The joint venture will inherit the state-owned firm's transport assets while KMB will supply cash. The company plans to expand its fleet size, push into other cities in southern China and take steps to list, according to KMB executive director Winnie Ng Wing-mui.

This is the second deal in the past two months to come from five assets the Shenzhen municipal government has put up for sale to foreign investors. In July, Hong Kong and China Gas bought 30 per cent of Shenzhen Gas for 271.5 million yuan.

The Shenzhen deal will open up new roads to KMB. Confronted by competition from railways and a public call for fare cuts, the franchised bus service provider is seeking growth in the rapidly growing Pearl River delta.

'The deal brings us even closer to the delta region,' Ms Ng told the South China Morning Post yesterday. 'The region is heading towards prosperity, with the signing of the closer free trade pact Cepa and the growing number of mainland visitors through Shenzhen to Hong Kong.'

The joint venture, to be owned 35 per cent by KMB, 55 per cent by Shenzhen Public Transportation and 10 per cent by state-owned enterprises, will inherit the special economic zone's public bus, taxi and vehicle rental services under a 30-year franchise.

Shenzhen Public Transportation holds 70 per cent of the market.

Ms Ng said KMB would also contribute management and technology know-how.

Shenzhen Public Transportation has 10,000 employees, 3,300 vehicles including taxis and public buses, 109 bus routes, an advertising business and bus depots.

The company, set up in 1975, was profitable, she said.

Ms Ng declined to reveal the premium KMB paid for the stake, but the acquisition price values the joint venture at 1.41 billion yuan.

'The acquisition price doesn't make up the whole deal,' Ms Ng said. 'We also look at the asset quality and prospects for the company.'

Shenzhen Public Transportation was well-positioned for rapid growth in the Pearl River delta as Hong Kong and the mainland yesterday signed annexes to the closer economic partnership arrangement to spur trade, she said.

'After setting up the joint venture ... we plan to expand the bus network and fleet and spin off the entity in the near future,' Ms Ng said.

The deal is KMB's largest on the mainland.

Ms Ng said the next deal would probably be a joint-venture agreement in Wuxi, which would involve operating public bus services in Jiangsu city.

Although talks on the Wuxi deal have reached a final stage, Ms Ng declined to confirm rumours of a 300 million yuan investment.

In April, KMB ploughed 80 million yuan into a taxi service joint venture in Beijing.

Jim Wong, a BNP Peregrine Paribas analyst, said: 'These mainland deals will be good for KMB's long-term growth given its core transport service in Hong Kong has limited room to grow.'