Valuations, reforms eyed as China share listings resume

By Lu Jianxin and Jacqueline Wong

SHANGHAI (Reuters) - China's first two initial public offerings (IPOs) in 10 months will list in Shenzhen on Friday but the usual volatility from speculative trading will likely be tamped down because of listing reforms and high valuations.

Six analysts and fund managers surveyed by Reuters on Thursday see the shares of Guilin Sanjin Pharmaceutical Co and Zhejiang Wanma Cable Co rising as much as 100 percent from their IPO prices on their debut.

While a doubling in IPO prices is impressive by global standards, strong price gains are not unusual for Chinese firms, in particular, small caps with a limited number of shares offered and especially after a dry spell in IPOs.

China has reformed its equity primary-market system to ensure that major investors can only get a limited portion of IPO shares. The Shenzhen Stock Exchange has also introduce measures to crack down on excessive gains, reducing the chances of illegal share price rigging.

Relatively high valuations of the IPO shares may also dampen interest for some retail investors, analysts say.

"We will still see some die-hard punters who may simply not care about risks and firmly believe they can sell shares at even higher prices to others eventually," said senior stock analyst Ren Chengde at Galaxy Securities in Shanghai.

"But regulators are taking steps to crack down on price bubbles in new listings and high valuations of primary-market shares will deter speculation to some extent."

Guilin Sanjin (002275.SZ), a traditional Chinese medicine maker, raised 910 million yuan ($133 million) in an IPO on June 29 to fund technical upgrades and product development, it said in a statement published in the official Securities Times.

Industrial cable maker Zhejiang Wanma (002276.SZ) said separately that it raised 575 million yuan in an IPO on July 2 to fund two cable projects and to supplement its working capital.

TRADING RULES

New circuit-breaker rules on trading could also keep a lid on the debuts of the two companies.

The Shenzhen bourse has adopted regulations this year stipulating that it will suspend trading in IPO shares for 30 minutes if prices rise or fall 20 percent, and another 30 minutes if they jump or dive 50 percent.

The China Securities Regulatory Commission's new rules this year have reduced administrative interference in IPO pricing, allowing the price earnings (PE) ratio of Guilin Sanjin and Zhejiang Wanma's shares to exceed 30 times their 2008 earnings.

"Any investors pushing prices of the newcomers too high will have the double risks of regulatory investigations and losing money due to relatively high valuations of IPO shares," said Western Securities analyst Cao Xuefeng in Chengdu.

Previously, the regulator from time to time gave instructions to firms on how to price their IPOs so as to ensure smooth sales of IPO shares. In some cases, it gave detailed requirements, such as pricing IPO shares around 20 times of historical earnings.