China Railway's Weak Debut to Hit Fund-Raising


Shares of China Railway Construction made a weaker-than-expected debut in Shanghai on Monday amid slumping equity markets, despite raising a combined $5.4 billion in Shanghai and Hong Kong in the world's largest IPO so far this year.

The lacklustre listing will hurt new share offers in China as it indicates a bearish turn in market conditions, which have been hit in part by huge corporate fund-raising programmes, including an $18 billion stock and bond offer planned by Ping An Insurance, analysts said.

China Pacific Insurance has delayed plans to raise roughly $4 billion in a Hong Kong share sale due to poor investor sentiment, sources familiar with the deal said on Monday, dealing another setback to an IPO market that has made a halting start to the year.

"Gone are the days when investors snapped up newly listed shares from any stock offers in the bull run in 2006 and 2007," said Cao Xuefeng, senior stock analyst at West China Securities in the southwestern city of Chengdu.

"It will hurt the market's fund-raising function," he said. "Many IPOs and other issues will likely be forced to be delayed or scaled back, with some others forced to be cancelled."

Local-currency A shares in the smaller of China's top two railway builders opened at 11.00 yuan, up 21 percent from their initial public offer price of 9.08 yuan. They managed a slight further gain to trade at 11.60 yuan at midday.

While such a performance would ordinarily be healthy by international standards, it lagged a 69 percent jump on the first day of trading by its bigger rival, China Railway Group, in early December.

Five analysts polled by Reuters last week forecast China Railway Construction's A shares would move around 13 yuan on their first day of trading, up 43 percent from their IPO price.

It was not unusual for Chinese IPOs to double or even triple in their first day of trade during a stock bull run last year and the year before.

China's benchmark Shanghai Composite Index was down 2.56 percent at midday and has plunged 14 percent since early December due to concerns over the impact of a possible U.S. recession on China's economy and corporate earnings.

Infrastructure Investment

China Railway Construction raised 22.25 billion yuan ($3.1 billion) in mainland China's 11th-biggest IPO ever, and added $2.3 billion from a Hong Kong offer that ranks as the most popular IPO in terms of demand from Hong Kong individuals.

Its Shanghai IPO drew a near-record amount of subscriptions from retail and institutional investors of more than 3 trillion yuan.

Han Qicheng, construction industry analyst at Guotai Junan Securities, said China Railway Construction's weak debut also reflected its more expensive IPO price compared with China Railway Group.

The IPO price was set at 28 times industry analysts' forecast for 2008 earnings per share, compared with 21 times for the IPO of China Railway Group, analysts said.

"But China Railway Construction should still be an attractive long-term play as the company gains from China's massive investment in infrastructure and the larger scale of its overseas business compared with China Railway Group," Han said.

Railway investment in China has lagged economic growth of at least 10 percent a year since 2002. Beijing has budgeted 1.2 trillion yuan in rail investment for 2006 to 2010, more than four times the figure for the previous five years.

China's worst winter storms in more than a decade delayed large numbers of migrant workers who returned home in January and February for the Lunar New Year holidays, drawing widespread criticism that the government had not done enough to improve the railway system.

Based on an A-share midday price of 11.60 yuan, China Railway Construction would be worth around $20 billion, compared with $26 billion for China Railway Group, whose Shanghai shares dropped 5.63 percent on Monday amid weakness in the broad market.

It would also give China Railway Construction a price-to-earnings (PE) ratio of 35 times analysts' forecasts for 2008 earnings per share, compared with 38 times for China Railway Group.

China Railway Construction, which built the Qinghai-Tibetan railway -- the world's highest -- as well as Shanghai's high-speed "maglev" train, will make its trading debut in Hong Kong on Thursday.