BIGGER taxes next year for China's Northeast Electrical Transmission and Transformation Machinery Manufacturing (NEMM) will be met by profits generated from more lucrative businesses, the company says. From next year, the H-share company will forfeit privileges enjoyed under a contractual tax arrangement. Under that agreement the company was allowed a rate lower than the statutory one. Chairman Xiang Yongchun said the company would have to pay 15 per cent income tax and 17 per cent value-added tax (VAT) on sales from 1996, but the increase would not eat into its profits. 'Our forecast for 1996 earnings has taken the factor into account. 'The company's sales and profit will grow substantially next year because of the manufacturing of new products with higher profit margins such as high-voltage transformers and gas insulated switchgear.' No profit forecast has been provided for next year but the company projects its earnings to reach 162 million yuan (about HK$150.82 million) this year. Mr Xiang said the figure included an estimated 38 million yuan in VAT refund from the government, the difference between the contracted tax amount and the amount paid with the statutory rate. Last year, NEMM posted net profit of 102.95 million yuan, which was boosted by a VAT refund of 38.17 million yuan. The profit would have been lower if it had to pay the statutory income tax at 33 per cent amounting to 36.8 million yuan instead of the 8.7 million yuan paid. 'In a bid to encourage the company's development, the municipal government has confirmed that our two subsidiaries Shenyang Transformers and Shenyang Switchgears will only pay an income tax of 15 per cent from next year,' Mr Xiang said. Two other subsidiaries, Jinzhou Capacitors and Fuxin Busbars, were applying for the reduction. If they failed, the impact would be limited because they made up less than 10 per cent of the company's sales, he said. NEMM's prospectus does not say the company has secured a 15 per cent income tax rate, only that the situation after 1995 is uncertain. 'I will prefer the company to pay the statutory income tax rate at 33 per cent, so there will not be any negative surprises,' said Salomon Brothers analyst Eddie Lau. As the company was going to pay a higher income and VAT tax rate, he said its earnings growth would probably be limited and the net margin would be squeezed. Mr Lau cited the impact of the austerity programme and the company's heavy debt burden. NEMM hopes to raise up to $503 million by selling 247.95 million shares at between $1.66 and $2.03, putting them at 8.4 and 10.3 times on a pro forma, fully diluted basis. Mr Xiang said the company was confident of achieving the maximum issue price of $2.03 per share, and it had fared better than Dongfang Electrical Machinery and Harbin Power Equipment in terms of tax payment and profits. Mr Lau said NEMM would be attractive, if its shares were priced at the low end of the range. It would make the stock at more than 20 per cent discount to Harbin and 30 per cent discount to Dongfang.