PetroChina Leapfrogs Exxon Mobil as World's Largest Company; But China Shares Wobble

By Jason Simpkins
Associate Editor

Shares of PetroChina Co. Ltd. (PTR) soared during its Shanghai initial public offering yesterday (Monday), making the state-owned oil and gas giant the largest company in the world by market capitalization. The Beijing-based company raised $8.94 billion, driving its total market value north of $1 trillion.

PetroChina is now twice the size of Exxon Mobil Corp. (XOM), which was worth $480 billion at the close of trading Monday.

With such an exorbitant valuation, market-watchers are growing more fearful of a China-based asset bubble that's posing a threat to that nation's continued economic advancement.

For decades, savings accounts with low interest rates were the only savings vehicles China's consumers had available. Suddenly, the stock market is open to them - and at a time when share prices are soaring. The net effect has been to create a speculative culture not unlike the one that fueled the dot-com boom here in the United States in 1998 to 2001 - an investment mania whose implosion tipped the U.S. economy into a fairly rough recession. A booming stock market in China has fueled that speculative fervor.

China's state-run media has reported that the number of share trading accounts now exceeds 100 million. According to the state-run Legal Daily, investing has become so popular in Wenzhou, one of China's richest cities that the government had to ban public officials from trading at work or from leaving work to conduct trades.

All of the excitement has resulted in a massive run-up in stock shares, and fueled some highly successful IPOs, some of which are increasingly overvalued. China's CSI 300 stock index has nearly quadrupled in the past year, and is currently trading at 42 times projected earnings, according to the International Herald Tribune.

"There is an accumulated desire to invest," Li Hongtao, an analyst with the Zhejiang Yongan Futures Company, told the International Herald Tribune. "People are heavily influenced by their families, friends, and colleagues at work. A lot of them don't have any knowledge of the market or any idea of the risk."

It is that level of investor enthusiasm - perhaps even euphoria - that has flooded the Chinese market with excess wealth and liquidity. The value of mainland China's public offerings this year has hit a record $61 billion. By comparison, listings in the United States and the United Kingdom have generated $51 billion and $43 billion respectively. 

As a result China is now home to five of the world's ten largest companies. By market capitalization, it has the biggest bank, insurance company, telecommunications carrier, airline, and now energy company. Unfortunately, bigger doesn't necessarily mean better…

Thanks to PetroChina's wildly successful IPO, its mainland shares are trading at a 150% premium to its Hong Kong shares. And while the company may be worth twice as much as Exxon Mobil, it is half as profitable. In the first six months of 2007, PetroChina's net income was $10.9 billion, while Exxon Mobil raked in $19.5 billion. 

"They are not of the strength of Exxon Mobil," John Vautrain, senior vice president of Purvin & Gertz, an energy economics consultancy based in Singapore, told IHT. "They are very strong in China and that is good if you make money, but China is not a good place to be a refiner at the moment. They are deeply underwater, losing a lot of money in refining."

Gains in PetroChina's shares in Shanghai have more to do with China's investors chasing returns than it does the outlook for the company's exploration and production operations, or its refining business, Larry Grace, an oil analyst at Kim Eng Securities Co. in Hong Kong, told Bloomberg News.

"Production is static with limited upside for the next three to four years. As for the downstream, the price controls and overall regulatory trend limit the company's earnings," Grace said.

China controls fuel prices to shield consumers in the world's most-populous nation from accelerating inflation. The policy limits the ability of PetroChina and other state-owned energy companies to pass on the burden of higher crude oil costs. The losses are even more devastating now that oil is trading above $96 a barrel.

Warren Buffett, chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B), didn't hesitate to dump his 2.34 billion shares earlier this year.

"It's easy to be carried away in the stock market when things are going very well," he said during an interview in the northern Chinese city of Dalian, during a recent visit to China. "We at Berkshire never buy stocks when we see prices soaring."

Buffett just announced that he's taken positions in some-20 companies in Korea, a market with much lower valuations.

Other investors have followed Buffett's lead and sold off their China holdings. Indeed, shares of PetroChina fell the most ever in U.S. trading Monday, after Bear Stearns Cos. Inc. (BSC) recommended investors sell the shares because they were too expensive compared with rivals such as Exxon Mobil.

"We see little fundamental reason why PetroChina should outperform other Chinese oil companies or even the China market," Bear Stearns analyst Adam Clarke wrote, citing record oil prices and the company's completion of the biggest share sale this year.

PetroChina's New York shares slid almost 13% Monday, dropping $32.96 each to close at $222.10. In Hong Kong, the stock dropped 8.2% to HK$18.

The iShares FTSE/Xinhua China 25 Index exchange-traded fund (FXI) - an ETF viewed as a proxy for the broader China stock market - fell 8.78%, or $18.28 a share, to close at $189.81 yesterday. The FXI ETF is down 14%, or $29.75 a share, from its 52-week high of $219.56.

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