China's IPO market undaunted by ghosts of dotcom boom and bust

HONG KONG (Reuters) - China's investors are fuelling their own version of a dotcom bubble going by the meteoric rise in the shares of a newly-listed Internet video company.

The 42-fold jump in the shares of Beijing Baofeng Technology since the company went public in March puts it well ahead of gains chalked up by rival stock listings, but it's no outlier on the Shenzhen stock exchange's start-up board ChiNext.

The tech-heavy ChiNext index has more than doubled this year making it the hottest share market in the world. New listings there have posted average gains of about 500 per cent - a punter's dream.

Regulators have warned retail investors, who make up 90 per cent of equity trading in China, not to get carried away with risk taking. Yet, share account openings have hit new highs this year and margin financing has more than quadrupled to nearly 1.8 trillion yuan (S$387.8 billion) since July.

"The forces are much too strong to make any bubble burst or any stock market to go down right now," said Josef Schuster, founder of IPO research and investment firm Ipox Schuster.

Investors are willing to risk their money in the volatile markets partly on optimism that government policy and more stimulus to support flagging economic growth will continue to drive the rally.

"To those who were previously dumbfounded by the meteoric rise in tech stocks, it's very clear now that the government is counting on this very sector to help China's economic recovery, and transformation," said David Dai, Shanghai-based investment director at Nanhai Fund Management Co Ltd. "Is there a bubble? Of course there is. But this is how you can guide resources into high-tech companies to fund very expensive innovation."

As for tech start-ups and small companies, volatile markets still offer efficient funding. Bank loans are expensive and funds from informal channels are getting tighter.

Beijing Baofeng raised US$34.2 million and its IPO was 291 time oversubscribed. Its shares debuted at 7.14 yuan and are now trading at 300.81 yuan.

Fifty-eight companies have gone public on the ChiNext so far this year, on track to beat the record 122 IPOs in 2011.

Retail interest on the ChiNext board perked up this year after the authorities rolled out a series of initiatives to boost the technology sector and encourage stock investments.

IPOs, averaging US$59 million in the ChiNext versus US$130 million on the Shanghai bourse, have drawn heavy oversubscription and saw huge price pops on debut.

Market watchers say the supercharged markets could invite more intervention from regulators who have already tightened trading rules, such as on margin financing and short-selling.

Evidence of the market's bubble nature are showing. Average price-to-earnings ratio for ChiNext is at 106 times, near a 2009 high of 128.

A Thomson Reuters analysis of 200 companies listed on the ChiNext board found nearly 20 per cent had no analyst coverage.

And some shares are simply defying fundamental logic.

Starway Bio-Technology Co Ltd's shares have risen more than 50 per cent this year despite the agricultural producer having racked up losses in the last two years.

Beijing Baofeng and Starway executives declined comment when contacted by Reuters.

Fund managers are not sure the market has reached a top yet.

"The underlying macro-economic fundamentals are looking less favorable but retail investors continue to jump on the bandwagon so it is very difficult to say whether valuations are bubbly or not," said Keith Taylor, a portfolio manager at BMO Asset Management in Hong Kong.

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