HONG KONG (MarketWatch) -- The Hang Seng Index's worst week in seven years and a deluge of negative news have so far failed to dent enthusiasm for the $5.4 billion dual listing of China Railway Construction, Asia's biggest listing of the year.
With the retail portion of H-shares oversubscribed a massive 291 times, even worsening market sentiment and credit woes will be hard pushed to derail this juggernaut. The A-shares listed in Shanghai on Monday, where they rose as much as 31% in initial trading, and the H-shares three days later in Hong Kong.
What, you might ask, makes China's largest railway builder so coveted?
To grasp the essence of the investment story, consider the scene that greets travelers crossing the Lo Wu border in Hong Kong to Shenzhen. A sea of near-new cars jams the streets, the product of China's recent automobile boom where in Beijing alone, 1,000 new vehicles join the throng every single day.
Nationwide, China's road networks that deliver people and goods are grinding to a halt, although it took the transport shambles at the recent Lunar New Year snowstorms to drive that home.
The need for alternative rail networks is plain for anyone to see. China Railway Construction will build them.
It also helps that Hong Kong investors know the construction sector well. Projects often come with steady or guaranteed returns, meaning good money can be made pouring concrete or digging tunnels.
This is also good defensive-sector exposure, all the more sought after by institutions in bearish looking equity markets. Spending here at least should hold up well and be immune from the credit tightening in China as building reliable rail networks is top priority.
A total of 300 billion yuan ($42 billion) is earmarked for China's railway construction this year as part of a total 1.25 trillion-yuan budget for railway infrastructure investment in its five-year plan through 2010. This is nearly quadruple the levels under the previous five-year plan.
As well as being defensive, the size of the issue and play it offers on the big macro theme of China's railway growth will likely make this a must-own name for many China portfolios.
Already China Railway has a formidable assembly of cornerstone investors including Cheung Kong Holdings Ltd., Henderson Land's chairman Lee Shau-kee, New World Development's chairman Cheng Yu-tung, Singapore's Temasek and Yale University, to name a few.
No doubt some of the Hong Kong names can lend some expertise on how to turn stations in property developments to boost profits. Whether that works as well outside Hong Kong is another matter.
I have heard some comments that the mega-sized company has Li Ka-shing's signature on it. Apart from property, perhaps the rail links could help service Hutchison's extensive ports business in the mainland and even overseas. China Railway also a growing number of projects overseas, where much of funds raised are earmarked for including Africa and Saudi Arabia. This should also be watched, as the investment destinations of some of China's quasi state owned firms can be controversial.
Hong Kong's bridge up the delta
Already, one chunky bit of new business China Railway could soon bid for is a three-pronged bridge linking Hong Kong to Macau and Zhuhai to the mouth of the Pearl River Delta. The 29-kilometer (18-mile) road and rail link estimated to cost upward of HK$60 billion has finally been given the go-ahead. Now the journey time from Chep Lap Kok airport to Macau could fall to 20 minutes rather than an hour by ferry.
Immediate beneficiaries could be construction companies like Hopewell Holdings that have been pushing the project for decades. It could be a useful feeder into Hopewell's web of toll roads in southern Guangdong.
We have heard little from Hong Kong's port operators, but they are likely to be happy if forecasts of up to 1million trucks a year using the new link to speed goods to port materialize. The public subsidy could be one reason for keeping quiet with an agreement that cost overruns will be shared by the government of Hong Kong and to a smaller extent Zhuhai and Macau.
It also looks to be good news for Macau casinos and property owners in adjacent Zhuhai. But there are some mixed feelings in Hong Kong.
In a week when Hong Kong was ranked 15th by Asian expatriates in a poll of favorite destination to live while Singapore was No 1, concerns are this bridge could make the local gripe about air pollution even worse.
One outcome might be more people decide they want to commute from up the delta where it is less populated, cheaper to live and there are more golf courses. Part of Hong Kong's success and high property prices is built on its self-enforced isolation and limited transport links that make a Manhattan to New Jersey-like commute impossible. That may change. Still, expect there will be much water under the bridge before we see this project completed.
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