A Big Chinese IPO in the Pipeline?

09/02/2009 1:00 pm EST

Focus: STOCKS

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says the Chinese government is encouraging public offerings, and giant CNOOC may step up to the plate in coming months.

There are many steps the Chinese government is taking to slow down the bull market without impacting economic growth. But increasing the supply of new shares through initial public offerings (IPOs) is truly becoming the key strategy to contain a stock market bubble.

In the past three months, China's SEC accelerated its approval process for new IPOs to enter both Shanghai and Shenzhen stock markets. More than 30 new companies, including state-owned enterprises (SOEs) and private sector firms, have gained listing approvals in Shanghai and Shenzhen.

A number of these IPOs have garnered significant attention due to their massive size, including the $7.3 billion IPO of China Construction (OTC: CICHY.PK) in late July. That was the biggest IPO in the world since March 2008. But there are several even larger IPOs in the A-Share market that are planned to keep the market rally in check, including the high-profile IPO of China Merchants Securities, which plans to raise 8 billion yuan, or $1.3 billion in an offering later this year.

I think one of the biggest planned IPOs on the A-Share market will be China National Offshore Oil (NYSE: CEO). There have been rumors that CNOOC would be going public in Shanghai next year.

CNOOC posted a better-than-expected profit in the first half due to the rebound crude oil prices and the spur in fuel demand from China's economic recovery. However, because oil prices are still lower than the first six months of 2008, net income fell 55% to 12.4 billion yuan and sales dropped 42% to 20.6 billion yuan.

The company is benefiting enormously from the economic recovery in China, though. So far this year the stock has gained about 40%, and as oil prices are rising, CNOOC is showing strong growth in its production in order to take advantage of the increase.

[CNOOC recently] made a new oil deposit discovery offshore China. During the drill test, the well was tested to flow at an average rate of 1,700 barrels of oil and 400,000 cubic feet of natural gas per day. The area is expected to become a new growth point of the company's reserves.

As new oil and gas projects have started operations off the coast of China, Indonesia, and Nigeria, net production may rise more than 15% this year. Overall, I'm expecting strong earnings in the second quarter for CEO, as oil prices strengthen in the second half.

[It is also] expanding aggressively in offshore drilling outside of China, particularly on the African coasts. With China's increasing diplomatic muscle behind it, CNOOC is beating private Western oil companies to valuable oil fields in many parts of the world.

Continue to buy CEO on dips under $140. (It closed above $128 Tuesday—Editor.)

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