SHANGHAI - CNR Corp, one of China's top two train makers, limped in with a lukewarm market debut after its $2 billion IPO in Shanghai, signaling investors' intolerance for high valuations as a flood of new equity awaits next year.

CNR (601299.SS) opened 4.3 percent above its IPO price and was the worst performance for a Shanghai debut this year, after the mainland's fourth-largest IPO of the year valued the company at 49 times its 2008 earnings, double the market average.

The weak debut is actually good for the market as it sends a warning for future IPOs, forcing companies to think twice before they set sky-high IPO prices, said Chen Huiqin, senior stock analyst at Huatai Securities in Nanjing.

CNR's local-currency A shares closed at 5.69 yuan, up 2.34 percent from the IPO price.

China has stepped up the pace of IPO approvals in recent weeks, as Chinese firms rush to tap buoyant stock markets to raise funds while regulators see boosting equity supply as a means of curbing potential asset price bubbles.

On Tuesday, building firm China National Chemical Engineering Co priced its Shanghai A-share IPO at 5.43 yuan a share, at the top of an indicated range, raising 6.7 billion yuan ($980 million).

That valued the company at 45 times its 2008 earnings, well above rivals China State Construction Engineering Corp (601668.SS) at 22 times and Metallurgical Corp of China (601618.SS) (1618.HK) at 16 times.

While stock market debuts have traditionally attracted feverish speculative buying by mainland investors, first-day gains by new listings have diminished in recent months as the IPO pipeline filled up and high valuations started raising eyebrows.

Metallurgical Corp of China, the firm that helped build Beijing's Bird's Nest Olympics stadium, and China Merchants Securities (600999.SS) both staged weak debuts this year.

CNR's IPO valuation matched the historical price earnings ratio of its rival China South Locomotive & Rolling Stock Corp (601766.SS) (1766.HK) but far exceeded the overall Shanghai market's .SSEC price-earnings multiple of 28.

The high IPO price leaves no margin for profit for secondary market investors. The problem will be solved through lower IPO pricing, said Ren Chengde, a senior analyst at Galaxy Securities.

OUT OF STEAM?

Domestic media reported last week that December alone is expected to see a total of 35 mainland IPOs, the biggest monthly number in 12 years, raising a combined 44.6 billion yuan.

Next year the Shanghai Stock Exchange is expected to outshine rival Hong Kong and raise 380 billion yuan through IPOs, Ernst & Young said in a research report last week.

CNR's share price was much weaker than the average market forecast for a debut day price of 6.7 yuan, or a gain of 21 percent from the IPO price, cited by local media.

Chinese companies have raised more than 200 billion yuan from the mainland markets since the China Securities Regulatory Commission lifted a nine-month ban on stock IPOs in June.

The annualized pace of the market's expansion has approached the record in 2007, when the authorities pushed 460 billion yuan worth of IPOs onto the market to help cool a bull run that boosted the Shanghai index six-fold in two years.

CNR competes with China South Locomotive to supply trains for the world's fastest-growing major railway market.

Beijing has budgeted 1.2 trillion yuan for rail investment for 2006-10, more than four times the figure for the previous five years. Rail spending had generally lagged economic growth this decade despite China's heavy spending on infrastructure.

CNR said it would use the IPO proceeds to upgrade technology.

CNR hired China International Capital Corp, Huatai Securities and Huarong Securities to underwrite the IPO.

(Additional reporting by Rujun Shen and Fang Yan; Editing by Edmund Klamann and Anshuman Daga)

China Investment