Across The Border

China’s IPO bonanza loses lustre as returns dwindle

New share listings in mainland China are no longer a guarantee of windfall returns as mainland authorities embrace reforms

PUBLISHED : Tuesday, 22 August, 2017, 10:41am
UPDATED : Tuesday, 22 August, 2017, 10:22pm

China’s initial public offering shares are losing their appeal.

Average returns from buying IPO shares have dropped by at least a third from earlier in the year, according to Guotai Junan Securities. Meanwhile, a gauge compiled by the Shenzhen Stock Exchange to measure the performance of new listings on the bourse fell to a record low this month.

A jump in the size of IPO share sales this year and record fines administered by the securities regulator to investors have crushed windfall returns from what was once among the world’s most profitable equity bets.

The China Securities Regulatory Commission has approved more new shares sales and stepped up its crackdown on market excesses. The developments follow President Xi Jinping call to let equity financing support more of the economy and prevent systemic risks in financial markets.

“Decreasing returns from IPO shares will become a norm in the future, with increased supply and regulatory scrutiny,” said Wu Kan, a fund manager at Shanshan Finance in Shanghai. “Exceptionally generous returns were previously built on not-too-fast supply. Now the premise is gone and the valuation of IPO shares fall.”

The values of IPO sales on the Shanghai and Shenzhen exchanges total US$23.1 billion so far this year, on track to exceed the US$23.8 billion raised for the whole of 2016, according to data compiled by Bloomberg. The number of new listings have risen to 301 this year, compared with 226 in 2016, the data showed.

While collecting 6.4 billion yuan (US$961 million) in penalties from speculators in the first half of the year, the CSRC also said it dealt with 16 cases of manipulating IPO share prices through multiple accounts that caused roller-coaster stock performances.

China’s IPO shares have historically been local punters’ favourites. The stocks typically soar on first-day trading, as China doesn’t implement a market-orientated mechanism of marketing the new stocks, requiring IPO shares to be priced below their market averages to make sure all the stocks will find buyers. That leaves decent arbitrage room for buyers to profit from selling newly issued stock on the secondary market.

Even after the debut surge, the momentum often continues in the following days or even weeks as they are targeted by speculators. The most frantic case was Baofeng Group, an online video provider that rivals Alibaba’s Youku Tudou.

The stock jumped by the exchange-imposed 10 per cent daily limit for a record of 29 consecutive days after its debut in Shenzhen in March 2017. At the peak, the stock surged 16 fold from the IPO offer price of 7.14 yuan.

The good days seem to be over for now. A gauge of Shenzhen-traded companies listed between 45 days and one year has shed 54 per cent over the past two years, touching its lowest ever level on August 11. Average returns from IPO shares dropped to between 100 per cent and 200 per cent in July from more than 300 per cent earlier this year, according to data from Guotai Junan.

Guizhou Transportation Planning Survey & Design Academe, Electric Connector Technology and Shanghai Daimay Automotive Interior are the three companies that delivered the lowest returns among IPO shares this year. The shares jumped about 70 per cent from offer prices before IPO buyers took profits.

Poor sentiment on small-cap shares this year has also dampened the enthusiasm for IPO stocks, with most of them being smaller firms, according to Li Jingyuan, managing director with Shanghai Bingsheng Asset Management

Institutional players have shifting out of smaller companies for large-caps as financial deleveraging prompts investors to seek companies with lower valuations and secure earnings. The ChiNext index of start-ups has dropped 6.8 per cent this year, trailing a 13 per cent gain in the CSI 300 Index of larger firms.

Since the start of 2016, there are five companies whose stock prices have already fallen below their IPO offer prices now, with four on the ChiNext board, according to Bloomberg data.

Among them, Qingdao Tianneng Heavy Industries, which started trading in November, recently closed at 30.30 yuan, compared with its offer price of 41.57 yuan, while Hangzhou Zhongya Machinery’s ended 7.5 per cent lower than its offer price during Monday’s session.

“There will be no above-average turns for IPO shares in the future,” said Wang Zheng, chief investment officer at Jingxi Investment Management in Shanghai. “Demand remains unchanged but there’s more and more supply.”