China’s market for initial public offerings is the hottest it’s ever been, thanks to the securities regulator.
The 62 new stocks that have completed their first month of trading this year soared 420% on average in the span, the steepest such rally on record, data compiled by Bloomberg show. For a clue as to why: the average size of this year’s offerings has dwindled to $88mn, the smallest since 2005.
While huge returns on mainland IPOs aren’t new, the numbers are getting even more eye-watering as the China Securities Regulatory Commission (CSRC) seeks to stabilise the nation’s $6.1tn equity market. Officials asked arrangers and companies to limit their deal sizes in the first half to avoid an oversupply of shares, according to people with knowledge of the matter, and a proposed registration system that would have given firms more flexibility on IPO pricing and timing has been delayed. The Shanghai Composite Index is down 16% in 2016, one of the world’s biggest declines.
“Regulators are carefully watching and testing market reactions as they approve IPOs,” said Dai Ming, a money manager at Hengsheng Asset Management Co in Shanghai. “They tend to tighten approvals when the market slumps and release more deals when sentiment improves.”
More than 800 companies have filed IPO applications and are waiting for approval, according to the CSRC’s website. The 78 completed sales this year compares with 219 in all of 2015, and the value of the deals is about a quarter of the 2015 amount, Bloomberg data show.
Wuxi Honghui New Materials Technology Co was one of the lucky ones, raising $39mn in June. The shares soared 553% in their first month on the Shenzhen exchange, and are now up 580% from their IPO price. The company is typical of Chinese IPOs in that it priced at a multiple below the market average - nearly all initial shares sold in the past two years were valued at less than 23 times profit, data compiled by Bloomberg show. Wuxi Honghui’s listing valuation of 22.98 times earnings compares to an average multiple of 43.3 for firms in the chemical products industry, the company said in a June 17 filing.
The stock climbed 2.2% at the close, while the Shanghai Composite added 0.1%. “Investing in A-share IPOs is highly profitable because regulators keep prices low,” said Hao Hong, chief strategist at Bocom International Holdings Co in Hong Kong.
For the 13 stocks that started trading last month, the average chance for a retail investor to be allocated any shares in an offering was 0.04%, data compiled by Bloomberg show.
The CSRC has been signalling a tougher stance on letting companies list in China, warning brokerages last month to improve their standards when helping clients raise money. The regulator is also said to be considering measures to curb the flow of overseas-traded Chinese companies seeking backdoor listings on the mainland.
As the market stabilises, the CSRC is set to approve bigger deals for the second half, the people familiar with the matter said. China Film Co has raised $628mn and is waiting for the regulator’s green light for a debut slot.
Bank of Jiangsu Co started trading August 2 after raising $1.1bn in the biggest IPO this year. The stock has surged 74% from its offer price through Thursday, taking its valuation to 1.7 times the book value, the highest among lenders listed in China.
Bank of Jiangsu was the first A-share banking IPO since August 2010, data compiled by Bloomberg show. Lenders that received CSRC’s initial approval more than six months ago and are still waiting for a listing slot include Bank of Hangzhou Co, Bank of Shanghai Co, Jiangsu Jiangyin Rural Commercial Bank Co and Bank of Guiyang Co.