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SCMP Reporter

CHINA'S Zhenhai Refining and Chemical Company is raising $1.43 billion with the most expensive H share initial public offering this year.

  Analysts have expressed concern about overpricing as the prospects for the mainland refinery are clouded by China's oil policy.

  Zhenhai will sell 600 million shares at $2.38, or 2.62 yuan each, according to a source close to the sponsor.

  The pricing will put the shares at 14.4 times prospective 1994 earnings on a fully diluted earnings per share of 18.25 fen, including 160 million yuan of reimbursement of crude oil cost and interest earned from the proceeds of the H share issue calculated at four per cent interest.

  The company estimates a net profit of 438 million yuan this year. If interest income is excluded, it will have earnings of 400 million yuan, putting the shares at almost 15.7 times.

  According to a Baring report, Zhenhai will post a multiple of 12 times next year, with prospective earnings per share of 22 fen.

  Zhenhai's 1994 multiple will be the highest among the H share offerings so far this year, in stark contrast to the rock-bottom price of nine times pitched by Qingling Motors in August.

  Shanghai Hai Xing Shipping, which just began trading yesterday, was sold at 10.78 times 1994 earnings.

  But Andrew Wong, director of Baring Securities, Zhenhai's sponsor, defended the aggressive pricing, noting the price was 'reasonable' and was confident the issue would receive a 'satisfactory subscription rate'.

  The refinery deserved a higher price earnings ratio in view of its sound fundamentals and domestic market demand, he said.

  Of the shares on offer, 237.6 million shares have been undertaken by the US oil giant, Atlantic Richfield Co. Another 271.8 million shares are set for an international placement which is said to be subscribed by six times.

  Only 90.6 million shares will be sold in a Hong Kong public offering from Tuesday to Friday. Trading will begin on December 2.

  Seapower Securities research director Samuel Lau said Zhenhai's issue price was a bit expensive, as the company tried to cash in on the listing success of Hai Xing.

  Analysts said Zhenhai's earnings growth would be restricted by its inflexibility in raising product prices and limited expansion in production capacity over next three years.

  Standard Chartered Securities analyst Queenie Leung said Zhenhai's issue price would give investors limited upside in the secondary market.

  She reckoned that the H share sector was averaged at 14 times next year earnings. If Kunming Machinery and Tsingtao Brewery were excluded, the ratio would fall to about 12 times.

  Ms Leung also wondered if Zhenhai could raise product prices under China's austerity programme, despite an excessive domestic demand for the company's products.

  Eighty per cent of Zhenhai's products are subject to the State Plan. According to its preliminary prospectus, ex-factory prices of petrol, diesel fuel, naphtha and fuel oil are standardised. The retail price of petrol, kerosene for illumination and diesel fuel is also standardised. The company is allowed to vary the ex-factory price in a narrow range of two to five per cent.

      Schroders Asia Fund Management manager Tina So said Zhenhai's profit margin would be squeezed with rises in crude oil price, as the company was restricted to raising product prices.

  She also pointed to the company's foreign exchange risk along with its increasing portion of crude oil from the Middle East.



Zhenhai Refining seeks $1.43b