According to local observers, thousands of Hong Kong residents were lined up in the streets yesterday trying to get in on the giant public stock offering of Industrial and Commercial Bank of China.The bank is China’s largest in terms of assets and the deal is reckoned to be the largest floatation on record.

All told, the bank is expected to have attracted orders of more than $170 billion from institutions, or about 17 times the amount actually being offered, while retail investors will likely offer $60 billion, or some 60 times the amount that will actually be sold. At the end of the day, the bank will sell stock valued at approximately $21 billion.

Wow. That is big, and the enthusiasm for the deal is staggering.What do Americans actually line up for? Soup? A glimpse of Madonna? Certainly not investment products.

The Chinese are optimistic about the growth of their country and about the strategic positioning of this, their number one bank.After all, this bank has 18,000 branches and more than 150 million retail clients. They are probably also impressed, as one local reporter described it, that the bank has been so forward looking as to remake their offices with comfortable chairs. (This could actually reflect a translation problem.)

More important, the bank has formed a strategic alliance with Goldman Sachs and American Express, embraced Internet banking, and has improved their loan loss ratios (which had previously been disastrous).In a country which desperately needs improved financial architecture, ICBC is at the cutting edge.

Still, there are many reasons to be cautious about the offering. For one thing, the official daily Chinese papers had headlines which reported the bank’s management talking about what a good investment it was likely to be (or maybe that one got a little mixed up in translation, too.) It is also perhaps chilling that the prior record for largest offering was the issue of shares by Japan’s mobile phone company, then called NTT Mobile Communications Network, which raised $18.4 billion in 1998. After a couple of stupendous years, the stock took a dive, participating fully in Japan’s disastrous longterm market decline. It didn’t exactly define the market top, but came to symbolize the outrageous values of the era.

In any case, for those who don’t like standing in line, we have another idea. We recently heard an interesting presentation by the management of YUM! Brands, Inc. (YUM $58). We’ve always been a little skittish about cutsie stock symbols, putting them in the same category as vanity license plates, but that should not deter us from taking this company seriously.

YUM! is the company that was spun out of PepsiCo in 1997, and which operates the Pizza Hut and KFC restaurant chains, among others.The company had been active in China for 10 years when it was spun off, and has continued to focus investment in the region. Between 2003 and 2005 the company added 1,696 restaurants in overseas markets, of which 921 were in Mainland China and another 70 in India.By contrast, in America YUM! is currently selling off a large number of operations to its franchisees.

Our interest stems from KFC’s position as the number one fast serve restaurant brand in China, with 1,560 restaurants operating in that country at the end of last year, up from 766 at the end of 2002. By way of contrast, McDonalds had only 725 outlets at the end of last year. Overall, about 20% of YUM!’s earnings are coming out of China; that figure is expected to rise rapidly.

YUM! would appear to have attractive growth potential.While the company has overall more than 18,000 restaurants in America, population 300 million, it so far has only 1,900 in China, population 1.3 billion, and 140 in India, population 1 billion-plus.

The dots are easy to connect.The bottom line is that 70% of incremental earnings are expected to come from China and other international markets. Overall, the company hopes to grow earnings at 10% per year; recent expansion has been around 14%.

Operating earnings for its China division have grown from $39 million in 1999 to an estimated $264 million this year. Annual operating profit growth targets are better than 20% in China (compared to 5% in America).

The Chinese are fans not only of KFC, but they have also anointed Pizza Hut as the number one casual dining brand in mainland China. Here, too, YUM! is adding new units as quickly as possible, including 51 in 2005.

The economics of YUM!’s Chinese restaurants are excellent. Average unit volume ranges from $800,000 to $1 million according to management, and margins are in the 20% to 25% range. The cash investment per store is about $500,000.

YUM! makes the case that it has a seasoned and well-educated management group in China, and a solid distribution network. The local team is sensitive to local tastes and culture and has tailored menus accordingly; for example, escargots are a regular item on Pizza Hut menus. Also, the units do a brisk mid-afternoon business serving tea and desserts.

Overall, management appears poised to take advantage of numerous growth engines in China. As the country’s middle class grows, and more women enter the work force, the appeal of restaurants like KFC and Pizza Hut will increase.

The main risks in the situation include the possibility that the Chinese do something injurious to foreignowned companies at some point or that the avian flu reappears in Asia and scares people away from eating chicken. We, along with most observers, expect the Chinese to be extremely wary of upsetting any investor apple carts before the 2008 Olympics.They see the games as a defining “coming out” of the country, and are intent on success. The avian flu is a more random probability and should be factored in.

Also, it should be noted that the stock has trended higher in recent years as investors have priced in its China exposure and is not especially cheap, now selling at about 20 times this year’s earnings.

The good news? You do not have to stand in line to buy YUM!

peek10021@aol.com