IPO resumption adds to bearish mood for equities

Investors opt to stay on sidelines as the CSRC gives nod to 11 listing hopefuls to raise 21b yuan

PUBLISHED : Monday, 06 January, 2014, 12:28am
UPDATED : Monday, 06 January, 2014, 12:28am

Just how much can the upcoming initial public offerings raise in the struggling stock market on the mainland?

Last week, Beijing officially opened the floodgates for new share flotations after a 15-month hiatus by giving the go-ahead to 11 companies, which are expected to raise a combined 21 billion yuan (HK$26.7 billion).

Investment bankers predicted restarting listings could lead to 250 billion yuan of deals on the A-share market this year. But not everyone is convinced as confidence remains low and outlook uncertain in a stumbling economy.

The Shanghai Composite Index shed 6.7 per cent last year even though listings remained suspended to bolster investor confidence. The key indicator finished last week at 2,083.14 points, more than 65 per cent shy of its record high in October 2007.

The resumption of listings in a flagging market is seen by retail investors as a high-wire act and many say they would rather stay on the sidelines.

"New shares are always the 'enemy within' and it was the main reason why investors lost money on A shares earlier," said Dong Jun, a Shanghai-based hedge fund manager. "There can be no IPO bonanza unless the market turns bullish."

The China Securities Regulatory Commission claims to have reformed the old listing mechanism to protect retail investors, saying it will embark on a disclosure-based system. The new format would require all listing applicants to fully publish information about their finances and corporate governance to enable investors to decide their worth.

These moves are aimed to curb frothy offer prices of the past that would often leave investors high and dry after debuts, when the stocks would plunge.

Earlier, offer prices were set through "offline subscription", when institutional investors would bid for a tranche of shares earmarked for them.

The CSRC says the old system of price consultation encouraged unscrupulous behaviour as some brokerages and mutual funds would artificially bid up the shares to unreasonable levels to benefit issuers and underwriters.

"The reformed system isn't enough to safeguard retail investors' interests," said Liu Jie, an individual investor. "Detailed information about companies' earnings will be difficult for us to understand in any case. We have to be prepared for a further slide on the market."

Analysts said the quality of the first batch of 11 listing hopefuls were not solid either, given their shaky histories. Guangdong Xinbao Electrical Appliances, for example, has been reporting flat sales in past years, with earnings growth mainly driven by government subsidies.

"The need to enhance listed companies' performance and make them give more dividends has become mere official platitudes," said Dazhong Insurance fund manager Wu Kan. "Unfortunately, the overall quality of publicly listed firms is not satisfactory."

The listing suspension since October 2012 has resulted in huge pent-up financing demand from mainland companies as small firms have been grappling with a worsening business environment because of dwindling exports and limited credit from banks, which prefer to lend to state-owned entities.

The Shenzhen Stock Exchange told a closed-door meeting recently that it would fully open the listing market this year to let small firms raise much-needed capital.

Unlike its foreign counterparts, the CSRC is tasked with maintaining market stability as millions of retail investors use their savings to bet on stocks on the mainland. A fresh equity influx is set to exacerbate the weak market, making it more volatile.

The resumption of listings has come as bad news for many. Investors are complaining that the market is not ready for more new shares while companies have begun to roll back their listing plans because of weak sentiment. China Postal Express & Logistics shelved its 10 billion yuan flotation last weekend.