What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing. Today there are six publicly traded companies in the world with market caps above one trillion dollars. They are apple, microsoft, google, saudi aramco, amazon and tesla, but this is a relatively recent phenomenon when apple first crossed the trillion dollar mark in 2018. It was big news, as it was the first u.s company to ever hit this milestone market observers.

Viewed this as the growing dominance of technology in the economy, tech companies were achieving heights. Never thought possible before in 2018. Apple was the only trillion dollar company, but they were far from the first. They came about one decade too late for that the title of first trillion dollar company was claimed more than 10 years ago in 2007, and it wasn't even an innovative technology company.

It was actually an old economy oil producer. In 2007, china's massive state-run oil company petrochina listed its shares on the shanghai stock exchange on the first day of trading, the share price tripled, giving them a 1 trillion market cap. Unfortunately, for people who bought into the hype shares almost immediately crashed and never recovered to anywhere near their ipo highs in this video, we'll look at what petrochina is how they were somehow able to achieve a one trillion dollar valuation and why its shares have lost almost 90 percent of their value since then petrochina is the largest state-run oil and natural gas company in china, similar to exxon, mobil or chevron, they're a fully integrated oil company. This means they do everything from exploration and extraction, transportation, refining and retail distribution of petroleum products.

In the 1990s, china was still transitioning from a communist state to a more open, market-driven economy. Part of this liberalization effect included listing their massive state-owned enterprises on public stock markets. The idea is as follows: the government will sell maybe 10 or 20 of a state-owned enterprise's shares to public investors. This way the government still maintains full voting control of the company, so they can still use it to advance their policy objectives, but at the same time, the company is supposed to maximize its profits to create value for shareholders.

This should encourage them to increase their economic efficiency. Ipo and small stakes of state-owned enterprises was a compromised solution. The government still retains control while at the same time transitioning to a market-based economy. In the early days, they ipo the state-owned enterprises on offshore stock exchanges in hong kong or new york.

The domestic shanghai stock exchange was considered too nascent and underdeveloped to handle large ipos at the time. In 2000, the government listed petrochina on both the hong kong and new york stock exchanges. It was reasonably profitable and had a market cap of about 40 billion dollars, but it was nothing particularly noteworthy in the early to mid 2000s, china, as well as the global economy. In general did very well construction and other economic activity, increased demand for oil, pushing prices up to record highs from 2002 to 2008, the oil price increased 7-fold from 20 per barrel, all the way up to one hundred forty dollars petro china was a big beneficiary of This and saw their revenue and profits reach record levels, but there was also company specific news that made investors even more bullish.

In 2007, petrochina announced that they made the largest chinese crude oil discovery in more than a decade. They named it the jidong nanpu oil field and estimated it had 7.4 billion barrels of crude oil. This would almost double china's proven oil reserves. Oil was trading at around eighty dollars per barrel at that time, so the total value of the oil field theoretically could have been worth hundreds of billions of dollars.

China's then premier, wen jabal, said he was so excited about the discovery he couldn't sleep to make matters. Even better because the oil deposits were relatively close to shore, the water was only 3 meters deep. This means it would be relatively easy to extract it and petrochina's profit margins could be huge. Just a few months after the big jitong nanpu oil discovery, the government thought it would be a good idea to list petrochina's shares on the shanghai stock exchange or sse.

The domestic exchange had developed significantly over the past 10 years. Enlisting on the ssc would give chinese citizens the opportunity to buy into petrochina and participate in the upside from the new oil field. They also didn't hurt that the shanghai stock exchange was experiencing a massive price bubble. The composite index had increased five-fold from 2005-2007.

Such a rapid move to the upside was almost unheard of for a major stock market. The chinese economy was booming and the country's growing middle class finally had excess savings to invest. They were extremely optimistic about the future and because of china's closed financial system, their only option was to buy mainland listed shares. Euphoria, combined with low interest rates on margin, loans pushed the shanghai composite index to valuations, which were absurd in hindsight.

Petrochina saw this as a great opportunity to sell their shares for a high price. They ipo'd on shanghai stock exchange in november of 2007 for a price of 16.7 chinese yuan per share. This was roughly in line with the trading price on the hong kong and new york stock exchanges, where it had been listed since 2000.. On the first day of trading shares tripled to almost 40 yuan, this gave them a market cap of over 7 trillion yuan or about 1 trillion u.s dollars.

Investors were certainly excited about the new oil field. Discovery and oil prices were near record highs at the time. So it makes sense that they would have a high valuation, but one trillion dollars was far more than could be justified by any dcf model. Petrochina's one trillion dollar valuation was driven much more by technicals and fundamentals.

They only listed two percent of their shares on the shanghai stock exchange, because china's stock market is closed. Domestic investors only had a free float of 2 percent of the company to buy from there were tens or possibly hundreds of millions of individual investors in china who all wanted a piece of the action because of the animal spirits at the time everyone wanted to own. At least a few shares and were willing to buy them at just about any price you can think of petrochina's shares as kind of like bitcoin. There is a limited supply and incredible amount of demand.

This allows the price to go arbitrarily high, at least in the short term, and it wasn't just petrochina that was experiencing a bubble in 2008 of the top 10 companies in the world by market cap. Four of them were chinese. These included petrochina china, mobile the industrial and commercial bank of china and sinopec. Of course, parabolic asset price moves rarely end sideways.

In december of 2007, there were rumors. The people's bank of china was concerned about speculative excesses and was considering raising interest rates. This, along with the concurrently unfolding global financial crisis, caused the shanghai composite index to fall by more than 70 percent in less than a year, even to this day is not yet recovered. If you bought shares of the index at the peak in 2007, you would still be down 40 14 years later.

Currently, there are no chinese companies with a market cap of one trillion dollars. In fact, despite being the second largest economy, no chinese company is within the top 10 global companies by market cap. Petrochina was hit even harder, with an 87 decline in share price, as it turns out. The jitong nanpu oil field wasn't as big as petrochina originally thought, and it failed to be a game changer for the company petrochina president jiang jiamin had a history of over-promising and under-delivering.

He would exaggerate the prospects of various chinese oil deposits to make himself look better and advance his career within the communist party. While he was in charge, he invested billions of dollars into new oil fields and pipelines, even when the projects were not economically viable. This caused petrochine to have a much lower return on equity than foreign oil majors, such as exxon, mobil and chevron. He was eventually arrested and sentenced to 16 years in prison on charges of bribery.

The story of petrochina shows the extent to which animal spirits can push up asset prices to absurd levels. It also shows that companies, often over exaggerate their future prospects to pump up their own share prices. Whenever you see stock prices going up parabolically, you should think twice before joining the bandwagon. Alright, guys that wraps it up for this video.

What do you think about petrochina? Were you surprised to hear that a company reached a 1 trillion market cap more than a decade before apple? Let us know in the comments section below, if you enjoyed this content, make sure to hit the like button and subscribe. So you don't miss future videos as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.