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Ye Jianming Emphasizes the Integration of Partnerships to Facilitate Strategic Development

CEFC China  

On February 24, 2016, CEFC China held a “Work Report Meeting of CEFC Financial Holding Group” attended by Chairman Ye Jianming, who delivered a speech concerning issues of “integrating CEFC China’s strategic resources and making financial planning” and “making the best of CEFC China’s flexible mechanisms to strengthen financial partnership and promote strategic development”. Chairman Ye noted that with unique strategic platforms and a comprehensive strategic system, CEFC China has an advantageous combination of resources, mechanisms and brand. Based on its main business in energy, he added, CEFC China should open its arm to embrace various forms of partnership in all its business areas, focusing on the three-tier structure of partnership supported by CEFC China, and on strategic design and financial operation supported by the executive teams. Independent board of directors should be established for each industrial project to seize every opportunity to expedite the strategic development.

 

The full text of the speech is as follows:

 

A comprehensive strategy is needed to do business, and specific planning based on the strategy is a must to guide our operations. All our teams should first of all understand CEFC China’s strategies and be well aware of the resources that we can leverage and put into practical use. Resource is power. To make the best use of resources available at a particular time and in a particular space to achieve our goals is the very essence of our overall strategy. Who will use the resources? It’s you, our talented workforce who provide CEFC China with great services and who are supported by CEFC China. This is a positive and mutually beneficial circulation in a broad system, in which your excellent professional teams have integrated with CEFC China’s strategy and platform resources to enable the success of a great undertaking that we all share.

 

CEFC China seeks to serve China’s national strategy as its aim. The strategic development of CEFC China’s energy and financial business is driven by both industrial operation and investment. The industrial operation has been built on our oil and gas terminals in Europe to acquire equities and rights of the upstream oil and gas resources, and then extended to financial services and downstream logistics to establish a platform licensed to provide a full range of financial services. In the meantime, we have established partnerships with Chinese State-owned enterprises (SOEs) such as the China Railway Group Limited (CREC) and Sinochem Group (Sinochem) to jointly develop downstream logistics systems to reap financial and logistics profits. In the area of investment, we set up our second headquarters in the Czech Republic to acquire currently undervalued stable overseas capitals by controlling J&T Finance Group. We are also seeking to become an international investment bank and focus on the development of two business sectors: tourism and airline, and industrial manufacturing.

 

Why did CEFC China invest in gas and oil terminals in Europe rather than in China? As China’s oil and gas industry is dominated by PetroChina and Sinopec, and is supported by the network of some SOEs, it is not likely for CEFC China to have terminals in China. Through the European terminals we have invested in, we have so far acquired dozens of oil depots and more than 1,000 gas stations, mostly in France and Spain. But this operation is a slow process, so we acquired last year the KMG International (KMGI) in the presence of both the Chinese Premier and the Prime Minister of Kazakhstan.

 

KMG and KMGI are to Kazakhstan as PetroChina and Sinopec are to China. KMG controls upstream oil and gas resources while KMGI controls the sales system, including refineries, gas stations, oil depots and pipelines. At present, KMGI owns over 2,000 gas stations along with oil depots, chemical plants and the most technologically advanced refineries, mostly in a dozen of Mediterranean countries. Kazakhstan is a major oil producer close to Central Asia and Russia, and the oil it produces is sold to European countries. After we controlled KMGI, it remained as a national corporation for the following ten years. In other words, it will continue to operate in the name of Kazakhstan’s national oil corporation in its downstream business. From now on, we are going to accelerate the acquisition of downstream terminal logistics businesses in the regions of the Black Sea, Mediterranean, and Central and Eastern Europe, including Turkey, Germany, France, Switzerland, Romania, Poland, and Israel, while selectively buying into some national oil companies.

 

Now that we hold shares in KMGI, we are able to speed up our terminals arrangement in Europe. For example, the Polish refinery is currently the only running one that serves the Czech Republic, Slovakia, and Poland, but its oil comes from Central Asia, mostly from Kazakhstan. Therefore, when Poland learned about CEFC China controlling KMGI, it sought to cooperate with us, which was expected to benefit KMG as well. With oil terminals in Europe as our strategic support, we are able to have a bigger say in acquiring the rights of the upstream oil and gas resources, and the use of these rights is the most key issue.

