UPDATE 2-Shaanxi Coal slashes IPO size as China scrutinises listings

Thu Jan 16, 2014 2:42am EST

* Regulator to begin inspections of IPO pricing behaviour

* Offering will still be biggest mainland China IPO since 2012

* Neway Valve to debut on Shanghai market on Friday (Adds UBS China CEO quotes, detail)

By Kazunori Takada

SHANGHAI, Jan 15 (Reuters) - Shaanxi Coal Industry Co Ltd has cut its IPO target by more than half to $660 million, as regulatory pressure mounts on listing companies to ensure unrealistic valuations do not mar the resumption of initial public offerings in China.

Chinese authorities have only just lifted a year-long ban on IPOs but concerns about a return to overpricing appear to have convinced authorities to step in to restore credibility to the market.

Following an announcement on Sunday that it would increase supervision of IPOs, the China Securities Regulatory Commission said Wednesday it has begun inspections of IPO pricing behavior, targeting 13 underwriters and 44 institutional investors.

Since then, at least six companies have postponed their IPOs and a raft of companies have sold shares at valuations much lower than peers.

The IPO by Shaanxi Coal, which will become China's third-largest listed coal miner by volume, is the biggest offering that appears to have been affected by the increased oversight, and even in its reduced form remains the largest mainland IPO for 2014 so far.

The new IPO target of up to 4 billion yuan compares with a statement in its prospectus issued this month that it wanted to use its IPO proceeds to fund 9.8 billion yuan of projects - phrasing by Chinese companies that is generally interpreted as an IPO goal. Shaanxi Coal could not be reached for comment on its scaled back fund raising plans.

The CSRC had said it would take a more hands-off approach on IPOs and the latest move will be a painful one for issuers and underwriters, but market players say it is a necessary step in developing the country's capital market.

"In the near term, this may lead to some reduction to fees for securities firms, but in the long run this is a good direction," David Li, the China head of UBS, one of the top foreign underwriting firms for mainland IPOs, told Reuters this week.

"It is positive for market players such as underwriters as long as it is clear that the regulatory framework is getting increasingly market driven in the long run. Since China is an emerging market, a bit of patience is sometimes required."

The CRSC's inspections will be long-term and will focus not only on the pricing but also on the procedure in which it is set, the 21st Century Business Herald reported, citing unidentified sources.

A number of issuers and underwriters are urgently preparing documents on their meetings with institutional investors to be submitted to the regulator, which will be looking for any evidence of improper information disclosures, the report said.

More than 700 firms are looking to list in mainland China this year and PwC estimated in early January that Chinese companies could raise 250 billion yuan ($41 billion) from listings in Shenzhen and Shanghai this year.

DOWNSIZED DEAL

Shaanxi Coal, a state-owned giant based in China's coal-rich northern province of the same name, said its IPO price was valued at a price to earnings ratio of 6.23 times its 2012 profit on a diluted basis. That compares with an average of 10.31 times for mining firms listed on the Shanghai stock exchange.

While its current fund raising plans pale by comparison with its original hopes in 2011 to raise as much as 17.2 billion yuan, the shares are still expected to meet with strong demand.

"I think investors will give it a warm welcome because it is a large company," said a Shanghai-based industry analyst who declined to be identified because he is not authorised to speak to the media.

"I don't think (the valuation) is the primary factor that will impact demand for shares. Most importantly, it's a leading firm."

The company has said proceeds from the deal will be used to boost its coal reserves, increase production and construct coal transport facilities. The firm will also use the funds to replenish its working capital.

The results of subscriptions will be announced on Jan. 20.

Before that, investors will get the first-hand look of appetite for new shares in the secondary market when Neway Valve (Suzhou) Co Ltd, a major industrial valve maker, debuts on the Shanghai stock exchange on Friday.

The company raised 1.46 billion yuan after selling 82.5 million shares at 17.66 yuan each, equivalent to 46.47 times its 2012 profit and more than double the average price to earnings ratio of 21.25 for manufacturers listed on the Shanghai exchange.

China Securities, CICC and BOC International are the underwriters for the Shaanxi Coal IPO.

Shaanxi Coal will trade under the ticker, while Neway will trade under the ticker. ($1 = 6.0460 Chinese yuan) (Additional reporting by Shanghai newsroom, Samuel Shen and Pete Sweeney, and Elzio Barreto in Hong Kong; Editing by Edwina Gibbs)

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