Air China opens below IPO price in Shanghai debut

[HenryTo]

The IPO market has not been cold only in the U.S., but in China as well:
------------------------------------------------------------------------------
Air China opens below IPO price in Shanghai debut
Fri Aug 18, 2006 12:18 AM ET

By Andrew Torchia

SHANGHAI, Aug 18 (Reuters) - Air China Ltd. <601111.SS>, one of this year's most high-profile listings on the Shanghai Stock Exchange, opened below its domestic initial public offer price in its debut on Friday.

China's flag carrier started at 2.78 yuan, below traders' expectations of a first-day range of about 2.80-2.95 yuan and compared with its IPO price of 2.80 yuan. At the end of morning trade it was at 2.81 yuan, after moving in a range of 2.74-2.81.

It was the first time in at least several years that a stock had opened below its IPO price, analysts said, and by far the worst first-day performance among the dozen firms which have listed in China's domestic stock markets since regulators lifted a year-long ban on listings in May.

"A strong performance hadn't been expected, but this will still cast a shadow over future IPOs. It's a lesson to learn for the regulators," said Zhou Lin, analyst at Huatai Securities.

To some extent, Air China was the victim of poor timing. Though analysts believe the airline stayed in the black in the first half of this year, the industry is plagued by rising fuel prices, and Shanghai's market has been soft for the past month.

In addition, Chinese investors have shown signs of a flagging appetite for fresh equity in the short term, after a flood of IPOs triggered by the lifting of regulators' ban.

The ambitious pricing of Air China's offer did not help, analysts said. The price of 2.80 yuan left the airline's Shanghai A-shares at a discount of just 2 percent to the closing price of its Hong Kong-listed H-shares on Thursday -- not a large enough discount to attract many investors' interest.

To complete its $575 million offer, the airline was forced to slash the number of shares sold by nearly 39 percent and to make an unprecedented promise to buy back up to 600 million shares if they fell below the IPO price by year-end.

Analysts said the poor listing would not derail China's plans to list dozens more companies, including some of its biggest, on domestic stock markets over the next year. But they said the affair showed the Shanghai market's growing pains as regulators work to transform it into one of Asia's premier bourses.

"They have tried to do too much, too quickly," said a foreign investment banker in Shanghai, while remaining optimistic about the long-term prospects for the market.

The opening price gave Air China a market value of 30.8 billion yuan ($3.9 billion) and a valuation of 18.5 times diluted 2005 earnings -- cheap compared to most other Chinese airlines, which have been losing money, but not particularly attractive against a ratio for the Shanghai market of near 20 times.

Because of Air China's promise to buy back shares if needed, analysts do not expect a sharp fall below the IPO price in coming months. But a drop of a few percent is possible if impatient local investors shun the stock in search of larger gains elsewhere. When the buy-back offer expires at the end of this year, the stock may be vulnerable to larger falls.

Because a sluggish Air China debut had been expected, it did not hurt the overall stock market. The benchmark Shanghai index <.SSEC> was flat at midday on Friday. ($1 = 7.98 yuan)