The country's investment in rolling stock procurement is estimated to be 250 billion yuan (HK$285.7 billion) in the 11th Five-Year Plan until 2010, according to Kevin Luo, an analyst at Guotai Junan (Hong Kong).

'We expect China South Locomotive will obtain the biggest share from the Ministry of Railways' huge rolling stock investment.'

Beijing-based China South Locomotive on Monday began roadshows in Beijing, Guangzhou, Shenzhen and Shanghai to raise US$1.3 billion in the A-share market.

The company will issue 750 million A shares to institutional investors, with the remaining 2.25 billion shares available for retail investors.

It will hold offline subscriptions on August 4 and 5 for institutional investors and begin online subscriptions for retail investors on August 5.

No definitive listing date has been set for the stock, though its first day of trading is expected to be as early as August 11.

It also plans to float 1.6 billion H shares on the Hong Kong exchange. It expects to launch roadshows in the city next week in hopes of raising about US$600 million. The listing is expected for August 21.

Sources said yesterday 25 per cent of the total funds raised in the H-share market would be held by five cornerstone investors. They also said three institutional investors and two tycoons would each pour in about US$30 million.

The company intends to sell H shares at 18 to 20 times its estimated earnings this year, a 30 to 35 per cent discount to China Railway Group and China Railway Construction, a document from China International Capital Corp showed.

Mr Tam said margins of international rolling stock companies averaged 25 to 30 per cent, but China South Locomotive's margin was comparatively thinner at less than 20 per cent.

Aside from the positive dimensions of the deal, he added, 'China South Locomotive's core technology is not good enough for a higher profit margin'.

Guotai Junan estimated the firm's gross margin would be 16.4 per cent this year, 16.8 per cent next year and 17.2 per cent in 2010.

The firm says in its preliminary prospectus that it aims to improve its technological skills by co-operating with global players such as Canada's Bombardier, Germany's Siemens and General Electric of the US.

Proceeds from the fund-raising will be used to set up three technology platforms - design, manufacturing and locomotive products - the company said. It also plans to increase manufacturing capacity, though it did not provide details.

Mr Luo said in a Guotai Junan report that China South Locomotive was challenged by increasing cost pressures from high metal prices, but its rising component localisation rate and product mix would help offset those costs.

China South Locomotive estimated that its net profit would soar 262.1 per cent to 367.55 million yuan by the end of this year on the growth in the rapid transit market because of urbanisation.

'The recent Sichuan earthquake will also bring along more demand for China South Locomotive,' Mr Tam added.

The company develops, manufactures, sells, refurbishes and leases rolling stock, including locomotives, passenger carriages, freight wagons, multiple units, rapid transit vehicles and key related components.

China South Locomotive leads the domestic rolling stock market with an average of more than 50 per cent market share.

The company also exports products to more than 30 regions in the world, including Asia-Pacific, Africa and South America.

Overseas contracts amounted to US$570 million last year, a 171.4 per cent increase from 2002, and accounted for 7.6 per cent of the company's total contracts.

China South Locomotive has room to grow on the mainland, too. The country has 0.59 railway kilometre per 100 people, considerably lower than the United States, which has 9.37 railway kilometres, and France, which has 4.89 railway kilometres.

According to the prospectus, the company bid last year on a number of sales and purchase agreements for rapid transit vehicles with a total contract value of about 12 billion yuan.

It also entered into an agreement to provide 22 rapid transit vehicles for Hong Kong's MTR Corp in the first quarter this year.

What the analysts say

Kevin Luo, analyst, Guotai Junan (Hong Kong)

Pros: The company will benefit from the biggest share of the Ministry of Commerce's 250 billion yuan spending on rolling stock under the country's 11th Five-Year Plan

Cons: It faces increasing cost pressure from strong metal prices, which will hurt its gross margin

Ricky Tam Siu-hing, chairman, Hong Kong Institute of Investors

Pros: Most big funds like to invest in the top three companies of an industry and China South Locomotive leads the rolling stock industry

Cons: The firm has a relatively low margin at 20 per cent, against an average of 25 to 30 per cent for international rolling stock companies

Simon Lam Ka-hang, research director, Christfund Securities

Pros: The company's subsidiary, Hong Kong-listed Zhuzhou CSR Times Electric, has performed well

Cons: Its pricing may be affected by bad market sentiment