Excavators at Lovol Heavy Industry Co in Qingdao, East China's Shandong Province in October Photo: cnsphoto

Xugong Group Construction Machinery Co is set to receive about 14.8 billion yuan ($2.26 billion) from backers including GIC Pte Ltd, sources said, in one of China's biggest mixed-ownership reforms of a state-owned enterprise (SOE).

The deal is set for completion by year-end, two people with direct knowledge of the matter told Reuters.

The mixed-ownership reforms aim to revive China's state-owned sector and create globally competitive conglomerates by injecting SOEs with private capital. Under the policy, China Unicom Hong Kong raised $11.7 billion in 2017 from investors including Alibaba Group Holding and Tencent Holdings.

Singapore sovereign wealth fund GIC and Chinese private equity firm CITIC PE together have agreed to invest 3.3 billion yuan in China's biggest construction equipment maker in exchange for a 10.5-percent stake. That would make the duo Xugong's single biggest shareholder among a dozen new investors, which will own a total of 46 percent after the deal, the people said.

The deal values Xugong at about 32 billion yuan, they said.

Xugong will then inject $2.1 billion in assets into Shenzhen-listed XCMG Construction Machinery Co — in which it owns 38 percent — including its core excavator business, which recorded 2019 revenue of $2.4 billion. Xugong will be dissolved after shareholders receive XCMG stock, the people said.

Xugong, advised by CITIC Securities Co, aims to complete the process by the end of 2022, said the people, declining to be identified due to confidentiality constraints.

Xugong, XCMG, GIC and CITIC PE did not immediately respond to requests for comment. CITIC Securities declined to comment.

Xugong is a diversified construction machinery manufacturer founded in East China's Jiangsu Province, which has 40 offices globally, 15 manufacturing bases and five research and development centers. Its products include excavators, concrete mixers, cranes and dump trucks.

Its asset-restructuring plan mirrors that of many large, state-run Chinese firms, including top automaker SAIC Motor Corp, with benefits including a full listing, improved corporate governance and increased funding channels.

The restructuring will put XCMG on a firmer footing to compete with expanding peer Sany Heavy Industry Co and foreign giant Caterpillar Inc.

V-shaped recovery

The deal is also another example of China's economic recovery, as excavators, which are widely used in infrastructure projects such as water conservation, electricity and roads, are regarded as an economic barometer of the construction machinery sector, and even the Chinese economy.

China's construction machinery industry experienced heavy losses at the beginning of the year amid the COVID-19 epidemic, but it has recovered since March, and its continues its surprisingly high growth rate.

Data from the China Construction Machinery Association showed that in the first 10 months of the year, 263,800 excavators were sold in China, a year-on-year increase of 34.5 percent, exceeding by 12 percent last year's annual sales. 

The recovery pace of the construction industry is also in line with China's efforts in virus control and economic recovery, as China's GDP grew 4.9 percent in the third quarter, the first positive GDP figure since the viral outbreak.

From January to October, investment in highway and waterway transportation was 2.15 trillion yuan, a year-on-year rise of 11.8 percent, Ministry of Transport data showed.

In the face of increasing competition in the global and Chinese markets, the brand influence and industry status of Chinese construction machinery manufacturers continues to improve.

In a list of top 50 global construction machinery makers released in June, the total sales of 11 Chinese companies reached $36.23 billion, or 18 percent of the top 50, a year-on-year increase of 3.22 percentage points. China only trails the US and Japan in terms of sales.