AN ENERGY GIANT GOES PUBLIC
Exxon What? PetroChina Is the New No. 1
By Frederik Balfour
A $1 trillion market cap, the world's largest, crowns the Shanghai
trading debut of the Chinese state-controlled energy company.
Shares in PetroChina, Asia's largest oil and gas producer, opened
Monday at 48.6 yuan ($6.50), up 191 percent in its first day of
trading in Shanghai from the initial public offering at 16.7 yuan.
AFP
Shares in PetroChina, Asia's largest oil and gas producer, opened
Monday at 48.6 yuan ($6.50), up 191 percent in its first day of
trading in Shanghai from the initial public offering at 16.7 yuan.
It was a record-setting day for PetroChina. With an $8.9 billion debut
in Shanghai, the state-controlled oil-and-gas producer laid claim to
raising the greatest amount of money of any new listing globally this
year. By the end of the first day of Shanghai trading on Nov. 5,
PetroChina's share price had more than doubled, to 59¢, up 163 percent.
The Beijing-based company first went public in New York and Hong Kong
in 2000, but until the Shanghai debut its stock was largely off-limits
to China's huge pool of retail investors, who can't legally trade
shares outside the mainland. Now PetroChina is no longer out of reach.
The euphoria that greeted the Chinese debut left the company with a
market capitalization of $1 trillion, leaving second-ranked Exxon
Mobil, valued at a mere $488 billion at the Nov. 2 close, in its dust.
But looking at PetroChina by market cap alone grossly overstates its
relative size and importance in the global oil industry. The company's
displacement of ExxonMobil is a reflection of just how overheated
China's stock markets have become. PetroChina may have a market cap
more than twice the size of ExxonMobil, for instance, but when
measured in profits the Chinese company is still a pip-squeak compared
to the U.S. giant: PetroChina saw earnings rise a mere 1.4 percent to
$10.9 billion in the first half of this year, compared with Exxon
Mobil's $19.54 billion.
Valuations Vary
Bear in mind too, that while PetroChina's shares trade on three
different stock exchanges, only a small percentage of its shares are
available to investors in any of them. PetroChina's state-owned
parent, China National Petroleum Corp., controls 86% of the company,
so the actual amount of tradable shares is tiny. Making matters even
worse, only 2.18 percent of the company is listed in Shanghai,
creating a huge imbalance between supply and demand from hungry China
investors. "I am not sure whether we should use the [Shanghai] price
to calculate market valuation," says Irvin Sanft, head of China and
Hong Kong equity research at BNP Paribas. "If the free float were
bigger, the share price would be lower."
Indeed, there's a huge disparity in the valuations of Chinese
companies that have dual listings. PetroChina's Shanghai shares, for
instance, now trade at a price-earnings ratio on 2007 earnings of 55.
Meanwhile on the same day that its share price soared in Shanghai,
PetroChina actually tanked in Hong Kong, with its share price dropping
7.3 percent. The Hong Kong-listed shares trade at a P/E of 21.8. On
the basis of its Hong Kong shares alone, PetroChina would be valued at
about $396 billion. Not bad, but not $1 trillion either.
That big difference in valuations reflects the fact that China's stock
markets are closed to foreigners and overseas markets are off-limits
to most mainlanders, making arbitrage of the two share prices
impossible. The fact that China's equity markets are isolated from
world markets also helps explain why Chinese investors clamored for
shares of PetroChina just weeks after U.S. billionaire Warren Buffett
completed selling Berkshire Hathaway's entire stake in the company.
China Delays Investing Plan
The plunge in PetroChina's Hong Kong-listed shares came against the
backdrop of a 2.8 percent drop in the Hang Seng Index on Nov. 5, on
the back of a 3.25 percent slump on Nov. 2. Investors sold on the
weekend statement by Chinese Premier Wen Jiabao that a plan to allow
mainlanders to invest directly in Hong Kong shares had been put on hold.
The decision to delay the launch of the so-called "through train"
program could take more steam out of the Hong Kong market. The Hang
Seng Index had increased by 50 percent since the pilot program was
announced on Aug. 20. Hong Kong and foreign investors had been loading
up on Hong Kong stocks in anticipation that the through train would
carry a crowd of mainland investors and close the gap between Shanghai
and Hong Kong shares.
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Back in Shanghai, meanwhile, the government's attempts to dampen
demand for stocks through five interest rate hikes this year have done
little to slow the market momentum. One reason: Real interest rates
remain negative as inflation picks up speed. The yield on one-year
time deposits is 3.87 percent, below price inflation, which grew 4.1
percent during the first nine months of this year and is accelerating.
News that mainlanders will not be able to invest in Hong Kong could
only intensify the buying pressure. The benchmark Chinese index, the
CSI 300, is up 162 percent this year.
Balfour is Asia Correspondent for BusinessWeek based in Hong Kong.
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