Shanghai Stock Exchange's first new listing, widely expected to occur on February 3, is likely to test Chinese investors' confidence in the domestic stock market, which has been in the doldrums for almost two years.

The listing, after a six-month hiatus imposed by the exchange, will also be the first initial public offering (IPO) to test China's share-bidding system. The system took effect on January 1.

So far, stockbrokers and investment analysts are upbeat.

Huadian Power International Corp Ltd is scheduled to raise 2 billion yuan (US$242 million) by selling 765 million A shares, including 196 million non-tradable shares.

The preliminary price, after bidding among institutional investors, settled at 2.3 yuan to 2.52 yuan (26-89 US cents) last Wednesday.

The company generated about 658 million yuan (US$74.77 million) in net profit in the first half of last year. That was 7-per-cent increase year-on-year.

The company's H shares are listed separately on Hong Kong's stock exchange. It's shares closed at 2.28 yuan (26 US cents) per share last Friday.

Liu Xu, an investment analyst with Guangdong Foretech Investment and Consultants Co Ltd, predicts strong demand by domestic investors will push Huadian's shares over 6 yuan (68 US cents) each.

That would be up by more than 100 per cent from the offer price, in "a matter of weeks."

Over the longer term, Liu predicts Huadian's share prices will peak at 10 yuan (US$1.20) each before "stabilizing."

He says he is basing his optimism largely on Huadian's projected performance in one of the hottest economic sectors of the Chinese economy, as well as domestic investors' pent-up demand for quality shares.

Other analysts are less bullish. But they generally agree the underlying factors for their enthusiasm about the firm's performance are strong.

Zhang Weijie, an analyst who specializes in power stocks with Shanghai-based Everbright Securities, says the price will most likely reach 3 yuan (36 US cents), or about 20 per cent more than the offer price, before levelling off.

"After having waited so long, investors are eager to snatch up any new listing that look respectable," he says.

China Securities Regulatory Commission (CSRC), the securities watchdog, halted approvals for new listings last July to ease the downward pressure on the stock market.

At the time, the market was hovering near the psychologically important 1,300-point level.

It was widely believed new shares would have pushed the indicator to an even lower level, which would have made recovery even more difficult.

Since then, authorities have introduced numerous measures aimed at reviving the stock market. The moves have included new regulations to give investors, especially institutional investors, a bigger say in deciding IPO prices.

Under the new pricing regulations, stock issuers must "consult" with institutional investors, including insurance companies and fund-management firms, on pricing.

The process is similar to the "bidding" system commonly used to issue new shares in other markets. Huadian is the first Chinese firm to adopt the process for its IPO.

Proceeds from the share placement will be used to finance Huadian's three new power projects and to purchase 80 per cent of Sichuan Guang'an Power Co Ltd, indicates Huadian's statement posted on the stock exchange's website.

One of the new power projects, in Sichuan Province, was operation late last year.

The project in Ningxia Hui Autonomous Region is scheduled to begin producing power this year. The project in Shandong Province is to be operational in 2008.

Huadian Power International, based in Shandong Province, is China's third-largest independent power producer.

Analysts expect the trading price will be slightly lower than the nominal price of 2.6 yuan (30 US cents) per share.

But even at the nominal price, the company's shares would be traded at a prospective price-to-earnings ratio of 13, which would be lower than the market average for companies in the energy sector.

"As the first IPO after a long drought, the turnover of Huadian's shares could reach 130 million lots in the first day of trading," Liu says.

"That is high, considering Huadian is just a mid-cap company."

Liu says his prediction of 6 yuan (72 US cents) is reasonable.

At that price, the company's shares would be trading at a multiple of 30, which would be in line with the industry's average, he says.

Gao Huiqing, a market analyst with the State Information Centre, agrees.

"The price-earning ratios for companies in the energy sector range from 17 to as high as 50," he says.

Last year, he added, was a year of handsome profits for the power industry. More than two-thirds of China was affected by blackouts last summer, which prompted power producers to expand generation capacity.

"This year may witness an oversupply, but there are still good opportunities to invest in Huadian, as power prices are expected to increase in the second half of this year," Gao says.

The Chinese Government has agreed to establish a mechanism to link coal and power prices. Power prices previously were fixed in China. Coal prices have surged in recent months.

Zhang says a price surge is unlikely during Huadian's IPO.

"Compared with the other power stocks, there is limited growth potential for Huadian."

He says Huadian has been performing relatively poorly. Last year, it had a 0.2-yuan-per-share earning. Other power generators, such as Huaneng, have performed better.

Second, he says, Huadian has a higher liability-asset ratio. It was 60 per cent in 2003. Its new projects, which will have a combined 5 million megawatts of installation capacity, require 20 billion yuan (US$2.42 billion) to finish.

"The 2 billion yuan (US$242 million) it is expected to raise will not help much," he says.

As the new pricing regulation is expected to help lower the price-earning ratio in China, the price of the first IPO will not surge very high, he said. He based the advice on the secondary market's expected reaction.

He expects a 12-13 price-earning ratio for the stock.

"Otherwise, what's the use of releasing such a pricing rule?"

Although the market will remain sluggish in the near term, investors will still trade, picking stocks that perform better, Zhang says.

"IPOs with good earning potential will have no difficulty in raising money from the stock market," as Chinese people have 1.3 billion yuan (US$157 million) in savings parked in banks, Zhang added.

Those savings are earning little interest.

He predicts the second IPO will hit the market right on the heels of Huadian's listing.

More than 40 companies have been given permission to launch their IPOs.

"And many more applicants are on their way," Zhang says.

(Business Weekly 01/26/2005 page5)