China stock market

China’s IPO shares set to become worst performers for a second year on increased supply and surveillance

Index of new listings on the Shenzhen exchange has retreated 32pc so far this year, as value of IPO shares rises almost 40pc from 2016 and the regulator ratchets up efforts to rein in speculation in small-caps.

PUBLISHED : Monday, 11 December, 2017, 7:16am
UPDATED : Monday, 11 December, 2017, 7:16am

China’s initial public offering shares are on track to become the worst-performing sector this year, as the regulator speeds up new share supply and increases curbs on speculations on new listings.

An index of new listings on the Shenzhen Stock Exchange has slumped 32 per cent so far, heading towards becoming the biggest decliner among the nation’s stock gauges in 2017. Its performance is a stark contrast to a 6 per cent gain on the benchmark Shanghai Composite Index and a 25 per cent advance on the SSE 50 Index of big-cap companies.

While increased supply of new stocks weighs on the sentiment on IPO shares, the escalating crackdown against manipulation by the China Securities Regulatory Commission has also deterred local traders from speculating on what used to be their favourite wagers. New listings are usually small-caps firms prone to rampant manipulation due to their relatively small amount of free-floating shares.

“For this sector, supply exceeds demand, so the overall valuations are going down,” said Wang Chen, a partner at Xufunds Investment Management in Shanghai. “There also could be some regulatory window guidance on mutual funds and brokerages not to participate in IPO speculations. We’d be very cautious about the sector.”

The index of IPO shares, which covers Shenzhen-listed companies that trade between 45 days after their debuts and one year within listings, is set to post a second straight annual loss after it dropped 21 per cent in 2016.

The securities regulator has been approving IPOs at a faster pace this year as direct financing is held as a prioritised means of fundraising in China’s ongoing transformation of its economic structure and state-owned enterprise shake-up. A total of 208 billion yuan (US$31.4 billion) has been raised from IPO sales on the Shanghai and Shenzhen exchanges so far this year, an increase of 39 per cent from the previous year, according to data compiled by Bloomberg.

We’d be very cautious about the sector
Wang Chen, Xufunds Investment Management

Caitong Securities tops the list of 415 companies that sold shares for the first time this year, raking in 4.09 billion yuan from its offering, the data showed. The stock is now down 29 per cent from its high after debuting in late October.

The regulator has also stepped up efforts to rein in excessive speculation as the stock market slowly recovers from a crash that wiped US$5 trillion off the value of mainland shares in 2015.

The most notable intervention involved the trading of BGI Genomics’ IPO shares. The gene researching and testing company had to suspend trading three times after it went public in July, due to wild swings in stock prices. The shares have fallen 13 per cent from their all-time high, but still maintained a 10 fold jump from its debut close.

Institutional investors’ switching out of small-caps and into big companies this year has also dampened enthusiasm for IPO shares. The ChiNext index of start-ups in Shenzhen has fallen 8.7 per cent in 2017.