SHANGHAI Petrochemical's $2.9 billion public offering is expected to elicit a better market response than the Tsingtao Brewery flotation due to its greater exposure to international investors, according to a company official. Institutional investors, however, are likely to view the issue with caution, as the company is more complex than Tsingtao. Also, its prospectus lists a number of stern warnings ranging from China's lack of experience in minority shareholder protection topossible negative fallout from further economic and political reforms. In addition, the prospectus points out that some of the company's major costs may rise substantially in the near future. On the investors' part, there is concern that, despite the company's public listing, it will remain under the effective control of China's state government. But the company official said Shanghai Petrochemical had become a shareholding company and, subsequently, did not belong to the state any more. ''We will treat the government like every other shareholder of the company,'' he said. The Chinese Government will control 67 per cent of the company, through the China Petrochemical Corporation, which is under the direct jurisdiction of the State Council. Another key area of concern has to do with the price paid by Shanghai Petrochemical for crude oil, the company's primary raw material. In 1992, crude oil purchases represented approximately 46 per cent of the company's total cost of sales. All of the company's crude oil needs are met through allocations by the Chinese Government at prices subsidised by the authorities. The prospectus states that the government has indicated that this practice may no longer be allowed, requiring the company to make costlier purchases to reflect free market prices in the near future. However the official said that about 30 per cent of the company's consumer product prices were set by the central government, and any change in subsidies of raw materials would cause a rise in the price of these products to offset the increase in raw materials. The prospectus also warns that, while the company currently adheres to state environmental regulations - spending about 3.7 per cent of its total capital expenditure on environmental control - there are no guarantees that the government will not implement stricter, and probably costlier, laws on environmental protection. Shanghai Petrochemical discharges vast amounts of waste materials into the environment and would be hard hit if the rules were tightened. The firm, China's largest petrochemical enterprise, will raise $2.923 billion through Hongkong, US and international share offerings. It has obtained approval from the China Securities Regulatory Committee to issue one billion new A shares to the mainland public, of which 550 million are to be offered by the end of this year, and 450 million by the end of next June. The company will issue A shares on September 30 at $3.18 yuan each to raise about $1.76 billion yuan. The public offering will be launched on July 13 with the shares expected to begin trading on July 26. The company will issue 1.680 billion H shares at a price ranging between $1.74 and $1.55, of which 840 million will be offered in Hongkong. The remainder will be offered in the US and internationally in the form of American Depository Receipts. Peregrine Capital managing director Francis Leung Pak-to explained that such an arrangement on the price range was the practice in the US market. The Hongkong offer will be closed on July 16, followed by the US and international offers. Mr Leung said by that time the price was likely to be fixed, and if the price was set lower than the offer price in Hongkong, subscribers would be entitled to refunds. He said the arrangement was a more efficient method of distributing shares, given the size of the funds to be raised. There is price stabilisation mentioned in the prospectus that says the underwriter can buy the company's shares within 30 days of its listing. Mr Leung said they were seeking approval from the Hongkong Securities and Futures Commission. About HK$1.25 billion of the proceeds of the flotation will be for financing capital expenditures to be incurred this year and the next. Another $950 million will be used this year and the next to repay foreign currency-denominated bank loans. The company's fully-diluted price-earnings ratio is 14.1 times to 15.8 times, while profit forecast for the year ending December 31, 1993 has been put at not less than $848 million yuan (about HK$1 billion), or about 91 per cent more than last year.
