AS investors become more selective about H shares, the structuring of initial public offerings (IPO) in Hong Kong by Chinese state-owned enterprises has become a challenge to their sponsors. Pulling off successful IPOs can no longer be taken for granted in the face of bearishness towards Chinese stocks. Just ask Morgan Grenfell Asia Securities, which was to have sponsored the territory's listing of Shanghai Haixing Shipping Co. The deal eventually was aborted because of disagreements with underwriters over the issue's pricing, making it the first casualty among mainland state-owned enterprises seeking to raise capital in overseas stock markets. Shanghai Haixing's fate contrasted vividly with the euphoria a year ago, when investors were snapping up H shares like hot cakes - despite the economic overheating in China and with little regard for company fundamentals. Today, as the bears dominate the market, investors are treating H shares with caution. Nothing illustrates this more clearly than the subscription levels of the issues coming into the market this year. Dongfang Electric was an exception, being 15 times subscribed, but the issues of Tianjin Bohai and Luoyang Glass managed to be only just fully taken up. The pragmatism indicates a giant step forward in the attitudes of investors in the one-year history of mainland concerns listing in Hong Kong. After swarming for any Chinese shares, market players are now going back to the basics of the companies. And the sponsors, acting as middlemen between investors and companies, will have to be more creative in presenting offers to attract enough buyers. Balancing an equation which makes a ''buy'', participants argue that there are only two major variables - quality and pricing - that they can play with. In a bid to guarantee better investor response, some prefer setting aside a larger proportion of shares for international placement - allocations that are tapped by institutional investors. ''There is no magic. You just have to do your work properly,'' said Joe Josephson, managing director of Smith Barney Shearson, sponsor of the Qingling Motors issue. He said what an investment banker could do was to ensure investors focus on a company's fundamentals and not be carried away by market conditions. No investment banker knows this better than his firm with its experience with Qingling Motors coming on to the territory's market. Qingling, a light-duty truck maker, has priced its shares at nine times estimated earnings on a fully diluted basis, the lowest yet offered by a mainland state-owned enterprise to list in Hong Kong. The figure is a far cry from the heady days of H shares last year when investors found the stocks a rare chance of participating in the world's fastest growing economy. When the first H share, Tsingtao Brewery, came to the market in July last year its shares were sold at a P/E (price-earnings ratio) of 17.89 times, the most expensive so far. Qingling set the bargain price in an attempt to avoid the plight of some of its predecessors. It saw shares of Luoyang Glass plunge 20 per cent on its first trading day early last month and then struggle to bounce back to its issue price of $3.65, an equivalent of 10.5 times. The aborted share issue by Shanghai Haixing last month also sent a strong pricing message to the companies. It has become obvious that investors will pay only what a share deserves. The mainland shipping company failed to compromise with underwriters, who sought a multiple of below 10 times. ''Every investor wants to make profits. It is very pragmatic,'' said Gary Chan, associate director of China Development Finance, which sponsored Luoyang Glass. ''As an investor, what he will consider includes the prospect of a company's earnings growth, its industry and its competitiveness. Also, he will see if the pricing is reasonable. ''When we fixed the price for Luoyang Glass, people said it was a bargain. But the market then took a downturn which was beyond our control.'' He said the misfortune of Luoyang is not about mis-pricing, pinning the blame on the stock market which was battered by jitters of an interest rate rise, which has deterred institutional investors from pumping money into new issues. So, what does a ''reasonable price'' mean? ''It means a pricing which reflects market demand for an issue,'' said HG Asia director Louis Koo, a co-sponsor of Qingling. In fact, Qingling chairman Wu Yun has no complaints. He said the multiple was in line with ''the current state of stock markets and economic situations''. In short, the right timing is significant. Even with positive economic signs glimmering in China, investors remain concerned as to whether the country will steer into a soft landing. China recently accounted a trade surplus for June - its first return to the black in 16 months - highlighting that Beijing has brought imports under control. It also revealed a slowdown in economic growth for the first six months - a stark contrast to the China fever last year, when investors were blinded by the grand theme of China's economic boom, neglecting signs of its economy overheating. The erosion of the scarcity premium on H shares by an increase in supply also has battered the sector. ''With more shares coming out, there will be selective buying by fund managers,'' said MeesPierson Securities analyst Sonja Jong. ''I think high-growth stocks will do better as fundamentals will count more.'' She ranked China's power and transportation industries, both characterised by a steady income stream, as the most attractive. Still, marketing is needed even for a quality issue. Mr Chan said investment bankers would try to convey to investors both a company's strengths and weaknesses and let them decide. ''The higher the transparency, the better it is for the company,'' he said. That also explains why investment bankers usually prefer an international placement in the structuring of an initial public offering. ''An international placement is more flexible. We can control it better because we talk directly to the potential buyers. We know how they think about the pricing,'' said an investment banker of a British house. An international placement usually targets institutional investors who are supposed to be more long-term and cushioned from short-term hiccups, while a public offering usually draws retail investors. Lawrence Ang, associate director of SBCI Finance Asia, said the slump of the H-share market had virtually forced investment bankers and Chinese authorities to be mature. ''This is a good thing. People have now become more realistic. There are always ups and downs in the market,'' he said.