Vacuum's slide kills off China's first rights issue

HONG KONG - Shanghai Vacuum's much-hailed rights issue, the first in China's socialist stock markets, has collapsed along with the company's share price in a huge market sell-off, Hong Kong analysts said.

'They'll have to cancel it,' Lawrence Ang, a China shares specialist with SBCI Finance Asia in Hong Kong, said.

Domestic 'A' shares of Shanghai Vacuum and Electron Device Co, which lost 13 per cent of their value on Monday, plunged a further 18.5 per cent yesterday to 480.53 renminbi ( pounds 53.36) on the Shanghai bourse, one of only two in China.

The Shanghai market's price collapse has pushed the Credit Lyonnais Class A index down more than 70 per cent from a high of 11,144.81 in April.

Vacuum's close yesterday was far below the rights issue target price of about 600 renminbi approved by shareholders at a general meeting this month, signalling death for the issue.

'No one's going to take it up if they can buy it more cheaply on the market,' Mr Ang said.

The one-for-two rights issue price of 800 renminbi was attractive four months ago when the scheme was announced and Vacuum A shares stood at 1,200 renminbi.

A 10-for-one share split was announced at the same time.

Mr Ang said that because investors, including Vacuum's largest shareholder, the Chinese government, had now abandoned the issue, Shanghai market authorities were sure to urge the company to scrap it.

Chinese investors are fast overcoming the giddy naivete with which they bid up shares to many times their issue prices in the Shanghai market's first few months, analysts said.

The Vacuum fiasco will further educate China's inexperienced investors, shareholding companies and underwriters about the discipline of market forces, they said.

'This is an underwriter's nightmare,' said Alan Hargreaves, who monitors China's stock markets at Hoare Govett Securities.

Company directors did not expect the free fall in Vacuum shares, which could see them far lower by January, when the issue was to have gone forward.

'God knows what Vacuum will be down to by then,' Mr Hargreaves said. 'That's eight months between announcement and the issue. You can't have a lead time that long when you are trying to do something that depends on market conditions.'

This is not the first embarrassment for Vacuum. Its international image suffered when it announced that foreign-held 'B' shares would be offered in the rights issue at a price far above their market value. Foreign investors ignored the issue, content to let domestic investors pour Chinese money into the company.