Brushing aside market worries about an imminent United States-led invasion of Iraq, Sinotrans has pulled off its HK$3.4 billion initial public offering with the shares being 20 times subscribed. The popularity of the offering meant the unit of China's biggest freight forwarder priced its shares towards the top end of the initial range at HK$2.19 each, or about 13 times its forecast earnings for this year. Given the valuation is at the high end, are the logistics company's shares still worth buying in the secondary market? 'It's a fair price', based on fundamentals, said Ben Kwong of KGI Asia. Nevertheless, he expects the shares to rise by 10 per cent to 20 per cent in the short term on speculative trading and a slightly more positive tone in what has been a badly depressed market. It is possible to build a bullish story for Sinotrans, with China stocks back in favour with global investors. The line goes that China's World Trade Organisation accession will mean more open markets and hence increased foreign trade, translating into greater demand for the transport and logistics services provided by Sinotrans. Low-cost China is rapidly becoming the workshop of the world and Sinotrans, with its market's leading position, should be a prime beneficiary as foreign direct investment pours into the export trade. 'In 2001, Sinotrans was the largest international freight forwarder in China with 270 subsidiaries . . . and the largest international express service provider with a market share of 40 per cent,' OCBC Investment Research said. Its geographical reach extends into the fast-growing regions of Guangdong, Shanghai, Fujian, Zhejiang and Tianjin. Sinotrans numbers both multinationals and domestic firms on its client list and has alliances with global peers such as DHL, UPS and OCS. Sinotrans has some numbers to back up the bullish story. It recorded a net profit of 348.6 million yuan (about HK$327.26 million) in the six months to June 30, up more than 23 per cent year on year. Group turnover rose 12.9 per cent to 5.95 billion yuan in the period. But China's opening market may not be so favourable for the logistics company in the longer term. 'Sinotrans will face increasing competition from foreign companies, although its market dominance should ensure investors' confidence,' Mr Kwong said. The American Chamber of Commerce in Shanghai calculated that logistics - getting the goods from producers to markets or end-user - makes up at least 16 per cent of overall product costs in China, compared with less than 4 per cent in more developed economies. If competition heats up, Sinotrans could find its tariffs dropping as the market moves towards Western cost structures. Potential investors in Sinotrans also had to contend with a 'poor' level of transparency and many interconnected transactions between the group's own companies, said Candra Gu of Sun Hung Kai Financial Group. Sinotrans' operations break down into three main areas: freight forwarding, express services and shipping agency services. The profit margins of the latter two, at about 30 per cent and 60 per cent, respectively, were very high compared to international levels, said Ms Gu. 'Such high profit margins are simply unsustainable if China were to open up its market as it is supposed to with its WTO admission.' Sinotrans chairman Zhang Bin has already played down those worries, saying the WTO impact had been less than expected and that his firm would be galvanised by new competition when it arrived. That remains to be seen given that the Sinotrans Group was set up as a monopoly freight forwarding agent in 1950 as a ministerial-level state-owned enterprise under the umbrella of the Ministry of Foreign Trade and Economic Co-operation. But at the very least the company should still wield a fair degree of clout in Beijing's corridors of power which could be a comfort for investors. Graphic: sino12gbz
