PREVIEW-China Everbright Bank in for modest debut on sector woes

* Shares seen up 5 percent or less on first day of trading

* Asset quality concern curbs interest despite low valuation

* Everbright H1 profit doubles to 6.83 bln yuan

* Bank shares lag wider market on bad-loan fears

By Soo Ai Peng and Samuel Shen

SHANGHAI, Aug 17 (Reuters) - China Everbright Bank's shares from its moderately priced $3 billion IPO will likely rise 5 percent or less when they debut in Shanghai on Wednesday as interest towards China's No. 11 lender may be cooled by renewed worries over the sector's health.

In an apparent effort to prepare the industry for a potential surge in bad loans, China's banking regulator has in recent weeks conducted its toughest-ever stress tests involving mortgage lending, renewed a probe into local government infrastructure financing and increased scrutiny over banks' loan books. [ID:nTOE67500M] [ID:nTOE67B079]

The flurry of government measures may sap demand for Everbright Bank's shares, which will probably rise to as high as 3.25 yuan ($0.48) on their first day of trading, 5 percent higher than the IPO price of 3.10 yuan, according to the median forecast of six analysts polled by Reuters.

But it would be unlikely for the stock to drop below its IPO price because the offering was priced competitively and some state-backed institutions could step in to prevent a fall, analysts said.

"After a fairly good first half, we think banks generally will see slower growth in the second half. The upside will be limited," said She Minhua, analyst at Haitong Securities in Shanghai.

"Given the wider market's recent performance, it's unlikely that Everbright Bank will trade below its issue price," said She, estimating the fair value for its shares at 2.97-3.34 yuan.

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For StarMine comparative table: r.reuters.com/qep45n

For updated graphic on China banks' fundraising:

here

For other stories on Everbright IPO: [ID:nTOE67502H]

For related NEWSMAKER: [ID:nTOE67800K]

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Wednesday's debut by Everbright Bank (601818.SS) would cap China's second-biggest IPO this year. The offering lags only Agricultural Bank of China's (601288.SS) (1288.HK) mammoth $22.1 billion IPO, which set a world record.

The listing, which is being watched closely as a barometer of investor sentiment toward banking stocks, would also be the culmination of Chairman Tang Shuangning's three-year toil to transform a moribund, mismanaged lender into a fast-growing financial institution.

Everbright Bank, which operates close to 500 branches across China, reported on Tuesday a doubling in first-half net profit to 6.83 billion yuan.

The lender, whose balance sheet was weakened by a 38 percent jump in loans last year, aims to double its net earnings within two years after the listing, Tang, also a poet and calligrapher, told investors during the IPO road show this month.

FORECAST VALUATION

Everbright, controlled by Central Huijin, the domestic investment arm of China's $300 billion sovereign wealth fund, sold 6.1 billion shares in its Shanghai IPO and could expand the offering by 15 percent through an over-allotment to raise as much as $3.2 billion.

The IPO attracted solid interest from investors and was priced at the top of an indicative range, valuing Everbright at 1.57 times its forecast 2010 book value, a discount to many of its Shanghai-listed peers.

Mid-sized rival China Merchants Bank (600036.SS) (3968.HK) trades at 2 times book value, while Bank of Ningbo 002142.SZ trades at a price/book ratio 2.2.

Despite the reasonable valuation, Everbright Bank is not likely to see a stellar debut at a time when the domestic stock market is still struggling to stand on its feet following a 27 percent slump in the first half of the year.

Whatever the obstacles, a successful debut for Everbright Bank would bode well for other banks' fundraising activities.

All major Chinese lenders, including Bank of China (3988.HK) (601988.SS) and China Construction Bank (0939.HK)(601939.SS), have announced massive fundraisings worth tens of billions of dollars in total after the industry lent a record 9.6 trillion yuan in 2009 to support government stimulus.

Investors have grown especially cautious toward banking stocks in recent weeks as the latest efforts by the government to regulate lenders highlights lurking risks in the sector.

In a sign of the weak investor appetite towards banking stocks, AgBank rose only 0.8 percent on its July 15 debut in Shanghai, in stark contrast to the debut of military supply provider Jihua Group (601718.SS) on Monday, which saw a 76 jump in the firm's shares. ($1=6.80 Yuan) (Additional reporting by Susie Kang; Editing by Muralikumar Anantharaman)