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September 25, 2009

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GEM companies now hoping to double initial expectations

THE first 10 companies approved to trade on China's Nasdaq-style market plan to raise 6.7 billion yuan (US$977 million) in their share sales today, more than double the amount of money they initially said they would seek.

The average share price of the companies will be 55 times their 2008 earnings, compared with an average price-earnings ratio of 36 for initial public offerings on China's main boards so far this year.

The pricey valuations aren't expected to dent enthusiasm for the first shares to be floated on the new Growth Enterprise Market in Shenzhen, which opens trading next month as a conduit for innovative start-up companies to seek capital.

"Investors will rush to subscribe to the shares of these companies, so it's not surprising that their offer prices may exceed reasonable ranges," said Zeng Lingbo, an analyst at China International Capital Co Ltd.

Zeng suggested investors be cautious. If a company's valuation isn't backed up by strong growth potential, the return-on-investment risk may be high, Zeng warned.

Concern that the market might invite some wild speculation has spurred regulators to tighten trading rules.

The Shenzhen Stock Exchange, which will host the new market, said yesterday that any share moving more than 80 percent either up or down on its first day of trading would be suspended until three minutes before the market's close.

That tightened existing rules suspending trading for 30 minutes after price movements of 20 percent and 50 percent.

The 10 companies' prospectuses showed that they planned to raise a combined 2.8 billion yuan, but that figure has since swelled after the companies gauged investor demand to be strong and reckoned they could cash in on the intense interest.

"We estimate each account will require 1.5 million yuan to succeed in subscribing to 500 new shares in the online tranche for both retail and institutional investors," said Lin Jin, an analyst at Shenyin & Wanguo Securities Co.

Some brokerages said a flood of investors had opened accounts this week to prepare for the GEM company share sales.

Some investors are obviously banking on so-called "stag profits," the strategy of betting that new shares will surge on their debut and selling the stock on the first day for a quick gain.

"I opened an account for the new board this week in anticipation that the share prices will surge because new stocks are always favored by investors in China," said an individual investor surnamed Yan. She said she had been investing in the stock market for more than a decade.

Among the 10 companies, Beijing Ultrapower Software Co is hoping to raise the most money. It is selling shares at 58 yuan each, which would raise 1.83 billion yuan. The company earlier said it planned to raise 503 million yuan.

The China Securities Regulatory Commission has ruled that firms must use excess funds from IPOs only in their main businesses.

Shanghai Bestway Marine Engineering Design Co Ltd is the only local company among the first 10. The Shanghai ship designer lifted its fundraising target to 350 million yuan from 120.56 million yuan. It sought the IPO to raise funds to finance two marine engineering design projects. Additional money raised will be applied to the second phase of one of the projects.

The Growth Enterprise Market has been in the planning stages for a decade. It was delayed several times because of a variety of concerns, ranging from the after-effects of the dotcom bubble collapse to last year's market nosedive.

China is launching the new market to help small firms with big ideas to raise money. Smaller firms account for 99 percent of all companies in China and 75 percent of employment.

Still, banks have been reluctant to provide them financing because they don't have solid track records.


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