Profits dampener for mainland IPOs

Data shows companies that listed last year had unexpectedly lacklustre earnings, which could trigger a regulatory tightening for new candidates

PUBLISHED : Thursday, 31 January, 2013, 12:00am
UPDATED : Thursday, 31 January, 2013, 5:20am

Mainland companies planning to float their shares on the A-share market have reason to feel apprehensive after reading the earnings forecasts of the firms that recently preceded them.

Data from information provider Hexin Flush Information Network shows firms that listed last year had unexpectedly lacklustre earnings for the year.

The rash of profit declines immediately following initial public offerings (IPOs) could prompt the securities regulator to tighten the procedures for reviewing companies hoping to raise funds from the market.

Nearly a third of the companies that launched offerings last year would report earnings drops, Hexin said. The finding was based on earnings forecasts from 124 newly listed firms.

Seven firms will report full-year earnings down more than 50 per cent from a year earlier.

The phenomenon could cast a shadow on the prospects for mainland offerings, which were suspended by the China Securities Regulatory Commission (CSRC) in early October to bolster investor confidence.

While the CSRC did not give a date for the reopening of the listings market, it may be deterred from restarting the vetting of fresh applications by concerns about the quality of listing candidates, investment bankers said.

They said it is likely that no applications will be heard before the end of the year's first half.

The CSRC has pledged to safeguard the interest of investors by allowing only solid firms to list.

A flood of listings in 2010 and 2011 dented the prices of existing stocks, and the mainland's key index was one of the world's worst performers in those years.

Profit declines shortly after the offerings were normally met with sharp falls in stock prices, causing investors heavy losses.

"The thorny IPO issue is still the biggest enemy to a bull run," Guotai Junan Securities analyst Shi Weixiang said.

About 900 applicants are lining up to raise funds on the mainland. They could drain liquidity from the buoyant A-share market, which has climbed 21.6 per cent since it hit a four-year low on December 3.

At the beginning of this year, the CSRC launched an unusual campaign, requiring auditors and underwriters to conduct in-depth checks on listing applicants and file a report by March 31. The campaign was seen as a clear message to investment bankers that they should withdraw listing applications if the candidates were not up to scratch.

As the regulator raises the threshold for firms seeking A-share offerings, it is trying to divert fundraising activities to Hong Kong. Last month, the CSRC said it would encourage more Hong Kong IPOs by lowering its earnings threshold in its preliminary reviews of mainland firms applying to list in the city.