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New share offerings sizzle on Shenzhen debut

By Zhou Yan (China Daily)
Updated: 2009-07-11 07:16

Chinese investors penchant for newly listed stocks reached a feverish pitch on Friday at the debut of the first two companies on the smaller Shenzhen Stock Exchange after a 9-month ban on initial public offerings (IPOs).

Zhejiang Wanma Cable soared 134.3 percent from its issue price to 26.95 yuan before the bourse called for a trading suspension to allow for a cooling off period. The share price of another debutant, Guilin Sanjin Pharmaceutical, also jumped 96.97 percent from its issue price at the opening to 39 yuan when trading in its shares was also halted.

At the end of the day, the Shenzhen Component Index rose 0.54 percent from Thursday to close at 12706.01 points, but the key indicator of the bigger Shanghai Stock Exchange edged down 0.29 percent to 3113.93.

Stock analysts said the pent up speculative interest in IPOs was behind the unusually big jump in the prices of the two newly listed stocks on Friday. Other than that, "I can't see any fundamental reason for the surge (in those share prices)", said Zhou Ronghua, analyst, TX Investment Consulting Co.

According to Zheshang Securities, which compiled the trading figures for the latest 26 firms listed on the small- and medium-sized board, the average gains for new stocks on the first day was 81.8 percent.

To avoid over speculation, the Shenzhen Stock Exchange, the smaller of the mainland's two bourses, issued new rules in early July allowing it to suspend trading in newly listed stocks for 30 minutes if its prices surge 20 percent or more from the opening price. Trading will be halted for another 30 minutes if the prices of those stocks continue to fluctuate beyond the 50 percent band.

Despite their first-day performance, "we expect a sharp correction in the prices of those two shares soon", said Zhang Fan, analyst, Tebon Securities.

"Most of the market capitals in the two stocks are not from institutional investors given their overvalued issue prices indicating high risks," he said.

Guilin Sanjin, China's largest maker of herbal lozenges and the first company to get IPO approval in June, rose 81.87 percent to 36.01 yuan at close on Friday, from the 19.8 yuan offer price.

Wanma Cable Co, a cable provider for China State Grid Corp, gained 125.5 percent to end at 25.93 yuan from 11.5 yuan.

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About 30.2 million Sanjin shares changed hands during the session, while Wanma Cable's trading volume reached 34.2 million. The combined turnover of the two companies reached 190 million yuan, out of the total turnover of 99.2 billion yuan on the Shenzhen bourse on Friday.

As a matter of fact the closing prices of both scrips surpassed estimates of most stock brokers. Guojin Securities, for instance, expected Guilin Sanjin's price on the first trading day to be within 22.2 to 25.9 yuan amid 25 times price/earnings (P/E) ratio in 2009.

Guotai Junan Securities projected Wanma's rational debut price on the secondary market to be around 10.8 yuan.

From an industry perspective, Wanma, which supplies cables to electricity distributors, will find it difficult to maintain sustainable earnings growth given the soaring copper prices and the tepid power generation growth in June, Zhang said.

Wanma's rival Guangdong Nanyang Cable Group had 26 times P/E ratio when it went public in February 2008.