here, through joint

ventures, M&A, wholly foreign-owned

enterprises, etc. At the same time, they

might be also interested in exploring the

business model of the comprehensive

energy service station which integrates

the services of gasoline, hydrogen

supply and electric charging.

The 2019 version of the negative list for

foreign investment access removes the

restriction that urban gas of a city with a

population over 500,000 has to be

controlled by the Chinese side. With the

official establishment of China Oil &

Gas Pipeline Network Corporation

(December 2019), the domestic gas

market is expected to undergo

significant changes. Competent foreign

companies can now enter China’s city

gas market through M&A, and bring

their comprehensive service ability

(operation and maintenance, etc.) to

domestic end-users.

In addition, foreign companies with

overseas gas sources can approach

more local customers here by investing

in domestic LNG receiving terminals.

PwC Views“

Natural gas

1. Market activity

As the second largest consumer of natural gas in the world,

China’s natural gas consumption has grown rapidly in recent

years. According to the “Opinions on Accelerating the Use of

Natural Gas” issued by the NDRC, by 2020 and 2030, the

proportion of natural gas in the primary energy consumption

will be increased to about 10% and 15%. Compared with

other fossil fuels (coal/oil), natural gas is generally regarded

as a cleaner energy, which might become one of the main

supplies of China’s modern clean energy system.

We found that the natural gas related deals (including LNG)

accounted for 39% and 47% of the total deal volume and

value respectively (a total of 25 deals with disclosed value

of USD6.3billion). If taking into account wider gas related

deals (including mixed oil & gas fields), the volume accounted

for 53%.

The deal volume and deal value related to natural gas

(including LNG) showed a steady upward trend from 2017 to

2019. Total deal value increased from USD1.1 billion in 2017

to USD4.2 billion in 2018, and further to USD6.3 billion in

2019; deal volume increased from 19 in 2017 to 26 in 2018,

and remained largely unchanged in 2019.

11

8

14

12

10

15

2017 H1 2017 H2 2018 H1 2018 H2 2019 H1 2019 H2

659 510

3,138

1,091 968

5,302

2017 H1 2017 H2 2018 H1 2018 H2 2019 H1 2019 H2

USD in millions

Source: Data from Mergermarket and PwC analysis

Note: Deal value is calculated based on the disclosed value

M&A in natural gas (incl. LNG) sector by deal value and volume (2019)

Natural gas related deal volume (2017-2019)

Non gas,47%

Mixed, 14%

Gas,39%

Natural gas related deal value (2017-2019)

48

Non gas,52%

Mixed, 1%

Gas,47%

By deal volume By deal value

2. Investment entity

Investors in the natural gas sector are diversified, which

include the three NOCs, provincial natural gas pipeline

network companies, private urban gas suppliers, and

financial investors.

1) Three NOCs – In August 2019, PetroChina Kunlun

Gas purchased 17 subsidiaries of Jinhong Holding

Group with Rmb1.65 billion (about USD235 million);

2) Provincial pipeline network company – In January

2019, Shaanxi Natural Gas acquired 100% of the

shares of Wuqi Baoze Natural Gas;

3) Private city gas supplier – In January 2019,

Zhongyu Gas acquired 100% of the shares of

Mengzhou City Gaoyuan Natural Gas Co., Ltd and

Wen County Gaoyuan Natural Gas Co., Ltd;

4) Financial investor – In June 2019, China Investment

took a stake in Cadent Gas (a subsidiary of National

Grid);

5) Other investor – In May 2019, Beijing Sanju

Environmental Protection & New Materials acquired

49% of the shares of Inner Mongolia Sanju Jiajing

New Energy for Rmb190.61 million (about USD28

million).

3. The establishment of China Oil & Gas Pipeline

Network Corporation

On December 9, 2019, China Oil & Gas Pipeline Network

Corporation was officially established in Beijing, marking a key

step in deepening the reform of oil and gas system in China.

For a long time, the construction and operation of China’s oil

and gas pipeline network has been dominated by national oil

companies. According to publicly available data, “as at the

end of 2018 the three national oil companies had 96,000

kilometers of main oil and gas pipeline network, with CNPC,

Sinopec and CNOOC accounting for 63%, 31% and 6%

respectively. At the same time, the provincial pipeline

network was 25,000 kilometres long, of which three NOCs

and other stakeholders accounted for a 50% stake

respectively.”

