Re­form in need of time to fix over­priced IPOs

Al­though pub­lic list­ings on the A-share mar­ket have been given the green light af­ter a long mora­to­rium, 2014 will be a tran­si­tion and learn­ing pe­riod, re­ports Emma Dai from Hong Kong

China Daily (Canada) - - BUSINESS -

Hav­ing re­sumed on the last day of 2013, the A-share mar­ket has seen the ap­proval of 51 new stocks in fewer than two weeks af­ter a 13-month freeze.

How­ever, fol­low­ing the Jiangsu Ao­saikang Phar­ma­ceu­ti­cal Co event, many planned list­ings have been sus­pended. The reg­u­la­tor’s an­nounce­ment on Wed­nes­day to step up scru­tiny and mon­i­tor­ing of the ini­tial pub­lic of­fer­ing process also cast a shadow over the re­form.

In the en­su­ing mar­ket uproar, an­a­lysts said real change takes time.

Late on Wed­nes­day night, the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion an­nounced through its Weibo ac­count that it has been look­ing into the process of IPO of­fer­ings. Apart from China In­ter­na­tional Cap­i­tal Corp Ltd, the ma­jor spon­sor of Ao­saikang, which post­poned its 4.05 bil­lion yuan ($669 mil­lion) list­ing be­cause its shares were con­sid­ered too costly, another 12 un­der­writ­ers, in­clud­ing Gu­osen Se­cu­ri­ties Co Ltd and Min­sheng Se­cu­ri­ties Co Ltd, are also be­ing checked.

In ad­di­tion, 44 in­sti­tu­tional in­vestors in­volved in off­line book-build­ing are be­ing tar­geted in the scru­tiny.

On Jan 12, the com­mis­sion re­it­er­ated its vow to strengthen su­per­vi­sion of IPO ac­tiv­i­ties.

“An IPO shall be sus­pended if the is­suer and un­der­writer use in­for­ma­tion other than that pub­licly dis­closed in the prospec­tus dur­ing a road­show,” said the stock mar­ket reg­u­la­tor in its no­tice. “In­vestors who are not ca­pa­ble of pric­ing in off­line sub­scrip­tions, or those who failed to of­fer rea­son­able prices, shall be black­listed by the Se­cu­ri­ties As­so­ci­a­tion of China and pro­hib­ited from book-build­ing in the up­com­ing list­ings.”

In ad­di­tion, the watch­dog has or­dered com­pa­nies to is­sue weekly risk warn­ings three weeks be­fore open­ing online sub­scrip­tions to re­tail in­vestors, if their price-toearn­ings ra­tios are higher than the av­er­age price-toearn­ings ra­tios of re­lated sec­tors in the sec­ondary mar­ket.

Fol­low­ing the com­mis­sion’s move, five com­pa­nies post­poned their list­ings on Jan 12.

Among them, He­bei Hui­jin Electro­mechan­i­cal Co Ltd and Bei­jing For­ever Tech­nol­ogy Co Ltd stepped for­ward and car­ried out online of­fer­ings on Wed­nes­day. The rest haven’t got a new timetable yet.

So far, among the 51 com­pa­nies the com­mis­sion has given the green light to for an IPO, only Ne­way Valve (Suzhou) Co Ltd an­nounced — on Thurs­day — that it is due to list on the Shang­hai Stock Ex­change on Fri­day, mak­ing the com­pany the first stock fin­ish­ing the list­ing process af­ter IPO ac­tiv­ity re­sumed in the A-share mar­ket. Drug­maker

Ao­saikang, a Nan­jing­based an­ti­cancer in­jec­tion maker, sus­pended its IPO on Shen­zhen’s ChiNext board on Jan 10, the day its online of­fer­ing was due to be­gin. “As the scale of the of­fer­ing and old share trans­fer were rel­a­tively big, the is­suer and ma­jor un­der­writer, China In­ter­na­tional Cap­i­tal Corp Ltd, de­cide to sus­pend the of­fer­ing,” said the com­pany.

