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To: RealMuLan who wrote (34149)	5/21/2003 2:36:58 PM
From: RealMuLan	Read Replies (1) \| Respond to of 74559

Buffett puts a halo on corporate China By Henry Lee Published: May 21 2003 5:00 \| Last Updated: May 21 2003 5:00 Fund managers and individual investors in Hong Kong shares and Chinese companies were treated to a nice surprise last month when it was revealed that Berkshire Hathaway, the investment holding company controlled by Warren Buffett, had joined their ranks by taking a big position in PetroChina Company, a Hong Kong listed H-share. PetroChina is a subsidiary of China National Petroleum Corporation, the largest petroleum company in China as well as its second-largest chemicals producer. CNPC was formed in 1988 after the abolition of the Ministry of Petroleum Industry when onshore oil and gas exploration and production entities were grouped under its umbrella. The offshore assets were organised under CNOOC, which listed 30 per cent of the company in Hong Kong in late 2000. PetroChina's H-shares represent 11.3 per cent of its share capital, the remaining 88.7 per cent being owned by the parent, CNPC. PetroChina has proven reserves of 11bn barrels of crude oil, 2,4600bn cubic feet of natural gas and more than 11,500km of pipelines and storage facilities in China. Of the company's crude resources and production, almost 50 per cent is derived from the aging Daqing oil field, which nonetheless is still considered a cash cow. Daqing has an estimated 14 years of reserves remaining at the current production rate. Natural gas will play an increasingly important role, especially as new pipelines come on line. The current valuation of PetroChina is attractive according to several measures. The consensus forecast of 2004 earnings puts the price-earnings ratio at about 7, which is lower than that of comparables such as Sinopec and CNOOC and much lower than international integrated oil companies such as Chevron-Texaco, Exxon Mobil and BP. Calculations of the value per barrel of proven reserves for PetroChina stands at around US$2.75 a barrel while US comparables trade closer to US$9 per barrel of proven reserves. Furthermore, PetroChina has not enjoyed the re-rating and run-up that Russian oil companies have had. All in all, PetroChina is a growth story at a reasonable valuation with a high dividend yield. What more do you need? It is also noteworthy that PetroChina is in absolute terms the most profitable enterprise in China. Mr Buffett's average entry price is HK$1.60 a share - approximately the mid-point between the initial public offering price of about HK$1.30 in 2001 and the all-time high of HK$1.90 a few months later. Berkshire Hathaway holds about 2.4bn shares or about 13.4 per cent of the HK-listed shares outstanding. This is equivalent to about 1.3 per cent of the total share capital after taking the parent shares into account. Assuming it has not sold any shares, British Petroleum Amoco has a larger position than Berkshire, with 20 per cent of the Hong Kong-listed shares (or 2 per cent of total share capital) acquired at the IPO. While Mr Buffet's stake in PetroChina is relatively minor in Berkshire Hathaway's portfolio, it is meaningful to the trading liquidity of PetroChina. Mr Buffett's stake in dollar terms is about US$530m. With daily average turnover of about US$12m, the position would take about 42 days of normal trading volume to sell. This is likely to be a long-term investment. Mr Buffett's foray into China is significant for several reasons. First, Berkshire accumulated its position in the open market and over a period of time. The structure of the markets, integrity of the audited reports and disclosure were all considered sufficient for Mr Buffett to make an informed judgment. Second, he did not ask for any special status on the board. Berkshire Hathaway is a shareholder like the rest of the investing public. The board will probably expand to include more international representation but, for now, Berkshire is comfortable with a largely all Chinese board. Third, the timing is worth noting. Mr Buffett's view of returns in the equity markets is well known. These are turbulent times in China, with increasing deregulation and competition in the domestic industry. He must figure that the reward outweigh the risks for this investment at this time. The presence of Berkshire Hathaway on the PetroChina's share register is also helpful from a corporate governance standpoint. The listed arm has come a long way from its origins as a government ministry, reducing overheads and improving return on assets. While CNOOC still has a higher ROA, PetroChina is at 15 per cent a year and increasing. Let's hope a virtuous cycle for investing in Chinese companies can be established and that shareholders of Hong Kong and mainland companies can enjoy the "halo effect" of Berkshire's investment. Then local shareholders can benefit from being on the doorstep of the world's largest emerging economy. The author is managing director of Hendale Group news.ft.com