Tuesday, March 11, 2008

China rail builder debut seen lagging rival's

Shares in China Railway Construction <601186.ss> could rise by 43 percent on their Shanghai debut on Monday, market players predicted, after the company raised a combined $5.4 billion in Shanghai and Hong Kong in the world's largest IPO so far this year.

While such a first-day performance would be healthy by international standards, it would lag behind a 69 percent jump on debut from its bigger rival, China Railway Group <601390.ss>, in early December. And it is not rare for Chinese IPOs to double or even triple on their listing debuts.

China Railway Construction <1186.hk>, which built the Qinghai-Tibetan railway -- the world's highest -- as well as Shanghai's high-speed Maglev train, will make a trading debut on Thursday in Hong Kong.

"Market conditions are much worse and China Railway Construction has set a more expensive IPO price compared with China Railway Group," said industry analyst Han Qicheng at Guotai Junan Securities.

Still, Han and other analysts said heavy demand for China Railway Construction's IPO shares showed investors are interested in the company's booming overseas business and the duopoly it holds with China Railway Group <0390.k> on the country's fast expanding railway construction sector.

"China Railway Construction's overseas business is much larger than its big brother," said Luo Guo, an analyst at Orient Securities in Shanghai. "Investors will look forward to its potential, in particular expansion in foreign markets."

The railway builder raised 22.246 yuan ($3.1 billion) in mainland China's 11th-biggest initial public offer ever, and added $2.3 billion from a Hong Kong offer that ranks as the most popular IPO ever in terms of demand from Hong Kong individuals.

Local-currency A shares in China Railway Construction, which builds railways, highways, ports and other big-ticket projects, are likely to close around 13 yuan on Monday, up from an IPO price of 9.08 yuan, a Reuters survey of five analysts found.

Its IPO price was set at 28 times 2008 earnings per share forecast by industry analysts, compared with 21 times for the IPO of China Railway Group, analysts said.

In addition, China's benchmark Shanghai Composite Index <.SSEC> has slumped 12 percent since early December, hit by profit-taking and huge corporate fund-raising programmes, including a $17 billion stock and bond offer planned by Ping An Insurance (Group) Co <2318.hk> <601318.ss>.

But analysts said China Railway Construction could be an attractive long-term play as the company gains from China's massive infrastructure investment.

Railway investment in China has lagged economic growth of at least 10 percent a year since 2002. Beijing has budgeted 1.2 trillion yuan in rail investment for 2006-2010, more than four times the figure for the previous five years.

This winter, China's worst storms in more than a decade delayed a large numbers of immigrants from returning home in January and February for the Lunar Near Year, drawing widespread criticism that the government had not done enough to improve the railway system.

Based on an A-share price of 13 yuan, China Railway Construction would be worth around $22 billion, compared with $27 billion for China Railway Group, whose Shanghai shares have surged by 89 percent since their December debut.

The price would also give it a price-to-earnings (PE) ratio of 40 times analysts' forecasts for 2008 earnings per share, the same level as China Railway Group.

($1=7.11 Yuan)

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