First Listings on Shenzhen Board Priced at High End

SHANGHAI — The first 10 companies due to list on ChiNext, theNasdaq-style board in China, plan to sell shares at price-to-earningsratios that are 50 percent above those of their main-board peers, justas worries over speculation spurred officials to announce strict newtrading rules Thursday.

After gauging investor demand,the 10 start-up companies, including the software developer BeijingUltrapower and the outdoor sportswear maker Toread, have decided onprices for their shares that average 55 times their 2008 earnings. Thatcompares with an average price-earnings ratio of 36 for other initialpublic offerings this year on the mainland.

“Growth potential,rather than past performance, is what investors are looking at, so ahigh P/E ratio doesn’t necessarily mean they’re overpriced,” said JiangJianrong, an analyst at Shenyin & Wanguo Securities.

“Butwithout doubt it will be quite a speculative market at the beginning,because it’s new and the companies are very small,” she added.

ChiNextmay start operating as soon as next month in Shenzhen, the southernboomtown. To curb risks, the Shenzhen Stock Exchange, which willoperate ChiNext, said Thursday that it would set an 80 percent limit onshare-price movements during a stock’s first day of trade.

Chinais hoping that ChiNext can provide badly needed financing for privatesector start-ups, which have difficulty obtaining bank loans but arecrucial to creating jobs and sustaining growth. The long-planned markethad until recently been referred to as the Growth Enterprise Market orthe Growth Enterprise Board.

Beijing is also hoping that themarket could become a cradle for China’s own future versions ofMicrosoft or Intel, helping to cut the economy’s reliance onmanufacturing.

The 10 companies, which also include the drugproducer Chongqing Lummy Pharmaceutical and Beijing Lanxum Technology,a provider of office information system services, will takesubscriptions from investors starting Friday.

“Our rival FujiXerox is stronger than us both in branding and in financial strength,”said Lanxum’s chairman, Chi Yanming. “Listing on the second board wouldhelp us to narrow the gap.”

Lanxum, which is selling 5.3 millionshares, said Thursday that it planned to raise 477 million yuan, or $70million, 73 percent more than its previous fund-raising target, afterpricing its I.P.O. at 18 yuan a share, or 51.49 times 2008 earnings.

LepuMedical, a medical equipment maker, plans to raise 1.19 billion yuan,more than double its target, after pricing its I.P.O. at 29 yuan ashare, or 53.54 times 2008 earnings.

Investor fervor isinitially likely to push stocks on the start-up board to very highvaluations, helping to create new Chinese billionaires.

“Somespeculation is not always a bad thing,” Ms. Jiang said. “It provideseasy money to private companies which had been at a disadvantage infinancing compared with state-owned rivals.”

“More important,”she added, “the demonstration effect of start-up billionaires wouldprod more young Chinese to start their own businesses, andentrepreneurial spirit is what China desperately needs.”

ButChinese regulators apparently fear that the new board could become likea casino, with excessive speculation potentially hurting the interestsof small investors and leading to a repeat of failures by similarboards in other countries created with start-up companies in mind.

Thirty-nine countries or regions have set up 75 such boards since the1960s and nearly half have closed, a Shenyin & Wanguo Securitiesreport said, including markets in Germany and Britain.

Under theprice limits announced Thursday by the Shenzhen Stock Exchange, shareswill be suspended from trade until the final three minutes of thesession if they move more than 80 percent from the opening price ontheir first day of trade. This is in addition to debut-day circuitbreakers that suspend trade for 30 minutes after price movements of 20percent and 50 percent from the opening price.