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Updated: 2007-03-06 11:12

News of an asset injection from Hudong Heavy Machinery Co Ltd's (HHM)'s parent company has given China's largest marine diesel engine manufacturer's share prices a shot in the arm.

The injection seems to be exactly what the doctor ordered for the company, which is working towards getting listed on the Hong Kong Stock Exchange.

HHM's share prices surged to daily limits on every day of the week after the firm announced an asset injection from its parent company on January 29.

The company's stock price rose a combined 104 percent to close at 67 yuan on February 5, one week after the statement was released. It soared another 136 percent to close at 77 yuan on February 16, the last transaction day before the break for Spring Festival.

HHM will issue a total of 400 million new shares to buy a package of assets from its parent company, China State Shipbuilding Corporation (CSSC), from Baosteel Group and Shanghai Electric Group Co Ltd, and to raise 3 billion yuan from no more than seven large-scale State-owned companies, according to the firm's statement to the Shanghai Stock Exchange on January 29. HHM plans to raise a total of 12 billion yuan in assets and capital at the new share-issuing price of 30 yuan per share.

The injected assets include 100 percent of shares in Shanghai Waigaoqiao Shipbuilding Co Ltd, 100 percent of shares in Chengxi Shipyard Co Ltd and 54 percent of shares in Guangzhou CSSC-Oceanline-GWS Marine Engineering Co Ltd, which is reportedly worth 9 billion yuan.

After the asset injection, HHM's main business will include shipbuilding and ship repairing in addition to its original business of marine diesel engine manufacturing.

"The three main businesses have structured a complete and independent industry chain for HHM. The company will become a leading domestic shipbuilding unit in CSSC," says Zhao Xuegui, an analyst at Everbright Securities.

The asset injection proposal is still waiting for approval from the China Securities Regulatory Commission (CSRC).

"All of the three assets that will be injected into HHM have high profitability according to their latest performance, so it is natural that HHM stock attracted many investors after the news was released," says Huang Dongsheng, an analyst at Changjiang Securities.

The return on the net assets of Chengxi Shipyard, one of the assets planned for injection, reportedly amounted to 45 percent, which is much higher than HHM's 13 percent, during the first nine months of last year. Another planned injection asset, China's largest shipbuilding company Waigaoqiao Shipbuilding, has an annual shipbuilding capacity of 2.5 million tons and had posted a net profit of 708 million yuan in the first 10 months of last year.

According to HHM's calculations, by adding these three assets at the beginning of 2007, HHM would increase its net profit in 2007 from 250 million yuan to 1.5 billion yuan, while increasing its earnings per share from 1 yuan to 2.3 yuan. The company's net asset would increase from 1.2 billion yuan to 13.2 billion yuan.

"HHM's net profit in 2007 and 2008 is expected to be 2 billion yuan and 2.6 billion yuan respectively," says Zhao of Everbright Securities.

Tradable shares of HHM would decrease to about 15 percent after the new issuance. Liu Rong, an analyst at China Merchants Securities, says it would lower the stock's liquidity.

"These three injected assets are exactly the assets HHM plans to get listed on the Hong Kong Stock Exchange," China Securities News quoted HHM sources as saying.

Once the asset injection is complete, the next step becomes getting listed on the H-share market.

"The injected assets, which account for only a small part of CSSC's total assets, have formed a platform and the injection is the first step towards getting CSSC wholly listed," says Huang. CSSC now holds 53 percent of HHM shares.

CSSC has 14 shipyards, nine machinery plants, nine R&D institutes and a handful of instruments and trading companies. Besides the high-quality assets recently injected, CSSC has other high-performance subsidiaries, such as Jiangnan Shipyard (Group) Co Ltd, Hudong Zhonghua Shipbuilding (Group) Co Ltd and Guangzhou Shipyard International Co Ltd.

Some military shipyard subsidiaries of CSSC, including Hudong Zhonghua Shipbuilding (Group) Co Ltd and Guangzhou Huangpu shipyard, are expected to be listed individually or be injected into already-listed companies, according to Huang.

China's shipping industry reaped profits of 9.6 billion yuan in 2006, up 102 percent from 2005. "The booming shipping industry will ensure the good business performance of HHM," says Huang.

Share prices of Jiangnan Heavy Industry Co Ltd, a subsidiary of CSSC that has already listed on the Shanghai Stock Exchange, surged a total of 97 percent to close at 14 yuan on February 16, also because of the wholly listed concept of CSSC.