First Listings on Shenzhen Board Priced at High End

SHANGHAI — The first 10 companies due to list on ChiNext, the Nasdaq-style board in China, plan to sell shares at price-to-earnings ratios that are 50 percent above those of their main-board peers, just as worries over speculation spurred officials to announce strict new trading rules Thursday.

After gauging investor demand, the 10 start-up companies, including the software developer Beijing Ultrapower and the 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 offerings this year on the mainland.

“Growth potential, rather than past performance, is what investors are looking at, so a high P/E ratio doesn’t necessarily mean they’re overpriced,” said Jiang Jianrong, an analyst at Shenyin & Wanguo Securities.

“But without doubt it will be quite a speculative market at the beginning, because it’s new and the companies are very small,” she added.

ChiNext may start operating as soon as next month in Shenzhen , the southern boomtown. To curb risks, the Shenzhen Stock Exchange, which will operate ChiNext, said Thursday that it would set an 80 percent limit on share-price movements during a stock’s first day of trade.

China is hoping that ChiNext can provide badly needed financing for private sector start-ups, which have difficulty obtaining bank loans but are crucial to creating jobs and sustaining growth. The long-planned market had until recently been referred to as the Growth Enterprise Market or the Growth Enterprise Board.

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 companies, which also include the drug producer Chongqing Lummy Pharmaceutical and Beijing Lanxum Technology, a provider of office information system services, will take subscriptions from investors starting Friday.

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

Lanxum, which is selling 5.3 million shares, said Thursday that it planned to raise 477 million yuan, or $70 million, 73 percent more than its previous fund-raising target, after pricing its I.P.O. at 18 yuan a share, or 51.49 times 2008 earnings.

Lepu Medical, a medical equipment maker, plans to raise 1.19 billion yuan, more than double its target, after pricing its I.P.O. at 29 yuan a share, or 53.54 times 2008 earnings.

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

“Some speculation is not always a bad thing,” Ms. Jiang said. “It provides easy money to private companies which had been at a disadvantage in financing compared with state-owned rivals.”

“More important,” she added, “the demonstration effect of start-up billionaires would prod more young Chinese to start their own businesses, and entrepreneurial spirit is what China desperately needs.”

But Chinese regulators apparently fear that the new board could become like a casino, with excessive speculation potentially hurting the interests of small investors and leading to a repeat of failures by similar boards in other countries created with start-up companies in mind.

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

Under the price limits announced Thursday by the Shenzhen Stock Exchange, shares will be suspended 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. This is in addition to debut-day circuit breakers that suspend trade for 30 minutes after price movements of 20 percent and 50 percent from the opening price.

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