Happy New Year: The Chinese IPO is Back

2014-Year-of-horse-4Happy New Year! It has only been the Chinese New Year in China for a few hours now, but it seems the Horse is bringing the IPO back.

Over the past two weeks, the first batch of initial public offerings (“IPOs”) came to market with a total of nine companies listing their shares on the Shenzhen exchange, and one company listing in Shanghai. Another 40 companies are expected to list in the coming weeks. The January listings came after the China Securities Regulatory Commission (“CSRC”), as expected, lifted a 13-month moratorium on new IPOs earlier in the month.

In October 2012 the CSRC imposed a freeze on IPOs due to concerns about the integrity of the IPO process. As a result of the moratorium, over 760 companies in China waiting to issue shares on the country’s stock exchanges. Fifty-one companies have already received the go-ahead from the CSRC. Along with approving the listings, the CSRC announced new rules designed to improve and streamline the IPO process.

Industrial valve producer Neway Valve (Suzhou) Co. (603699) was the first to take advantage of the end to the moratorium, listing in Shenzhen on Friday, January 17. Neway’s shares were priced at 17.66 yuan and traded up 43 percent to 25.34 on the first day of trading. Neway’s shares have since traded down, closing at 19.03 yuan on January 30.

On Tuesday, January 21, another eight companies listed on Shenzhen and one company listed in Shanghai. Like Neway, the shares of all companies fared well in post IPO trading. In fact, trading in seven of the eight companies that listed in Shenzhen was halted twice after breaching the percentage gain limits adopted as part of the CSRC’s new trading reforms. CSRC’s thresholds first go into effect when a stock rises 32 percent and caps the daily gain at a maximum of 44 percent. Similar percentage limits are also in place for when stocks drop precipitously.

The hefty share price increases of the newly listed companies come against the backdrop of an overall China stock market that has been one of the worst performing in the world. At 2033, the Shanghai Stock Exchange Composite Index is down 4 percent on the year. After reaching a high of 5955 in October, 2007, the SSE Composite Index is trading at the same level today that it traded at in May 2001. The Shenzhen Composite Index has fared somewhat better, increasing by just over 1 percent so far in 2014. However, shares in Shenzhen are still trading at the same level as they did in September 2007.

Apart from the share price increases that the new IPO companies have experienced in initial trading, the new offerings are trading at lofty price/earnings multiples. For example, shares of Neway are trading at 45 times earnings at the current price. Shares of Zhejiang Wolwo Bio-Pharmaceutical Co Ltd. (300357), one of the companies that listed on January 21, have doubled from the initial offering price and are currently trading at 69 times earnings. Likewise, shares of Hangzhou Sunrise Technology Co. (300360) are trading at 32 times earnings and shares of Guangdong Qtone Education Co. Ltd. (300359) are trading at 75 times earnings.

The CSRC’s new rules are designed to improve the IPO process by moving toward a registration-based system, much like that which exists in the United States, where regulators merely ensure that a company meets listing requirements, rather than trying to judge whether a firm is able to stay profitable. Higher disclosure requirements will enable investors to make their own determination as to the future profitability of a company. Under the new rules, applications may take just two or three months, instead of several years. Moreover, the new rules make the IPO process more market oriented with investors determining the offering price and the companies seeking to list determining the timing of the offering.

In order to help prevent over-priced IPOs, the CSRC’s new rules include restrictions on controlling shareholders selling their shares for up to five years if the share price is below the IPO price. In the past, controlling shareholders had to wait three years. Other changes include allowing the original shareholders of a company planning a listing to sell their stake in the IPO as a way to increase the supply of shares that come to market. In order to increase a company’s options for raising capital, the CSRC is preparing a pilot program to allow listed companies to issue preferred stock.

MTD would like to wish all of its readers good health, prosperity, and success during the Year of the Horse!

No comments yet... Be the first to leave a reply!