Xinjiang infrastructure builder shoots up in Shenzhen trading debut

State-owned Xinjiang Communications Construction Group shot up in its trading debut on the Shenzhen Stock Exchange on Wednesday.

Shares of the transport infrastructure builder in China’s westernmost province surged by the maximum permissible 44 per cent early on first-day trade from its initial public offering price of 7.18 yuan to 10.34 yuan, where it stayed through to the day’s close on the Shenzhen Stock Exchange’s board of small and medium enterprises.

A total 65 million shares were offered and the company has raised funds of 467 million yuan (US$67 million).

China’s regulator caps IPO shares at around 23 times earnings to ensure each flotation is successful, and gains on new shares cannot exceed 44 per cent on the first day of trading on exchange rules aimed to curb speculation.

The valuation metrics suggest the stock has more room to run. It is now valued at 24.6 times earnings, compared with the average multiple of 37.4 times for the construction and engineering sector, according to Bloomberg data.

Xinjiang Beixin Road & Bridge Group, the company’s main rival in the region, meanwhile, currently trades at 103 times earnings, the data showed.

Founded in 1999 and based in Xinjiang’s capital city Urumqi, Xinjiang Communications Construction constructs, surveys, designs and tests infrastructure like roads, bridges and tunnels, as well as trades construction materials, predominantly in China.

The Xinjiang government is its largest shareholder, with 46.5 per cent of shares owned by the State-owned Assets Supervision and Administration Commission.

“China’s large-scale infrastructure is now concentrated in Xinjiang, and Xinjiang is also a place of geographical importance in China’s Belt and Road Initiative,” said Wang Chen, a partner with Xufunds Investment Management in Shanghai. “So the market has high expectations for the company which could resist China’s current down economic cycle, and will give the stock a bit of a higher premium.”

The Chinese central government has poured hundreds of billions of yuan into Xinjiang, in the hope that constructing schools, hospitals and infrastructure in the province may placate the political frustrations in the restive territory, which is increasingly coming under fire for the mass indoctrination of tens of thousand of ethnic Uygurs. Such massive infrastructure spending would benefit Xinjiang Communications Construction, one of the biggest builders in the province.

As China, the world’s second largest economy, seeks to invest in infrastructure in Europe, Asia and Africa through its Belt and Road Initiative, the company also signed two agreements with Ukraine’s state road agency Ukravtodor in October, to modernise highways in its west and central regions.

The deals, worth US$95 million, mark the first Chinese company to carry out road reconstructions projects in Ukraine, one of the first European states to formally sign an agreement to participate in the Belt and Road Initiative.

In the 2017 financial year the construction company’s operating income reached 7.1 billion yuan, and earned a net profit of 245.8 million yuan.

Shanghai-based Investment bank Changjiang Financing Services was the lead manager of the listing.