China stocks: going home to raise more capital

In an effort to raise more capital, some of China''s biggest state-owned companies are abandoning Hong Kong and heading home.

StockHouse LogoHomecoming is often not a bad thing. That is what some of China's biggest state-owned companies, which in the past decade have raised capital and international exposure through Hong Kong listings, are discovering.

Now, these very companies are looking homewards to raise more money. And the number of them doing so is growing, as issue prices for domestic listings are almost guaranteed a premium to their Hong Kong stock prices. That not only could boost the Hong Kong stock prices, but proceeds from a domestic A share IPO could also help companies buy back their flagging H shares.

Already, Huaneng International Power [902] said it plans to sell up to 350 million domestic A shares, which are restricted to Mainland Chinese investors. And Yanzhou Coal Mining Co [1171] is issuing A shares at RMB10 ($1.21) a piece, a premium to its Hong Kong listed stock, which was recently quoted at HK$2.20 ($0.28).

China Overseas Land and Investment [688]has also said it's considering transferring some of its assets to its parent company, an IPO listing candidate for the A share market which is also controlled by the Chinese cabinet.

Jiangxi Copper [358], the Mainland's largest copper producer, will list domestic A shares soon, raising about RMB500 million to partly help expand smelting capacity to 350,000 tonnes by 2002.

FrontShangTeleFor the Chinese companies, why not turn to their home turf now that investor interest for Hong Kong-listed stocks is flagging and at best, lukewarm? H shares and red chips - Hong Kong companies with Mainland China backing - are trading at steep discounts of up to 95% to their A share counterparts.Back in China, state companies can try to lure more of the nation's nearly HK$75 billion in savings into the stock markets. There is an ambition and a political will by Beijing to transform the domestic Chinese market into one of the largest in the world.

Shoring up the Chinese stock markets is necessary, before further opening up to foreign interests as required when China joins the World Trade Organization. In the past few years, regulators have also launched different products to enhance the stability of the fledging markets, including the introduction of mutual funds and allowing insurers to invest in stocks.

In the last quarter of 2000, the China market saw two of the biggest IPOs in Shanghai Baosteel, the Mainland's biggest steelmaker and China Minsheng Bank, the country's first private bank. The listings were further indication of the national ambition.

H shares and red chips - Hong Kong companies with Mainland China backing - are trading at steep discounts of up to 95% to their A share counterparts.

Such development could be bad news, in the long term, for the Hong Kong market, which has assumed the role of a capital market for Chinese companies. In 2000, H share and red chip companies raised more than HK$344 billion from the Hong Kong market, including HK$96.5 billion in IPOs.

"We believe that Hong Kong's competitive edge as the fundraising centre will be maintained as it continues to provide Mainland issuers with an open and transparent market where freely convertible currency could be raised, advanced and efficient market infrastructure and a large pool of legal and financial services professionals," said the Stock Exchange of Hong Kong in a written response to StockHouse.

Yet, the Hang Seng China Enterprise Index and the Hang Seng China-Affiliated Corporation Index, which monitor H share and red chip firms, respectively, fell at least 18% in 2000.

The Shanghai A share market, on the other hand, was one of world's top performing indices, with more than a 50% return in 2000. In 2000, about RMB141.7 billion was raised in new issues on the Chinese markets, up 65% from 1999. At present, there are more than 1000 companies listed on the Shanghai and Shenzhen stock exchanges, and the number is rising on average by two new listings a week. Beijing has pledged to merge the Shanghai and Shenzhen exchanges not too long from now.

Investment bankers in Shanghai said the most crucial factor for Chinese companies choosing an exchange to sell shares is cost. Pre-IPO costs in the Mainland are about 3% of the amount to be raised in the IPO. In Hong Kong, that percentage goes up to at least 7%.

Analysts, such as Joe Zhang of UBS Warburg in Hong Kong, are convinced the domestic markets are only just going to become a better place for Mainland companies to raise capital. Familiarity is one thing but the government's push to improve liquidity is welcomed. In UBS' latest report on A and H shares, the brokerage points out that successful listings of Shanghai Baosteel and Minsheng Bank - exploded the myth that Chinese domestic A share market is too shallow to float large companies .

Zhang believes that, in the future, companies that seek Hong Kong listings would be those ordered by the Central Government.

And it's not just the Chinese companies. Even Hong Kong-based and foreign companies such as the Chinese arm of Unilever plc [L.ULVR] have been considering listings on the Mainland.

Shui On Group, which controls Shui On Construction and Materials [983], wants to consolidate its China property investments into a listing vehicle for a Shanghai IPO.

As such, the Group is also planning to expand its business in Shanghai, China's biggest commercial city which Beijing aims to turn into the nation's answer to Wall Street.

Farfetched? Consider Chinese Premier Zhu Rongji's recent analogy: Shanghai is China's New York, and Hong Kong is Canada's Toronto.

Copyright: StockHouse Media Corporation

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