A China Construction logo at a building site in Fuzhou, Fujian province. The company is planning to raise funds to invest in large-scale engineering projects. [CFP]

China State Construction Engineering yesterday began roadshows covering four cities, Shenzhen, Guangzhou, Shanghai and Beijing, to drum up interest from institutional investors for its 42.6-billion-yuan new share issue, the largest initial public offering after PetroChina's 66.8-billion-yuan issue in October 2007.

China State Construction Engineering Corporation, the country's largest housing contractor, is the fifth firm to get IPO approval from China Securities Regulatory Commission (CSRC), after the ban on new share issues was lifted last month. It is the first major approved company to start the capital raising process since the resumption.

At the roadshow in Shenzhen yesterday, the room was packed with over 100 institutional investors.

"Almost all the major brokers and fund management companies who participated in the event felt that the company's earnings would be much better than earlier expectations," said Qiu Bo, property analyst from Guosen Securities.

Indeed, the impressive market debut last week of the first two IPO companies, Guilin Sanjin Pharmaceutical and Zhejiang Wanma Cable, has raised expectations of overwhelming support to the China State Construction issue, analysts said.

"Investors are crazy about new shares as they believe that they have greater upside potential than existing ones considering the market rally in the past few months," said Zhang Zhaowei, investment manager, Guojin Asset Management Center. "I am sure that (China State Construction's) IPO will be many times oversubscribed," he said.

Indeed, many institutional investors are believed to have lined up big lines of bank credit to bid for China State Construction shares. The sharp increase in the demand for funds by these investors has also driven up interbank market rates in the past few days.

China State Construction received approval to issue up to 12 billion new shares valued at about 42.6 billion yuan on the Shanghai bourse. The company plans to start off-line subscriptions on July 21 for up to 4.8 billion shares. The final issue price is likely to be fixed on July 23.

The State-owned homebuilder said in its IPO prospectus that the money raised would be invested in large-scale engineering projects, residential property development and for construction of a steel structure-processing base.

The company initially obtained regulatory approval to sell 12 billion A shares last June, but had to shelve the plan because of the persistent market gloom.

Despite the enthusiasm for the new issue, many investors have expressed concern that a new issue of this size could suck up the market liquidity that has been driving the rally since the beginning of this year. The benchmark barometer Shanghai Composite Index dropped 1.1 percent on Monday mainly on such concerns, stock analysts said.

"Investors are getting uneasy. Historical data shows that big IPOs often dent market confidence," said Mao Nan, senior strategic analyst, Orient Securities. He cited the example of earlier large issues like Sinopec Corp in 2001.

The major index shed over 12 percent in over half a month to fall below 2,000 points when Sinopec announced its plan to float shares on July 16, 2001 and had its trading debut on the Shanghai Stock Exchange.

The securities regulator approved the restarting of IPOs last month after the market rebounded nearly 70 percent.

To avoid dramatic corrections, the first two stocks were listed on the smaller Shenzhen Stock Exchange, and has caught investors' fancy, which saw their shares surging on listing.

Zhang, however, warns that the round of IPOs may not be able to rake in the huge gains of Guilin Sanjin and Zhejiang Wanma Cable.

The two stocks subsequently started seeking lower levels. Guilin Sanjin has fallen nearly 10 percent in the past two days, while Wanma Cable fell about 6 percent in the same period.

"Both the stocks are heavily over-valued," Zhang said, adding that investors penchant for China State Construction shares may not be feverish, but still with enough potential for huge gains.

"Around 20 percent to 40 percent premiums on the large caps' debut can be expected," Zhang said.

Guosen Securities' chief property analyst Qiu estimated the construction giant's subscription price could be around 3.96 yuan with 22 times price/earnings (P/E) ratio, while issue price should be around 5 yuan.

Established in 1982, the State-owned China State Construction has become the largest construction enterprise and the largest international contractor in China, with property development, and infrastructure construction as its core businesses.

"The company is under restructuring process to optimize internal management and reduce costs and is projected to have good earnings this year, despite its profit contraction in 2008," Qiu said.

The company's major underwriter China International Capital Corporation said in a research note that China State Construction's 2009 earnings will exceed 4.5 billion yuan, and set the company's rational stock price scope within 3.39 yuan and 4.25 yuan.

"The company will benefit from recovery of the real estate industry and the 4-trillion-yuan stimulus package given its status in infrastructure business," Guojin's Zhang said.

Market insiders expect more companies to get IPO permission going forward. They said China State Construction's debut could also lead to more red-chips seeking mainland listings.

(China Daily July 15, 2009)