China’s initial public offering shares, traditionally a sure-fire bet for investors looking to make a quick buck, have been losing their lustre, with some even generating losses on the first day of trading.
Mainland Chinese IPO shares, which are usually massively oversubscribed in the primary market, typically ensure a 44 per cent gain on their debut as their price rockets up to hit the ceiling put in place by the exchange watchdog.
The main reason for their early gains is that nearly all such shares are floated at a price of no more than 23 times earnings, under guidelines designed to make sure every deal is successful. Although the price cap is not official, it is an unwritten rule well known to stockbrokers and issuers, and eagerly enforced by regulators.
But the trend is showing signs of unravelling as market sentiment turns shaky, and as the regulator increases the supply of new stocks and pushes for a more market-based mechanism for pricing the shares.
In the past month, cases of IPO flops have been on the rise.
Luoyang Jianlong Micro-Nano New Materials, which began trading on the new technology board in Shanghai early this month, fell 2.2 per cent below the offer price on its first day of trading, making it the worst-performing debutant in seven years.
China Zheshang Bank rose less than 1 per cent on its debut last month and dropped below its IPO price the following day. Postal Savings Bank of China, the mainland’s biggest new listing in five years, is struggling to trade above the offer price since its listing this month.
“In general, it shows weak market sentiment and liquidity flow,” said Hong Hao, managing director at Bocom International Holdings in Hong Kong. “It’s also related to the quality of the recent listings.”
The benchmark Shanghai Composite Index has been stuck in a 200-point trading range for the past two months as concerns about faltering economic growth keep investors on edge. Trading volumes were light, with the value of shares that changed hands only about a third of the 1 trillion yuan (US$142.8 billion) in the early part of the year.
Even so, the regulator has been increasing the supply, further eroding sentiment. The China Securities Regulatory Commission has approved 200 companies for listing this year, compared with 105 in 2018, according to Bloomberg data.
Planned reforms of IPO rules almost certainly will not improve the prospects of debutant shares. As the regulator trims its role of underpricing IPOs, investors must be accountable for judging their intrinsic values, according to Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai.
On the Nasdaq-styled Shanghai Science and Technology Board, or Star Market, the regulator has completely waived the unwritten rule of IPOs being sold at a maximum 23 times earnings and imposes no limits on how much new shares can rise or fall in the first five trading days. Unprofitable companies are allowed to list on the board and a more market-based registration system has been implemented for vetting applications.
The Shanghai Stock Exchange bases its approvals on requirements of information disclosure rather than the quality and growth outlook of applicants. The Star Board is inaccessible to most retail investors because it has a high threshold for minimum assets, making excessive gains of IPO shares less likely.
Currently, 76 companies trade on the Star Market, with about 16 per cent of them below their IPO prices.
“Once institutional investors sense that IPO prices are too high, they immediately sell in the secondary market and that means IPOs are not risk-free investments any longer,” said Dai. “The registration system will make the market more and more efficient. Investors will make the judgment on their own and pricing will be market-based.”
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