The newly established China Oil & Gas Pipeline network

Corporation will be responsible for the investment and

construction of national oil and gas pipeline network and

some gas storage facility, as well as the pipeline

transportation of crude oil, refined oil, and natural gas. This

will effectively solve problems such as low interconnectivity of

pipeline network, and the lack of unified planning and

regulatory, as well as ensure the stable market supply and

fair open access to all the third parties.

The establishment of China Oil & Gas Pipeline Network

Corporation is expected to restructure the competitive

landscape of the natural gas industry. In the long run, it will

help accelerate the transition to a new market pattern: The

upstream is dominated by Three NOCs, supplemented by a

variety of gas sources, the midstream is transported by a

unified pipeline network, and the downstream sales market is

fully competitive (x+1+x).

Natural gas

49

We think that the long-term and far-reaching impact on the

entities of the sector includes:

1) For NOCs, the separation of pipeline network will break the

integrated operation model of upstream, midstream and

downstream. The loss of the monopoly advantage of the

midstream through the pipeline network, leaving only two

business units of upstream production and downstream

sales, will have an impact on its own profitability. However,

the NOCs can change their development strategies, better

rely on their upstream resource advantages, actively enter

the city gas sale market, and find new profit growth model;

2) For other upstream companies, with the separation of

pipeline network business and the liberalization of

upstream competition, capital expenditure is expected to

be more inclined to the exploration and production, thus

helping to increase natural gas production.

Unconventional gas companies and equipment &

engineering companies related to exploration and

production are likely to benefit.

3) For midstream companies, the establishment of China

Oil & Gas Pipeline Network Corporation promotes the

interconnection of the pipeline network. Pipeline

investment and construction companies will likely be

among the first to reap the benefits.

4) For the downstream, large city gas companies operating

nationwide will be keen to facilitate the integration of

value chain and further secure more potential customers.

4. Potential Challenge

With the gradual opening-up of the domestic gas industry and

the introduction of social capital, more investment

opportunities have emerged, but accompanied by challenges:

The asset integration of China Oil & Gas pipeline network

corporation might lag behind: After the establishment of

China Oil & Gas pipeline network corporation, the details of

the assets involved are yet to be finalized. It will also take a

considerable amount of time, manpower and material

resources to integrate the pipeline business of each

company. The slower-than-expected asset integration would

lead to the lag in the reform of the natural gas industry.

Natural gas consumption grew below expectations: To

prevent the COVID-19 from spreading, most regions in the

country have issued traffic restrictions since early 2020.

Many enterprises and factories also postponed the date of

work after the Spring Festival. Public places and

entertainment/catering industries were closed for a while.

These led to a sharp decrease in the demand for natural gas

in the short term and a decrease in the growth rate of annual

consumption. It is unlikely for the natural gas consumption

this year to meet the objective of “13th five-year” plan (10%

of total primary energy consumption in 2020).

Natural gas

50

Natural gas

51

• In August 2019, PetroChina Kunlun Gas purchased 17

subsidiaries of Jinhong Holding Group for Rmb1.65

billion (about USD235 million). Kunlun Gas is a

professional company in charge of urban gas business

under CNPC. With its advantages in upstream resources,

Kunlun Gas actively expands in the urban gas market.

Jinhong Holding is headquartered in Jilin City. Its main

business is the construction and operation of long-distance

natural gas pipeline and urban gas pipeline network.

Among the 17 target companies, all except Tai’an Port, are

engaged in city gas supply and management. We believe

that through this acquisition, Kunlun would be able to

increase its market share in the urban gas market in

Hengyang, Tai’an and Hengshui. It would also contribute

to the integration of the company’s gas business and the

achievement of gas sale targets.

• In January 2019, Zhongyu Gas acquired 100% of the

shares of Mengzhou City Gaoyuan Natural Gas Co.,

Ltd and Wen County Gaoyuan Natural Gas Co., Ltd. As

a professional gas operation service provider, Zhongyu

Gas operates in 11 provinces and cities including Henan,

Shandong, Hebei, Beijing, and Jiangsu, and distributes

pipe gas to residential and industrial and commercial users.

