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CHINA IS PUSHING a new round of restructurings by state-run companies that will put more assets into their publicly traded arms. That could make some of those listed companies more attractive -- though investors will want to carefully choose which ones fit their portfolios.
Analysts say there are significant bright spots in industries such as infrastructure and shipbuilding, where productive and profitable assets are coming to the market -- or are expected to soon. Such companies include China State Shipbuilding Co. and Zhejiang Expressway Co.
For much of the modern Chinese stock market's 17-year history, the pattern for companies going public -- almost all of which were state controlled -- was to put just a portion of their assets in a listed vehicle. That left a large chunk -- sometimes the majority -- of operations out of private investors' hands.
Over the years, that has gradually changed, sometimes with significant impact on share prices. In the mid-1990s, the transfer of factories and other assets to the publicly traded arms of sprawling state-controlled conglomerates helped power an across-the-board surge of China shares listed on the mainland and in Hong Kong.
This time around, analysts caution, investors seeking to benefit from the trend will need to be more discerning in their approach, as much of the process has already been completed.
'Most of the large, best assets are already listed,' says Vincent Chan, an analyst at Credit Suisse in Hong Kong. 'The room for asset injections is much smaller.'
Credit Suisse estimates that about 50% of the assets overseen by the State-Owned Assets Supervision and Administration Commission, which handles 155 government companies, are already part of listed entities -- and that those assets account for nearly 90% of pre-tax profits produced by the agency's enterprises. That means the assets yet to be listed are considerably less profitable than those already part of publicly traded companies.
In a speech earlier this year, Li Rongrong, director of the assets commission, said the government's aim is to create a smaller number of larger, stronger enterprises with publicly traded shares. For businesses that can't be listed themselves, the commission will encourage them to 'inject good assets of core businesses into listed companies, making the listed companies stronger and better,' Mr. Li said.
One company that has already begun the process is Shanghai Automotive Industry Corp., which makes cars in partnership with General Motors Corp. and Volkswagen AG, as well as its own-brand vehicles. Last year, Shanghai Automotive Industry moved its most valuable auto-assembly operations into its publicly traded arm. The listed company, Shanghai Automotive Co., basically traded its grab bag of less-attractive auto operations, along with shares valued at more than $2 billion, to secure its parent's core assets.
Shanghai Automotive Co. lists Class A shares, denominated in yuan and available mainly to Chinese investors, on Shanghai's stock exchange. Since the end of September -- the month when the asset swap was approved -- the company's shares have increased more than 4.5 times. Shanghai's composite index has nearly tripled over the same period.
China State Shipbuilding Co., the Shanghai-listed arm of a big shipbuilding group, said last month it was considering buying a shipyard near Shanghai as well as other assets from its government-run parent, China State Shipbuilding Corp. The listed company, which until now has manufactured marine engines, received regulatory approval to purchase about $1.59 billion in shipbuilding assets, primarily from its parent, using newly issued shares, and has begun acquisitions.
The asset injections 'will bring a significant increase in the financial results of the listed company,' says Shi Weidong, board secretary of China State Shipbuilding. 'The injected assets are all very good and leading companies in the industry.'
Analysts see favorable asset-injection prospects for other firms as well. Among the favorites of Credit Suisse's Mr. Chan: China Cosco Holdings, an ocean shipping company, and Zhejiang Expressway, which runs toll roads in a province bordering booming Shanghai.
The parent of Hong Kong-listed Cosco Holdings is one of the world's largest shipping groups, with a fleet that includes bulk carriers, oil tankers and ships to transport liquefied natural gas. Over time, many of the vessels are likely to be acquired by Cosco Holdings, Mr. Chan says. And given the group's track record on asset injections, Credit Suisse says the 'pricing should be favorable.'
Cosco Holdings received regulatory approval to issue new shares, which analysts expect will be used to acquire assets. Its parent's large and profitable bulk shipping fleet is likely to be the first purchase. Mr. Chan says a deal could close by the end of the year and would double Cosco Holdings' net income, though earnings per share would rise by a smaller amount. Yesterday, Cosco Holdings' shares fell eight Hong Kong cents (one U.S. cent) to HK$13.06 -- almost triple their level at the end of 2006.
Zhang Qi, an analyst at Haitong Securities in Shanghai, thinks that Minmetals Development Co. is a good asset-injection play. The company's board last week approved a share issue to fund acquisition of a controlling stake in a northeast China steel-plate company from its state-run parent. 'Companies in the resource sector are worth attention,' Mr. Zhang says.
Another resource play is listed coal companies. An Yun, an analyst with Shanghai Shenyin Wanguo Research & Consulting, says China Shenhua Energy Co. and China Coal Energy Co., both listed in Hong Kong, are expected to receive asset injections from their parents. 'For coal companies, the more mines they get, the better,' he says.
Mr. An also thinks that property companies could benefit from the asset-injection trend, getting improved access to land held by state conglomerates. 'It's very difficult to get land for real-estate development now,' he says. In the sector, he likes Cofco Property Group Co. and Shenzhen Overseas Chinese Town Holdings Co., both of which trade in Shenzhen.
While the effects of asset injections on the overall market won't be as significant as in the 1990s, says Mr. Chan of Credit Suisse, the quality of individual deals is likely to be considerably higher as companies buy more assets that fit existing ones. 'There are more opportunities for synergy,' he says.
