China Railway Construction to "pass on" rising material costs
Updated: 2008-02-29 07:03
By Amy Lam(HK Edition)
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The rising price of raw materials will adversely affect the profitability of China Railway Construction Corp, but the company plans to make adjustments to offset the effect.
"The rising raw material cost will have some impact on us," company president Jin Puqing said at a press briefing yesterday, "but we will try to pass on the costs" to customers.
The company's cost of purchasing raw materials last year, between January and November, went up 8.4 percent to 71.07 billion yuan.
Of all the money the company spent last year, raw materials accounted for 51.9 percent, a 1.3 percent jump from 2006.
Prices of most commonly-used raw materials, including steel, cement and non-ferrous metals, have been shooting up globally over the past two years with China leading the charge. Costs this year are expected to set new records, with more demand coming from emerging markets.
China Railway Construction generates a substantial portion of its revenue from fixed-price contracts, with some of those contracts containing price-adjustment clauses. However, the company is typically required to bear a portion of the increased cost, according to its prospectus.
A massive IPO
At about the same size as China Railway Group, its sole rival, China Railway Construction aims to raise up to $5.4 billion from a dual Hong Kong and Shanghai IPO listing.
The company will start the retail subscription for its Hong Kong public offering today. It initially planned to launch its IPO in January but pushed back the date because the market was too volatile.
Listing 1.71 billion H-shares, China Railway Construction hopes to sell them between HK$9.90 and HK$10.70 each.
The firm priced the mainland portion of its IPO at 9.08 yuan per share, at the top of an 8.00-9.08 yuan range, it said yesterday.
The Shanghai IPO freezes 3.13 trillion yuan, compared to China Railway Group's 3.38 trillion yuan last December.
The offer values China Railway Construction at 26.6 times forecasted 2008 earnings, a 32 percent discount to China Railway Group's price-to-earnings ratio of 39 times.
The upcoming IPO is projected to be the world's largest this year, and is already drawing intense industry demand given the current industry demand and the duopoly situation, analysts said.
"Many retail investors have already shown interest in margin financing for the shares," said Louis Tse, director of Value Convergence Brokerage. "Since the price is quite reasonable and the company is fundamentally strong, I expect the response will be very good."
Tse noted that the recovering market sentiment in Shanghai and Hong Kong will help also boost the IPO subscription.
To increase investors' confidence, the company has tapped nine major investors, including tycoon Li Ka-shing, Singapore state investor Temasek, and Yale University in the United States.
China Railway Group's Hong Kong shares have jumped 62 percent since its dual listing in December, and its Shanghai shares have more than doubled.
China Railway Construction will begin public trading in Shanghai on March 10 and in Hong Kong on March 13.
China's CITIC Securities is underwriting both the Shanghai and Hong Kong deals, while Citigroup and Macquarie are sponsoring the Hong Kong offering.
(HK Edition 02/29/2008 page2)