China South Locomotive jumped 58% in its Shanghai stock market debut on Monday, buoyed by a low IPO price and its dominance in China's train manufacturing sector, after it raised $1.5bn in Asia's third-largest share offering this year.
But analysts said the company's strong performance would not do much to reverse the trend of the country's overall stock market, which has fallen 62% from its peak last October.
South Locomotive, the country's largest train maker, had scaled back the size of its dual Hong Kong and Shanghai offering and set the price low as it confronted a weak market.
"South Locomotive is an isolated case, with the debut price propelled in part by the low IPO price," said senior stock analyst Chen Jinren at Huaxia Securities in Nanjing.
"Its rise cannot quell investor jitters about an economic slowdown both at home and abroad, nor can it boost sentiment after the prolonged stock market slump."
Its mainland-listed A shares closed at ¥3.47 after touching an intraday low of ¥3.34 and a high of ¥4.00, while China's benchmark Shanghai Composite Index tumbled 5.3% to a 20-month closing low.
A Reuters survey of six analysts last week gave a median forecast for a 60% rise in the stock to ¥3.5 on its first trading day, with a wide range from ¥2.8 to ¥4.2.
"South Locomotive's Shanghai debut is in line with our expectations, which have already taken into consideration weak market conditions," said Mo Yanjun, machinery sector analyst at Guotai Junan Securities in Beijing.
"Its first-day gain, relatively mild by Chinese standards, means the stock should have some room to rise in coming days."
Rapid railway growth
At ¥3.47, South Locomotive has a market value of $5.05bn compared with $28.8bn for French high-speed train maker Alstom, and $12.5bn for Bombardier Inc, the world's top passenger train maker.
The price gave South Locomotive a price-to-earnings ratio of 25 times forecast 2008 earnings, compared with Alstom's 21 times and Bombardier's 27 times.
"South Locomotive's unique position in China's rapidly expanding rail vehicle market sparked strong interest among investors," said industry analyst Xu Caihua at Guodou Securities in Beijing. "The company's value means a trading price of around ¥3.5 is reasonable."
The Beijing-based firm accounts for around half of China's railway and subway rail vehicle market. It plans to use the funds to upgrade technology, expand capacity, build factories and make acquisitions overseas.
Investors are tapping into the rapid development of China's railway network, which is driving demand for new rail vehicles as well as vehicle upgrades and refurbishment services.
While China is spending heavily on infrastructure for its booming economy, railway investment has lagged economic growth of at least 10% a year since 2002. Beijing has budgeted ¥1.2t ($174.7bn) in rail investment for 2006–10, more than four times the figure for the previous five years.
The Shanghai A-share debut will be used by investors as a reference for Thursday's listing of its Hong Kong H shares.
The Shanghai offer of 3 billion A shares, or 30% of its expanded share capital, attracted huge demand of ¥2.27t. It was also the first major equity listing in nearly four months, after Zijin Mining Group's debut on 25 April.
Its A-share oversubscription ratio was one of the highest for a big IPO in the past two years as the offer was priced at just over 16 times forecast earnings per share, compared with 28 times for China Railway Construction Corp in February and 21 times for China Railway Group last November.
Analysts said the weak market would not permit a higher IPO price for South Locomotive. The two railway builders, whose shares both surged in their Shanghai debut, have retreated sharply and are only about 5% above their IPO prices.
South Locomotive's Hong Kong-listed unit Zhuzhou CSR Times Electric trades at 16 times forecast earnings.
By Lu Jianxin, Reuters
