BP spells trouble for China oil giant

ZHENHAI Refining & Chemical Co is one of the many China-linked stocks that have excited investors in Hong Kong over the past year. The giant refining group is also a important affiliate of British energy major BP, which holds close to 10% of its equity.

But BP, which has recently ditched holdings in two other Chinese energy groups listed in Hong Kong, has a problem on its hands as Zhenhai now says it wants BP to offload its entire holding.

And in an potentially embarrassing comment, a senior Zhenhai executive said BP had not brought much to the party. 'It doesn't have a big impact on our operations,' chief financial officer Zhu Zengqing said yesterday in what amounts to a hefty slap in BP's corporate face. Shares in Zhenhai, which have soared more than threefold in the past year, dipped five cents or 0.5% to HK$9.15 today as investors pondered whether a chunk of the red-hot stock was about to find its way on to market.

In ordinary circumstances, suggestions that a large placing is in the offing, even remotely, would kick the legs out from under a share price. Zhu's stinging remarks appear to have weakened the shares' value only marginally, suggesting underlying demand is strong.

Zhu, in a wire-service interview, said he wanted BP to sell out in order to boost Zhenhai's free float, allowing other keen investors a chance to buy into the company, which is a unit of Chinese State-linked energy group Sinopec.

'We would welcome the sale because those shares are not liquid,' Zhu said, making plain that BP's presence was unwelcome. 'There are a lot of other shareholders that want to buy, but are unable to,' Zhu added. BP officials have yet to respond to the remarks.

The Hong Kong market has already been asking in recent weeks whether BP will sell out of Zhenhai, a step that BP executives have previously dismissed. The question arose after BP sold its minority stake in PetroChina, the Chinese oil and gas group that also counts US investor Warren Buffett as a shareholder.

BP placed its PetroChina shares at HK$3.70 a piece. But since then they have traded north of HK$4, and were today level at HK$4.075.

BP this month also quit Sinopec. It sold its 2.1% stake for HK$3.175 a share; the stock today picked up an additional 2.5 cents or 0.7% to HK$3.875. BP executives have said they remain fully committed to energy-hungry China, where the economy is booming.

But they say they prefer to invest directly in projects on the ground and - with the notable exception of Zhenhai - not have capital tied up in minority equity stakes. Zhu's sentiments may just alter BP's commitment to the group.

The wider market was a touch firmer, aided by strength in banks, most of which have earnings reports in the offing. Global bank HSBC put on 50 cents or 0.4% to HK$127.50; it reports on 1 March.

In Hong Kong, the Hang Seng index firmed 14.34 points or 0.1% to 13,881.56.

Trade in Korea was centred on KorAm Bank, the lender targeted for a takeover by Citigroup, HSBC, Standard Chartered and a Singapore Government investment unit. KorAm today rose 50 won to 15,850 as reports suggested Citigroup was poised to win the battle. The Korea Composite Stock Price Index traded at

877.58 points, 4.07 softer.

In Japan the Nikkei 225 closed down 33.11 points at 10,720.69