HONG KONG -- Shanghai Electric Group Co., China's biggest power-equipment maker by capacity, unveiled a plan to merge with its Shanghai-listed unit Shanghai Power Transmission & Distribution Co. through a share swap.

The merger, if approved by shareholders of both companies and Chinese regulators, will provide Hong Kong-traded Shanghai Electric with a listing on the Shanghai stock market, where valuations are much higher than in Hong Kong. Shanghai Electric owns 83.75% of Shanghai Power. The move will also increase Shanghai Electric's exposure to China's power-transmission and distribution equipment-making sector, which is expected to grow quickly amid the country's booming demand for electricity, analysts said.

News of the plan sent Shanghai Electric's Hong Kong-traded stock price soaring 42% Friday, to a record closing of 4.99 Hong Kong dollars (64 U.S. cents). On the Shanghai stock exchange, Shanghai Power rose by a 10% daily trading limit, to 30.86 yuan (US$4.09), up 2.81 yuan.

Shanghai Electric said it planned to issue 616 million new Class A shares to Shanghai Power's shareholders to acquire the stake it doesn't own in the Shanghai-listed unit. Shanghai Power's shareholders will receive 7.32 Shanghai Electric Class A shares for every share in Shanghai Power held, Shanghai Electric said. Class A shares are denominated in yuan and traded on mainland China's stock markets.

In a separate statement Friday, Shanghai Electric said it may sell up to its entire 50.32% stake in Shanghai Diesel Engine Co. to Shanghai Automotive Industry (Group) Corp., the state-owned parent of listed Shanghai Automotive Co., the country's largest car maker by sales. Shanghai Electric and Shanghai Automotive Industry are in talks on the stake sale, the statement said. It didn't say how much the sale may fetch.

Merrill Lynch & Co. raised its recommendation on Shanghai Electric to "buy" from "neutral," saying the diesel-business disposal would help the company focus on its core business of power equipment.