China’s IPO flops from vaccine maker to retailer show growing pain as investors get a taste of listing reforms

·4-min read

Some things have changed in mainland China’s initial public offerings (IPOs) and investors who are used to reaping outsized gains from such bets should take note and be prepared to stomach instant losses.

Nine stocks ended below their offer prices on their first day of trading in Shanghai and Shenzhen exchanges over the past three weeks. The worst of the lot is vaccine maker Liaoning Chengda Biotechnology, whose stock crashed 27 per cent. None of the more than 400 debutants this year that came before the nine had suffered such embarrassment.

The losses are the result of a two-prong measure introduced in August by both stock exchange authorities covering tech and start-up companies. First, by encouraging IPO subscribers to bid for shares at higher price-multiples, and second, by cracking down on underpricing that regulators blamed for upsetting market mechanisms.

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Investors can now wield more pricing power in the market in which companies raised more than 465 billion yuan (US$72.9 billion) from IPOs so far this year. That is a further boost to the registration-based system introduced in 2019, by waiving a cap of 23 times price-earnings on IPOs. The unwritten PE limit, however, still applies to companies seeking to list on the main boards.

“IPO subscription is no longer a risk-free deal,” said Lin Jin, an analyst at Shenwan Hongyuan in Shanghai. “Investors will need to strengthen research on stock fundamentals and be more serious in pricing. Institutional investors will need to reflect more of their professionalism and rationale in bidding.”

Liaoning Chengda Biotechnology, which makes rabies vaccine from its base in northeastern city of Shenyang, sank 27 per cent on October 28, after selling shares at 54 times earnings, versus the industry average of 38 times. Rumere, a clothing retailer, slumped 13.2 per cent on the same day.

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More companies could suffer the same fate as part of the growing pain, as China’s US$12.3 trillion stock market matures and reflects some of the characteristics in more established regions.

So far, only 2.1 per cent of the 426 mainland IPOs this year have flopped, according to Bloomberg data. In contrast, 35 of the 85 IPOs in Hong Kong, or 41 per cent, fell on the first day of trading, up from 30 per cent during the 2018-2020 period. This year’s biggest loser, Unity Enterprise Holdings, sank 42 per cent on its March 31 debut.

“The flops will prompt institutional investors to improve their pricing power and heed the stock fundamentals,” said Zheng Jiawei, an analyst at Shanghai Securities. “By doing so, IPO pricing will be on the path to becoming more market-oriented.”

The first-day losses have had an unsettling impact on some investors. They rejected successful bids for 509,000 shares in the IPO of Shenzhen Qiangrui Precision Technology earlier this month. The 2.8 per cent “abandon rate” is the highest since the IPO registration system was introduced in 2019. The stock surged 48 per cent in its November 10 debut.

The jitters are understandable. The average gain from owning one lot of IPO shares currently stands at 2,340 yuan, a 90 per cent drop from the level before the new rules came into effect in August, according to Lin at Shenwan Hongyuan. The maximum loss may even reach 15,000 yuan, she said.

“Market-based pricing is an important step in the reform of the registration system,” said the Securities Daily in a commentary last week. “Given the current result, that is more in line with international practice. Shrinking returns from new shares and breaching offer prices will become more frequent.”

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