Chinese rights issue

China CNR plans $1.1 billion rights issue

The railway-carriage maker will offer up to three rights shares for every 10 existing A-shares.

China CNR Corp, the country’s second-biggest maker of railway carriages, has scrapped plans for a Rmb10.2 billion ($1.6 billion) private placement and will instead raise Rmb7.1 billion ($1.1 billion) through a rights issue.

The company will use the funds to pay for research and development of carriages for high-speed trains. CNR will offer up to three rights shares for every 10 existing A-shares, which will result in the issue of approximately 2.49 billion new shares, according to a stock filing to the Shanghai Stock Exchange.

The company didn’t give details on the subscription price but the steep drop of 43% year-to-date in the share prices of CNR suggests that shareholders might be able to top up their holdings at a fairly low price. The stock closed 1.77% lower at Rmb4.44 compared to a 0.60% drop in the Shanghai Composite Index yesterday. The benchmark of Shanghai stocks has fallen 17.7% so far this year.

Based on the company’s 2012 forecast earnings, CNR is currently trading at a price-to-earnings ratio of 9.4 times.

CNR said in a statement that the board of directors has approved the rights issue plan and it decided to scrap a private placement because of “changes in capital market conditions”.

It is not a good year for China’s rail-related stocks. Shares in all the listed companies engaged in railways have plunged sharply ever since a deadly train crash in July that transformed the country’s high-speed rail network from a national pride into a global embarrassment. As many as 40 people died in the crash.

Early this year, China’s railways minister, Liu Zhijun, was removed from his position for “severe disciplinary violations”, Chinese media reported. Liu was the most senior Chinese official to come under investigation for corruption in recent years. All rail-related stocks tumbled heavily following the news.

In the wake of the nation’s deadliest train crash, China has slowed the building of its rail network. Spending on railway construction has been reduced by nearly 50% to Rmb33 billion in August from Rmb65.5 billion a year earlier, according to the railways ministry.

However, some industry specialists are optimistic. “Although the A-share prices [of railway-related companies] have dropped heavily, spending on high-speed railways will continue because it is a national strategy that serves the efficiency of economic development,” said Wendy Liu, head of China research at RBS.

CNR is the second company to plan a sizable rights issue during the past three months. China Merchants Bank (CMB) said in July it would raise up to Rmb35 billion from a rights issue of A- and H-shares to boost its capital reserves. The bank said it will offer up to 2.2 rights shares for every 10 existing A- and H-shares.

The state-owned Assets Supervision and Administration Commission had approved its rights issue plan, CMB said last month, though it still needs the approval of China’s banking and securities regulators.

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