UPDATE 1-CITIC Heavy rises on debut in China's biggest IPO this year

Thu Jul 5, 2012 10:59pm EDT

(Adds analyst comment, background)

* Shares up 3 pct in mid-morning trade

* First major offering after introduction of new IPO rules

* Optimism over government policy supports shares

By Melanie Lee

SHANGHAI, July 6 (Reuters) - Shares of CITIC Heavy Industries Co firmed on its Shanghai debut on Friday, after the heavy machinery maker raised $500 million in China's biggest IPO so far this year, boosted by expectations of pro-growth policies to support the economy.

CITIC Heavy shares opened at 4.69 yuan, compared with its IPO price of 4.67 yuan, but pushed higher to be up 3 percent at at 4.81 yuan by 0155 GMT.

"The sector is bottoming out in the second quarter and fundamentals are improving, with the government looking at more infrastructure and residential construction to support growth," said Alexious Lee, a Hong Kong-based analyst with CLSA.

The 3.2 billion yuan ($503 million) IPO is the first major offering by a Chinese company since regulators unveiled a series of rules aimed at pushing down IPO prices and curb speculative trading in newly-listed stocks.

CITIC Heavy had planned to raise 6 billion yuan, but slashed its fundraising target due to market sluggishness. China's main stock index has been flat this year after falling for two straight years.

The IPO is still China's biggest this year, although China Communications Construction , which was already listed in Hong Kong, raised 5 billion yuan when it listed in Shanghai in March.

Chinese investors have become wary after IPOs have typically been sold expensively, with newly listed shares pushed to lofty valuations before tumbling, burning many of the country's 72 million retail investors.

Of nearly 600 stocks that debuted over the past two years or so on the smaller Shenzhen stock exchange, more than 85 percent now trade below their debut prices.

To boost investor confidence in the stock market, regulators have unveiled punitive measures against irresponsible IPO pricing and scrapped lock-up periods for institutional investors in IPOs to boost liquidity and curb speculation.

Among the new rules introduced in May, a company must publish a statement disclosing potential risks if its IPO is priced more than 25 percent higher than the average price/earnings ratio of its industry peers.

The stock regulator will also seek an explanation from senior management and can punish companies that fail to meet profit forecasts.

SECTOR SLOWDOWN

CITIC Heavy, controlled by state conglomerate CITIC Ltd, priced its offering at 16.2 times historical earnings, lower than an average price/earnings ratio of 20 times for its listed rivals.

The IPO comes at a time when Chinese heavy machinery makers such as China First Heavy Industries and Taiyuan Heavy Machinery Group Co are suffering from sluggish sales and tight liquidity due to government curbs on real estate and fixed-asset investment.

Rival Sany Heavy Industry aims to launch a listing in Hong Kong, worth around $2 billion, IFR, a Thomson Reuters publication, reported in May.

CITIC Heavy, based in central Henan province, is currently the country's fourth-largest heavy machinery maker with a four percent share of a fragmented market crowded with nearly 5,000 players.

The company, whose clients include global mining giants Vale and BHP Billiton as well as Chinese energy firms such as China Shenhua Energy Co Ltd , posted a 27 percent gain in net profit last year, but has warned investors that growth may slow due to economic uncertainty. ($1 = 6.3633 Chinese yuan) (Additional reporting by Samuel Shen; Editing by Kazunori Takada and Richard Pullin)