Foreign investors lured by prospect of toll-road projects.
Rapidly increasing foreign investment in China's infrastructure projects is widely seen as a vote of confidence in that country's continuous progress of economic reform. Foreign investors have shown a particular interest in China's toll-road projects because of expected high demand for road transport services in coming years. Not only are they investing in expressways in the prosperous coastal regions, they are also building roads in newly developing provinces inland.
The successful issue of Rmb400 million (US$50 million) B-shares by Guangdong Provincial Expressway Development has helped pave the way for other infrastructure companies in China to raise capital from overseas investors.
Trading in the company's B-shares on the Shenzhen Stock Exchange was due to begin at the end of August. Only foreign investors are allowed to hold B-shares listed on the stock exchanges in China. The lead underwriter of the Guangdong Provincial Expressway issue was China Securities Co. BA Asia, the merchant banking unit of Bank of America and DBS Bank of Singapore jointly acted as international co-ordinators.
Because of strong demand, mainly from European investors, the shares were priced at HK$3.54 (US 45.6 cents), all B-shares on the Shenzhen Stock Exchange are priced in Hong Kong dollars, or 8.1 times projected 1996 earnings, compared with the stock exchange's average of about seven times. A recent B-share issue by a telecommunications company in Shanghai was priced at 7.4 times earnings.
In its prospectus, dated June 27, the company says it intends to use the proceeds to help finance the building of an expressway and expansion of another.'We have done pretty well,' says Pang Chung Min, China country manager of Bank of America and a managing director of BA Asia, the bank's Hong Kong-based investment banking unit. 'We are really encouraged by the reception of the issue in the European money capitals,' says Pang.
The issue was 1.5 times to three times oversubscribed, mainly by institutional investors from Germany, France, Britain and Luxemburg, Pang says. Although the new issue could not be marketed in the US, Pang says he believes a large number of US institutional investors have acquired shares through their Hong Kong-based fund managers.
The issue has been closely watched by many Hong Kong and Chinese corporations that are active in developing infrastructure facilities in China. They are always looking for opportunities to raise capital in international money centres to help fund their projects. Stock analysts and fund managers expect the strong foreign investors' interest in the new issue to encourage other infrastructure development companies to consider tapping the market for funds.
This is particularly significant for China, which has a huge need for infrastructure development but little experience in raising project financing in the international markets.
Foreign bankers in Hong Kong say that Chinese regulations, especially those relating to foreign exchange control, have created almost insurmountable problems in financing projects there (Asian Business, April 1996, page 46).
In the past, infrastructure projects in China were largely financed through equities and bank loans, raised by foreign partners in those projects mainly by using their overseas assets as collateral.
Only a few large Hong Kong-based companies, including CITIC Pacific, Cheung Kong Holdings and Hopewell Holdings, have been successful in raising capital in international capital markets through their various subsidiaries to finance their infrastructure projects in China.
Leading the way
This may be changing. The Guangdong Provincial Expressway issue has set the tone for others to follow, say stock analysts in Hong Kong. BA Asia, for example, is helping a number of Chinese enterprises to raise international capital, says Pang.'We are particularly keen on the transportation sector, including toll-roads and ports,' he says. Also, 'we like petro-chemicals and iron and steel', he adds.
Power plants seem a sure bet, Pang says, but adds, 'their earnings growth is usually limited by state-controlled pricing'.
Pang says that it took 13 months of planning to put the Guangdong Provincial Expressway issue together. During that time, BA Asia helped arrange for IJM Corp Bhd of Malaysia to acquire a 6.5% interest in the company. IJM is one of the largest construction companies in Malaysia with a market capitalisation in excess of US$500 million. Pang says that the acquisition of a significant interest by IJM, which has experience in infrastructure projects in Malaysia, Vietnam, China and Argentina, is seen by many foreign investors as a vote of confidence in the Chinese company.
Guangdong Provincial Expressway is a unit of Guangdong Provincial Freeway Co, which was established by the Guangdong Communications Department to build and operate expressways and bridges in the province. The main assets controlled by Guangdong Provincial Expressway include Jiujiang Bridge, 75% of Guangfo expressway and 25% of Fokai expressway.
Jiujiang Bridge, built in 1988 at a cost of Rmb200 million, is part of Highway 325 linking Guangzhou, the provincial capital, with Zhangjiang, a major port city and oil exploration centre in the southwest.
Traffic on the bridge has grown at an average rate of 15% a year since its first full year of operation in 1990, according to a report published by BA Asia.
However, some traffic is expected to be diverted to a new bridge, which is scheduled for completion in 1996. What's more, the company would need to make a major investment in resurfacing the bridge, the report says.
The 15.7km Guangfo Expressway was the first expressway in the province. It is also one of the busiest, serving as the major trunk route between the provincial capital and Foshan, the centre of a fast-growing industrial district in the province.
With an average growth rate of 30% a year since completion in 1990, traffic on the expressway is fast approaching its design capacity of 69,000 vehicles a day. Sufficient land has been set aside for widening the expressway to increase capacity by at least 20% to more than 82,500 vehicles a day. The company is setting aside Rmb150 million to finance the expansion.
Construction of Fokai, which is a 79.8km extension of the Guangfo Expressway, is scheduled for completion in late 1997. When complete, it will form part of the southern section of one of China's north-south arterial highways. The BA Asia report says that Guangdong Provincial Expressway has invested Rmb500 million in the project and has undertaken to pump in another Rmb335 million later this year. Most of that will be funded by the proceeds of the new issue.
