China South Locomotive Shares Jump in Shanghai Debut

By Lee Spears

Aug. 18 (Bloomberg) -- China South Locomotive & Rolling Stock Corp. jumped as much as 83 percent on its first day of trading in Shanghai, a sign that demand for new shares is withstanding the worst stock-market slump in more than a decade.

The nation's biggest maker of trains climbed as high as 4 yuan, and traded at 3.68 yuan as of 11:30 a.m., from an initial offer price of 2.18 yuan. The benchmark CSI 300 Index fell 2.8 percent and is down 60 percent from its October peak.

China South raised $1.48 billion in a combined Shanghai and Hong Kong sale, testing investors' appetite as stocks dropped on concern slowing economic growth will hurt earnings. China plans to spend 2 trillion yuan ($291 billion) on railway systems through 2020, which may help China South weather any slowdown.

``This company's main business in based on infrastructure investment, and people think this sector will perform well even if the whole economy is weak,'' Zheng Tuo, who manages $790 million at Bank of Communications Schroder Fund Management Co., said in Shanghai.

Profit will more than double to a forecast 1.36 billion yuan this year from 613 million yuan in 2007, the Beijing-based company said in its prospectus. It raised 6.54 billion yuan selling a 26 percent stake on the Shanghai exchange.

The Shanghai offer price valued the company at 16 times this year's earnings, and was at the top of the selling range. This compares with the average estimated price-to-earnings ratio of 14.1 times on the benchmark index. General Electric Co., which bought $30 million of shares in China South's Hong Kong IPO, trades at 13.5 times estimated 2008 profit.

Peer Valuations

Siemens AG, which also makes trains, is valued at 17.2 times estimated earnings per share for the year ending September. GE and Siemens both sell locomotives in China.

``The current market price is a little bit higher than its intrinsic value, but investors know that if they want to invest in the A-share market, they must seek some safer stocks,'' said Zheng, who didn't buy the shares. Chinese stocks are referred to as A-shares.

New share sales in Shanghai and Shenzhen this year rose an average 116 percent on their first day of trading, according to data compiled by Bloomberg. China South is headed for the best trading debut in Shanghai since Zijin Mining Group Co.'s 95 percent gain on April 25.

China South Locomotive had an order backlog of 68.4 billion yuan by March, according to its prospectus. The company and China North Locomotive & Rolling Stock Corp. control 95 percent of China's train market, according to Core Pacific-Yamaichi.

China's cabinet, the State Council, earmarked 2 trillion yuan to expand and upgrade the nation's railway system between 2006 and 2020, according to a Macquarie report last month.

``This stock theoretically provides more revenue visibility and growth stability, given that it's the Railway Ministry's infrastructure spend that drives the top line,'' said Howard Wang, who oversees $10 billion at JF Asset Management Ltd. in Hong Kong. ``It is a virtual monopoly.''

The Shanghai share sale was managed by China International Capital Corp. and Industrial Securities Co.

The company also sold shares in Hong Kong, which will make their debut on Aug. 21.

To contact the reporter on this story: Lee Spears in Beijing at lspears2@bloomberg.net.