Investors wary of China's listing reforms

Scepticism prevails ever since authorities said they would expedite the approval process and change the pricing mechanism in IPO market

PUBLISHED : Monday, 13 January, 2014, 12:46am
UPDATED : Monday, 13 January, 2014, 12:46am

While reforms to the public listing process on the mainland will introduce new rules and expedite approvals, we're going to have to wait another quarter before we can tell if this new system is as effective as claimed." said Ringo Choi, Asia-Pacific IPO leader for professional services firm Ernst & Young.

The statement is the typical feedback you get when you talk to people in the financial community, ranging from bankers to private-equity investors, who are extremely wary of the pace of reforms in the mainland's initial public offering market ever since the authorities said they would expedite the approval process and change the pricing mechanism.

Market participants clearly seem to be sceptical, especially after drug maker Jiangsu Aosaikang Pharmaceutical put its fundraising process on hold because of an unusually large chunk of old shares in the offering that attracted the attention of the China Securities Regulatory Commission.

But the market is divided on the rationale for the scrapping of the Aosaikang offering. Some are questioning whether the CSRC should have stepped in at all after having already given the IPO green light to the drug maker.

High-growth companies including technology firms and those with unique business models, they reason, can be priced much higher than the industry average and it should be left to investors to decide whether they want to take the risk.

In the Aosaikang case, the drug maker had planned to raise about 4 billion yuan (HK$5.09 billion) by selling 55.47 million shares, of which nearly 80 per cent of the entire offering, or 43.6 million, were old shares offered by its largest investor, raising worries about the investor cashing out of the company.

One of the problems is that the mainland stock market, driven by retail investors, is still rife with frauds, insider trading and questionable financial reports. Major shareholders often put shares on sale at unreasonably high valuations as access to funds is limited after the IPOs, with the lock-up period imposed on them being as long as two years on average. In Hong Kong, the average is a six-month lock-up.

Shares in Aosaikang were being marketed at a price-earnings ratio of 67 times based on 2012 earnings, much higher than its Hong Kong-listed peers such as the mainland's biggest drugs distributor Sinopharm and cardiovascular drug maker Sihuan Pharmaceutical, which are trading at a range of 19 to 23 times their earnings.