Sinohydro warns it is vulnerable to risk overseas

Toh Han Shih

Originally published in the South China Morning Post

Sinohydro Group, which lists in Shanghai today, faces growing political and financial risks with its rapidly increasing international business.

The Chinese state-owned enterprise is the world's biggest dam builder, having built two-thirds of the country's dams - and half of the world's.

It has continuing and completed projects in over 50 countries.

Sinohydro will issue three billion A shares at 4.50 yuan each, raising 13.5 billion yuan (HK$16.37 billion) from its Shanghai offer, the company has said. The funds raised will be 22 per cent less than it had previously aimed for because of weak market conditions, but it will still be one of Shanghai's biggest IPOs this year.

"In its overseas operations, the company is susceptible to political, economic and diplomatic risks," warns Sinohydro's prospectus, citing as an example the raging civil war in Libya, where the company had 2.22 billion yuan of project assets in February.

"The standards of international projects are those of the developed nations of Europe and USA, especially in quality control, safety and environment, which are very demanding. It is difficult for China's practices to meet such high standards. There are deficiencies in many areas between China's technical standards and international standards," the prospectus says.

According to Grace Mang, the China global programme co-ordinator for non-governmental organisation International Rivers, the company is "engaged in some destructive dam projects".

She said Sinohydro is currently completing feasibility studies for the Pak Lay dam planned on the Mekong River in Laos. The dam would threaten the Mekong River's ecology and the well-being of millions of people who depend on the river for food, income and transport, she said.

Sinohydro is also conducting feasibility studies to develop the Tasang dam on the Salween River in Myanmar, Mang said.

"The dam faces violent local opposition. Over 50,000 people have petitioned for the suspension of the dam," she said.

"As Sinohydro has quickly become the market leader in the global hydropower sector, it is exposed to greater scrutiny by media and international civil society for its participation in controversial projects.

"Sinohydro's reputational risks are likely to increase as it takes on projects where it has more responsibilities as a financier and developer," Mang said.

In the past two years, it has announced two "build, own and transfer" projects, including seven dams worth US$2 billion along the Nam Ou River in Laos.

It is drafting a sustainability framework for its global operations, which is deemed important in helping the firm overcome its deficiency in international standards, and will demonstrate the company is a worthwhile investment, Mang added.

The world has not fully recovered from the 2008 financial crisis, warns Sinohydro's prospectus: "If a major reversal occurs in international financial markets, the company risks a decline in international and domestic demand."

Sinohydro's new overseas contracts jumped 53.6 per cent to 45.7 billion yuan last year. During the first half of this year, it won 22.1 billion yuan of overseas contracts.

International revenue accounted for 26.6 per cent of Sinohydro's turnover in the first half, which totalled 50.68 billion yuan, while net profit amounted to 1.82 billion yuan.