Friday, November 02, 2007
Petrochina Reaches Nirvana
After hyping and broadcasting about Petrochina for the past 4 months, this baby has finally been delivered by the golden stork as planned. Its the chosen one because there is only one Petrochina. China investors have accorded a much higher premium for A-shares of companies that are top in their industry. How do you value, what pricing for Petrochina? It is not only top of its industry, its valuation would put it firmly to be the second biggest company in the world, and pretty soon the biggest. It is also in the most explosive sector possible - oil.
Despite the unsuccessful funds being returned to investors in China, many have not reinvested back into Shanghai or Shenzhen stocks with gusto, the word on the street is that most want to buy and keep some Petrochina shares. The average estimate by market players is 40 yuan which would give its H-shares a 50% discount. Methinks its possible for the share to run up to 46-50 yuan. Bearing that in mind, and keeping the 50% discount, the H-shares should close firmer today (closer to HK$21) and may trade between HK$21-HK$23 on Monday and Tuesday. Anyone holding Petrochina covered warrants on the H-shares should be happy to hold on because I doubt very much that Petrochina A-share will ever dip below 40 yuan from here on judging from the amount of potential buying available for the shares. If it won't fall below 40 yuan, it shouldn't fall below HK$20.50.
As if all the news about the share is not positive enough, Beijing decided to raise gasoline and diesel prices by 10% yesterday to stop the erosion of refiner's margins and to guarantee the supply of fuel amid public discontent over shortages. Car owners now have to pay 0.4 yuan (5 US cents) more per liter of gasoline. This will increase the operating cost for rail cargo, public transportation and aviation immediately. The increase will boost the prospects of the already bleeding pure refiners such as Sinopec.
The hike in gasoline and diesel prices in China have checked the stock prices in China a bit - however, I think people are reading too much into the hike. Soaring food prices have caused inflation to jump this year, although the increase in the benchmark consumer-price index slowed to 6.2% in September from 6.5% in August. Underlining official caution about inflation, the government issued an estimate shortly after revealing the fuel-price increase, saying it will have a limited impact on inflation, likely adding only 0.05 percentage point to the consumer-price index. The share price weakness in China yesterday and today are not really due to "inflationary scares" or "fuel/gasoline price hikes" - it is because almost all investors are cashed up to ready themselves to buy Petrochina A-share come Monday - I know this sounds like a sidewalk Chinese medicine oil salesman, but go and do a survey by phone in Beijing, Shanghai, Tianjin, etc... you get the same response.
There are concerns that these could have a ripple-on effect across other industries and could halt the uptrend of China's stock markets. Everyone would always slip in a question as to how and when the China stock market bubble will end. I have heard the Shanghai being called a bubble (including by me) since it was 4,000. A re-examination and study of Beijing' persuasions have led me to be a bull a again (even though a cautious one). I agree it is bubblish but its not extremely over valued. As for any super bull (and this IS definitely one), the momentum, liquidity, fundamentals all are converging. Year on year profit growth is still in the 20%-30% range, though there should be some concern still that some 30% of all profits are from investment income (stock market investments and holdings). Shanghai is trading at 38x forward earnings - frothy, yes... bubble, yes ... more upside, also yes... If we all examine super bulls of the past such as Nasdaq in 1989 or the HK market back in 1973 - they all went as high as 50x -60 x forward PER before crashing. If we were to use that as a guide, the Shanghai markets still has another 35% upside from here before we really should call the cops on ourselves.