Sinotrans journeys to flotation

China''s sprawling transportation giant, Sinotrans, is planning an international listing.
The company is said to be in the final stages of deciding which banks will lead manage a roughly $500 million to $600 million offering. One out of three international banks shortlisted - Deutsche, HSBC and Salomon Smith Barney - is expected to be selected alongside one local bank - either BOCI or CICC.

A fourth quarter listing on the Hong Kong Stock Exchange has been targeted, although this may prove a little optimistic given the restructuring work that is said to be involved. At the moment, the company is also said to be undecided whether to combine the offering with an ADR and which of its many assets should be included in the listing vehicle.

Founded in 1950, Sinotrans is an arm of the Ministry of Foreign Trade and Economic Co-operation and officially known as China National Foreign Trade Transportation group. Until the last decade, transportation was a controlled industry in China and even now, foreign operators are still heavily reliant on local agents for delivery across the country's labyrinthine distribution network. In most other countries, by contrast, transportation is operated by specialist companies at each point of the supply chain rather than as an integrated network.

Sinotrans itself employs 67,000 and with assets of Rmb22 billion ($2.66 billion) is engaged in shipping, (it owns the country s third largest operator), freight forwarding (it runs 15 port terminals and is the largest agent and forwarder of domestic cargo), rail transportation (77 sidings), road transportation (its own trucking company with 3000 vehicles) and warehousing (16 warehouses with storage capacity of 5.6 million square metres).

One its key functionalities and the one which is said to be the prime candidate for the listing vehicle is transport logistics. This operational web involves 52 domestic branches, 238 domestic joint ventures, 9 representative offices and 67 enterprises overseas and the handling of more than 400 freight forwarders, shipping agents, brokers and shipping companies.

However, specialists say that one sizeable hurdle to be overcome will be the company s debt burden and a second, such a large number of subsidiaries, none of whose financials appear in the main accounts. Following efforts to open up the logistics business, most of these subsidiaries also compete against one another, meaning that service standards can vary greatly from one region to another. 

In a bid to improve overall distribution, delivery and inventory control, Sinotrans is said to have been working particularly hard on its technical capabilities, signing agreements with Chinese e-commerce provider CA and Singaporean information technology provider IPACS. Bankers also believe that getting a software company, or alternatively an international transportation company on board as a strategic investor, will be one of the key components to a successful flotation of about 35% of its equity.

Most, nevertheless, believe that the combination of old economy (transport), new economy (logistics software plus forward thinking, English-speaking management), with strong domestic GDP projections will prove a strong draw. Economists are projecting growth of around 7.2% this year and argue that although China will not be immune to a global slowdown, it will be less affected than many, because growth is being increasingly underpinned by domestic demand.

This factor and high barriers to entry give the company a natural monopoly which efforts to liberalize the industry will make it hard to break. In one area where greater freedom has been allowed since the mid 1980 s  express delivery  Sinotrans has also set up a number of profitable joint ventures with the likes of DHL, UPS and TNT. 

Three of the company s express delivery JVs comprise the main assets of subsidiary SinoAir, which completed a roughly $120 million IPO on the Shanghai Stock Exchange in December last year.

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