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GEB float rates see mark-up

(China Daily/Agencies)
Updated: 2009-09-25 08:29

Investors should be aware of the high risks involved in GEB shares before they invest, say experts.[China Daily]

The first 10 firms due to list on China's NASDAQ-style second board plan to sell shares at prices 50 percent above their mainboard peers, just as worries over speculation spurred officials to tighten trading rules.

After gauging investor demand, the 10 start-up companies, including software developer Beijing Ultrapower and outdoor sportswear maker Toread, have decided on prices for their shares that average 55 times their 2008 earnings.

That compares with an average price/earnings ratio of 36 for other initial public share offerings this year on the mainland.

"Growth potential, rather than past performance, is what investors are looking at, so a high PE ratio doesn't necessarily mean they're over-priced," said Jiang Jianrong, analyst at Shenyin & Wanguo Securities Co.

"But without doubt it will be quite a speculative market at the beginning because it's new and the companies are very small."

To curb risks, the second board for start-ups, to be launched as soon as next month in China's southern boomtown of Shenzhen, will set an 80-percent limit on share price movements during the first day of trade, the Shenzhen Stock Exchange said yesterday.

China is hoping that the growth enterprises board could provide badly needed financing for the private sector, which has difficulty obtaining bank loans but is crucial to creating jobs and sustaining growth.

Beijing is also hoping that the market could become a cradle for China's own future versions of Microsoft or Intel, helping to cut the economy's reliance on manufacturing.

The 10 firms, which include drug producer Chongqing Lummy Pharmaceutical and Beijing Lanxum Technology Co, a provider of office information system services, will take subscriptions today.

"Our rival Fuji Xerox is stronger than us both in branding and in financial strength," said Lanxum Chairman Chi Yanming. "Listing on the second board would help us to narrow the gap."

Related readings:  Green light for seven GEB suitors  Regulator vetting suitors as GEB ball finally starts rolling  PE/VC companies offer helping hand to GEB suitors  GEB listed firms may get approval for Hong Kong trading

Lanxum, which is selling 5.3 million shares, said yesterday that it plans to raise 477 million yuan, 73 percent more than its previous fund-raising target, after pricing its IPO at 18 yuan per share, or 51.49 times its 2008 earnings.

Lepu Medical, a medical equipment maker, plans to raise 1.19 billion yuan, more than double its target, after pricing its IPO at 29 yuan a share, or 53.54 times its 2008 earnings. Lepu shares were 117.12 times over-subscribed during the road show.

Investor fervor is initially likely to push stocks on the start-up board to excessively high valuations, helping to create new Chinese billionaires.

"Some speculation is not always a bad thing. It provides easy money to private companies which had been at a disadvantage in financing compared with state-owned rivals," said Shenyin & Wanguo's Jiang.

But regulators fear the second board could become like a casino, where excessive speculation could hurt the interests of small investors and lead to a repeat of failures by start-up boards in other countries.

Thirty-nine countries or regions have set up 75 second boards since the 1960s and nearly half have closed, including markets in Germany and the UK, a Shenyin & Wanguo Securities report said.

The Shenzhen Stock Exchange's new price limit announced yesterday will suspend shares from trade until the final three minutes of the session if they move more than 80 percent from the opening price on their first day of trade.