More than 10 billion investment in Hengli Petrochemical Saudi Aramco's layout in China still has a big drama

Hengli Petrochemical Co., Ltd. (600346. SH) eventually signed a contract with Saudi Aramco.

On the evening of April 22, Hengli Petrochemical announced that the company's controlling shareholder, Hengli Group, has signed a memorandum of understanding with Saudi Arabian Oil Company (hereinafter referred to as "Saudi Aramco"). The two parties are negotiating a strategic cooperation between Saudi Aramco and Hengli Petrochemical in crude oil supply, raw material supply, product offtake, technology licensing, etc., and at the same time, Saudi Aramco or its controlled affiliates will acquire from Hengli Group its shares accounting for 10% + 1 share of Hengli Petrochemical's issued share capital.

According to the announcement, the memorandum of understanding is non-binding, after which Saudi Aramco will also begin to carry out due diligence work on Hengli Petrochemical.

The 21st Century Business Herald reporter previously learned from people familiar with the matter that Hengli Group had negotiated with Saudi Aramco on strategic cooperation and shareholding between the two sides, which was even earlier than Saudi Aramco and Rongsheng Petrochemical (002493. SZ) to negotiate and realize strategic cooperation. However, at that time, the cooperation between the two sides did not take place for some reason.

If Saudi Aramco successfully takes a stake in Hengli Petrochemical, it means that among the four major private refining and chemical companies, except for Hengyi Petrochemical (000703. SZ), Rongsheng Petrochemical, Dongfang Shenghong (000301. SZ) and Hengli Petrochemical have all signed contracts with Saudi Aramco.

However, for the acquisition, the secondary market response has been flat for the time being. As of the close of trading on April 23, Hengli Petrochemical fell 2.38%.

Image source: Visual China

The consideration for the acquisition has not yet been determined

According to public information, Hengli Petrochemical's main business includes refining, petrochemical and polyester new materials industry chain related business, is the first in the industry to achieve "crude oil - aromatics, olefins - PTA, ethylene glycol - polyester new materials" industry chain integration of new chemical materials listed companies, its new materials subsidiary Kanghui New Materials is also planning to split the listing.

In terms of shareholding structure, at present, Hengli Group, Hengneng Investment and other persons acting in concert, and the company's employee stock ownership plan Hengli Group-Southwest Securities-21 Hengli E1 guarantee and trust property account hold a total of 75.45% of the shares of the listed company, even if Saudi Aramco becomes the owner, it is enough to ensure the stability of the control of the family company of Fan Hongwei, the actual controller.

"If the two parties finally sign a formal agreement on the aforementioned share transfer and business cooperation and implement it smoothly, Saudi Aramco (or its controlled affiliates) may become a shareholder of more than 5% of the company's shares, which will help optimize and improve the company's share capital structure, enhance corporate governance capabilities, and deepen the cooperation between the two parties in the petrochemical field, which is expected to have a positive impact on the company's development in the long term. Hengli Petrochemical said in the memorandum of understanding signed by the two parties.

The marriage between Hengli Petrochemical and Saudi Aramco is not surprising to the outside world.

"Hengli has always maintained a good cooperative relationship with Saudi Aramco, and there is continuous cooperation in crude oil procurement. Hengli has always had an open attitude and actively explored the possibility of cooperation with excellent strategic partners at home and abroad. Li Feng, secretary of the board of directors of Hengli Petrochemical, revealed in the Shanghai stock performance exchange meeting in October last year.

It is important to note that the MOU does not involve transaction consideration. According to the closing price on April 22, the shares of Hengli Petrochemical negotiated by Saudi Aramco will be worth 10.7 billion yuan.

Of course, "benefiting the benevolent" is not the way that the "Middle Eastern tyrants" who scolded Fang Xuan have been throwing money.

