GUANGDONG Fotao Group Corp has fallen victim to the depressed H-share market, with investors demanding a heavy discount to the tentative issue price. The Chinese ceramics maker was expected to fix the price for its initial public offering in Hong Kong last night after a three-week global roadshow that ended yesterday. Sources with the underwriting team said that price could not be agreed on last night due to low investor interest in the sale of the 305 million H shares. The fate of the sale is uncertain. 'It all depends on whether Fotao and its sponsor can agree on a new price,' the source said. Sponsor China Development Finance could not be reached for comment yesterday. 'The market view is that investors will buy the shares only when it is sold at a price-earnings ratio of seven times or below.' On a pro forma fully diluted basis of seven times, Fotao will sell the shares at $1.17, raising $356.85 million. This is a far cry from $509 million that Fotao could raise at the high end of its initial price range of $1.40 to $1.67. The initial price range puts the offer at 8.38 to 9.78 times on a pro forma fully diluted basis, based on the profit projection of 178 million yuan (about HK$163 million) this year. The source said the share offer could only proceed if the mainland authorities in charge of state-owned assets agreed to Fotao's lowering of the PE ratio to seven times, or an issue price of $1.17 a share. 'The Chinese authorities want the companies to sell shares at no less than their net asset value (NAV) to avoid any draining of state assets. 'If you want to come to the market, that just doesn't make sense,' the source said. Fotao's NAV was 1.5 yuan a share. 'The issue price should take reference of current PEs of H-share companies,' the source said. With China stock prices at a low, mainland companies will have a hard time finding buyers for their shares. The benchmark Hang Seng China Enterprises Index is down 29.5 per cent this year. The index tracks 17 state-owned Chinese companies that trade shares in Hong Kong. Just several weeks ago investors were caught off-guard by the disappointing interims of the H-share companies and then they were thrown into confusion by the changes in interest rate subsidies which eroded earnings of some. They also fear that an expected move to further slash tax rebates on January 1 will eat into their earnings. 'The sentiment of the H-share market is so poor, Fotao may have to postpone the share sale,' the source said. Overall poor sentiment in the H-share market, an unfavourable ceramics sector caused by the mainland construction slump, and Fotao's high debt-to-asset ratio of 110 per cent were all cited by investors as reasons for concern. With debts of 1.4 billion yuan, one-third of the proceeds of the share sale will be used to repay loans, lowering its debt-to-asset ratio to 80 per cent.