Weak market weighs on China First Heavy IPO price

SHANGHAI (Reuters) - China First Heavy Industries (601106.SS) set its $1.67 billion Shanghai IPO price below the top of its range, the first to do so since China resumed IPOs last June, and a sign of growing realism as markets weaken and regulators demand more rational pricing.

Chinese IPOs are typically priced at the top of the indicated range, but First Heavy, China's biggest maker of heavy machinery, priced below that as it faced a market down 8.5 percent this

year and rare debut falls in Shanghai's two most-recent listings.

"First Heavy's pricing sends a signal that companies are getting a bit more realistic about their IPO pricing, and also reflects market weakness," said Jiang Jianrong, strategist at Shenyin & Wangguo Securities Co. "But IPO prices are far from being rational under the current system."

First Heavy sold 2 billion yuan-denominated A shares, or 30.59 percent of its expanded capital, at 5.70 yuan apiece, near but not at the top of an indicated range of 5-5.80 yuan.

The IPO is China's biggest so far this year but an even bigger one is in the works from Huatai Securities, which on Tuesday launched a Shanghai offering of up to 785 million A shares that analysts said could raise up to 16.5 billion yuan.

WEAK DEBUTS

First Heavy will use the proceeds to upgrade technology and expand manufacturing capacity, aiming to ride China's heavy spending on nuclear power to a five-fold surge in revenue by the end of 2015, to 40-50 billion yuan from 10 billion yuan in 2008.

The IPO price values its shares at 41.22 times its 2008 earnings, about in line with 40.48 times for rival China Erzhong Heavy Industries (601268.SS) but well above 25.77 times for China's benchmark Shanghai Composite Index .SSEC and 19.7 times for rival Taiyuan Heavy Industry Co Ltd (600169.SS).

China Erzhong's Tuesday debut in Shanghai does not bode well for First Heavy: Erzhong ended below its IPO price and fell a further 1.6 percent on Wednesday.

Last week, China XD Electric (601179.SS) became the first mainland listing in 5- years to end its debut day below its IPO price.

"The bad debut performances by new listings may not be a bad thing, as they would prod institutional investors to become more rational when pricing IPO shares," said Lu Juan, analyst at Guotai Junan Securities Co.

She expects First Heavy to trade between 5.4 and 6.6 yuan when it debuts on February 9, meaning it may also breach its IPO price of 5.7 yuan.

The state-owned company, based in northeastern China's Heilongjiang province, makes equipment for steel mills, power producers and refiners such as Baosteel Group (600019.SS) and Sinopec (0386.HK) (600028.SS).

Its profit more than doubled to 1 billion yuan in 2008 and Guotai Junan Securities forecast that, despite largely flat earnings last year, may jump 52 percent in 2010, pegging the profit growth to China's nuclear power spending.

SAGGING MARKET

Mainland IPOs are confronting a market that is sagging under the weight of heavy share supplies, fed by authorities who have approved a steady stream of new share issues to keep the market cool and avert asset price bubbles.

Shanghai's market has also been hit by government curbs on booming credit, including a crackdown on bank loans that may be finding their way into the stock and property markets.

After XD Electric's poor debut, China's securities regulator called for greater restraint in IPO pricing.

Reforms to China's IPO pricing mechanism last June, when IPOs were resumed after a nine-month suspension that followed the global financial crisis, fully removed curbs on valuations as the government aimed to expand the role of market forces.

But companies, after long waits in the listing queue, have typically set their IPO prices as high as possible and above what many analysts deemed they were worth, especially since new mainland listings have tended to draw brisk speculative interest.

(Editing by Valerie Lee)