Caixin
Jan 18, 2017 05:47 PM
FINANCE

Accelerated IPO Process Reduces Profits From Going Public

(Beijing) — Investing in China’s initial public offerings (IPOs) used to be fairly lucrative, but profits have shrunk significantly recently, mainly because of the nation’s accelerated IPO approval process.

A China IPO used to be a hot ticket, partly because almost all the newly listed companies were purposely undervalued. Since 2014, in a move taken by the regulators to protect small investors in an unstable stock market, the pricing of IPO shares has followed an explicit rule set by the China Securities Regulatory Commission (CSRC) in its oral directives — it capped the valuation of new listings at no more than 23 times their earnings. That may sound high in some markets, but it’s less than half the average valuation for some industries.

Though the odds of getting an allocation of IPO shares were about as low at the lottery, the payoff could be generous. It was not uncommon to see prices of new IPO shares jump by the daily 10% regulatory limit for more than a dozen days in a row earlier in 2016.

But those days may be in the past.

Companies floated on the Shanghai stock exchange last week, including Peacebird Co., a fashion retailing company in the eastern city of Ningbo, and Shenzhen Kinwong Electronic Co., saw only three or four consecutive days of share price increases at the daily limit, according to data compiled by Wind, a financial information provider.

“The gains of betting on IPO stocks plummeted mainly because ever-more companies have recently gone public due to an accelerated IPO approval process controlled by the securities regulators,” said Wendy Liu, head of China Equity Research of Nomura International in Hong Kong. “As a result, bidding for an allocation of IPO shares appears not as lucrative as before,” Liu said.

China's securities regulator appeared to have started shortening the processing time for companies seeking to list on domestic stock exchanges since November in a bid to reduce a waiting list of more than 600 applicants and pave the way for reform of IPO procedures. Unlike many other markets in the world, it usually takes months and sometimes even years for a company to launch an IPO in China.

Wind data show that back in July, when 27 companies were approved by the CSRC to launch, the prices of new shares could reach seven times their initial IPO price after jumping for weeks.

But the increase dropped to about three times for new listings in December, when 51 companies got the nod, as new stock prices rose but lost momentum earlier than expected.

In the first two weeks in 2017, 24 companies have been granted the green light to float, which tripled the number in the same period in 2016, CSRC said on its official Twitter-like Weibo account.

As trading closed Wednesday, the share price of Peacebird had grown by 23% since its listing on Jan. 9. The price of Kinwong had increased by 33% after it floated on Jan. 6. But shares of Riyue Heavy Industry Co. Ltd, a heavy machinery maker based in Ningbo and listed in Shanghai on Jan. 4, have dropped 22% since its IPO.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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