Air China Ltd is likely to change its domestic listing plan after institutional investors displayed lacklustre interest in its Shanghai initial public offering (IPO).

"Institutional investors were not excited about Air China's shares and the share subscription was much less than what Air China had planned," a source at CITIC Securities told China Daily yesterday. The securities house was one of the three underwriters of Air China's IPO.

"Air China chose a bad time for its domestic listing," said the source, who wished to remain anonymous.

Rao Xinyu, secretary of the board of Air China, declined to comment on the speculation. She said that the airline would announce the details of its share sale today.

Air China Ltd is likely to cut the size of its domestic share sale by 40 per cent, according to media reports yesterday. The Beijing-based carrier had planned to issue no more than 2.7 billion shares.

After strategic corporate investors earmarked 350 million shares at the end of July, Air China planned to sell up to 1.175 billion A shares to institutional investors by the end of last week. A similar amount of shares would be sold to retail investors tomorrow.

Analysts said Air China's share price was set too high to attract investors, given that so many firms are set to list in Shanghai in the wake of the government lifting its ban on domestic IPOs in May.

Air China last week set the price range for its Shanghai listing at between 2.75 and 2.95 yuan per share, 3-10 per cent less than its H shares. This is a smaller discount than Bank of China's indicative price range before its Shanghai IPO in June. Compared to its H shares, the bank's share price was set at a 9-12 per cent discount.

"At a time when the aviation industry's overall prospects are far from promising due to soaring fuel prices, Air China's shares are too expensive for us to make a profit. It's not a good pick for us," said an unnamed fund manager at Bosera Asset Management Co Ltd.

Chinese airlines suffered an aggregate 2.57 billion yuan (US$321 million) loss in the first half of the year, more than quadruple that in the same period of last year. Record high fuel prices triggered a 21 per cent year-on-year rise in their costs. Jet fuel accounted for 39 per cent of Air China's 2005 operating costs, compared with 33.4 per cent in 2004, the airline said in its A-share prospectus.

Investor interest in Air China was diluted by the flood of companies planning to list in Shanghai.

"Investors will look around and make a careful comparison of all these companies. The capital in their hands is limited, and they have so many choices," said Guo Dongmou, an aviation analyst at Shenzhen-based China Merchants Securities.

The China Securities Regulatory Commission lifted its year-long ban on domestic IPOs in May. Gains on new shares have been falling as more companies sell shares.

Shares in China CAMC Engineering Co, the first company to go public after the ban was lifted, jumped more than fourfold on its first day of trading in June. Bank of China Ltd achieved a gain of 31 per cent on the day of its IPO in July. However, the premium from the trading debut of Daqin Railway Co narrowed to 12 per cent when the company was listed last Tuesday.

Some analysts have suggested that the best way for Air China is to postpone its domestic listing or lower its price.

Air China's H shares yesterday dropped 3.38 per cent to close at HK$2.86.

The carrier planned to raise 8 billion yuan (US$1 billion) from its domestic listing to finance the purchase of 45 aircraft and its airport expansion project in Beijing.

(China Daily August 8, 2006)