Just one day be­fore, Ao­saikang an­nounced that it planned to is­sue 55.466 mil­lion shares at 72.99 yuan apiece. The sale would value the drug­maker at 67 times its 2012 earn­ings com­pared with the av­er­age 55.3 times for its peers listed on Shen­zhen’s growth en­ter­prise board. What’s more, 43.6 mil­lion stocks of the of­fer­ing are old shares re­leased from its ma­jor share­holder, Nan­jing Ao­saikang In­vest­ment Man­age­ment Co Ltd, which would have pock­eted 3.18 bil­lion yuan. The com­pany to be listed would have raised only 866 mil­lion yuan.

Al­though the com­mis­sion has de­nied any heavy-handed in­ter­ven­tion, it is widely be­lieved that Ao­saikang’s sur­pris­ing move was based on the reg­u­la­tor’s in­ter­ven­tion.

“The Ao­saikang IPO was stopped ob­vi­ously be­cause of its sky-high of­fer­ing price and out-of-range P/E,” said Kenny Tang, gen­eral man­ager of AMTD Fi­nan­cial Plan­ning Ltd. “In or­der to bring down the share price, the com­mis­sion al­lowed a re­duc­tion of the old shares to boost the stock sup­ply on of­fer. But the reg­u­la­tor’s ap­proach is not com­pre­hen­sive.

“How­ever, what’s dif­fer­ent this time is that the com­mis­sion in­ter­vened im­me­di­ately when they found things were wrong. That means they are se­ri­ous about bring­ing down is­sue prices. Rules that suit de­vel­oped mar­kets don’t nec­es­sar­ily suit China,” he said

“It’s not the right time yet. The re­form has to be car­ried out grad­u­ally. At this mo­ment, ad­min­is­tra­tive in­ter­ven­tion is still an ef­fec­tive tool.” He adding fur­ther moves from the au­thor­ity are ex­pected to fill the reg­u­la­tory loop­holes.

“The Ao­saikang sce­nario is an in­de­pen­dent event. It wouldn’t change the fact that, ul­ti­mately, the pric­ing power will be given back to the mar­ket,” said Chen Yuan­fei, chief an­a­lyst of the fi­nance sec­tor at Haitong In­ter­na­tional Se­cu­ri­ties Group Ltd.

“The sus­pen­sion of the Ao­saikang IPO looks like the com­mis­sion is eat­ing its words about lib­er­al­iz­ing the IPO mar­ket. But we are at a very

early stage of the change and there are bound to be re­lapses. The key is to im­prove the reg­u­la­tion sys­tem,” she added. “The re­form needs three to five years to be car­ried out. So in­vestors de­serve more time to ma­ture.”

On Dec 30, the eq­uity mar­ket watch­dog is­sued a pack­age of new IPO rules to kick off the A-share mar­ket re­form. The pack fea­tures stricter rules on in­for­ma­tion dis­clo­sure and em­pha­sizes the lib­er­al­iza­tion of the mar­ket. In ad­di­tion, it vows to bring down the is­su­ing prices and pro­tect the in­ter­ests of in­di­vid­ual in­vestors.

Fol­low­ing the new rules, the au­thor­ity re­sumed the IPO pipe­line, which had been stopped since Septem­ber 2012. In less than two weeks, up to Jan 9, the com­mis­sion ap­proved 51 list­ing ap­pli­ca­tions. This week, 33 com­pa­nies have been sched­uled to de­but. More than 700 other com­pa­nies are still in line for the green light.

“The IPO rule re­form is long-term pos­i­tive to the A-share mar­ket, be­cause the trend is now clear that the main­land cap­i­tal mar­ket will ap­ply a reg­is­tered sys­tem for list­ing,” said Ben­son Wong, part­ner of Price­wa­ter­house­Coop­ers Ltd.

“As the A-share mar­ket lib­er­al­izes, the av­er­age price-to-earn­ings ra­tios of IPOs will de­cline. We see the val­u­a­tion gap be­tween the main­land and Hong Kong stock mar­kets nar­row­ing now. Be­cause the A-share mar­ket tends to pro­vide sim­i­lar pro­tec­tion to in­vestors, and the sup­ply of new stocks is huge, the share prices of the two sides will get closer.”

An­a­lysts from Deloitte China also said they be­lieve the new rules will set­tle the over­pric­ing prob­lem of IPOs on the main­land stock mar­ket.

