PetroChina, world's largest company

♠ Posted by Emmanuel in , at 11/05/2007 11:29:00 AM
The incredible run-up in Chinese bourses is in large part attributable to local citizens having limited investment outlets elsewhere. It's a cliche, but yes, everyone and his dog has piled into the stock market with self-evident (and rather bubbly) outcomes. While China is now trying to encourage investment abroad through its qualified domestic institutional investor (QDII) scheme to help alleviate the almighty rush into local bourses, authorities have been reluctant to let mainland retail investors enter the exotic faraway market of, er, Hong Kong. What is the result, you ask? Five out of the ten largest companies in the world by market capitalization are now in China. Further, they are for the most part state-controlled:
  • World's largest bank: Industrial and Commercial Bank of China
  • World's largest telecoms company: China Mobile
  • World's largest airline: Air China (not to be confused with ROC's China Airlines)
  • World's largest insurer: China Life Insurance
  • World's largest energy company: PetroChina
I previously featured commentary suggesting that, despite their hefty price tags, Chinese stocks are fairly valued. At these levels, however, I am with Alan Greenspan and those Marxists who always await a crisis of overaccumulation in predicting the bubble will pop. Like with the housing bubble stateside, a lot of novice investors in China will inevitably learn that, yes, markets do go down as well. It's an old story, but one that's coming sooner or later. Here is the International Herald Tribune on today's unbelievable Shanghai offering of PetroChina. The world has gone mad:
PetroChina, the state oil and gas giant, became the world's first company to pass $1 trillion in market capitalization when it debuted on the Shanghai Stock Exchange on Monday.

With PetroChina's share price on the booming mainland market rising as high as 48.62 yuan, or $6.52, it trebled in value on its opening day and surpassed U.S. energy behemoth Exxon Mobil as the world's most valuable company.

PetroChina shares, already traded in New York and Hong Kong, were seized on by a market awash with cash and investors eager for new opportunities. At its intra-day high in Shanghai trading, it was valued at almost $1.2 trillion, compared to Exxon Mobil's market capitalization at Friday's market close of $487 billion. At that level, PetroChina was worth more than the gross national product of Australia.

The huge valuation underlines the scale of the asset bubble that has been building as Chinese investors have dived into the share markets of Shanghai and Shenzhen, unleashing the huge savings in personal bank accounts. China is now home to the world's most expensive companies. It has the biggest bank, insurance company, telecommunications carrier and airline by market capitalization. By that measure, it has five of the world's ten largest companies.

The prices set on the Chinese exchanges, still largely isolated from the rest of the world by regulatory barriers that limit the amount of foreign money going into the stock markets and domestic money permitted to go out, bear little relation to company performance or to markets elsewhere [they are massively bubbly].

Despite PetroChina's share price trippling on debut in Shanghai and overtaking Exxon Mobil in value, it is about half as profitable as its rival. In the first half of 2007, PetroChina's net income was $10.9 billion, compared to $19.5 billion for Exxon Mobil.

With China's economy continuing to grow at double digit rates and no sign that investors are losing their appetite for the share markets, this price bulge has so far been unaffected by issues that have shaken other markets, like mortgage defaults by low credit rated borrowers in the United States.

"It could continue for a while longer yet," said Warren Blight, a market analyst with Fox-Pitt Kelton in Hong Kong. "Everyone agrees that at some point the stock market bule will burst. The issue is when that will happen and what will cause it."

While times are good, PetroChina and a string of other state-controlled companies are cashing in on the euphoria with so-called A-share mainland listings. The oil and gas company raised 66.8 billion yuan, or $8.9 billion, ahead of its listing Monday by selling 4 billion shares at 16.70 yuan a share, the largest amount ever raised in a mainland initial offering. But only 13 percent of the company has been floated. The rest is in the hands of its state-owned parent China National Petroleum.

But the ebullience of Shanghai investors for the stock is not matched elsewhere. While in Shanghai PetroChina's A-share price was up as much as 191 percent at one point, in Hong Kong its H-share was down 6.6 percent to 18.30 Hong Kong dollar by midday. [Hong Kong is not a "captive" market.]

Weighed down by government-imposed price caps on gasoline, PetroChina's refinery business is losing tens of millions of dollars a day, according to petroleum analysts.

"They are not of the strength of Exxon Mobil," said John Vautrain senior vice president of energy economics consultancy Purvin & Gertz in Singapore. "They are very strong in China and that is good if you make money but China is not a good place to be a refiner at the moment. They are deeply under water losing a lot of money in refining."

The fine details of balance sheets and comparative values of shares elsewhere in the world have done nothing to dampen the high spirits of Chinese investors.

After decades where low interest rate bearing accounts in state-owned banks were virtually the only outlet for savings, the soaring stock market has become irresistible to a new generation of Chinese.

"There is an accumulated desire to invest," said Li Hongtao, Beijing-based futures analyst with the Zhejiang Yongan Futures Company and a keen investor. "People are heavily influenced by their families, friends and colleagues at work. A lot of them don't have any knowledge of the market or any idea of the risk."

Earlier this year, the state media reported that the number of share trading accounts had exceeded 100 million. For millions of retirees, students, teachers, public servants and office workers, logging on to the internet and experiencing the instant gratification of rising portfolio values has become part of their daily routine...

As China's economic boom continues to boost living standards, the stock market is contributing to a widespread sense of well being for many investors. This is fed by blanket coverage in the media with newspapers, magazines and business websites carrying prominent stories about stock market winners...

The big unknowns are when this free-market revelry in communist China will come unstuck and the consequences of a crash.

Some economists say that a major correction today would have a limited impact on the health of China's overall economy.

Others warn that a sharp decline that hurts business and investors could be the catalyst for a financial crisis with a fresh wave of bad loans undermining the balance sheets of China's fragile, state-controlled banks.

In a report on the Chinese economy earlier this year, the World Bank, said China's banks appeared to have limited exposure to the stock market although the report acknowledged there was insufficient data to make an accurate assessment.

Blight, who specializes in analyzing Asian banks, said China's banks have been benefiting from a "perfect storm of good news", arising from strong loan growth, widening interest margins, room to increase fee income, a tight control on expenses and lower provisioning for bad loans.

That has helped drive up the share price of the banks. ICBC has become the biggest bank in the world by market capitalization, although it is less profitable than global competitors like Citigroup and HSBC.

Blight said there would be pain for the banks in [a] stock market crash in part because "people borrow for working capital and then punt it" on the share market.

"If the market does collapse there will be a lot of pain and the banks will end up being exposed in some way," he said. "It won't be disastrous but it will hurt them."

In a clear indication that the authorities worry about the social and political consequences of millions of first-time investors suffering heavy losses, senior Chinese officials have issued periodic pleas for investors to show caution.

Shang Fulin, chairman of the China Securities Regulatory Commission warned twice last month that investors needed to be aware of the risks as the market continued to climb...

These warnings have seemingly had minimal impact with many investors convinced the government will not allow a crash, particularly ahead of the Beijing Olympics in August.

Gordon Kwan, an analyst at CLSA Asia Pacific Markets, said the Chinese government has the tools to exercise considerable influence over the performance of the share markets. Kwan, who analyzes oil stocks, cited a decision by the government last week to increase prices at the petrol pump, just ahead of PetroChina's Shanghai listing.

"It might be why the government timed the price hike, so PetroChina could squeeze passed Exxon Mobil," he said. "I think China wants to win all the gold medals. Face is very important for China."