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SCMP Reporter

FOREIGN investors in China - restricted to B shares - say they suffer from the big discounts on most B shares to mainlanders-only A shares.

  But when they come to talk about China Southern Glass, a Shenzhen-listed counter producing downstream glass products, there are no complaints.

   The company is the only stock in China with its B shares now trading at a premium to its A shares.

   This means foreign investors have a chance of seeing their shares trade at parity with domestic shares.

   On Friday, the company's B-share close of $13.30 was nine per cent higher than the Hong Kong dollar equivalent of its A-share closing price of 13.8 yuan.

   ''We call it the Nanbo [Southern Glass] phenomenon in China,'' said Zhong Zhongliu, the company's deputy general manager.

   Most B-share counters in China trade at a large discount to their respective A shares - with the latter driven up by the relatively limited supply of shares in relation to demand.

   Based on Friday's close, Shanghai's Rubber Belt B shares have the highest discount to its A shares, of 80 per cent.

   The average discount in Shanghai is 58 per cent; in Shenzhen it is 38 per cent, again based on Friday's close.

   While the rare Nanbo phenomenon indicates foreign investors' liking for the company, it also underscores the different perceptions of the stock between mainland and foreign investors.

   Mr Zhong said: ''The rationale behind the Chinese is speculative buying for quick and big gains, so companies involved with property and equities investment will be the favourites of mainlanders.

   ''On the contrary, foreign investors are looking at fundamentals and the industry's prospects. Our growth, profitability and outlook should make them feel comfortable.''    Foreign investors' current interest in the company contrasts with last May, when they shunned Southern Glass' proposed rights issue.

   The issue was intended to raise some $124 million from B-share holders and 284.6 million yuan (about HK$252 million) from A-share holders.

   But the then gloomy B-share market kept investors sidelined, resulting in the issue being largely undersubscribed.

   ''People say that the underwriting parties involved in the rights issue have made huge losses,'' Mr Zhong said.

   ''In fact, they are the ones to have gained most from the rising share price.''    He said the share price had doubled, to more than $13 from the original subscription price of $6.90, compared with the 24 per cent rise in the Shenzhen B index.

   At current prices, China Southern Glass is still being recommended by some Hong Kong analysts.

   Credit Lyonnais Securities recommends the stock as a ''buy'' at the moment, while James Capel Asia says it is worth a ''hold'' if prices are below or around $13.

   The current price compares with last December, when the stock hit a high of $15.40 on a buying spree and news that Shanghai Yaohua Pilkington Glass, an upstream operator in the float-glass industry, had listed B shares in Shanghai.

   Running one of only two float-glass production lines of international standard in China, Yaohua can supply products to downstream operators such as Southern Glass.

   Yaohua and Southern Glass are both on the receiving end of a pent-up demand for float glass and its value-added products in China.

   Elizabeth Cheng, head of China research at James Capel Asia, believes Southern Glass is better prepared for the future than Yaohua in the face of the changing environment.

   She said Yaohua's growth for the next two years would be limited to its existing capacity, and that faster growth would be seen only when its second production line was in place in 1995.

   ''Comparatively speaking, Southern Glass has better planning and prospects,'' she said, citing plans for industrial diversification and vertical integration.

   Net profits in 1992 reached 55.6 million yuan, more than double the previous year's 24.4 million yuan, and most brokerages expect the company's profits to have doubled again in 1993.

   Plans for this year and next year include setting up a joint venture for the manufacture of super-thin float glass, commonly used for high-technology products such as liquid crystal displays and solar energy cells.

   The factory, in which Southern Glass has a 50 per cent interest, is expected to have a production capacity of some 100,000 tonnes per year.

   Mr Zhong expects the venture to be in place in two years, with total investment reaching US$1 million.

   ''We hope to vertically integrate our operations. The joint venture is just the beginning,'' he said.

   The new plant is to supply Southern Glass with the raw materials it requires for products like solar-control glass, tempered glass, laminated glass, insulating glass and mirrors.

   Solar-control and tempered glass can be used for doors and curtain walls in hotels and other buildings.

   Laminated glass is a safety product used for shop windows and for security reasons, while insulating glass is applicable where heat and sound insulation are necessary, such as for luxury houses and in cooler areas.

   Some 30 per cent of the company's products are exported.

   Southern Glass currently sources its raw materials from its affiliate, Guangdong Float Glass, both of which are majority-owned by mainland-backed China Merchants Holdings of Hong Kong.

   Plans for this year include industrial diversification into the production of windscreens, Indium Tin Oxide Electrode Glass - commonly used in liquid crystal display products - multi-layer electronic ceramics and industrial ceramics.

   Besides the rights issue, Mr Zhong said that with Hong Kong financial advisers, including Wardley Corporate Finance, the company was studying ways of raising cash.

   ''Options under consideration include the issue of offshore convertible bonds and US dollar bonds,'' he said, adding that details had yet to be finalised.

   Several mainland counters are expected to issue offshore convertible bonds, although the Swiss issue by China Textile Machinery last year upset Beijing.

   Therefore, companies have become more cautious over such issues.

   Asked whether Southern Glass' diversification would present a risk to foreign investors, Mr Zhong said: ''The diversification matches the company's development.

   ''We have reached the stage where business operations have to be expanded.''    Ho Cheuk-yuet, head of China research at Credit Lyonnais, expects the expansion to help profits.

   He recommended the stock as a ''buy'' at its current price, while classing Yaohua as a ''switch''.

   Mr Ho said Yaohua's quality management had been reflected in its share price, which had shot up 74 per cent in two months since it began trading, but that growth in the next two years would be rather flat.

   ''Southern Glass, however, should have high-speed growth in the coming years. It has been actively expanding and boosting its capacity via diversification and vertical integration,'' he said.

   On China's bid to re-enter the General Agreements on Tariffs and Trade, Mr Ho said the adverse impact on Southern Glass would be less than on Yaohua.

   Southern Glass' possible losses from tariff cuts might well be offset by the lowered tariffs on imported raw materials, he said.

   Low-priced imported raw materials might cap the price increase of raw materials in China, he said, although Southern Glass might not use imported raw materials.

   ''The risk facing downstream operators is always lower than for upstream operators, but the latter are always fully supported by the Government,'' he said.

    Mr Ho expects the recent slump in the A-share market to cap the rise in B-share prices.



Southern Glass B shares create a phenomenon