IT appears that the bullish sentiment on China's infrastructure plays will be sustained in the near term. With the prices of some quality infrastructure plays such as Jinqiao and Outer Gaojiao already ramped up by long-term investors to well over 20 times their 1994 earnings, Shanghai Diesel Engine could be an alternative for investors who want to participate indirectly from the rapid expansion of infrastructure facilities. The recently listed Shanghai Diesel Engine is the leading manufacturer of diesel engines for construction machinery and vehicles in China. The company has a 60 per cent share of the 135 series diesel engines market in China and is the sole manufacturer of 3300B series diesel engines in the domestic market. Principal applications of these products include construction machinery, heavy duty vehicles and power generators. According to some projections, China will spend about 80 billion yuan annually between 1994 and 1999 on improving its transportation facilities. The massive investment in roads and bridges will generate strong demand for diesel engines and other construction related products. In addition, the economic growth and construction programmes for new roads in the coming years will increase the demand for buses and heavy duty vehicles. The expansion in production capacity of the medium weight D Series, which is mainly used in buses and heavy duty vehicles, will allow the company to gain the full benefits from these construction programmes. A major strength of Shanghai Diesel Engine is a technology licence agreement to import the manufacturing technology from Caterpillar for the production of 3300B Series diesel engines. With Caterpillar being a world renowned heavy machinery producer, the company should be able to strengthen its foothold in the high-end market and compete in export markets. Other attractions of the company include relative low currency risk, competitive pricing against imported products, and the reduction of tax rates in 1994. Shanghai Diesel Engine sources most of its raw materials from the domestic market. The prices of imported products are nearly 40 per cent higher than Shanghai Diesel Engine's products, even after accounting for the import duties. We are forecasting a net profit of 114 million yuan for the 1993 financial year, and a 30 per cent increase to 148 million in 1994. Eugene Yang is managing director of Standard Chartered Securities