 

CEFC China has established three overseas strategic platforms for developing upstream resources: Kazakhstan, Abu Dhabi, and Chad. In Kazakhstan, we have controlled KMGI and started cooperation with KMG. Why have we made such planning in these three countries? Many of you may not be very familiar with the oil industry. In fact, the oil economy is by nature political, and oil and gas resources are controlled by heads of state, leaving a slim chance for private companies to get a share. Some experts keep talking about cheap oil resources in South America and cheap gas resources in Canada. But this is only technical analysis, which may turn out to be empty talk, because however low-priced they are, you are not able to get hold of them without political support. In May 2015, CEFC China set up a gas and oil investment fund with Abu Dhabi witnessed by the Crown Prince of Abu Dhabi and the Mayor of Shanghai, bringing CEFC China 10 million tons of oil equity each year. We have selected Chad as our focal point in Africa, and have established profound friendship with the President of Chad through energy diplomacy, based on which we have signed an agreement on oil sales rights with Chad as a shareholder of CNPC International. CPC Corporation Taiwan also transferred to us 35% of equity of its Chad project. Based on these three platforms, we are building up a network covering Central Asia and Russia via Kazakhstan, the Middle East via Abu Dhabi, and Africa via Chad. Now, the prime time has come as the oil and gas prices have fallen below USD 30, which means the more equities we control, the higher profit we’ll make. Apart from the price rise from USD 30 to USD 60, the equity-derived profit from financial and logistics services is huge.

 

We have acquired equity rights to achieve two “driving forces”. The first one is financial profits. Why have we set up futures, securities, asset management and finance companies, as well as financial trading and petroleum products trading platforms? We are actually turning our equities into financial profits. Because we own these equity rights, many large independent trading companies and international oil companies from both upstream and downstream will seek cooperation with us, which will yield huge financial profits. For example, the equity rights worth USD 100 billion will produce a profit of over RMB 10 billion, which is not difficult to calculate. As we have controlled the source, all our financial teams can work for this source. The downstream accounts receivable and securities can be packaged as wealth investment products, and the futures and paper can be used for hedging. We can lock down many options under the price of USD 30 or put them to factoring. Mining, transport and trades, including trades in energy and financial assets and financial leases can all serve the equity purposes. This is the first “driving force”.

 

The second one is the logistics profits. We have formed strategic partnerships with CREC and Sinochem, which are then able to integrate their logistics chains through the partnerships. We have established with CREC a joint venture, CREC Central Asia Logistics, the first joint-venture in China co-founded by a private enterprise and the railway corporation, which enables transmission of oil and gas through railways, thus opening access to Central Asia and Europe in the future. To stockpile refined oil products, China’s State Reserve Bureau needs to transit the oil by railway to the inland oil reserve bases, which requires a full railway access. We can get this done through our cooperation with the CREC. In the meantime, we have also joined hands with Sinochem by holding stakes in its latest and most advanced oil refineries, and have been remolding the old refineries at the Rizhao Port with the Rizhao Port Group to increase their refining capacity to 15 million tons and acquire the license and ratios for importing crude oil, so we can refine oils on orders. The products can either be stocked as national reserves or as commercial storages, or be imported to the Southeast Asia.

 

Now is the best time to store crude oil at the current low prices. The ideal places for oil storage with a capacity of 300,000 tons along the coastal areas in China are Yangpu Port in Hainan Province, Zhanjiang Port in Guangdong Province, Dongjiakou Port and Rizhao Port in Shandong Province, and Ningbo-Zhoushan Port in Zhejiang Province. We have gained our strategic advantages by establishing large oil reserve bases at Dongjiakou Port, Rizhao Port and Yangpu Port, all of which have almost completed their first phase of construction. With these storage bases, we can reserve oil brought in by cargo ships and then put for national reserves and commercial reserves, or for oil replacement and allocation for commercial purposes.

 

With abundant oil storage, we have partnered with China State Shipbuilding Corporation (CSSC) to build floating oil storage vessels in the Southeast Asia, particularly around Singapore. We have completed 3 ships, and 6 more vessels are going to be remolded soon. The vessels can also be extended to the energy groups of the provinces under a mixed ownership to vitalize the logistics assets and increase the logistics profits.

