Sunday, October 07, 2007



Petrochina & Shenhua To Sizzle Even More

Both had notched good gains over the last few weeks on news that they are next in line for a Shanghai listing. A factor which many have missed recently was the performance of the China Oilfield Services,
which tripled in their Shanghai debut, far exceeding even analysts' bullish expectations as investors eyed its near monopoly position in a high-growth sector of the world's second largest energy market.

Generally, the H-shares which is going for a Shanghai listing will see their Shanghai IPO priced at a slight discount to the H-shares, hence the tripling on listing will exaggerate the A-share premium even more, causing the H-shares to rise further to narrow the gap.
Not all H-shares going for listing to Shanghai perform equally. The China Construction Bank experience recently was a good example. Shares in China Construction Bank rose by a less-than-expected 32 per cent on their first day of trading on the Shanghai market. Seems like mainland investors are not acting like madmen or are hunting as packs of wolves. They do differentiate. Although such a share price increase would be considered large in many markets, it is well below the first-day jump enjoyed by several other Chinese companies in recent months. The CCB's experience was compared to other H-shares bank listings such as China Citic Bank, Bank of Nanjing and Bank of Communications - all nearly doubled on their first day of trading in Shanghai.

There were two things working against CCB, its not that unique as there are plenty banks listed in Shanghai already, and arguably CCB is not the best managed one anyway. Two, it was the largest flotation as CCB raised Rmb58bn (US$7.7bn) from the Shanghai listing. Good is good, but to propel the largest ever listing to double would have required an avalanche of a whole load of fresh investors funds on listing day to soak up the profit takers.

The record for the largest initial public offering will be broken with Shenhua Energy, China’s largest coal-miner, which will raise as much as Rmb66.6bn from the upcoming listing. As the largest in its industry, Shenhua should do a lot better than CCB. Investors seem to be according higher premiums to industry leaders or companies with a near monopolistic hold on their industry. Shenhua fits the bill. PetroChina fits the bill even more. China Oilfield almost monopolises the rapidly growing domestic offshore oil drilling and services sector, Shenhua is the same, while Petrochina is an even bigger force than China Oilfield.

The recent weakness on bouts of selling by Warren Buffett in Petrochina should not deter investors from buying the H-shares. As explained many times before in this blog, Buffett has a significant stake of around 10% in Petrochina and has made a killing many times over on the investment. If one were to go through the minutes of his last AGM for Berkshire Hathaway, there were a lot of questions, concerns and calls to sell off Petrochina owing to the company's "participation" in Darfur. I see the selling down of the stake as moves to pacify the shareholders - the last thing Buffett wants is to be accused of NOT listening to shareholders on what they want the company to stand for in terms of corporate governance, integrity and moral compass issues. The other thing is that it will be very difficult to sell all Petrochina over a short period of time owing to the size of the stake. I believe Buffett wants to have his cake and eat it by selling in small bouts thus pacifying shareholders, and this prolongs his ability to hold onto the rest of Petrochina for an extended period, thus boosting returns. All said, Buffett and Berkshire will be on their way out of the company, probably after 2 more years, but that is not a bad thing necessarily as Berkshire is forced to sell on issues which are non-financial in nature.

Hence I expect Shenhua to perform close to China Oilfield, but probably not as well. The shares should at least double, which will move the H-shares up nicely to bring the gap to 40%-50%. As for Petrochina, there is a very good chance that we may see a performance outstripping that of China Oilfield despite the size of Petrochina's offering. After all, there is only one Petrochina, and its probably the next best big cap stock to hold in China after China Mobile.

As if that was not enough to boost Shenhua and Petrochina prospects in the near term. The HK Exchange has come in to pour gasoline on the flames of optimism. In a move to reflect the importance of mainland companies in Hong Kong's capital market, PetroChina and Shenhua are expected to become Hang Seng Index constituent stocks on December 10 following the HSI's quarterly review next month.

HSI Services, which compiles the benchmark index, completed its reshuffle last month by capping large stocks such as HSBC Holdings and China Mobile at 15 percent market float in order to include more H shares, reflecting the growing prominence of Chinese firms. After adding the 10 mainland-linked stocks, Hou said the HSI would develop more of the China character favored by global investors. The inclusion of both giants will cause a big surge in demand for their H-shares for indexing purposes.

6 comments:

Hanafi Mohd Noor said...

Your blog is inspirational, keep up the good work.
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The Rock said...

Hi,

What is the target IPO price for Shenhua in China, and the target price for H-share in HK? Hence what is likely target for Shenhua-C1?

xatomic said...

Is there a warrant on China Resources Power?

Yuen said...

Hi,
I have followed your assessment on Talam since day 1, at its current course is it still OK?

Salvatore_Dali said...

yuen,

talam should be ok, even if delisted, if delisted, the process of being taken over by IJM will take a lot longer and winded ... the SC ruling was a big surprise, esp since there were a couple of buyers for the company anyway... the ruling makes for a lot of uncertainty ... if either buyer had gotten Talam, the share px should have no prob moving to 50-55 sen but now not so sure... risks have risen appreciably.

the rock,

either you hold shenhua till maturity or till the day the Shanghai IPO starts trading. Good or bad, you can sell into strength or take profits.

Hedge Fund said...

UBS has upgraded Shenhua fair value from HK$35.15 to HK$101.