Mengzhou City Gaoyuan Natural Gas and Wen County

Gaoyuan Natural Gas, located in Henan Province, have

signed franchise agreements with Mengzhou and Wen

County local governments respectively, and are mainly

engaged in the sales of pipe gas and gas appliances. This

acquisition is in line with Zhongyu’s development strategy:

“that is, entering the surrounding developed areas by

accelerating the acquisition of high-quality projects”.

Zhongyu Gas has not carried out any large business in the

target company’s business operation areas (Mengzhou

and Wen County), but owns several urban gas projects in

the nearby regions. Through the acquisition, Zhongyu can

expand the coverage of its products and services, and

further increase its market share in the region.

Key deals at a glance

Natural gas

52

Xi Wei, Assistant General Manager of Shanghai Petroleum

& Gas Exchange (Strategic Investment)

With the rapidly increasing natural gas consumption,

China has been the major driving force for the growth

of global natural gas market. Considering natural gas

infrastructure development in China relatively lag

behind, it is more important to consider the

investment on the entire industrial value chain other

than purely upstream gas assets. Meanwhile, foreign

companies are paying closer attention to combine

the strengths of their overseas gas supply together

with the enormous customer group in China market.

For example, South Korea SK Group recently

announced their plan to jointly develop and construct

LNG receiving station in Weihai in collaboration with

CNPC Shandong Branch.

We believe the key investment themes in the future

mainly include the areas below:

1) LNG receiving terminals – including the existing

operational 22 LNG terminals in China, over 30 LNG

terminals will be expected to be in operation in 3-5

years, which means there might be an excessive

capacity by then. However with the establishment of

national Oil & Gas Pipeline Network Corporation,

LNG terminals will be playing an increasingly

important role. Also because the distribution of LNG

terminals around coastal provinces/cities is not even,

some regions might still have the room for further

development, particularly the provinces where there

are high demands for natural gas and pipeline

infrastructure is better established, such as Jiangsu,

Zhejiang and Guangdong provinces.

2) City gas is another area worthwhile for further

study. Along with China urban redevelopment and

battle for blue sky, the future gasification rate among

city dwellers will be gradually increased. Heating

supply in some of Northern and Central cities will

heavily reply on the natural gas, and large

Commercial & Industrial customers are also being

encouraged to switch from burning coal to using gas.

Stable cash inflow and huge consumers group make

the city gas more attractive for investors.

Expert opinion

Natural gas

53

Xi Wei, Assistant General Manager of Shanghai Petroleum

& Gas Exchange (Strategic Investment)

In the short term, many small private city gas

companies are on the offer for sale. Under the

background of national oil & gas pipeline network

corporation’s establishment, gas companies are

moving towards both upstream and downstream on

the value chain. Nationwide operational city gas

companies and regional leading players are more

capable of achieving expansion and building the

entire value chain through green-field investment and

M&A. On the other side, some small private city gas

companies are willing to be sold due to the pressure

on profits. This might become an opportunity for

M&A of city gas industry.

In the long run, we are also positive about the

prospect of gas-fired power. Power industry will

become one of the important channels to consume

surplus imported LNG, and newly built LNG-fired

power stations can also contribute to the local

economy development, which is the strategic growth

direction currently being explored by many medium

and small costal cities.

The outbreak of COVID-19 since early 2020 has led

to travel restriction and reduced commercial &

industrial activities. Natural gas consumption in 2020

is hard to predict at this moment. Provided the

pandemic in Europe and America is under control by

end of Q2 2020, we expect China’s exports to bring

recovery and economy development and energy

consumption to rebound.

Shanghai Petroleum & Gas Exchange (SHPGX) was set up approved by Shanghai

government with the purpose to become a national energy trading platform, under the

guidance by NDRC and NEA.

