China South Loco steams to debut

China South Loco steams to debut

By Andrew Wood in Hong Kong

Published: August 17 2008 21:37 | Last updated: August 17 2008 21:37

Shares in China South Locomotive & Rolling Stock are expected to make a strong debut when they start trading this week in Shanghai and Hong Kong in spite of sharp falls in both stock markets this year.

China Southern Railway (CSR), as China’s largest train maker is also known, raised a total of $1.5bn in a dual Shanghai and Hong Kong share offering. Its shares are expected to benefit from a low initial public offering price as well as a good outlook for China’s rail sector.

A Reuters’ survey of analysts said CSR’s shares could rise as much as 60 per cent when they debut in Shanghai on Monday and by about 30 per cent when they start trading in Hong Kong on Thursday.

The strong forecasts come even though stock markets round the world have fallen sharply this year in the wake of the US subprime crisis.

Shanghai’s market, which closed at 2,450.61 on Friday, is down 50 per cent so far this year and is off 60 per cent from its peak last October. Hong Kong’s benchmark Hang Seng closed at 21,160.58 on Friday, its lowest point in five months.

Many Asian companies have postponed or abandoned IPOs this year, as investor appetite for new issues has dwindled. Poor market sentiment delayed a share offering for China State Construction Engineering, which was approved in June and could raise as much as $6bn.

Some investors had hoped Beijing would announce measures to boost the stock market ahead of the Olympics. However, none materialised and the Shanghai composite index continued to fall as the games got under way.

The market hit its lowest level since December 2006 last week, wiping out all of the gains made during the bull market of 2007.

Market observers say there is strong interest in China’s railway sector. China Railway Construction, for example, raised $5.4bn in a dual public offering in Hong Kong and Shanghai in March, as investors looked forward to a building boom.

Based on its Shanghai IPO, CSR’s shares are valued at about 16 times the company’s forecast earnings. That is low compared with international rivals Alstom, which has a price-earnings ratio of 21 times, and Canada’s Bombardier at 27 times.

“The market environment has been challenging but good companies are still seeing genuine demand,” said Jing Ulrich, chairman of China equities at JPMorgan Securities in Hong Kong. “Several sectors are still active. We are seeing accelerated interest in anything that’s related to railways.”

China’s present five-year plan allocates Rmb1,250bn ($180bn) of capital expenditure to railways – quadruple the amount in the previous period – and so far just 27 per cent of the money was spent in 2006 and 2007, according to Julius Baer, the wealth managers.