The Worlds Biggest Company – Chinas Oil Giant PetroChina

Has this ever happened in the history of the stock market? A company that was already one of the biggest in the world, nearly trebles its value overnight, becoming the world’s largest company by market valuation, adding a staggering US$596 billion to its market value within 24 hours from US$365 billion to US$961 billion.

This is what happened with PetroChina, when they listed their shares on the Shanghai A-Share Market on November 5th. The company is China’s largest Oil Corporation and was already amongst the world’s biggest companies before the Shanghai IPO with their listing on the Hong Kong Stock Exchange.

Before the listing in Shanghai the market value of PetroChina stood at around US$365 billion.

So what exactly happened?
The IPO in Shanghai was priced at 16.70 Yuan which translates into HK$17.30, a discount to the previous closing price in Hong Kong of HK$19.60.

What happened on 5th November the day of the listing is absurd. As the IPO was priced at a discount, the shares closed lower in Hong Kong at HK$18, losing more than 8% that day.

In Shanghai sheer madness (I like to call it the investor’s mad cow disease of a bull market that is getting out of control) drove the price to a close of about HK$46. This is an IPO profit of more than 160%. On that same day for the same company, Hong Kong investors were only willing to pay HK$18 per share at the Hong Kong bourse.

What would Freud have said? Some kind of delusional money greed? Do the mainland investors think a company is suddenly worth US$596 billion more over night, merely because the company lists it shares on an exchange within communist borders of the PRC?

One reason of this madness is that the PetroChina shares listed in Shanghai make up only 1.64% of the total shares issued by the company. So retail investors that probably until a year or two ago have never touched the stock market at all were responsible for valuing that world’s largest company, holding less than 1.7% of the corporation in their portfolios and simply putting a price tag nearly 3 times as high on the company compared to a day before.

Well this might just be the highest price investors will get for PetroChina shares for time to come. Valued at a Price/Earnings ratio of 54 at forecast earnings PetroChina has a premium of 300% in terms of valuation over Exxon Mobil Corp which is valued at a Price/Earnings ratio of 13.

Just as a side note: What PetroChina earned last year was not even half of what Exxon was able to report in net profit.

Even the next day and the day after the IPO the difference of price that investors were willing to pay at the two exchanges for PetroChina was more than 100%. That is not only irrational, unsustainable, but, pardon me for repeating, it is sheer madness.

Talking about a bubble in China’s stock markets? I don’t need to see anymore signs, when the bubble is right in everyone’s face, as PetroChina’s IPO proves.

Warren Buffett once again did the right thing by pulling out of PetroChina in time.
Happy Investing!

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