Activity and prices of B shares set to rise
TURNOVER in Shanghai and Shenzhen B shares is picking up; but the 14 B shares listed in Shanghai and the 19 B shares listed in Shenzhen together trade at less than half the value of only five H shares listed in Hong Kong. I expect both B share prices and activity to pick up further. Most B shares are very cheap in relation to H shares.
Just over a year ago China Focus had the headline Delay of Hero Pen Issue Comes As No Surprise. Like several other planned 1992 Shanghai B share listings, this issue is now being revived.
Peregrine and Standard Chartered are likely to be the foreign underwriters with Shanghai International Securities taking the lead position.
There are two similar companies with B shares already listed, Shanghai First Pencil and Shanghai Wing Sung Stationary. First Pencil B shares have just begun to pick up, having performed poorly since listing, it trades just three cents above issue price at 56 cents, on a 1994 forecast price earnings ratio of 12.1. Wing Sung B shares have done worse. Listed at 70 cents, they are now 14 per cent lower at 60 cents, on a 1994 rating of 9.9 times.
Hero will have to be pretty special or tantalisingly cheap to compete for investors' attention based on the experience of First Pencil and Wing Sung.
Shanghai Hero Co will comprise Hero Fountain Pen Factory, Hero Gift Company and Hero Computer Drafting Instrument Company. When I visited the company in Shanghai, management was expecting 1992 net profits of 32 million yuan on a turnover of 180 million yuan. Well, the turnover figure turned out to be spot on, but the profits forecast was way out. In the event, Hero made 16.55 million yuan; down from 22.58 million yuan in 1991. Expenses shot way up last year, damaging the net profit forecast.
Hero should get back on track in 1993 with turnover of 255 million yuan and net profits of 40.7 million yuan. Earnings per share are forecast to rise by 24 per cent in 1994. Even so, I think the price earnings ratio on the new issue price will have to bekept pretty low for subscribers to make any money.
Hero was established over 60 years ago and has 30 per cent of the domestic pen market, producing 60 million pens each year. Hero exports 20 million pens which accounts for 60 per cent of China's total. Hero's main products are fountain pens. Of the 54 million made, 10 million are disposables and should only be used once.
China is a great consumer of fountain pens. One reason is that students are not allowed to use ball-point pens. For good calligraphy you either need a brush or a fountain pen.
Shanghai Hero Company's profits for the eight months to the end of August are actually running ahead of the full year forecast by 7.5 per cent. This bodes well for the full year, as one imagines there will be additional demand for gifts in the run up to Christmas.
Duncan Mount is a director of The China Fund and managing director of CEF Investment Management Limited which may have an interest in and/or hold positions in securities mentioned above