“One of the fac­tors be­hind the high list­ing price is the short­age of sup­ply. Be­cause China is a rel­a­tively closed cap­i­tal mar­ket, idle money has to be used at ev­ery op­por­tu­nity. New stocks are very at­trac­tive to peo­ple,” said An­thony Wu, China A-share cap­i­tal mar­ket leader of the na­tional pub­lic of­fer­ing group at Deloitte China.

“The reg­is­tered sys­tem will lead to a large amount of new stocks, which in turn can ease the pres­sure.”

It promised in the com­mis­sion’s Dec 30 rules that the au­thor­ity will make its de­ci­sion within three months af­ter an IPO ap­pli­ca­tion is filed. “That should sig­nif­i­cantly speed up the ap­pli­ca­tion process,” said Wu, adding there used to be no limit on how long the au­thor­ity took to de­liver re­sults.

“Small cases took roughly six months, and there was no sur­prise if big­ger caps had to wait for 18 months or more.”

Mean­while, the new reg­u­la­tion en­cour­ages ma­jor share­hold­ers of com­pa­nies on of­fer to re­lease old shares in or­der to make sure de­mands for new stocks are met.

“If there is over-sub­scrip­tion, the com­pany must of­fer more old shares. That can ease the pres­sure in the sup­ply of new stock,” said David Xian, an au­dit part­ner at Deloitte China.

Apart from that, un­der the new rules, the amount of new stocks re­tail in­vestors can sub­scribe to is linked with the val­u­a­tion of shares they own in the sec­ondary mar­ket. “In­di­vid­ual in­vestors will be less ac­tive in sub­scrib­ing to new stocks,” said Xian. “For those who used ar­bi­trage in IPOs with all their cap­i­tal, the good days are over. Now a large pro­por­tion of their cash is trapped.”

Dick Kay, co-leader of the na­tional pub­lic of­fer­ing group of Deloitte China, said that less par­tic­i­pa­tion by re­tail in­vestors in sub­scrip­tions will help to solve the over­pric­ing prob­lem be­cause in­sti­tu­tional in­vestors are more rea­son­able.

“Re­tail in­vestors take a more spec­u­la­tive ap­proach. They are not ca­pa­ble of pric­ing a com­pany. In­vest­ing in the eq­uity mar­ket re­quires a lot of re­search, which should be left to the pro­fes­sion­als,” he said.

How­ever, AMTD’s Tang said that Chi­nese in­sti­tu­tional in­vestors are not re­li­able part­ners in the re­form, ei­ther.

“The Ao­saikang event shows that the main­land mar­ket is full of short-sighted in­vestors. Even in­sti­tu­tions are eye­ing fast cash. That’s no good for sta­bi­liz­ing the val­u­a­tion of A shares. Peo­ple hoard small caps. Big names are left aside,” said Tang, adding the ma­tu­rity of a mar­ket de­pends not only on its reg­u­la­tion sys­tem but, more im­por­tantly, on the qual­ity of par­tic­i­pants.

“What the A-share mar­ket needs is longterm in­vestors,” he said. “It’s help­ful that the re­cent fi­nan­cial re­form raises insurance com­pa­nies’ ex­po­sure to the stock mar­ket. The IPO re­form also gives pri­or­ity to the So­cial Se­cu­rity Fund and pub­lic of­fer­ing funds in new stock sub­scrip­tions. In the fu­ture, the reg­u­la­tor should bring in more long-term cap­i­tal such as pen­sion funds to sta­bi­lize the mar­ket and build up con­fi­dence.”

How­ever, Haitong In­ter­na­tional’s Chen said that those who get burned learn fast. “The au­thor­ity should have al­lowed Ao­saikang’s IPO pro­ceed as planned,” she said.

“Some in­vestors just have to learn their les­son the hard way. There should be sev­eral oc­ca­sions when the mar­ket sees new stocks fall to the limit on their de­but. Only when peo­ple re­al­ize buy­ing new stocks is not risk­free will they start to be ra­tional about IPOs.” Con­tact the writer at em­madai@ chi­nadai­lyhk.com

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