China South Locomotive plans $1.5 bln HK-Shanghai IPO

HONG KONG (Reuters) - China's largest train maker, China South Locomotive & Rolling Stock Corp Ltd, has launched a smaller-than-expected $1.5 billion initial public offering in Hong Kong and Shanghai, sources close to the deal said, pressing ahead with its listing despite market weakness.

China, aiming to ease bottlenecks caused by its surging economy, earmarked 1.25 trillion yuan ($182.6 billion) for railway infrastructure investment in its five year plan for 2006 to 2010, which is also expected to boost expenditure on the country's rail vehicles purchase.

"There is little choice for rail vehicle stocks in the market. Investors may buy South Locomotive in order to tap the growth of China's railway infrastructure spending," said Adam Tam, a fund manager at Pacific Sun Investment Management.

The company plans to raise up to 6.54 billion yuan in the Shanghai portion of its IPO by offering 3 billion A-shares, or 30 percent of its enlarged share capital, at a proposed price range of 2.1 and 2.18 yuan per share, according to a statement filed with the Shanghai Stock Exchange on Sunday night.

The firm, which also kicks off a marketing roadshow for its Hong Kong IPO on Monday, plans to raise $566 million in Hong Kong by selling 1.6 billion H shares at a price range of HK$2.49 to HK$2.76 each, the sources said.

Three so-called cornerstone investors -- China Life Insurance, General Electric and south Korean fund giant Mirae Asset, have pledged to buy a combined $90 million worth of shares at the Hong Kong IPO price, the sources said.

The Hong Kong listing is being handled by Macquarie Bank and China International Capital Corp (CICC), which is also underwriting the Shanghai portion of the IPO with Industrial Securities.

Proceeds will be used to upgrade technology, expand capacity, build factories and make acquisitions overseas.

SURGING PROFIT

CICC and Macquarie expect the company to increase net profit 134 percent to 1.43 billion yuan in 2008, and a further 34 percent rise to 1.9 billion yuan in 2009, boosted by capacity expansion and strong industry demand.

CICC said in a report that China South Locomotive faced risks from its overreliance on the railway ministry and rising raw material costs.

The indicative price range of the Hong Kong portion of the deal represents a multiple of 17.6 to 19.6 times forecast earnings for 2008, or 13.2 to 14.7 times forecast earnings for 2009, the source said.

By comparison, its subsidiary Zhuzhou CSR Times Electric Co Ltd trades at 18 times forecast 2008 earnings, while French high speed train maker Alstom and the world's top passenger train maker Bombardier Inc trade at 21.8 times and 26.5 times, respectively.

The Hong Kong listing is expected on Aug 21.

China South Locomotive, which originally planned to raise a combined $2 billion from Hong Kong and Shanghai, is launching its IPO despite the slack domestic stock market. The Shanghai composite index .SSEC has lost 46.7 percent so far this year.

A $6 billion IPO by China State Construction Engineering Corp -- approved in early June and set to be China's biggest so far this year -- has already been delayed for more than a month due to poor market sentiment.

Hong Kong's benchmark Hang Seng Index .HSI has lost about 17.8 percent over the same period.

Earlier this year, China Railway Construction Corp raised a combined $5.4 billion in a dual Hong Kong and Shanghai IPO. Its Hong Kong shares trade 14 percent above their March IPO price.