The mysterious corruption scandal engulfing PetroChina, China’s largest oil company, is a reminder of why shares in the country’s state-owned enterprises are a thorny asset class.

September 3, 2013 Leave a comment

Updated September 2, 2013, 7:24 a.m. ET

Investors Left Hanging in PetroChina Saga

State-Owned Companies Enjoy Some Advantages—but Aren’t Run In Shareholders’ Interest

AARON BACK

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The mysterious corruption scandal engulfing PetroChina, 601857.SH -0.13% China’s largest oil company by production, is a reminder of why shares in the country’s state-owned enterprises are a uniquely thorny asset class. Last week, state media named three executives at PetroChina and one at its parent company, China National Petroleum Corp., as targets of a corruption probe. All four stepped down from their posts. On Sunday, Beijing announced that the former chairman of CNPC, Jiang Jiemin, is also under investigation. Mr. Jiang left CNPC in March to become the head of a powerful government body that oversees China’s state-owned companies. PetroChina shareholders are suffering whiplash. The company’s shares had been buoyed by news that Beijing was set to increase government-controlled prices for natural gas. The stock dropped 4.4% in one session last week on news of the corruption investigation and, despite recovering slightly, has underperformed Hong Kong’s Hang Seng Index since.That is hardly surprising: There have been no details about the alleged infractions and it is impossible for ordinary investors to understand what is really happening to the company. As in so many corruption cases in China, full details of the case may never be known.

Many analysts believe the motivation behind the investigations is partly political. At least three of the targeted executives, including Mr. Jiang, have career ties to Zhou Yongkang. Mr. Zhou, a powerful former Politburo member and security chief, and before that himself a CNPC executive, is now out of favor for supporting disgraced politician Bo Xilai.

PetroChina has confirmed that its executives have resigned and are under investigation; the executives could not be reached for comment.

Even in the absence of scandals, shareholders in Chinese state-owned companies are at the mercy of unpredictable political forces. Two years ago, for instance, Beijing abruptly shuffled the leadership of the three top oil companies. The CNPC vice general manager became the chairman of competitor China National Offshore Oil Corp., whose widely admired chairman became the head of China Petrochemical Corp. No reasons were given for the swap.

This helps explain why PetroChina shares trade at 9.2 times forecast earnings for the next 12 months, a discount to the likes of Exxon Mobil, XOM -0.13% at 11.1 times, and Chevron, CVX +0.05% at 9.8 times, according to S&P Capital IQ. State-owned companies in China enjoy some advantages, including access to cheap capital. But they are not run with shareholder interests in mind.

As PetroChina indicates, government links can carry risks as well as perks.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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