SHANGHAI Refrigerator Compressor is the first B share issue for half a year, and it has taken that long for the last few issues to climb back near their initial prices. It was listed on January 18, having been placed late in 1992 at US$4.61 (HK$35.87 at today's rate). By the new year holiday, the B shares had risen to US$5.35 - an appreciation of 16.1 per cent. Refrigerator Compressor was originally supposed to come to the market in September last year, underwritten by Shanghai Shenyin Securities and Barclays de Zoete Wedd in a US$50 million issue. At the time, it looked particularly interesting because of the potential demand for its two main products: compressors for use in the manufacture of refrigerators and compressors for air-conditioning machines. Its refrigeration compressors use Mitsubishi technology and have done so since 1984. Production of these compressors has expanded rapidly from 400,000 in 1987 to more than a million units per annum. The company is the most profitable of its type in China and, of the 14 main compressor factories, has always been rated No. 1. Indeed, in 1991 Refrigerator Compressor was the 11th most profitable company in Shanghai. But its high profitability has caused some criticism. Shanghai Shangling Household Electric Appliances, a producer of 330,000 refrigerators a year, buys its compressors from Refrigerator Compressor and complains that these are very expensive. Compressor imports are protected and it appears that Refrigerator Compressor enjoys high profit margins as a result. These may be brought into question by China's entry into GATT and the reduction or removal of tariffs. The company has bought land in Pudong, intended for an air-conditioning compressor factory using Hitachi technology. Air-conditioning compressors is a growth industry, and one imagines that future demand for air-conditioning in Shanghai will be dramatic. The company aims by 1995 to have total sales of 420 million yuan (about HK$546), of which nearly 40 per cent will be from air-conditioning compressors. Profits in 1993 are forecast to be about 59 million yuan, rising by 13 per cent to 67 million yuan in 1994. Eighty per cent of Refrigerator Compressor's raw materials come from within China, but 20 per cent are imported from Japan so the recent weakness of the yuan will presumably have raised their costs. While compressor imports are restricted, the demand for compressor products is greater than their ability to supply. Apparently, other manufacturers in China are not in this fortunate position. These inequalities in the market place arise as a result of tied business agreements that originate through government instructions that one company should provide materials more less exclusively to another company. The greater freedom granted enterprises to make their own business arrangements, together with China's entry into GATT, will need careful study to identify resulting strengths and weaknesses. The B shares are now selling on about 12.6 times 1993 forecast earnings per share which seems very reasonable. Duncan Mount is managing director of CEF Investment Management Limited which may have an interest in and/or hold positions in securities mentioned above.
