Curtailed markets drive valuation
China’s over- the- counter ( OTC) stock exchange reached a notable milestone last week, when a private car services provider, in business for just one year, made its trading debut with a hefty valuation of more than 40 billion yuan ($ 6 billion). The impressive valuation for Ucar extended a trend this year that has seen new listings explode on the Beijing- based National Equities Exchange Quotation ( NEEQ) system, often called the New Third Board.
There are a number of factors behind this dynamite debut, most of which are a by- product of the sharp slowdown in traditional IPOs on China’s more mature stock markets, like Shanghai and Shenzhen, due to regulator concerns about market volatility. That same conservatism has prompted a growing number of companies to seek public listings by injecting their assets into already trading shell companies, again creating distortions and chaos in the market through a process known as backdoor listings.
Attempts by the stock regulator to stabilize the market are understandable, especially after a huge sell- off at the start of the year that prompted an indefinite postponement of much- needed reform in the IPO process.
But as the booming number of NEEQ offerings and backdoor listings show,
companies in need of funding will keep looking for alternative ways to achieve their goals which could damage capital markets in that process. Accordingly, the regulator would be well advised to lower its interference and let free markets play a greater role in the regulation of capital raising, even if that means short- term volatility as markets adjust to new conditions.
Ucar was founded early last year as an affiliate of Car Inc, one of China’s leading car rental companies, that is listed in Hong Kong. Despite its late arrival to the private car services game, Ucar is hoping to play in a crowded field that includes the far larger Didi Chuxing and Uber, as well as mid- sized companies like Yidao.
With that in mind, Ucar surprised many last week
when it not only became the first in the car- sharing market to become publicly listed, but did so on the NEEQ and attained a hefty valuation in the process. The company is worth 41.8 billion yuan, based on its share price after the listing, making it the second largest company on the NEEQ, even as it posted a 3.7 billion yuan loss last year.
Ucar is notable for its valuation, since the NEEQ is typically designed to host much smaller companies. But its choice to list on that market, which is closed to most ordinary investors, is not unusual given the current climate.
The NEEQ now hosts nearly 8,000 companies, a number that has more than doubled since last October. In this month alone, the board added a staggering 164 companies, including 14 that began trading on Monday. The NEEQ’s total listings are more than double the number traded on all of China’s three other main exchanges combined, including 1,153 on the Shanghai Stock Exchange, 1,787 on the Shenzhen Stock Exchange, and 516 on the NASDAQ- style ChiNext.
The explosion of listings on the Beijing- based market is no coincidence, since the China Securities Regulatory Commission ( CSRC) sharply curtailed all other channels for public listings this year, following a massive sell- off that saw the main Shanghai index lose about a quarter of its value in January. Since then the market has stabilized, though the index is still down about 15 percent for this year.
In response to the volatility early in the year, the CSRC has allowed just 61 A- share offerings, which have raised 28.8 billion yuan, in the first half of 2016, down 67 percent and 80 percent, respectively, from a year earlier.
This huge slowdown has not only sent companies hunt- ing for funds on the NEEQ, but also led to a brief surge in backdoor listings earlier this year on the main stock exchanges. The regulator has slammed the brakes on such backdoor offerings, rightly worried about market distortions and other profiteering that comes with such a lightly regulated process.
True financial markets can be scary in their uncertainty, volatility and reflection of real economic conditions that are not always rosy and upbeat, but the CSRC’s attempts to extinguish that uncertainty and volatility are ultimately hurting China’s financial markets. Its efforts create distortions that result in growing financial pressure that will need to be released sooner or later.