China First Heavy Industries Co became the first company in at least a year to fail to raise the maximum amount sought in a Shanghai IPO after the benchmark index fell 15 percent from its 2009 high.
First Heavy, a maker of equipment used in the mining and energy industries, raised 11.4 billion yuan, selling shares at 5.70 yuan apiece, below the high end of a price range of 5 yuan to 5.80 yuan marketed to investors, according to a stock exchange filing yesterday.
The sale adds to evidence that demand for IPOs is drying up in China, where stocks have retreated on concern lending curbs will slow the economy. All the previous 153 companies that went public in China since the securities regulator overhauled the system for pricing first-time shares in June obtained the highest valuation they aimed for.
"Market sentiment is extremely weak because of an increase of new stock supply coupled with the liquidity squeeze," said Li Jun, a Shanghai-based strategist at Central China Securities Holdings. "Companies aiming to price their shares unreasonably should now come to their senses because investors are holding their purse strings very tight."
A man works at a China First Heavy Industries Co plant in Qiqihar, Heilongjiang province. The company raised 11.4 billion yuan in a Shanghai IPO. [China Daily]
In selling shares below the top end of the range, First Heavy may have been trying to avoid the fate of China XD Electric Co and China Erzhong Group Deyang Heavy Industries Co, which fell on their debuts this year - a rarity in a country where several IPO shares more than doubled on the first day in 2009 - according to Gao Xiaochun, a Beijing-based analyst at China Securities Co.
Investors worried
IPO stocks in China jumped an average 74 percent on their first day of trading last year, according to data compiled by Bloomberg. Yet the 9.8 percent decline in the Shanghai Composite Index since Dec 31 has soured the appetite for new equity.
"Market sentiment is bad, investors are worried about the possibility of stocks falling below the offer price in the secondary market," said Gao. "Investors are forcing companies to realize they can't price the stocks too high anymore. First Heavy got the message and lowered the price."
Officials at First Heavy and the bank weren't immediately available for comment.
First Heavy sold 2 billion shares. Institutional investors ordered 3.82 times the stock available to them in a so-called offline tranche. The company received subscriptions for 20 times the remaining 1 billion shares in an electronic portion of the sale that was also open to individuals.
Investors who ordered shares at the 5.80 yuan price will be refunded the 0.1 yuan per-share difference by the nation's clearing house, according to the statement.
New pricing system
The China Securities Regulatory Commission changed the IPO pricing system when it resumed share sales in June after a 10-month hiatus. The reform was aimed at making pricing more based on investor demand.
Previously, the CSRC would use so-called window guidance to steer prices lower when it considered an IPO valuation too high.
That led to many companies surging on the first trading day and slumping after that, eroding investor confidence.
Thirteen of the companies that went public since the pricing reform are trading below their IPO price, according to data compiled by Bloomberg. Metallurgical Corp of China Ltd is the worst performer, sliding 10 percent in Shanghai trading since its September offering.
First Heavy makes equipment for the mining, electricity, energy, transportation, and petrochemical industries, as well as products and technology for national defense. The company posted a profit of 504 million yuan in last year's first half, according to its IPO prospectus. The document didn't provide a year-earlier figure.
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