China’s IPO market is set for a comeback in the New Year as a ban on IPOs on the mainland is lifted in January. But investor participation cannot be taken for granted, says Chris Laskowski, chief operating officer for corporate and investment banking at Citi in Hong Kong. With new guidelines introduced by China’s Securities Regulatory Commission (CSRC) – the first to be introduced following China’s detailed blueprint of reform following the Third Plenary Session in November – the aim is to streamline China’s IPO market by moving towards a US-style registration-based system and increase market forces in pricing.
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| Chris Laskowski, Citi |
“There are still 760 companies pending approval, even though 260 withdrew their applications following the shutdown of the IPO market in October 2012. With the new regulatory framework, the CSRC expects around 50 to 60 companies to list domestically before the Chinese New Year [January 31],” says Laskowski.
As many as 11 companies have already received approval to list in Shanghai in Shenzhen, including industrial valve-maker Neway Valve and household-appliances manufacturer, Guangdong Xinbao Electrical Applicances Holdings Company.
“I’m not sure if this really marks the return of the Chinese IPO market. We will have to wait to see if investors are willing to engage following the regulatory changes,” says Laskowski. “But from now on, any issuers that don’t comply with higher regulatory requirements and those that are valued too high will be forced to buy back all of their shares. This would act as a deterrent to some fraudulent issuers and will help clean up the market.”
For example, if major shareholders intend to sell their shares after the post-IPO two-year lock-up period, they must sell them at a price higher than the issue price, and if the price of an IPO falls below its issue price for 20 consecutive days within six months of the issue, the two-year lock-up period will be extended by at least six months.
The CSRC will also streamline the application process from nine months to three months through a gradual transition.
“This is good news for the domestic IPO market and will be welcomed,” says Laskowski.
In 2012, more than a third of new issues in China saw a decline in profits within the first three quarters of their listing. In response, regulators shut down China’s IPO market in October 2012 in a bid to clean up the saturated market, boost investor confidence and curb the issue of overpriced stocks on the mainland. Hundreds of IPOs were left waiting for the market to reopen.
“There is a rumour that the backlog will be cleared up within the next year, but this would entail a very aggressive strategy,” says Laskowski.
Hong Kong reaping the benefit
In some cases, Beijing actively encouraged companies to go to the H-share market because of the backlog. Laskowski adds: “There have been some Chinese corporates that have decided to turn to the H share market in Hong Kong since the IPO market on the mainland came to a halt, but this also takes time as corporates need to restructure their issues and comply with regulations in Hong Kong.”
China Cinda Asset Management, a bad-debt investor, floated a $2.5 billion offering on December 12, attracting more than $65 billion in demand.
According to data compiled by Bloomberg, shares of Cinda closed at HK$4.50 in Hong Kong, 26% above the original IPO price, marking it as the biggest first-day gain of an IPO of at least $1 billion in the region since Chinese hypermarket operator Sun Art Retail Group Ltd’s debut in July 2011.
China Everbright Bank – China’s 11th-largest bank in terms of assets – followed Cinda to Hong Kong, raising $3 billion on December 20 in the country’s biggest IPO this year. But shares fell slightly by 0.8% in its Hong Kong trading debut on the first day on concerns that rising bad debts might influence the outlook for Chinese banks.
Both IPOs had heavy take-up by cornerstone investors. For Cinda, 10 cornerstone investors put in a combined $1.1 billion in the IPO, including Oaktree Capital Management Ltd, the world's largest distressed-debt investor; New York-based Och-Ziff Capital Management Group LLC, which has a strong focus on distressed debt; China Life Insurance; and Norges Bank Investment Management, Norway's sovereign-wealth fund.
Some $1.74 billion of shares were sold to 19 cornerstone investors before the Everbright IPO was released to retail investors. Cornerstones included Canadian insurer Sun Life Financial and American insurer Prudential Financial.
While the return of cornerstone investors might boost confidence for retail investors, encouraged by the presence of blue-chip companies in the equity markets, Laskowski highlights that the return of cornerstone investors to Hong Kong might be a sign of weakness.
“A healthy IPO market doesn’t need cornerstone investors. Cornerstones end up setting the price, usually pushing the price downwards, which limits the issuer from better price discovery up the range,” he says. “But on the other hand, cornerstones are always going to be looking to push the price downwards because they are tied into the issue for longer.”