Expert opinion

With the establishment of China Oil & Gas Pipeline Network

Corporation, the distribution pattern of interests in natural

gas industry chain will change. Market players can seek new

business opportunities through M&A:

1. Three NOCs with upstream resources in hand might

actively enter and integrate downstream city gas

markets through M&A. In addition, the fair access of

China Oil & Gas pipeline network corporation to third

parties will also benefit non-conventional natural gas

companies (coalbed methane/shale gas/tight gas, etc.)

by alleviating problems, such as the lack of gas

pipelines in development zones which will affect their

enthusiasm for expanding production;

2. Nationwide city gas companies and local leading

companies will invest in and secure low-cost overseas gas

sources by entering LNG receiving terminals to further

expand their scale advantages in the domestic market;

3. At present, most of the regional gas franchise rights of

the second-tier, third-tier and the county-level cities are

owned by local companies, and the competition pattern

is relatively scattered. Local private city gas companies

are small and relatively passive because they lack the

ability to negotiate with upstream and it is difficult to

obtain overseas gas sources through using LNG

receiving terminals. This may lead to opportunities for

merger and consolidation of the city gas industry.

In addition, the establishment of China Oil & Gas

Pipeline Network Corporation will promote the

independence of oil and gas pipelines, separate pipeline

transmission and sales, and accelerate the construction

of pipeline infrastructure. Engineering and equipment

companies in the natural gas industry might also attract

investors’ attention, such as steel pipe manufacturing,

storage and transportation services.

Investment outlook and hotspots

Restructure of natural gas industry stimulating M&A activities

Survival of the fittest in the refinery industry;

stepping into the period of integration

54

In the next two years, the expansion of China’s refining and

chemical industry will continue to be released, competition

will become fierce, and some products may have excess

capacity (such as refining and PTA). On the other hand,

China still heavily reply on the imports for high-end

petrochemical products.

In the great Petrochemical age, “refinery and petrochemical

integration” will become the long-term development trend. A

new model is being adopted in refining and petrochemical

integration to promote companies to reduce the proportion of

refined oil production and increase the output of high value-

added petrochemicals.

In addition, increasingly stringent environmental regulations

will affect SMEs substantially. Only companies with high

environmental performance can survive, while those with low

efficiency and environmental protection will be eliminated or

merged. The industry has entered the survival-of-the-fittest

phase and is moving towards a high-quality development

stage.


55

China at present depends largely on foreign oil and gas

imports (72% oil and 43% natural gas in 2018). Although

China has the resource base to achieve stable oil and gas

production, the probability of discovery of large conventional

oil and gas fields is uncertain. To accelerate the realization

of resources, more advanced technologies would be needed

to serve old oilfields or unconventional oil and gas fields.

Technologies that help reduce costs and increase

operational efficiency will be favoured by more companies

and investors.

• Digital Technology – Information technology is used as a

means to fully realize digitization, networking, intelligence

and visualization of oilfield entities and companies. The

application of digital and intelligent technologies in the

field of oil and gas production can help companies

reduce costs and improve their overall competitiveness.

In addition, the recent COVID-19 epidemic has also put

forward higher requirements for emergency management

in the oil and gas industry. Adopting advanced

unmanned and intelligent production operation

management technology can effectively reduce

unnecessary personnel contact and improve safety

performance. For example, automated (unmanned) oil

rigs, LOT smart gas meters, self-service gasoline

refuelling stations, etc.

• Enhanced Oil Recovery – At present, several

mainstream methods, such as the injection of water˴

polymer˴ and carbon dioxide, have been formed around

the world to enhance oil recovery in oil fields. In recent

years, the proportion of China’s difficult-to-recover oil and

gas reserves has increased year by year. To prolong the

lifespan of old oil fields, further development and

application of enhanced oil recovery technology (EOR)

are needed.

Technological innovation leads to the change

Opportunities in the hydrogen era

• As a clean and efficient energy source, hydrogen has

turned the heads of many investors and policy makers at

home and abroad in recent years. hydrogen production

by natural gas (one of the paths) has mature technology,

high output, and moderate cost, which is suitable for

large-scale hydrogen production. In the future, further

integration may occur between the natural gas and

hydrogen energy industries. For example, the joint

construction of liquid hydrogen LNG receiving terminals,

and the blended hydrogen into natural gas pipeline

network for transportation.

• The rapid development of China’s hydrogen energy

industry also provides opportunities for petrochemical

companies. The cost of by-product hydrogen in the

petrochemical industry is relatively low, which could

become a stable and cheap source of hydrogen.

