Tighter profit rules dim hopes of China IPO candidates

Hundreds of listing applicants may have to scrap their share offering plans after the regulator orders underwriters to do an earnings review

PUBLISHED : Wednesday, 20 February, 2013, 12:00am
UPDATED : Wednesday, 20 February, 2013, 3:13am

Renewed measures by mainland regulators to ease fund-raising pressure on the stock market are expected to force hundreds of initial public offerings to be called off if they fail to meet more stringent listing requirements.

As of February 7, 39 listing applicants had voluntarily withdrawn their plans, just a month after the China Securities Regulatory Commission ordered underwriters and auditors to re-examine the 2012 earnings of prospective listing candidates.

The regulator asked the underwriters to file reports of their re-examinations before March 31.

Investment bankers said more than 100 applicants could terminate their share-sale plans in the coming months as a result and seek alternative fund-raising opportunities.

The latest move by the regulator follows its suspension of all listing approvals in October last year, pending in-depth checks ordered on the nearly 900 applicants by all underwriters and auditors. No share offerings have been approved since then.

The moves are seen as an attempt to solve the so-called "quake lake" of listing applications that has been accumulating on the market, where at the last count 873 companies had lined up to launch share offerings.

It will be a waste of time for those companies if they stick to their IPO plans ... The in-depth checks were originally designed to expel a large number of listing applicants

The benchmark Shanghai Composite Index was among the world's worst performers in the past three years due partly to a flood of initial share sales that drained liquidity out of existing holdings.

The CSRC has not officially announced that it is raising the listing threshold and tightening review procedures. But its latest insistence that underwriters should re-examine the earnings of listing candidates had been interpreted as a clear signal that firms reporting profit declines last year would not be eligible, said two investment bankers.

Analysts estimated up to 40 per cent of the 332 start-ups applying to list on the Nasdaq-style ChiNext market in Shenzhen would show earnings declines last year.

"It will be a waste of time for those companies if they stick to their IPO plans," said a Beijing-based source close to the CSRC. "The in-depth checks were originally designed to expel a large number of listing applicants."

Even if the candidates meet the listing requirements, they must also convince the regulator that they can sustain earnings growth in the next few years to secure approval.

CSRC chairman Guo Shuqing has proposed embarking on a disclosure-based IPO system, under which the regulator can relinquish its responsibilities for assessing a firm's earnings outlook. But a lacklustre market deterred the reform-minded chairman from implementing the system, which is considered a common practice in Western markets.

The five-month listing drought since the regulator suspended new initial public offerings has helped drive the main gauge of share prices up 16.6 per cent.

The regulator has not given an exact date to reopen the listing market, but investment bankers believe the suspension will not be lifted until the second half of this year.

The CSRC has encouraged applicants to scrap their local plans and turn to the Hong Kong stock exchange to raise funds instead.