GIVEN the size of the Maanshan Iron and Steel flotation, and the competition from other issues, there are suggestions that it will not be over-subscribed in the typically monstrous Hong Kong style. But the current environment of maximum US bullishness towards China should mean a stellar performance for a direct play on mainland infrastructure development. Maanshan is the eighth-largest steel company in China, but the largest mainland flotation in Hong Kong. Brokers argue that the performance of some H-share offers has been disappointed, but even if Maanshan does no more than mirror the other four Chinese state flotations, the upside potential is enormous. Maanshan is forecast to announce profits of 1.25 billion yuan (about HK$1.67 billion at the official rate) in the current year, and the shares are being launched at $2.27, representing a price-earnings multiple of 8.9, which increases to 13 if the figures are fully diluted for the new shares issued from the flotation. However, the outlook is sufficiently positive that the shares should be trading at a strong premium to the stock market average of 15 times current year earnings, despite the fact that steel demand will reflect the enormous expenditure on infrastructure in China. The Chinese steel industry is going through a rapid evolution from a state-controlled to a market-controlled system. Previously, orders were sold to the Government at below market prices, but raw materials were supplied to the manufacturer on a similar basis. Maanshan is having to face up to change, in addition to facing increasing competition with overseas producers. It is adapting surprisingly well. Raw material costs have risen sharply, but the company is close to the coal mines of Anhui province and while it has an abundant source of iron ore at higher prices than many Asian competitors, this is more than offset by low labour and electricity costs. According to James Capel, the broking arm of the issuing merchant bank, Maanshan has a cost advantage of US$200 per tonne, over most of its potential Asian competitors. Maanshan is using the bulk of the $3.9 billion proceeds to fund an expansion programme which will widen its product range and also improve the quality of production, of which more than two thirds already meets international standards. It is, for example, to become the first Chinese manufacturer of H-section steel bars, a vital component for tower blocks, which have become a standard feature of all Chinese cities. James Capel is forecasting that Maanshan will announce net profit of 1.53 billion yuan in 1994, putting the shares on a fully diluted PE of 12.3, even assuming further depreciation of the yuan against the Hong Kong dollar. Given the present vogue for high-quality China stocks, Beiren is on a 1994 PE of 22, Guangzhou Shipyard is on 19 and even Shanghai Petrochem, which was considered too complex for local investors, is on a 1994 PE of 16. This indicates the potential upside for Maanshan (on 18 times 1994 earnings, it would trade at $3.33) and the stock rates a significant subscribe recommendation.