Why are investors dumping Japan Display on its debut?

Bearish on Japan Display: Pro

Shares of Japan Display - the world's largest maker of smartphone screens – plunged on their trading debut Wednesday, with analysts attributing the dismal performance to the mispricing of its stock.

"The pricing was wrong simply because you're seeing more and more competition coming through from the AU Optronics of the world. We are expecting more supply to come through," Amir Anvarzadeh, director of Japan equity sales at BGC Securities told CNBC, referring the Taiwanese manufacturer of liquid crystal display (LCD) screens.

"Demand is going to be strong this year, but this year is going to be short-lived. I think competition is going to commoditize the business. [With the stock priced] at 12 times earnings, would I pay for that? No. Simple as that," he added.

(Read more: Japan's exports still not getting a weak-yen boost)

Japan Display shares opened at 769 yen - 15 percent below their offer price of 900 yen - and continued to decline in the morning session.

A Sony Corp Xperia Tablet Z, rear, and Xperia Z smartphone are displayed for a photograph in Tokyo, Japan.
Junko Kimura | Bloomberg | Getty Images

The shares were untraded for more than 25 minutes after the open of the Tokyo Stock Exchange as sell orders overwhelmed buy orders. The shares last traded at 758 yen.

This was against a backdrop of weakness in the broader Japanese market, which edged lower on Wednesday amid concerns over the country's looming consumption tax hike and geopolitical tensions surrounding Ukraine.

Anvarzadeh expects Japan Display's shares to settle in the range of 700-800 yen.

(Read more: Japan retailer pulls out of talks to buy J.Crew)

Japan Display, formed in 2012 from the merger of struggling display units at Hitachi, Sony and Toshiba, raised a lower-than-targeted 318.5 billion yen ($3.1 billion) through an initial public offering (IPO), selling shares at the bottom of a planned range.

The IPO ranks as the biggest in the technology sector since Facebook's $16 billion listing in May 2012. It is Japan's largest IPO since Suntory Beverage & Food's $4 billion offering in June 2013.

This is the fundamental issue for Japan Display

Mark Hibbs, managing director and portfolio manager, Adamas Asset Management shared a similar view to Anvarzadeh, adding that Japanese companies such as Japan Display will find it difficult to remain competitive in the production of commoditized products given high labor costs in the country.

"Frankly this is not the kind of business that Japan is going to be good at going forward," Hibbs said.

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"Essentially the business itself is pretty low margin, they [Japan Display] have been lucky with the weak yen, but if the yen strengthens from here they are going to have problems," he added.

Ben Collette, head of Asian equities, Sunrise Brokers said at current levels, the stock is still not a buy.

"Japan Display needs to finds a level at which it becomes attractive relative to current environment. If the yen doesn't turn around quickly, it's going to keep going down," he said.

The company's disappointing debut follows a similar slide of 13.5 percent on Tuesday in the first day of trade in shares of Hitachi Maxell, a battery maker spun off by parent Hitachi.

—By CNBC's Ansuya Harjani. Follow her on Twitter @Ansuya_H