Banks, real estate, alcohol makers fund managers found a host of hot investment sectors to pursue in the 2006 A-share market. Yet when the exuberance of a 130 percent main index gain left with the year's end, investors are now asking what the theme of 2007 will be.
One answer, at least for sure, is the restructure of companies in the military industry. Investor's enthusiasm is highly strengthened by a guideline released recently by the Chinese government. China has built an advanced military production system, e.g. fighter jet production lines in Chengdu and Shenyang. Find out more about chinese military airpower in http://www.airforceworld.com
The report, issued March 2 by the Commission of Science Technology and Industry for National Defense, says that China will encourage military-related industries to expand into manufacturing and trading of products for civil use and raise funds through capital markets.
The statement is seen as a strong signal that the Chinese government will encourage its military industry giants to copy the success story of Lockheed Martin, one of the world's leading ordnance manufacturers, which doubled its size via the stock market.
Investors now have a strong interest in mysterious military industrial giants that have big potential to develop non-military businesses by raising capital through the stock market.
Speculation on the assets of the non-military units in the defense industry to be used by existing public companies held by those military giants already boosted a new wave of investment on the A-share market.
"The total assets and profit- making capability of those public companies under the control of the military industry are still small, but increased high-quality asset injection will help those companies to grow rapidly, especially in the next three to five years," China Galaxy Securities says in a recent report.
As a result, manufacturers of rockets, satellites, missiles and aircraft are expected to witness frequent reshuffle and restructuring. Among them, China's aircraft manufacturing and trading industry has been at the forefront of the restructuring trend.
CATIC's flight
China National Aero-Technology Import & Export Corporation (CATIC), the nation's largest aviation industry trading company, says that the company is actively seeking strategic investors.
"The restructuring of shareholders is part of CATIC's plan to finally go public in its entirety," says Tao Ruichang, CATIC assistant president. According to Tao, the headquarters of CATIC will be changed into a holding company with several business units under its control.
"We expect to pick one or two domestic strategic investors by the end of 2007. Leading domestic financial institutions are the company's favorites," Tan tells China Business Weekly.
The entity currently runs four business units. Beside its core business of exporting aviation products, it also exports products in transportation, construction, electric power and high technology and is involved in manufacturing, commerce, retailing and hotels.
The trading giant currently controls three A-share companies based in Shenzhen and three H-share companies based in Hong Kong. TIANMA Micro Electronics Company Ltd in Shenzhen is the main enterprise of CATIC for the manufacturing of liquid crystal displays. CATIC's Shennan Electro Circuit Company Ltd in Shenzhen is a new high-tech enterprise mainly producing multi-tier printed circuit boards.
In addition to its restructuring into a public holding company, CATIC is simultaneously targeting exports of its civil airplanes via an independent unit that will expand by going public. The company is seeking strategic investors from overseas and the private sector to invest in the business unit.
Future 'Lockheed Martins'
Unlike many other industries, the defense industry is not as subject to economic cycles. Besides CATIC, other military industrial giants are also expected to conduct a series of restructurings and build themselves into Chinese "Lockheed Martins" using the capital market.
Lin Zouming, president of China Aviation Industry Corporation I (AVIC I), a leading aviation manufacturer, said at the company's year-end summit recently that it plans to list four more of its units in 2007, and following that, is expected to finally to go totally public.
Public companies under the control of AVIC I have seen great buoyancy since then. Shares of Hubei Aviation Precision Machinery Technology Co Ltd, a Hubei province-based public company, rose by 8 percent in February, and Guizhou Liyuan Hydraulic Co Ltd, another listed company under AVIC I, rose by 16 percent last month.
China State Shipbuilding Corporation (CSSC), established in 1999, is the country's conglomerate in shipbuilding, making both naval and civilian products.
CSSC is capable of building various kinds of warships and auxiliary vessels, as well as related equipment for the Chinese Navy.
For civilian ships, CSSC is adept at building many types of modern ships that fully comply with the rules and regulations of any classification society in the world.
On January 29, Hudong Heavy Machinery Co Ltd, a public company under the control of CSSC and China's largest marine diesel engine manufacturer, said that it will issue a total of 400 million new shares to buy a package of assets from its parent company CSSC.
The statement pushed the company' shares to rise to their daily limit in their first five trading days.
China North Industry Group Corporation (CNGC), the largest weapon-manufacturing group in China, develops high- tech weapons for the army, navy and air force, as well branches of other armed forces. Following the policy of combining military and civil production, CNGC is also developing high military technology for civilian use.
