China IPOs: still not ready for prime time

Weak debuts for Galaxy Securities and Sinopec Engineering mean sentiment remains tepid for such IPOs, and could remain so through the end of 2013

Doug Young

Published: 10:29am, 23 May 2013

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Everyone is hailing the success of two massive China IPOs this week that seems to herald a new uptick in the moribund sector, with relatively strong debuts for offerings from Galaxy Securities (6681.HK) and Sinopec Engineering (2386.HK). But I'm going to go ahead and play the contrarian here by noting that these two offerings are hardly the success that many people desperately want to see, meaning it could still be months or even next year before we see real signs of life return to the market.

Let's start with Galaxy, China's seventh largest brokerage, whose shares rose as much as 11 per cent in their Wednesday trading debut in Hong Kong before finishing up 6 per cent at HK$5.62. While that rise looks respectable, it doesn't seem all that impressive when one considers that Galaxy had to price its shares at near the bottom of their indicated range, with a final pricing at HK$5.30.

What's more, the first-day closing price is still 17 per cent below the HK$6.77 price at the top end of Galaxy's previous pre-IPO range, meaning the shares would have tumbled in their debut if Galaxy had tried to price them more aggressively. Galaxy ultimately raised $1.1 billion from the offering, about 20 per cent less than the upper limit of what it previously hoped to raise - again highlighting the fact that this was hardly the stellar IPO that some are trying to claim.

If anything, the case for Sinopec Engineering looks even worse. The company's shares traded up as much as 8.6 per cent in the gray market to HK$11.40 ahead of their formal listing debut on Thursday. I suspect they will perform similarly or slightly weaker than Galaxy's in the regular trading day, meaning they could finish their debut session at around HK$11, about 5 per cent above their offer price of HK$10.50.

That finish would be about 16 per cent lower than the HK$13.10 at the upper end of the company's pre-IPO price range, again meaning the stock would have tumbled if the company had priced its offering more aggressively. Sinopec Engineering's IPO also raised far less than the company originally hoped for. It ultimately netted about US$1.8 billion from the offering, again about 20 per cent less than the top end of its original target of up to HK$2.24 billion.

Meantime, another offshore IPO that many were looking to as a bellwether of market sentiment has also suddenly gone silent, again indicating that the deal is probably meeting with tepid response. That deal had online retailer LightInTheBox make its first public filing more than a month ago for a New York IPO to raise up to a relatively modest US$86 million. If that deal ultimately goes forward, it would mark the first IPO by a Chinese company in New York in more than half a year.

But we've heard little or nothing about that IPO in the five weeks since LightInTheBox's initial public filing, which tells me the deal is probably meeting with weak demand. Thus it could ultimately raise well below the original US$86 million target and possibly even get scrapped completely.

This kind of weak performance certainly doesn't seem to merit the hype around the Galaxy and Sinopec Engineering IPOs, which would probably have been considered flops during the market's headier days. I seriously doubt this kind of performance will encourage lots of other companies to follow suit with more offerings in either Hong Kong or New York anytime soon. That means we may have to wait a while longer still to see the highly anticipated IPOs of China's two e-commerce leaders Alibaba and Jingdong, which may ultimately delay their offerings until next year unless the market suddenly improves.

Bottom line: Weak debuts for Galaxy Securities and Sinopec Engineering mean sentiment remains tepid for such IPOs, and could remain so through the end of 2013.

To read more commentaries from Doug Young, visit youngchinabiz.com

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