 

CEFC China has strong independent trade teams. We have an international team with 7,000 professionals from KMGI, as well as seasoned teams in China, all of whom have increased the profits in logistics. This is the first point.

 

Second, to run energy business needs huge amounts of capital. If the capital is not stable, the profits may be neutralized by the costs of financing, which will prevent us from further operations. That is why we must have our own banks on top of what we already have, including full licenses for our securities, futures, finance, asset management and insurance companies. Why did we choose J&T? J&T is a crucial and highly influential consortium in Central and Eastern Europe which controls the postal saving system in Slovakia.

 

Now we have controlled two key enterprises: KMGI and J&T. On October 27, 2014, both the Chinese and Czech heads of state witnessed the signing of an agreement that finalized the acquisition by CEFC China of 30% (now increased to 50%) equity shares of J&T. What J&T is planning to do next is: firstly, J&T, on behalf of the Czech government, will launch the China-CEE Investment Fund for 16 CEE countries together with Industrial and Commercial Bank of China (ICBC). Secondly, it is planning to set up in Shanghai a wholly foreign-owned bank. With branches in seven European countries, J&T is well positioned to cooperate with China Development Bank in fund settlement, bond issuing and interbank credit extension. With CEFC China’s investment of EUR 2 billion in J&T, the Czech National Bank allows an increase of EUR 20 billion in its external loan limit at the lending rate of less than 2%, significantly lower than that in China. We are the first Chinese private enterprise to have controlling stake in a European bank, and our joint investment increase will enable more acquisitions as intended by J&T.

 

With our own banking system in place, CEFC China is able to serve as an international investment bank by establishing its second European headquarters in Czech. Why did we do this? Because as the heart of Europe and Central and Eastern Europe, Czech is endowed with bountiful resources and functions as a bridge between Europe and Asia. Czech and the 16 CEE countries, which used to be Austro-Hungary controlled by the Germans, became a major industrial center during World War II, featured with highly advanced industrial equipment and technologies as well as management capacities, including special aircrafts, vehicles and steel in its product portfolio. Now we have held shares of or controlled these enterprises as part of our strategic collaboration. As we enjoy huge influence empowered by our financial services and media outreach, their consortia are willing to enter into cooperation with us, providing a great many opportunities for us as an international investment bank.

 

Building upon our brand influence overseas and well-endowed resources, CEFC China has helped facilitate the “going-out” and “bringing-in” strategies for both Chinese central and state-owned enterprises, thus promoting global collaboration in the energy sector and domestic industrial upgrading. We have grasped the strategic opportunity of low asset price nominated in EUR, and invested to integrate the two sections.

 

One section covers tourism, airlines and media. We have acquired majority shares of the biggest Czech media group and the oldest Czech football club - SK Slavia Prague, which has over 100,000 registered fans and 400,000 unregistered supporters. After we took over the club, it witnessed a remarkable improvement in its performance, rising from the bottom to the fourth, eligible to participate in the UEFA Champions League. We have also acquired Travel Service Airlines, the shareholder of the biggest Czech airline, thus gaining a bigger say in the aviation industry. I proposed the strategic planning of developing Prague into an aviation hub, which won recognition from the Czech president, prime minister and councilors. The aviation hub will be the “Dubai” of the Czech Republic for transfer flights after expanding the existing airports, of which we have a share. Starting from aviation, we have expanded our business to tourism industry, acquiring several tourism groups, media and TV groups, and hotels, including some of the best five-star hotels and downtown properties.

 

Why are the European assets priced so low? It has something to do with the financial crisis in 2008. Any adjustment to fiscal policies is closely associated with the pricing of currencies, assets and exchange rates. The RMB 4 trillion in the stimulus plan launched by our government aims at attracting foreign investment and further opening up the economy. As a result, the foreign investment of RMB 5 trillion has flowed into China. Capital seeks profits. We bought a stake in this financial platform and increased RMB-nominated assets, but the currencies of eurozone did not depreciate, so the overall assets were undervalued. Things are changing now. It is the best time to buy euro assets with guaranteed profits, which also serves the “One Belt, One Road” Initiative. Therefore, we have integrated tourism, aviation, media and high-end properties into a tourism and aviation section for future asset securitization.

