IPO backers forced to take up shares
The lead underwriters of China Communications Construction's 5 billion yuan (HK$6.2 billion) initial public offering have been forced to take up 102 million unsold shares after a lukewarm response to the world's biggest share sale so far this year.
This is the first time since 2005 that underwriters have to take up unsold shares in an initial public offering and may prod the securities regulator into taking the drastic action sought by critics to solve serious problems related to the ailing market.
BOC International and Guotai Junan Securities paid 551 million yuan for the 102 million shares at 5.40 yuan each, as the mainland's largest port builder set the price at the top end of the indicative range.
The port builder had cut the size of the offering by 75 per cent from its original target of 20 billion yuan.
According to a filing to the Shanghai Stock Exchange, the underwriters believed the firm's fundamentals could support a rally in its shares after their trading debut, which could see their price gain more than 30 per cent because of rosy earnings potential.
BOC International said the shares could reach 7.10 yuan while Guotai Junan expected them to top 7 yuan.
'The valuation of the stock is not questioned,' said West China Securities trader Wei Wei. 'The problem lies in the fact that investors are determined to shun new offerings regardless of their investment value.'
The port builder had to delay its share offering in July last year because of the bearish market.
Based on its estimated earnings for last year, a share price of 5.40 yuan translates into a price-earnings ratio of 7.68, the lowest in the history of the mainland market.
Before 2009, share offerings were all easy sales because prices were set artificially low, under the directive of the regulator, to facilitate their fund-raisings. The China Securities Regulatory Commission then reformed the pricing mechanism, which allows companies and sponsors to set prices according to market forces.
But high offer prices then saw millions of investors suffer heavy losses when the new stocks fell on trading. As a result Guo Shuqing, the newly appointed CSRC chairman, urged companies and investment banks to set reasonable offer prices after taking office in October.
The bid by the regulator to lower offer prices was also seen as an attempt to reduce the amount of funds siphoned off by new listings and hence boost the beleaguered market. However, investors hoped the CSRC would rather halt new listings or slow their approvals.
Previously, they noted, the CSRC would suspend new listings in a bear market to prop up falling stocks.
'The regulator is in a hot seat. On one hand, it wants to protect investor interest by limiting the number of IPOs. On the other hand, it has to consider the financing needs of IPO applicants,' Haitong Securities analyst Zhang Qi said.
Earlier this month, the CSRC for the first time released the names of 515 firms seeking to list on the mainland exchanges, a sign that it would not slow the approval procedure.