CSCEC China IPO may be signs of bubble, reuters says

The stronger-than-expected debut for China State Construction Engineering Corp's $7.3 billion IPO showed China's booming markets are drawing investors, but it heightened concerns about a speculative stock market bubble forming.

The IPO, the world's largest in a year, surged 56 percent in its Shanghai debut on Wednesday, while building materials groupBBMG enjoyed the strongest listing in Hong Kong this year as ample investor funds chased exposure to Beijing's infrastructure stimulus spending.

Despite the strong debut, the mainland's benchmark Shanghai Composite Index fell 5 percent in its biggest one-day drop this year, after a 90 percent year-to-date surge that had prompted Beijing to reopen its IPO pipeline last month.

The rally has been fuelled by a surge in lending from state-linked banks aimed at helping the economy recover.

Beijing has also committed to spending around $585 billion on stimulus measures, much of it focused on building and infrastructure.

"Stir-frying (speculation) has gone too far," said Zhang Qi, senior stock analyst at Haitong Securities in Shanghai. "Late on Wednesday, investor sentiment turned sour as many believe too much speculation may spark regulatory intervention."

But Zhang, several other analysts and fund managers believed that Beijing would only use market-oriented means, such as pushing more supplies of new shares onto the market, to cool the market in the near term.

The authorities typically resort to administrative steps, such as a hike in stock trading duties, only when they truly believe the market is overheated.

This is considered unlikely now, as the market is still considered to be recovering from a slump last year with the Shanghai index only half its record peak of late 2007.

Good Omen

The listing for CSCEC, China's biggest homebuilder, follows Monday's spectacular Shanghai debut of Sichuan Expressway, which tripled on its first day's trading.

It creates an index heavyweight that is the Shanghai market's biggest construction and property stock.

The debuts bode well for a series of listings lining up on the mainland since China lifted an unannounced 10-month IPO ban last month, includingEverbright Securities, which this week began book-building for a $1.5 billion IPO next week.

Other big names include the country's top tourist agency, China International Travel Service, and its biggest ship builder, China Shipbuilding Industry, whose IPOs were approved by the China Securities Regulatory Commission over the past two weeks and are likely to be launched next month.

In Hong Kong, Beijing-based BBMG, a manufacturer of building materials and rose as much as 65 percent to HK$10.50 in its trading debut, the best debut by a Hong Kong listing this year. Hefty liquidity in the Hong Kong market has also been drawn to IPO shares, but some analysts expressed concern over stretched valuations.

"This company is just a Beijing play, not a national one, so a 20 to 21 times P/E valuation looks quite pricey. But it's a demand and supply thing; in the short term there aren't enough new shares coming in, so it may still find takers at this valuation," said Peter Pak, vice-president with BOCI Research in Hong Kong.

    Similar valuation concerns were raised in Shanghai.

    "We're glad to see the listing of a 'triple giant' as China's fledging market still needs more large-cap blue chips to bolster healthy development," said construction industry analyst Luo Guo at Orient Securities. "But the market is also clearly worried about excessive speculation as CSCEC's debut pricing is apparently over-valued."

    Local-currency A shares in CSCEC kicked off trading on the Shanghai Stock Exchange at 6.70 yuan, up 60 percent from their IPO price of 4.18 yuan. They reached an intraday high of 7.96 yuan in early trade, up 90 percent, and closed at 6.53 yuan, still topping consensus expectations for a debut close around 6.0 yuan.

    CSCEC raised 50.2 billion yuan ($7.34 billion) by selling 12 billion A shares, or 40 percent of its expanded capital, to become China's fourth-biggest IPO ever, while its listing gives the market a leader for the property and construction sectors, as well as the index overall.

    The 6.53-yuan price gives CSCEC a market capitalisation of $29 billion, making it the mainland market's 14th biggest stock with a weighting of about 1 percent in the benchmark index.

    CSCEC's market cap far exceeds the $20 billion of the previous construction and engineering sector leader, China Railway Construction, and $23 billion for the country's top listed property developer, China Vanke.

    The closing price valued CSCEC at 41 times its forecast 2009 earnings per share of 0.16 yuan, well above the average 26 times for 15 listed Chinese construction and engineering companies, according to Reuters Estimates.

    CSCEC Chairman Sun Wenjie told reporters in Shanghai on Wednesday the company's sales would reach 300 billion yuan next year, but it has no plans to list in Hong Kong or other markets outside China for now.

    China International Capital underwrote CSCEC's IPO. -by Reuters

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