What the Shanghai stock exchange giveth, Wall Street taketh away.
Hours after PetroChina shares almost tripled in value on their first day of trading in Shanghai, they slumped 11 percent in New York after a big investment bank said the stock was overvalued.
China’s biggest oil and gas company — the publicly listed unit of state-owned China National Petroleum Corp. — became the world’s first company with a $1 trillion market capitalization after its shares debuted Monday in its homeland.
The 4 billion new shares surged to 43.96 yuan ($5.90), nearly triple the IPO price of 16.70 yuan ($2.24). The initial public offering raised 66.8 billion yuan ($8.94 billion) — a record for a mainland exchange.
The Shanghai shares are meant for domestic investors and are generally off-limits to would-be foreign buyers. Chinese investors likewise have limited access to overseas-traded shares, crimping the leeway for arbitrage between the markets.
The buying frenzy in China, though, didn’t translate to Wall Street.
PetroChina’s U.S. shares were off sharply Monday, falling $28.56, or 11.2 percent, to $226.50 in afternoon trading.
In a research note, Bear Stearns downgraded the shares to underperform, noting they were trading at a 51 percent premium to the investment bank’s new year-end 2008 fair value and target price.
“PetroChina shares have risen 45.6 percent over the past month alone,” Bear Stearns said. “Time to take profit.”
Adding the value of PetroChina shares traded in Shanghai, Hong Kong and New York, and the 157.9 billion shares held by CNPC, the company’s total market capitalization rose to just over $1 trillion, far surpassing No. 2 Exxon Mobil Corp.’s $488 billion.
However, Bear Stearns noted, based on Wall Street consensus forecasts, PetroChina was trading at a 72 percent premium to Exxon Mobil based on a 2008 price-to-earnings valuation. “From an operational perspective, we see little reason for this disparity,” the investment bank said.
Indeed, when measured by earnings, Exxon remains a much larger company. Its $9.41 billion in third-quarter net profit, while down 10 percent from a year earlier, nearly matched PetroChina’s net profit of 81.8 billion yuan ($10.8 billion) for the entire first half of the year.
Exxon’s oil and gas reserves — a gauge of future profit potential — stood at 22.7 billion barrels by the end of 2006, compared with PetroChina’s 20.5 billion barrels.
The Chinese company has seen revenue soar amid surging oil prices but has struggled to boost production from its aging domestic oil fields. Like rival Sinopec, it’s been squeezed by a widening gap between soaring world crude oil prices and state-controlled prices for oil products in the domestic market.
But PetroChina’s strong showing was expected all the same. Chinese investors have shown a huge appetite for elite government giants that are seen as proxies for the country’s economic boom.
However, more than 86 percent of the company’s shares outstanding are held by PetroChina’s parent company — part of the government’s policy of retaining state ownership of strategically vital industries such as energy.
Those shares are unlikely to trade on the market anytime soon.
So with only 2.18 percent of the company’s 183.02 billion shares available to Chinese domestic investors, demand far exceeds supply — another factor some analysts say has over-inflated PetroChina’s share price.
PetroChina’s luster appears to have been undimmed by a decision by Berkshire Hathaway Inc.’s decision to sell off all its 2.3 billion PetroChina shares. The U.S. investment company made about $3.5 billion on the sale of that $488 million investment, Berkshire Hathaway Chairman and Chief Executive Warren Buffett has said in interviews.
Until Monday, coal producer China Shenhua Energy Co.’s debut in Shanghai in September was the largest for a domestic exchange, raising 66.58 billion yuan ($8.91 billion).
But there are plenty more big IPOs in the pipeline.
China Mobile Corp., whose shares traded in Hong Kong are valued at HK$3.05 trillion ($391 billion), is among several other big names planning IPOs in coming months.
PetroChina will account for nearly a quarter of Shanghai’s total market capitalization, displacing banks and other major financial companies, analysts said Monday.
Reflecting that expectation, the benchmark Shanghai Composite Index fell 2.5 percent to 5,634.45 Monday as institutional investors cut holdings in heavyweight financial companies and other energy giants to buy into PetroChina.
Shanghai’s benchmark has more than doubled in value this year as investors chased a slew of IPOs by big-name companies, hoping for higher returns than they can earn on bank savings.
But the authorities appear ambivalent over the gains.
While the state-run Xinhua News Agency rushed out headlines proclaiming PetroChina the world’s most valuable company on Monday, other reports cited top officials expressing alarm over precipitous share-price gains.
A notice by the China Securities Regulatory Commission, issued over the weekend, ordered securities funds to avoid “blind expansion” or speculative activities. It urged funds to tighten risk controls.