Five-star opportunities in Jin Jiang flotation

A YEAR ago, Jardine Fleming Securities presented a potential B-share issue to Hong Kong institutional investors. The B-share market was poor at the time and the issue was pulled. This flotation, Shanghai Jin Jiang Tower, a luxury hotel, will now go ahead.

At the time, the average price-earnings ratio for Shanghai B shares was about 18. It now stands at 14 and the Jin Jiang Tower B shares are being issued at a slight discount to the market, which the company finds acceptable now whereas it did not last year.

The number of shares to be issued has not changed and remains at 90 million. However, the offer price has been raised from 21 yuan to 33 yuan. The price-earnings ratio is still about the same after this year's jump in profits and is 9.7 times this year'searnings or 12.7 times fully diluted.

This is clearly a rare stock, being the only listed five-star hotel in China at a time when business travellers find it increasing difficult to find good hotel rooms.

Shangri La Asia, listed in Hong Kong, traded at nearly 17 times earnings.

Jin Jiang Tower Hotel was fully opened in 1990 at a cost of US$100 million. Hotel occupancy has been rising sharply from just over 60 per cent in 1991 to 90 per cent last summer and has settled at just under 80 per cent as new hotels have come on stream.

Jin Jiang Tower's profits have also risen sharply. The figures appear to have been restated, allowing the Jin Jiang group to absorb taxation which has improved the numbers for the hotel company. The B-share placement memorandum shows profits rising 114.5per cent in 1991, 77.1 per cent in 1992 and 123 per cent, on an annualised basis, for the first half of 1993.

Tax at the rate of 15 per cent will be charged this year and post-tax profits are forecast to be 71.5 million yuan, giving earnings per share of 30.34 yuan by the end of December.

A year ago, the company said it would make around 41 million yuan in 1993.

The B-share new issue proceeds of US$33 million will be put toward the retirement of debt and construction of a commercial centre adjacent to the hotel, as well as investing in a five-star hotel project in nearby Pudong.

Jin Jiang Tower Hotel has 633 rooms and a number of restaurants and bars. The hotel is locally managed and is in a prime location close to the main business district.

The lead underwriter of the B-share issue is Shanghai Hai Tong Securities which has a reputation as a sensible pricer of new issues.

A hotel in China is a very useful source of foreign exchange earnings, with all the costs of running the business denominated in renminbi.

The current credit squeeze in China to reduce the rate of inflation is not likely to reduce the number of business travellers seeking rooms in the hotel, but may put a cap on wages and the cost of construction materials which will benefit the company.

Wage rates are still very low in Shanghai and there is certainly no shortage of young people seeking jobs in the hotel industry.

The issue of Shanghai Jin Jiang Tower B shares will be by private placement only and should go very well.

Duncan Mount is a director of The China Fund and managing director of CEF Investment Management Limited which may have an interest in and/or hold positions in securities mentioned above.