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October 17, 2009

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Traders on new board may fear high valuations

THE first batch of firms to be listed on China's upcoming Nasdaq-style stock board raised more than double the amount planned, but analysts said that may not be good news for investors looking to chase these chips on their trading debut.

The 28 firms set to go public on the Growth Enterprise Market in Shenzhen collected a cumulative 15.48 billion yuan (US$2.27 billion), compared with the targeted 7.08 billion yuan, the Shenzhen Stock Exchange said yesterday.

The average price of these firms' shares exceeded last year's earnings by 55 times, compared with an average 36 times for initial public offerings on the main boards so far this year.

"The excessive valuations have reduced the investment value of the new board," said Qiu Yanying, an analyst at TX Investment Consulting Co. "New listings face the risk of dropping below their issue prices."

The Shenzhen Stock Exchange has yet to say when the GEM will start trading, but investors and analysts expect the market to kick off in the final week of this month.

Investors wanting a piece of the first batch of companies signed up for about 120 times more shares than the amount on offer, dashing expectations and partly reflecting the cautiousness toward the high valuations.

The oversubscription rate was much lower than the average 400 times for the more than 20 companies that floated IPOs on the two main boards in Shanghai and Shenzhen this year.

"The stock subscription process shows investors have already turned cautious," said Liu Yu, an Orient Securities Co analyst.

"It's not likely we will again see stock prices double on the trading debut; only a 30 percent to 40 percent rise is expected."

China resumed IPOs on its main stock exchanges in late May, and the share prices of the first four new listings doubled on the first day of trading. The average gain for the ensuing newly listed firms exceeded 50 percent.


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