In March last year, Saudi Aramco signed a share sale and purchase agreement with Rongsheng Holdings, the controlling shareholder of Rongsheng Petrochemical, under which the two parties will deliver a 10% stake in Rongsheng Petrochemical at a consideration of 24.3 yuan per share. According to the price of 12.91 yuan per share on the trading day before Rongsheng Petrochemical issued the equity acquisition announcement, the consideration was 88% higher than the market price.

However, since there is no market bidding and the right to appoint directors, etc., significant minority shareholder transactions are often completed at a partial premium.

In addition to equity acquisitions in listed companies, Aramco will continue to "throw money" at its portfolio companies to further expand their businesses.

In November last year, Rongsheng Holdings completed the delivery of a minority stake in Rongsheng Petrochemical to Saudi Aramco. Mitib Awadh M Alharbi, President of Aramco Asia, became a non-independent director of the company.

In January this year, Rongsheng Petrochemical and Saudi Aramco signed another memorandum of understanding, under which Rongsheng Petrochemical and Saudi Aramco will acquire 50% of the shares of each other's subsidiaries Jubail Refining & Chemical Company and Ningbo Zhongjin Petrochemical Co., Ltd., respectively, and continue to cooperate in upgrading and expanding their subsidiaries.

On April 20, Rongsheng Petrochemical and Saudi Aramco have signed a "Cooperation Framework Agreement" and launched further negotiations on the specific terms of equity and expansion.

Saudi Aramco lays out the Chinese drama

Aramco's aggressive partnership with Chinese companies began seven years ago.

In May 2017, North Industries Group, Saudi Aramco and Panjin Xincheng signed a joint development agreement to jointly develop joint refining, chemical and retail projects in Liaodong Bay. Two years later, the two sides finalized the content of the cooperation, including the establishment of a joint venture shareholding platform by Saudi Aramco, Huajin Chemical and Panjin Xincheng Industry, and the investment of more than 10 billion yuan in the construction of refining, ethylene and other petrochemical production capacity.

In December 2019, Huajin Aramco was officially incorporated. However, due to the disruption of global public health events, the above-mentioned refining capacity investment plan was put on hold for a time.

Until March 2023, Saudi Aramco's investment in Rongsheng Petrochemical caused a thousand waves. Since then, Saudi Aramco's investment in China has accelerated significantly.

In September 2023, Saudi Aramco and Dongfang Shenghong signed a cooperation framework to acquire a 10% stake in Shenghong Petrochemical, a subsidiary of the company, and the two parties intend to promote strategic cooperation in all aspects, including raw materials and product lines, and in October, they announced that they have signed a memorandum of understanding with Nanshan Group, Shandong Energy Group and Shandong Yulong Petrochemical to acquire a 10% stake in Shandong Yulong.

However, the above-mentioned Saudi Aramco equity investment plan has not disclosed the follow-up consideration and the specific content of the strategic cooperation so far.

Entering 2024, Saudi Aramco's seven-year preparation for the Liaodong Bay project has the following.

At the end of February, Huajin Aramco announced the simultaneous start of construction of a 4.2 million mt/year high-propylene catalytic cracking, 1.4 million mt/year gas separation, and 450,000 mt/year full-density polyethylene units.

According to relevant information, the total investment of the Huajin Aramco project is expected to exceed 83.7 billion yuan, and it is expected to form an annual production capacity of 15 million tons of oil refining, 1.65 million tons of ethylene and 2 million tons of PX.

Speaking at the March earnings conference, Aramco President and CEO Amin Nasser said that China's oil demand is strong and growing, and that Aramco is looking for opportunities to invest further in China. Earlier, Nasser also said that China's economy continues to pick up, and it is expected that 50% of the increase in global oil demand will come from China in the future.

Saudi Aramco's marriage with a Chinese refining and chemical company is no longer a whim.

Earlier, Saudi Aramco revealed plans to convert more than 4 million barrels of crude oil production into petrochemicals by 2035 — about one-third of the 12 million capacity cap set by the Saudi government for Saudi Aramco in January.

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