Trial Balloon Almost Pops on Hong Kong Market

A coal-mining company in the heart of China isn't exactly the type of firm that would normally attract much interest on the cosmopolitan Hong Kong stock exchange.

But on April 1, Yanzhou Coal Mining became the first Chinese state enterprise to list on the Hong Kong market since last year.

It was an important test of whether confidence in Chinese stocks is on the rebound. With East Asia still struggling to regain its economic footing, such symbolic moves are being closely watched.

So far, this coal company has kept investor interest burning - but not exactly at the pace that would power a locomotive.

Before last year's market crash, any stock with a "China play" - close connections to the Chinese government - was hot. Yanzhou Coal's lukewarm reception sends a clear signal to any China-based stock that the era of China plays isn't back.

"If they're doing a road show, it might be difficult for them to get in the door to ask international fund managers to see this company just on the fact that it is a [mainland company]," says Lisa Chow of Guinness Flight Hambro Asia, an investment house here.

"I think anybody trying to sell a future issue will have to point to other more salient points for it to fly," she says.

Yanzhou Coal's backers thought they had those salient points to sell.

The underwriters - big investment houses such as Bear Stearns and ABN Amro Hoare Govette - focused on Yanzhou Coal's strong balance sheet. Unlike many Asian firms, which are debt-ridden, analysts say the company is able to finance new projects.

The firm had hoped to list on the Hong Kong exchange last year. Poor sentiment forced it to wait. The Hong Kong market has rebounded now, though, with the Hang Seng index up 50 percent from mid-January to mid March. And most China plays jumped 75 to 100 percent.

But many investors - still wary of last year's losses - have remained on the sidelines.

Yanzhou Coal's backers tried to entice investors back into the market by pricing the company at a level far below that of other listed mainland firms (relative to their earnings).

This attracted interest initially, but Yanzhou Coal has disappointed. It rose about 2 percent above its issue price on the first day of trading, and since then has traded in a narrow range.

At the end of the day, Yanzhou Coal is still just a commodity company - and coal isn't exactly a hot commodity. In fact, its is expected to fall this year.

Ms. Chow says many Asian investors are hoarding cash, which is "waiting to be invested in good quality stocks."