ExxonWhat? PetroChina Is the New No. 1

A $1 trillion market cap, the world's largest, crowns the Shanghai trading debut of the Chinese state-controlled energy company
Photographer: Paul Hilton/Bloomberg News

It was a record-setting day for PetroChina (PTR). With an $8.9 billion debut in Shanghai, the state-controlled oil-and-gas producer laid claim to raising the greatest amount of money of any new listing globally this year. By the end of the first day of Shanghai trading on Nov. 5, PetroChina's share price had more than doubled, to 59¢, up 163%.

The Beijing-based company first went public in New York and Hong Kong in 2000, but until the Shanghai debut its stock was largely off-limits to China's huge pool of retail investors, who can't legally trade shares outside the mainland. Now PetroChina is no longer out of reach. The euphoria that greeted the Chinese debut left the company with a market capitalization of $1 trillion, leaving second-ranked Exxon Mobil (XOM), valued at a mere $488 billion at the Nov. 2 close, in its dust.

But looking at PetroChina by market cap alone grossly overstates its relative size and importance in the global oil industry. The company's displacement of ExxonMobil is a reflection of just how overheated China's stock markets have become. PetroChina may have a market cap more than twice the size of ExxonMobil, for instance, but when measured in profits the Chinese company is still a pip-squeak compared to the U.S. giant: PetroChina saw earnings rise a mere 1.4% to $10.9 billion in the first half of this year, compared with Exxon Mobil's $19.54 billion.

Valuations Vary

Bear in mind too, that while PetroChina's shares trade on three different stock exchanges, only a small percentage of its shares are available to investors in any of them. PetroChina's state-owned parent, China National Petroleum Corp., controls 86% of the company, so the actual amount of tradable shares is tiny. Making matters even worse, only 2.18% of the company is listed in Shanghai, creating a huge imbalance between supply and demand from hungry China investors. "I am not sure whether we should use the [Shanghai] price to calculate market valuation," says Irvin Sanft, head of China and Hong Kong equity research at BNP Paribas (BNPQY). "If the free float were bigger, the share price would be lower."

Indeed, there's a huge disparity in the valuations of Chinese companies that have dual listings. PetroChina's Shanghai shares, for instance, now trade at a price-earnings ratio on 2007 earnings of 55. Meanwhile on the same day that its share price soared in Shanghai, PetroChina actually tanked in Hong Kong, with its share price dropping 7.3%. The Hong Kong-listed shares trade at a P/E of 21.8. On the basis of its Hong Kong shares alone, PetroChina would be valued at about $396 billion. Not bad, but not $1 trillion either.

That big difference in valuations reflects the fact that China's stock markets are closed to foreigners and overseas markets are off-limits to most mainlanders, making arbitrage of the two share prices impossible. The fact that China's equity markets are isolated from world markets also helps explain why Chinese investors clamored for shares of PetroChina just weeks after U.S. billionaire Warren Buffett completed selling Berkshire Hathaway's (BRKA) entire stake in the company.

China Delays Investing Plan

The plunge in PetroChina's Hong Kong-listed shares came against the backdrop of a 2.8% drop in the Hang Seng Index on Nov. 5, on the back of a 3.25% slump on Nov. 2. Investors sold on the weekend statement by Chinese Premier Wen Jiabao that a plan to allow mainlanders to invest directly in Hong Kong shares had been put on hold.

The decision to delay the launch of the so-called "through train" program could take more steam out of the Hong Kong market. The Hang Seng Index had increased by 50% since the pilot program was announced on Aug. 20. Hong Kong and foreign investors had been loading up on Hong Kong stocks in anticipation that the through train would carry a crowd of mainland investors and close the gap between Shanghai and Hong Kong shares.

Back in Shanghai, meanwhile, the government's attempts to dampen demand for stocks through five interest rate hikes this year have done little to slow the market momentum. One reason: Real interest rates remain negative as inflation picks up speed. The yield on one-year time deposits is 3.87%, below price inflation, which grew 4.1% during the first nine months of this year and is accelerating. News that mainlanders will not be able to invest in Hong Kong could only intensify the buying pressure. The benchmark Chinese index, the CSI 300, is up 162% this year.

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