Even as the China Railway Construction is getting ready to issue its initial public offering (IPO), a lot depends on the IPO pricing, said an analyst.

Kingston Lin, associate director of Prudential Brokerage, said the China's top road and rail contractor could attract more investors only if the IPO price is cheap.

This is because it is engaged in the same business with another two Hong Kong-listed counterparts China Railway Group and China Communications Construction.

"The company is comparable to, or even, better than China Railway in terms of business model and growth potential," Lin said. "But whether it is attractive depends on the pricing, which is more reasonable under 30 times 2008 estimated price-to-earnings (PE) ratio," he added.

China Railway Construction, which had hoped to begin marketing its $4-billion Hong Kong and Shanghai IPO before Chinese New Year, delayed the listing because of bleak market sentiment. It hopes to have dual listing or to list subsequently in Shanghai and Hong Kong.

A price range for the sale of 1.7-billion shares in Hong Kong is tentatively set on February 22. The company has started meeting investors before formal roadshow starts on February 25, setting a tentative listing date in Hong Kong on March 14.

China Railway Construction's 2008 estimated PE ratio multiple is between 27 to 37 times, according to a research report by its sponsor Citigroup. Citigroup estimates that the company's 2007 - 2009 compounded annual growth rate in revenue and profit to be 16 percent and 54 percent respectively.

Meanwhile, gross profit margin may increase to 7.9 percent in 2009 from 6.7 percent in 2007, projecting its valuation at HK$119.8 billion to HK$166.7 billion, Citigroup said.

"Under the volatile market condition, it is critical for the company to give bigger discount for investors to benefit," said Lin.

The 2009 estimated PE multiples for China Railway and China Communications Construction are 24.6 and 20.6 times respectively.

Macquarie, which jointly arranges China Railway Construction's IPO, estimates the company's 2008 profits to surge twofold to 4.3 billion yuan. But the company's gross profit margin is projected at 6.6 percent, lower than China Communications Construction's 11 percent, according to the bank's research report.

"The tentative large gap in PE range indicates the company is quite conservative in pricing under the volatile market condition," said Cho Fook-tat, senior manager of Taifook Securities. "But whether it is attractive depends on how much discount the company offers compared to China Railway."

Analysts are positive about the industry's prospect as the mainland government plans to invest 1.25 trillion yuan on railway infrastructure under the 11th Five-Year Plan (2006-10), three times more than the total amount under the 10th Five-Year Plan (2001-05).

Shares in rival China Railway had risen more than 60 percent in Hong Kong since the company raised 5.5 billion in a dual listing in Hong Kong and Shanghai last December.

(HK Edition 02/13/2008 page3)