Fokai is one of the first medium-to-large scale transport infrastructure projects in Guangdong province financed by the World Bank, which provided a US$100 million loan to the developer, Guangdong Provincial Freeway, the parent company of Guangdong Provincial Expressway.
The company says in its prospectus that it expects that much of the traffic from the existing roads between Foshan and Kaiping will be diverted to the Fokai expressway after it opens. The BA Asia report estimates that traffic in the first year will reach an average of 25,000 vehicles a day.
In the prospectus, the company posted a profit of Rmb118.5 million for 1995, up 4% from a year earlier.
Turnover, consisting of toll revenue from Guangfo and Jiujiang Bridge, increased 11% to Rmb185 million for 1995. BA Asia projects in its report that the company's net profit, which will include the share from Fokai, will jump 81% to Rmb214.2 million in 1996.
A solid earnings base plus a credible foreign partner are being cited by Pang as major factors behind of the success of the Guangdong Provincial Expressway issue. 'It was the first such deal for our bank in China,' Pang says. 'It is very important for us to do it right.'
Going west and prospering
To address the imbalance in growth between the prosperous coastal regions and the interior provinces, Chinese leaders have begun calling for foreign investors to 'Go West'.
The western part of China is 'endowed with abundant resources, [a large] population and market, and inexpensive labour,' says Wang Liaoping, deputy director-general of China's ministry of foreign trade and economic co-operation, at a recent seminar in Hong Kong
At least one Hong Kong company is listening. In fact, 'we were one of the first foreign investors to show an interest in that region last year,' says Tsui Tsin-tong, chairman of New China Hong Kong Group, a consortium of Hong Kong and China interests.
Established in 1993 with an initial paid-up capital of HK$500 million (US$64 million), New China Hong Kong has already invested in numerous China projects.
Tsui considers his prized project in China to be the construction of a 90km toll road that runs from Chengdu to Mianyang in Sichuan province on the southwest border of China. Construction of the Rmb1.4 billion (US$169.4 million) project began in 1994 and is scheduled for completion next year. The project was undertaken by a joint venture (JV) between New China Hong Kong Development, a unit of New China Hong Kong Group, and a subsidiary of Sichuan Provincial Department of Communications (SPDC). New China Hong Kong Development holds a 60% stake in the project; the rest is controlled by SPDC. Other investors in New China Hong Kong Development include the Asian Infrastructure Fund of AIG, a US insurance company, and an investment fund managed by Peregrine of Hong Kong.
Tsui says that he and his partners in the Sichuan project have great confidence in the development potential of that region.
With a population of over 112 million and a gross domestic product valued at around Rmb300 billion, Sichuan is far less developed than Guangdong, which has a population of 66 million but a GDP valued at more than Rmb500 billion.
But in recent years, Sichuan has been a major beneficiary of government incentive schemes to lure foreign investors into industries and infrastructure development in the region. Nearly all the preferential treatment conferred on selected coastal regions and special economic zones has been extended to the central and western parts of China.
What's more, the government has opened up local markets to products manufactured at JV factories established in these regions.
Spurred by increased foreign investment, the economy of Sichuan, rich in natural resources, is poised for take-off, say analysts. As a result, demand for infrastructure services has soared.
Tsui says his company has plans for the second and third phase of the highway development project in Sichuan.
The second phase, scheduled to begin on completion of the first, calls for the construction of an 80km road around Chengdu, the economic and cultural centre of western China. The third phase of the project will encompass the extension of the highway 127km south to Leshan.
Tsui says that the three phases of the highway project are merely the initial part of a grand scheme to build a 1,000km superhighway that runs through Sichuan and Yunnan provinces in China, then through Myanmar and across to the Bay of Bengal. 'We're re-constructing the Burma Road,' says Tsui.
The original Burma Road, made famous in Hollywood movies, was built by US forces during World War II to supply the Chinese government, which had retreated to Sichuan in the face of the Japanese invasion.
The new Burma Road 'would become the main route for trade between the fast-growing economies of west China and its Southeast Asian neighbours', says Tsui.
He says that he established New China Hong Kong Group to serve as a conduit for foreign investment into China. The group hasn't got the same clout and influence as CITIC and other Hong Kong companies that are directly controlled by Beijing, but it does have powerful backing both in Hong Kong and China.
Among its mainland Chinese shareholders are China Trust and Investment Corp for Economic Development which is directly under the Ministry of Finance, China National Technical Import and Export Corp and the Posts and Telecommunications Economic Development Centre.
Its Hong Kong-based shareholders include: Bank of China Group Investment, a unit of the Bank of China; Shougang Holdings (HK); China Resources; Goldman Sachs China; Century City Holdings and the Hong Kong-listed CNT Group, which is controlled by Tsui.
In addition to the highway project, the group has also invested in a jeep factory in Sichuan.
Elsewhere in China, the group is building a US$100 million tin plate plant in Guangzhou in partnership with three Japanese companies - Nippon Steel, Mitsui and Itochu. It has also acquired Harbin Beer, which has an annual production capacity of 300,000 tonnes.
In Shanghai, the group is a partner in a US$100 million project to construct a hotel-cum-office complex. Tsui declines to disclose figures but says that he plans to list, all or part, of the New China Hong Kong Group in Hong Kong and other stock markets.
Recognising the risks involved in infrastructure development in China, Tsui says: 'You've got to know your way around when you do business in China. You have to understand the Chinese system and make it work to your advantage.'