China's largest coal company Shenhua Energy made a disappointing IPO debut in Hong Kong Wednesday, with analysts blaming the high volatility of energy prices.

The company's share price fell by 2.67 percent to close at HK$7.30 from the offer price of HK$7.50. A total of 322.18 million shares in the energy giant were traded between HK$7.25 and HK$7.70, with total trading volume peaking at HK$2.43 billion.

Louis Wong, director at Phillip Securities, told China Daily the poor performance could be attributed to the lack of market support for the standing high price to earnings (P/E) ratio strangling the growth potential of the stock.

"I would see the price range for Shenhua floating between HK$6.50 and HK$8.00 in the next half year but it is less likely to see the price exceed HK$8.00 owing to the high likelihood of coal price reduction in the near future," Wong noted.

Ben Kwok, director at KGI Securities, said: "I would not be surprised to see the stock falling below its offer price as the lukewarm market response during IPO has made everyone prepare for it."

"The lack of growth prospect as a result of high P/E ratio coupled with uncertainty of future coal price deterred investors from rushing to the stock."

Shenhua and Yanzhou Coal were trading at P/E ratios of 9.7 and 7.7 respectively.

Following the debut of Shenhua H-shares, the market is eagerly awaiting the launch of its A-shares on the domestic market in the next six months, but Chairman Chen Biting brushed aside any speculations.

"The group can only issue A-shares after complying with regulations issued by the relevant state authorities," Chen explained.

Chen does not believe the poor market response to the IPO was because of overpricing, and stressed the company deserves to be priced higher than fellow H-share company Yanzhou Coal Mining.

"Compared with Yanzhou Coal, Shenhua's edge over Yanzhou is evident because it has its own one-stop transportation system with railways and ports and I am sure investors can yield a good return by investing in Shenhua," Chen noted.

Investment banks remain upbeat about the firm's prospects despite the less than satisfactory debut yesterday.

Credit Suisse First Boston said Shenhua is a defensive play and gave a "neutral" rating to the stock with a target price of HK$8.00, with a mid cycle valuation of HK$6.50.

On the other hand, Capital Securities said Shenhua's stock price might rise to HK$8.17-HK$8.92 with reference to the 11-12 times P/E ratio of strategic shareholder Anglo American.

Shenhua had initially set the IPO offer range at HK$7.25-HK$9.25, representing a P/E ratio of 9.75-12.43, but the indifferent market response forced the company to price its shares near the bottom of the range at HK$7.50.

The target amount of capital as initially expected was forced down from HK$28 billion to HK$23 billion.

(China Daily June 16, 2005)