The five-month absence of initial public offerings (IPO) from the mainland market came to an end yesterday with the launch of Huadian Power International Corporation Limited's A-share IPO.

The power company, already listed in Hong Kong and planning to issue as many as 765 million A shares, is also the first to test China's new IPO pricing system.

The new mechanism was recently introduced to ensure reasonable IPO prices through price inquiries with institutional investors.

But the reappearance of IPOs also sparks concerns that a rapid market expansion could occur in the already fragile market.

As a result, the Shanghai composite index dipped by 2.33 percent yesterday to close at 1,216.652 points.

Dong Chen, an analyst at China Securities Co, explained that many investors are adopting a wait-and-see attitude as to whether the new IPO pricing system can really work effectively and how well the pace of IPOs can be controlled.

China's securities authorities suspended new share issues on August 30, 2004, to prepare for the launch of the new IPO pricing system, which requires companies launching IPOs to set prices based on the results of their inquiries among registered institutional investors.

The China Securities Regulatory Commission hopes the new system will make IPO prices more rational and acceptable to the market. In the past, some companies overpriced their IPOs and the pricing process was often opaque.

As stated in Huadian's A-share IPO prospectus, which was published yesterday, the company will give no more than 196 million State shares to its parent firm China Huadian Group, which will not be traded in the market. The remaining shares will be floated to institutional investors and retailers.

The proceeds will be used to finance the power company's takeover of a power firm and the expansion of its existing generating projects, which involve an estimated investment of around 2 billion yuan (US$241.5 million).

They are expected to expand the company's capacity by 3,860 megawatts, 50 percent of its current capacity, by 2008.

The A-share issue will further enhance Huadian's financial strength and support is expansion, said Xiao Hanping, an analyst with China Galaxy Securities Co.

Compared to the other major players in the industry, Huadian still needs to improve its profitability by increasing its production scale, lowering costs and upgrading its equipment, he said.

Huadian and its lead underwriter, China International Capital Corp, launched their roadshow Monday in Beijing, Shanghai and Shenzhen, and started to make price inquiries among 77 registered institutional investors, including fund managers, securities houses, qualified foreign institutional investors and trust firms.

Analysts predicted that the company's A shares may be priced at a slight premium to its H shares, which closed yesterday at HK$2.25 (US$0.29).

But that means it would be lower than most power stocks listed in the mainland, as H share prices are generally lower than A shares.

As a result, the IPO already pulled down some other power stocks yesterday, said Xiao.

Hunan Chendian International Development and Chongqing Fuling Electric Power Industrial Co Ltd both almost plunged to their daily limit of 10 percent to close yesterday at 5.81 yuan (US$0.7) and 5.59 yuan (US$0.68).

(China Daily January 18, 2005)