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By Kennix Chim

HONG KONG, Aug 21 (Reuters) - Shares in China South Locomotive & Rolling Stock Corp Ltd <1766.HK>, the country's largest train maker, rose a disappointing 1 percent in their Hong Kong debut as investor enthusiasm was derailed by a sharp selloff in the broader market.

Despite a rousing Shanghai debut after it raised a combined $1.5 billion in a Hong Kong and Shanghai listing, China South Locomotive could not overcome Thursday's 2.58 percent drop in the Hang Seng Index <.HSI>, dampening the outlook for upcoming IPOs.

"Fundamentally, the stock is attractive as it will benefit from China's transportation expansion plan and its valuation is low, but stock markets are so weak, the firm is under selling pressure in the short term," said Teresa Chow, fund manager at RBC Investment Management.

Glorious Property Holdings Ltd and Longfor Properties Co Ltd, each looking to raise $1 billion from Hong Kong IPOs, have put their listings on hold even though they have approval from Hong Kong regulators.

Investors crowded into China South Locomotive's IPO, lured by a railway investment boom in the world's fourth-largest economy and the stock's low valuation, raising expectations that this year's moribund Hong Kong IPO market might be returning to life.

That hope may have been premature.

"After the tumble in the market, many blue chip valuations are very attractive now. Investors prefer buying from the secondary market to the primary market, which makes launching IPOs difficult," said Steven Leung, director of institutional sales at UOB-Kay Hian.

Shares in China South Locomotive rose as high as HK$3.08 on Thursday morning, compared with a Hong Kong IPO price of HK$2.60, which had been near the middle of an indicated range. The stock closed at HK$2.63, while its Shanghai-listed A-shares ended down 10 percent at 3.49 yuan.

In Hong Kong grey market action on Wednesday, China South Locomotive traded between HK$3.03 and HK$3.12 -- a gain of 16.5 percent to 20 percent on Phillip Securities' trading platform.

LOW VALUATION

This year's third largest share sale ranks behind offerings from China Railway Construction Corp <1186.HK> <601186.SS> and India's Reliance Power Ltd <RPOL.BO>, according to Thomson Reuters data.

China South Locomotive drew interest from investors looking to tap into rapid development of China's railway network, which is driving demand for new rail vehicles as well as upgrade and refurbishment services.

China, aiming to ease transport bottlenecks caused by its surging economy, earmarked 1.25 trillion yuan for railway infrastructure in its 2006-10 five-year plan, or four times the amount under the previous five years.

The fragility of China's transport links was exposed by snowstorms early this year that crippled the movement of people and goods in large parts of the country.

China South Locomotive's <601766.SS> Shanghai shares rose 58 percent in their trading debut on Monday, compared with their IPO price of 2.18 yuan. Based on its closing price on Thursday, the firm's Shanghai shares are 60 percent above their IPO price.

The state-run company raised 6.54 billion yuan (US$955 million) in mainland China and $533 million from its Hong Kong offering, generating orders worth HK$5.8 billion from Hong Kong retail investors. The Hong Kong shares were priced at a 4.8 percent premium to the Shanghai IPO.

China South Locomotive's closing price in Hong Kong represents a price-to-earnings multiple of 18.6 times 2008 forecast earnings of its IPO underwriters.

By comparison, French high speed train maker Alstom <ALSO.PA> and the world's top passenger train maker, Bombardier Inc <BBDb.TO> of Canada, trade at 21 times and 26 times, respectively.

Mainland railroad builders China Railway Construction <0390.HK> and China Railway Group <601390.SS> trade between 25 times and 27 times forward earnings.

The Hang Seng Index has dropped 26.7 percent so far this year amid the rout in global equity markets.

The Hong Kong listing was handled by Macquarie Bank <MQG.AX> and China International Capital Corp (CICC), which also underwrote the Shanghai portion of the IPO, along with Industrial Securities.

(US$1=HK$7.8=6.85 yuan)

(Addition reporting by Parvathy Ullatil; Editing by Tony Munroe and Jean Yoon)

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Keywords: SOUTHLOCOMOTIVE DEBUT/