 

The other section is the industrial sector. Many Chinese industrial enterprises have resources and professional teams, along with considerable excessive capacities. What they need is to upgrade their industrial technologies and management capacities. This is why they have to both “going-out” and “bringing-in”. In the near future, many excellent professional managers of state-owned enterprises and private enterprises will engage in the mixed ownership development. Building on our international influence and advantages, we will help enterprises of mixed ownership to expand into the global market, serving the national supply-front reform. For example, Chinese central and state-owned enterprises faced challenges in expanding to the European market of nuclear power, so CEFC China controlled a first-rate nuclear power company in Europe and secured strategic cooperation with China General Nuclear Power Corporation (CGN) to bid for nuclear power projects. When Chinese high-speed rail enterprises faced difficulties in going out, we controlled a top high-speed rail company in Europe to facilitate their overseas expansion. This is our strength. We are also shareholders of European large-scale manufacturing enterprises in special vehicles, steel and aircrafts, which may establish partnerships with Chinese enterprises and jointly set up factories in China. This will create considerable opportunities for financial teams. We are gradually increasing our market share, with a clear goal in developing the two sections.

 

We have built up strong teams for these two sections, including a group of partners like you. Every section has a strong management team who are in partnership with our corporation. For example, the management team for the section of oil and gas terminals comprises domestic and international leading professionals. In addition to operation management, the coordination of strategic planning and financing, and asset securitization are also crucial for every project. If the strategy of a project doesn’t match its available financial resources, the project may make slow progress and miss good opportunities despite our outstanding operating capability. We must concentrate our efforts and resources on the two major projects of J&T Finance Group and KMGI, whose total assets have increased by RMB 500 to 600 billion recently. However, the current investment in media, aviation, tourism, special steel, special vehicles, the Internet and other sections are all from our own funds, which calls for partnerships with domestic enterprises and asset securitization.

 

Why have we established a financial services company? Because we want to rapidly make business plans and implement them through promoted partnerships. Operation teams in many Chinese enterprises only do what they are paid for. Although the joint ventures of CREC and CERCG have their own management teams, they do not have such a professional team for strategic planning and financing planning. As a result, we can only support the development of these joint ventures through funding. For example, we have allocated RMB 200 million to the joint venture we have established with CREC for its lubricant production. The funding of RMB 200 million aims specifically at what the joint venture requires currently. In fact, it can aim higher, for example, to become a lubricant supplier for the entire railway system and to acquire some upstream lubricant brands. It can further expand its scale by setting up a fund to attract investments and can go public through financing partnerships. Another example is our cooperation with CERCG. We have acquired a natural gas conversion station in Kazakhstan and realized the transport of gas and oil by railway through the Central Asia in response to the need of this joint venture, leading to a reduction in the cost of reserves in Xinjiang and Inner Mongolia and an increase in the profit of their refineries and transport services. The joint venture also has mapped out a more ambitious strategy to get access to Europe, which needs stronger capital support. The rising profit will also enable the financial platform to revitalize stock logistics assets. If the joint venture had a professional team for strategic planning and financial planning, these targets could have been realized sooner. I’d like to say that all of you can be our project partners in the future. Our project operators will do their work according to your strategic planning, unlike many of those who only do what they paid for just to keep the platform functioning.

 

All platforms of CEFC China can be open to our financial service teams. To ensure success, we need partnership for all projects. The partnership does not only involve operators, but also people in business planning and financing. With partners in operating, strategic planning and financing as members of the board of directors, a platform can make rapid progress. CEFC China’s operating mechanism is a combination of the strategic and financial control and the partnerships should be expanded to 3 tiers for all projects. All project companies are going to be securitized and listed.

