Equity capital markets: China IPOs ride high despite regulator’s action

The recently reopened Chinese IPO market was dealt a blow last month as at least five companies pulled plans to list at the last minute in response to a statement from the stock market regulator saying it intended to step up supervision of IPOs.

The pulled deals come as the China Securities Regulatory Commission (CSRC) launches a probe into several underwriters and institutions as part of its efforts to stamp out the damaging and widespread practice of setting artificially high share prices for stock offerings.

That the companies responded by pulling their offerings demonstrates how careful the securities regulator must be not to alienate companies before they go public as it seeks to build the market back after its longest ever drought, lasting 14 months.

The CSRC has said that its reforms, first unveiled in November, are designed to put power into the hands of investors and take it away from regulators and issuers. It says it wants to complete a move towards a registration-based system for stock offerings and away from its current approval-based system.

The process is bound to be gradual, but eventually it is hoped that markets and investors will decide pricing and a fairer, more representative market will result.

Although the pulled offerings are cause for some concern, other companies clearly believe regulators are in earnest when they stress their seriousness about changing the market for the better.

China’s first new listing since November 2012 – Neway Valve – made its debut last month in Shanghai. On its first day of trading, the stock rose by 43%, giving encouragement to the other companies, now numbering more than 700, that are lining up to follow. It did this despite pricing at the high end of its indicative range.

The largest deal in the pipeline already to gain approval to list from regulators is coal producer Shannxi Coal.

Asia Pacific IPOs account for 88% of overall IPO deal activity this year to date, according to Dealogic, with 67 deals raising a combined $8.8 billion. Both activities and volumes are at record year-to-date levels following the lift on the Chinese A-share IPO ban.

With the resumption of Chinese A-share IPOs, mainland China leads the exchange nationality ranking with $4.8 billion via 45 deals.

The average current return for mainland China-listed IPOs priced this year is 41%, compared with an average of 31% for global IPOs in 2014 so far.

Meanwhile, in Hong Kong, Asia’s richest man, Li Ka-Shing, was again in the news as he raised $3.1 billion through the IPO of Hong Kong Electric.

HK Electric Investments, the investment trust controlled by Power Assets Holdings, sold an allocation of 4.43 billion shares at $0.70 each, at the low end of the indicative price range.

The deal is Hong Kong’s largest since China Everbright Bank raised $3.2 billion late last year .

Li’s conglomerate is also carrying out what it terms a strategic review of AS Watson, its entire retail and manufacturing arm, in a deal that might raise much more and could be just the sort of multi-billion dollar deal that Hong Kong bankers are waiting for.

Alongside ParknShop, AS Watson is made up of several other stores in the personal-care sector including the Watsons, Superdrug and Kruidvat chains. An IPO, one of the possible results of the review, might value AS Watson, which in total has about 11,000 stores across the world, at upwards of $20 billion and an IPO could raise up to $6 billion.

So far this year, investor sentiment towards Hong Kong IPOs appears to be good. Magnum Entertainment Group became the first nightclub operator to go public in Hong Kong and did so successfully, trading at more than double its offer price on its first day.

The stock jumped as high as HK$3.20 ($0.41), up from its offer price of HK$1.50. Individual investors flocked to the deal and the offer was one of the most oversubscribed to take place in Hong Kong.