Analysts say there are significant bright spots in industries such as infrastructure and shipbuilding, where productive and profitable assets are coming to the market -- or are expected to soon. Such companies include China State Shipbuilding Co. and Zhejiang Expressway Co.
For much of the modern Chinese stock market's 17-year history, the pattern for companies going public -- almost all of which were state controlled -- was to put just a portion of their assets in a listed vehicle. That left a large chunk -- sometimes the majority -- of operations out of private investors' hands.
Over the years, that has gradually changed, sometimes with significant impact on share prices. In the mid-1990s, the transfer of factories and other assets to the publicly traded arms of sprawling state-controlled conglomerates helped power an across-the-board surge of China shares listed on the mainland and in Hong Kong.
This time around, analysts caution, investors seeking to benefit from the trend will need to be more discerning in their approach, as much of the process has already been completed.
'Most of the large, best assets are already listed,' says Vincent Chan, an analyst at Credit Suisse in Hong Kong. 'The room for asset injections is much smaller.'
Credit Suisse estimates that about 50% of the assets overseen by the State-Owned Assets Supervision and Administration Commission, which handles 155 government companies, are already part of listed entities -- and that those assets account for nearly 90% of pre-tax profits produced by the agency's enterprises. That means the assets yet to be listed are considerably less profitable than those already part of publicly traded companies.
In a speech earlier this year, Li Rongrong, director of the assets commission, said the government's aim is to create a smaller number of larger, stronger enterprises with publicly traded shares. For businesses that can't be listed themselves, the commission will encourage them to 'inject good assets of core businesses into listed companies, making the listed companies stronger and better,' Mr. Li said.
One company that has already begun the process is Shanghai Automotive Industry Corp., which makes cars in partnership with General Motors Corp. and Volkswagen AG, as well as its own-brand vehicles. Last year, Shanghai Automotive Industry moved its most valuable auto-assembly operations into its publicly traded arm. The listed company, Shanghai Automotive Co., basically traded its grab bag of less-attractive auto operations, along with shares valued at more than $2 billion, to secure its parent's core assets.
Shanghai Automotive Co. lists Class A shares, denominated in yuan and available mainly to Chinese investors, on Shanghai's stock exchange. Since the end of September -- the month when the asset swap was approved -- the company's shares have increased more than 4.5 times. Shanghai's composite index has nearly tripled over the same period.
China State Shipbuilding Co., the Shanghai-listed arm of a big shipbuilding group, said last month it was considering buying a shipyard near Shanghai as well as other assets from its government-run parent, China State Shipbuilding Corp. The listed company, which until now has manufactured marine engines, received regulatory approval to purchase about $1.59 billion in shipbuilding assets, primarily from its parent, using newly issued shares, and has begun acquisitions.
The asset injections 'will bring a significant increase in the financial results of the listed company,' says Shi Weidong, board secretary of China State Shipbuilding. 'The injected assets are all very good and leading companies in the industry.'
Analysts see favorable asset-injection prospects for other firms as well. Among the favorites of Credit Suisse's Mr. Chan: China Cosco Holdings, an ocean shipping company, and Zhejiang Expressway, which runs toll roads in a province bordering booming Shanghai.
The parent of Hong Kong-listed Cosco Holdings is one of the world's largest shipping groups, with a fleet that includes bulk carriers, oil tankers and ships to transport liquefied natural gas. Over time, many of the vessels are likely to be acquired by Cosco Holdings, Mr. Chan says. And given the group's track record on asset injections, Credit Suisse says the 'pricing should be favorable.'
Cosco Holdings received regulatory approval to issue new shares, which analysts expect will be used to acquire assets. Its parent's large and profitable bulk shipping fleet is likely to be the first purchase. Mr. Chan says a deal could close by the end of the year and would double Cosco Holdings' net income, though earnings per share would rise by a smaller amount. Yesterday, Cosco Holdings' shares fell eight Hong Kong cents (one U.S. cent) to HK$13.06 -- almost triple their level at the end of 2006.
Zhang Qi, an analyst at Haitong Securities in Shanghai, thinks that Minmetals Development Co. is a good asset-injection play. The company's board last week approved a share issue to fund acquisition of a controlling stake in a northeast China steel-plate company from its state-run parent. 'Companies in the resource sector are worth attention,' Mr. Zhang says.
Another resource play is listed coal companies. An Yun, an analyst with Shanghai Shenyin Wanguo Research & Consulting, says China Shenhua Energy Co. and China Coal Energy Co., both listed in Hong Kong, are expected to receive asset injections from their parents. 'For coal companies, the more mines they get, the better,' he says.
Mr. An also thinks that property companies could benefit from the asset-injection trend, getting improved access to land held by state conglomerates. 'It's very difficult to get land for real-estate development now,' he says. In the sector, he likes Cofco Property Group Co. and Shenzhen Overseas Chinese Town Holdings Co., both of which trade in Shenzhen.
While the effects of asset injections on the overall market won't be as significant as in the 1990s, says Mr. Chan of Credit Suisse, the quality of individual deals is likely to be considerably higher as companies buy more assets that fit existing ones. 'There are more opportunities for synergy,' he says.
(WSJ.COM)
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