• In addition, more conventional refuelling stations will be

expected to be transformed into integrated energy

service stations (gasoline + hydrogen + electric charging)

to meet the needs of different types of consumers

(vehicles). For example, the Foshan Station built by

Sinopec in Guangdong is the first new outlet that

integrates gasoline˴ hydrogen energy˴ EV charging and

convenience chain services in China. The integrated

energy station model saves related costs such as land

and labor, and contributes to the better use of different

energy resources.

Outbound, domestic and inbound deals

The COVID-19 has had a large impact

on the M&A market recently, and some

planned deals have been delayed.

Assuming the epidemic is successfully

contained in the short time, M&A

activities might rebound in the next 1-2

years. Seeking growth opportunities and

breakthroughs in an uncertain

environment will be an important issue

quality investors and companies must

consider.

• Affected by the COVID-19 outbreak

since the beginning of 2020, travels

due to traffic regulations are

reduced, factory resumption is

delayed, and the easing of global oil

and gas supply and demand will

continue. With China being a major

importer of oil and natural gas, it is a

good time for Chinese investors to

purchase “good and cheap”

upstream assets worldwide when

international oil prices are low. The

NOCs and local SOEs with deep

pockets remain important forces for

outbound M&A;

• When the epidemic is over, oil and

gas demand and consumption might

resume their previous vitality, and

overseas strategic investors will

again be paying close attention to

the Chinese market. Multinational

companies will consider establishing

closer partnerships with Chinese

companies to seize opportunities

and advantages, especially in the

fields of high-end refining and

petrochemical, unconventional and

offshore oil and gas field

development, and comprehensive

energy service stations；

• Regarding M&A in the domestic

market, we believe that they are still

concentrated in areas such as urban

gas and refinery & petrochemicals.

Urban gas companies have carried

out horizontal M&A activities of “big

eats small” in order to continuously

expand their coverage and achieve

expansion. Refinery and

petrochemical companies are keen

to extend their upstream and

downstream businesses through

vertical M&A, to achieve the

integration of the industrial value

chain. Investors will also have a

more diversified distribution. In

addition to SOEs, private companies

will play an important role.


56

Future trend in the period of low oil price

Since the beginning of this year,

affected by geopolitical factors, and also

because of the demand slowdown and

global economy downturn caused by

COVID-19 outbreak, international oil

prices have plunged sharply. Price of

WTI future contracts for May 2020

before expiration date even fell below

zero (also due to the lack of available

storage capacity). During the period of

low oil prices, investment entities on the

market tend to take a more rational and

pragmatic attitude towards green-field

investment and

M&A activities. Some small/medium

size oil & gas operators with high costs

and incompetent performance are likely

to face the risks of reducing or

suspending production. Some refinery &

petrochemical companies might benefit

because the prices of their products do

not fall as much as the price of raw

materials (crude oil). Given the fact that

imported gas price here is related to

international crude oil price to some

extent, gas prices might go lower, which

might benefit the development of city

gas and gas-fired power industry.

Meanwhile, in the future, oil and gas

storage facilities/infrastructure will

probably attract more attention from

investors.

In the middle to long term, there is

uncertainty on the future trend of oil

price which might need more

observation. The corresponding impact

on each subsector development and

associated investment/M&A activities

will need further understanding and

comprehensive study.

57

This article is for the purpose of providing general information only and should not be used as a substitute

for the advice provided by professional consultants.

© 2020 PwC. All rights reserved. PricewaterhouseCoopers refers to the independent member organizations

of the PricewaterhouseCoopers network and/or the PricewaterhouseCoopers network. For more

information, please go to www.pwc.com/structure.

Franklin Zhai

EUM (Energy/Utility/Mining)

Industry Deals Lead Partner

PwC China

+86 (21) 2323 2957

[email protected]

Sammy Lai

Power and Utilities Deals

Lead Partner

PwC China

+86 (10) 6533 2991

[email protected]

Bing Lu

Deals Strategy &

Operation Partner

PwC China

+86 (10) 6533 2118

[email protected]

Contact us

Steve Cheng

Energy Oil and Gas Industry Deals

Lead Partner

PwC Hong Kong

+852 2289 2568

[email protected]

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