Regulators put A before H and talk up mainland listings

PUBLISHED : Saturday, 24 November, 2007, 12:00am
UPDATED : Saturday, 24 November, 2007, 12:00am

'In the past, state-owned enterprises preferred to list in Hong Kong because the A-share price was low. But it's different now. The A-share market offers a very high price-to-earnings ratio. Investors are ready to pay a high price. With such a good A-share market, there isn't a reason not to list most of the shares at home.'

An anonymous China Securities Regulatory Commission official, China Securities News, 21 November 2007

But the facts slap that absurd statement in the face. Just consider the latest initial public offering announcement. This week, China Railway Group announced the price range of its share offering in Hong Kong, which is significantly higher than the price in its Shanghai offering.

So many officials preach about the higher valuations a company can get by listing in the A-share market before the H-share one - even if it is only a few days earlier.

So much propaganda is unleashed that this so-called 'A before H' offering arrangement will ensure that a company will issue more A shares than H shares and increase supply in the mainland.

The new arrangement, which has been forced on China Railway - and other state-owned enterprises to come - is no more than a plot to make sure players in the mainland IPO market, predominantly state-owned institutions, get a deeper discount than foreign investors.

Here are the facts. The A shares of the railway constructor are selling at four yuan to 4.80 yuan. The price range for its H shares is HK$5.03 to $5.78 (or 4.80 yuan to 5.52 yuan).

Contrary to the commission's spin, the company is not getting more by selling its shares in Shanghai instead of Hong Kong. In fact, it faces the risk of getting 13 per cent to 27.5 per cent less. That will translate into a 3.4 billion yuan loss in capital raised, given that the company is selling more shares in Shanghai than in Hong Kong.

No, the lower price in Shanghai is not because mainlanders responded coolly at the pre-marketing. It is the regulators.

First, the CSRC has ordered that China Railway's H-share price cannot be lower than that of its A-share price. That is what management and sponsors told a closed-door analyst meeting.

Since the H-share price is largely decided by demand and supply, an easy answer to the regulator's request is to sell the A shares cheaper. Any primary school pupil can figure that out.

But how much cheaper? Here again came the CSRC, which indicated that it wanted mainland investors to get the lowest price possible indicated by the sponsors, according to a banking source.

In short, while blabbering about the higher PE that a 'A before H' arrangement will offer, mainland regulators are in fact suppressing the IPO price at home.

Why all the fuss about the 'A before H' policy when issuers, such as the Industrial and Commercial Bank of China, have been doing successful simultaneous listings in Shanghai and Hong Kong before?

First, it's the money. It is all right to sell state assets cheap to nationals but not to foreigners. In the case of a simultaneous listing, the price is the same for everyone.

ICBC was stopped by the CSRC from raising its offering price, despite a very hot international demand, forgoing billions of dollars. This will not be the case in an 'A before H' arrangement. Foreigners will pay the market price while locals get a discount.

Second, there is pride. If you have read what the mainland media has said about 'the home market finally getting the control over pricing with the A-before-H policy', you will know what I mean.

It does not matter that China Railway had in fact done its pre-marketing with domestic and overseas investors at the same time, so that they had a better sense of the real market. Winning control from the foreigners always sounds good to the ear on the mainland.

The financial bureaucrats have every reason to keep the price down. The CSRC has been under persistent criticism that mainland investors are being ripped off by Hong Kong-listed state-owned enterprises which are pricing their A shares high.

The 'disappointing' performance of PetroChina added more fuel. The mammoth IPO recorded a 190 per cent gain on its first trading day in Shanghai and has dived more than 30 per cent since, hurting a lot of secondary market investors. There are now calls to cap the IPO price at 15 times PE, instead of the current 30.

At the same time, the A-share index has dropped by nearly 20 per cent in the past two weeks, so keeping the IPO market profitable is important for investor confidence and the health of many financial institutions.

The 'A before H' arrangement will ensure locals get a deeper discount, hopefully taking some heat off the bureaucrats.

That is perhaps what China Railway's chairman Shi Dahua meant when he said: 'The principle of our pricing is everyone finds it acceptable; and everyone fa cai (makes a fortune).'

Yes, everyone, in particular the regulators and mainland investors.

There is nothing wrong with the government selling its assets cheap to locals. The question is, who is benefiting from the arrangement? Is it the retail investors or the state-owned institutions that are privileged to get a lion's share of every IPO?