Shanghai Electric expects profit surge
(China Daily)
Updated: 2005-03-22 13:58

Shanghai Electric Group, which plans to raise up to US$700 million in an April IPO, expects its earnings to surge 45 per cent this year due to strong demand and rising prices in China for power sector equipment, fund managers said yesterday.

The Shanghai-based firm, which has a joint venture to make power generation equipment with Germany's Siemens, is expected to generate net profit of 1.57 billion yuan (US$190 million) in 2005 up from 1.09 billion yuan (US$132 million) in 2004, the fund managers said, citing a forecast from the company's IPO sponsor CSFB.

The company, which is controlled by the Shanghai city government, plans to offer 25 per cent of its enlarged equity to raise between US$500 million and US$700 million, which values the entire company at 10.5-14.7 times 2005 earnings.

Its deal comes to market as investors are in a selective mood for initial public offerings (IPO). Kunming Iron and Steel recently delayed its US$200 million IPO as the market was tepid.

By comparison, shares in Dynasty Fine Wines Group, China's second-largest wine maker, attracted heavy demand for its US$99.5 million January listing. Dynasty shares are up 37 per cent from their offering price.

Shanghai Electric's valuation is in line with that of its mainland rivals, despite the firm's higher EBIT (earnings before interest and tax) margin of 10.7 per cent.

By comparison, Dongfang Electric has an EBIT margin of 5.5 per cent and Harbin Power Equipment generates 1.9 per cent.

Dongfang and Harbin trade at 7.5 times and 13.7 times forecast 2005 earnings, respectively.

Shanghai Electric has net cash of 13 billion yuan (US$1.57 billion) and a 4.6 per cent debt-to-capital ratio, compared to Dongfang's 8.4 per cent and Harbin's 41.3 per cent.

It will start a management roadshow on April 6 and price its deal on April 22. Its trading debut is expected on April 28.

Shanghai Electric has four major divisions, with power equipment accounting for nearly 47 per cent of its revenue. Electromechanical equipment, such as elevators, contributed 35 per cent of turnover, followed by transportation equipment, which accounted for 17 per cent, and environmental systems.

However, the firm's EBITDA (earnings before interest, tax, depreciation and amortization) margins are falling due to a sharp increase in steel prices in the past three year.

According to CSFB, steel accounts for about 50 per cent of the firm's total cost of sales.

Fund managers said CSFB estimates the firm's EBITDA margin will fall to 10.9 per cent in 2005 from 11.9 per cent in 2004.

But CSFB expects steel prices to ease in the second half of 2005. Its global steel team projects that cold-rolled coil steel prices will fall about 48 per cent from 625 euro (US$825) per ton in 2004 to 326 euro (US$430) per ton in the second half of 2006.

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