Investors take shine to a firm benefiting from the mainland's urbanization drive

Changsha Zoomlion Heavy Industry Science & Technology Development Co, the mainland's second-largest industrial equipment maker, surged 8 percent in its first day of trading in Hong Kong Thursday.

The stock outperformed the weaker broad market as investors bet on potentially huge demand for Zoomlion's products, driven by the country's accelerating urbanization process.

The stock closed at HK$16.18, up from its offer price of HK$14.98. The benchmark Hang Seng Index closed at 22,902.97, down 142 points or 0.6 percent from Wednesday.

The company issued a total of 870 million shares in Hong Kong, raising approximately HK$13 billion in fresh capital. It said in its prospectus that it will use funds raised to build a factory on the mainland and develop new products, as well as open a research and assembly center in Senago, Italy. The company expects to earn at least 76 percent more this year compared with last year.

Zoomlion's Chief Executive Officer Zhan Chunxin said Thursday that the company will benefit greatly from the urbanization process that is gathering pace on the mainland. He cited Japan's experience back from the 1960s to 1990s, when the urbanization rate climbed from 45 percent to 60 percent, demand for construction equipment was buoyant as new cities kept shooting up and existing ones sought refurbishing.

Zhan said Zoomlion will experience fast growth in the next 10 to 20 years, riding on the country's rapid development. Official figures showed that China's urbanization rate - urban residents as a percentage of the overall population - was 45.7 percent in 2008.

The CEO also said that "we are always looking out for acquisitions, if appropriate targets or good opportunities appear."

Everbright Securities, a major brokerage house on the mainland, noted in a recent research report that fixed-asset investment in 2009 was almost seven times that of 2001, which will greatly benefit Zoomlion.

According to the National Bureau of Statistics of China, fixed-asset investment in 2001 was 3.7 trillion yuan and 22.5 trillion in 2009, representing a compound annual growth rate of 25.3 percent.

Qu Hongbin, China economist at HSBC, estimated in the bank's latest Global Economics quarterly report that China's fixed-asset investment will grow 25 percent, 21.5 percent and 19 percent, respectively, in the three years to 2012. Although the pace will begin to slow, the double-digit growth rate still leads major economies in EMEA (Europe, Middle East and Africa) and the Asia Pacific regions, according to the report.

A downside risk factor, as Zoomlion itself identified in its prospectus, is the Central Government's move to tighten its credit policy, which will inevitably affect the capital-intensive construction equipment industry. After the mainland's inflation rate hit 5.1 percent in November, the central bank announced on December 10 that it was to raise the reserve requirement ratio by another 0.5 percent, the sixth increase this year.

HSBC's Qu thinks Beijing is likely to slow credit growth to below 16 percent and money supply growth to around 16 percent in 2011 (currently it is more than 19 percent). Moreover, there is still room for multiple reserve ratio hikes in the upcoming quarters. HSBC also predicted that the central bank will raise interest rate by 75 basis points in the next six months.

China Daily

(HK Edition 12/24/2010 page3)