China's listing reform under scrutiny after six firms suspend IPO plans

Reform plans by securities regulator come into question after six listings are put on hold following higher than average PE ratios

PUBLISHED : Monday, 13 January, 2014, 2:23pm
UPDATED : Tuesday, 14 January, 2014, 1:13am

Six companies have suspended their IPO plans, embarrassing China's securities regulator and providing further evidence that a 15-month long effort to reform the new share sale mechanism on financial exchanges still faces hurdles and scepticism from investors.

Five firms due to list on the SME board and the startup ChiNext market in Shenzhen announced yesterday that they would delay their initial public offerings. Over the weekend, Jiangsu Aosaikang Pharmaceutical also put its listing on hold after its lofty offering price and high volume provoked public ire among investors, who were miffed at the inability of the regulator to curb such high-priced offerings.

The China Securities Regulatory Commission (CSRC) lifted a 15-month ban on offerings at the beginning of this year, reiterating that the reform mechanism would safeguard investors' interests and prevent issuers from excessively raising funds to dilute their existing holdings.

"The CSRC failed to live up to its promises of curbing elevated offering prices, high price-earnings ratios and large fundraising sizes," said UBS strategist Chen Li. "The reform did nothing to curb frothy IPOs."

Aosaikang was aiming to raise a combined four billion yuan (HK$5.1 billion) by offering 55.46 million shares at a price of 72.99 yuan a share, a level which meant its PE ratio stood at a lofty 67 times its earnings in 2012.

The average PE multiple on the ChiNext market stood at 56.7 yesterday, according to exchange data.

The CSRC was under heavy pressure to resume offerings, especially given the pent-up financing needs of many companies. This month about 50 companies were expected to launch on the market, and analysts said the number could top 80 each month from March to June as the CSRC was expected to fast-track fundraising approvals.

The regulator said the new reforms were aimed at a disclosure-based IPO system under which applicants were required to fully reveal information related to their earnings and operations while letting investors decide their market worth.

A flood of high-priced listings were blamed for a sharp fall in the A-share market between 2010 and 2011 as the new floats soaked up available investment funds.

Thousands of investors lost money after the debut listing of these companies.

On Sunday, the CSRC sought to make amends by announcing that companies planning to price their offer shares at a higher PE level than their peers traded on the exchange must postpone subscriptions by three weeks and publish repeated risk warnings.

"The CSRC is facing stern challenges after its loopholes in the reformed IPO mechanism were exposed," Zhang Qi, an analyst with fund consultancy Zero2IPO, said in a research report.

The regulator denied last Friday that it used administrative measures to order Aosaikang to delay its listing.

But investment banking sources said the CSRC was forced to put a brake on the fast pace of IPOs in order to maintain market stability.

The five companies that delayed their floats were scheduled to publish their final offering price and volumes yesterday. It is believed that their PE ratios exceeded the market average.