 

We have already had unique strategic platforms and a comprehensive strategic system, and what’s next? You should dig deeper with the resources CEFC China has and what can be done with them, and when you think about it, you should have a focus and put it into practice. The financial service staff members are free to participate in small groups in whatever projects they want to, and resources of all platforms are available. We have more flexible policies for financial service teams than all other companies. First of all, authorizations. When a team is engaged, we give them normal authorizations for budgets as requested. In the meantime, we also give special authorizations. What is a special authorization? For example, one of your managers is normally not authorized to take the first-class cabin in air travel, but one day he/she may have to take a first-class cabin to get things done. You have an authorization of RMB 500,000, and you can approve it right away. Or, if a staff member of yours is doing a great job, you can award him or her RMB 50,000. It’s your call if the employee is doing well or not. And in this way you can keep excellent staff members in the company. Second is profits. We share the operating profits of our platforms, and for platforms with no profits during the acquisition, we can appropriate them profits. This is also a very flexible mechanism that all financial service teams can make use of. Third is the partnership. We have two forms of partnership: the options partnership and the direct partnership. An options partnership means you are in charge of a certain project, and after 5 years, this project can be transferred to you at the initial share price. For a direct partnership, when a GP needs to finance RMB 1 billion, he/she offers RMB 400 million, and you offer RMB 40 million, or 10% of the RMB 400 million, and our financial companies can lend you that money, free of interest for the first 2 years, and then the loan is paid with interest, but it is borne by all LPs. In this way, we make you directly a shareholder. This mechanism applies to all executives.

 

We are also very flexible about human resources both at the front-end and the back-end. The back-end is about administration and finance. For the front-end, a department director is seen as the basic unit who makes plans for workloads, number of people to be recruited and the standards to be used for the recruitment. The headquarters evaluates a director by reviewing his or her standards and plans. For exceptional recruitments, the director should report to the Chairman for approval, and the director can recruit all staff members that meet the standards on his/her own. That means, you can build your own team, and the headquarters won’t interfere. Assigning someone to your team without prior notice will never happen. You employ your own people under the best mechanisms we have offered. We can also offer influential and advantageous platforms, including the financial, futures asset management, securities asset management, financial assets exchange, oil products exchange, and public offering funds. All these platforms are open to our financial service teams to expand our business.

 

Our partnership involves three types of people. The first type is owners of private businesses that survive after China’s implementation of reforms. These business owners may not be that highly educated, but they have accumulated rich experience and highly practical competence in business operations. The second type is professionals from second-tier and third-tier companies. Many of them are quite competent, and they choose us to partner with. The third type is financial professionals. They come to partner with various institutions by establishing funds. Why so many professionals and Chinese enterprises choose to partner with CEFC China? They trust us in the first place, and second, they are attracted by our strategic influence. Through partnership with the three types of people, we have established a new Board of Directors that manages our own operation while CEFC China will be an organizer only. We should focus on energy operations, while not ignoring financial investment. Our goal is to integrate strategies with financial control. This partnership mechanism implies that supervision will come from four sides – CEFC China, our fund partners, reformed SOEs with mixed ownership, and managing partners. They can all be part of the executive board and keep an eye on the on-going operations and projects. With a sound strategic system and a good supervision mechanism, we can easily prevent many problems from happening.

 

So far I have talked about our overall strategy and you have understood that you can make use of many resources for cooperation. What you should do is to make a strategic planning and specific financing proposals before you can develop any real partnership. Now the system and the platform are well-established for you, and each program is in lack of financial resources. What you are supposed to do is to match the resources with CEFC China’s overall strategy. For that CEFC China enjoys many advantages. We have excellent teamwork, rich external resources and a good brand reputation. Over the past years, CEFC China has attracted and trained many talented managers in various areas. What we now need most are professionals in financial operations. What we have done is concrete work. We have built a good corporate culture and an efficient operation system, with which we are able to deal with all kinds of internal problems. Led by the Board of Directors, we have integrated strategies with financial control, classified companies into first-tier, second-tier and third-tier platforms, and have attracted a large number of professionals. What we have done has laid a solid foundation for what we are going to do. The trail-blazers are teams resolute in action. Now we are going to assign their team members to work for different programs. We should focus on the three-tier structure of partnership supported by CEFC China, and on strategic design and financial operation supported by the executive team. Independent board of directors should be established for each industrial project to seize every opportunity to expedite our strategic development.


 
Next: Speech by Board Chairman Ye Jianming at CEFC China Strategic Seminar for 2016
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