China’s IPO approvals nosedive as regulator raises review threshold
The CSRC is giving a bigger priority to accuracy and authenticity of corporate disclosures when vetting IPO applications
It has been a week of rejections where China’s securities regulator would have set a record of vetoing companies seeking to list.
The new listing committee under the China Securities Regulatory Commission (CSRC) rejected six out of nine firms seeking initial public offerings (IPO) on the mainland’s stock exchanges in three review meetings this week, according to the vetting results posted on the regulator’s website.
The 33.3 per cent approval rate is sharply lower than the average 77.5 per cent so far this year, and the 89.8 per cent for the whole of 2016, according to data from Shanghai-based brokerage Shenwan Hongyuan Group.
While President Xi Jinping stressed the need to raise direct financing to serve the real economy in his work report to the national party congress last month, the securities regulator is quietly raising the bar for letting companies sell new stocks on the equity market amid a twofold increase in IPO shares this year.
“Earnings are not the key problem,” said Lin Jin and Peng Wenyu, analysts at Shenwan Hongyuan.
“The major problems for the rejected companies lie in earnings sustainability, internal controls, abnormal accounting numbers and rational use of IPO proceeds.”
In Tuesday’s review meetings, the listing committee disapproved the applications from six companies, including gaming company Tap4fun and Shennong Agricultural Industry Group.
The committee questioned Tap4fun for its unlicensed internet games, massive cross-border capital flows and wild swings in research and development expenditure. Shennong Agricultural was found to have problems in raw material procurement and differentials in sales prices and gross margins, the CSRC said on the website.
The securities regulator is giving a bigger priority to the accuracy and authenticity of corporate disclosures in vetting IPO applications. China is preparing to transition to a more western-style registration system for first-time share sales, in which regulators are not responsible for judging the values of IPO shares and investors have full say in pricing.
Most of China’s IPO shares are now universally sold at 23 times earnings on unwritten rules from the CSRC to ensure they all find buyers. Unsurprisingly, IPO shares would surge once they hit the secondary market to narrow the valuation gap with their listed peers.
The listing committee, which took on its duty last month, is more than twice the size of the last one. It consists of 42 full-time members, mainly from the CSRC and its regional branches as well as the stock exchanges, and 21 part-time members. That compared with a total of 25 members for the last committee.
The new committee has convened 10 meetings since its creation, delivering a 55.6 per cent approval rate so far against 81 per cent from the preceding one, according to Shenwan Hongyuan.