China’s securities regulator warns new economy firms from overinflating valuations for IPO

The combined market value of Ping An Good Doctor, ZhongAn Insurance, China Literature, Yixin Group, and Razer has fallen by more than HK$160 billion from their recent peaks

PUBLISHED : Friday, 15 June, 2018, 7:54pm
UPDATED : Friday, 15 June, 2018, 8:34pm

China’s top securities regulator has warned new economy companies not to inflate their valuations in the pre-IPO stage, singling out Ping An Good Doctor, ZhongAn Insurance, China Literature, Yixin Group, and Razer, noting that the wild swings after their IPOs have raised concerns about overpricing.

China Securities Regulatory Commission has asked issuers, underwriters, and institutional investors to “exercise caution” in the initial public offering book building process after it recently launched a pilot programme to support innovative companies to list on domestic exchanges and allow overseas listed mainland companies to issue China Depositary Receipts.

Book building is the process by which an underwriter attempts to determine at what price to offer an IPO based on demand from institutional investors.

Where do blockbuster IPOs stand as the fizz goes out of Hong Kong’s stock trading debuts?

Several new economy companies have quickly plunged from their peaks or fallen below their offer prices after being listed in Hong Kong, “in stark contrast with the frenzy during their IPOs”, the state-owned Securities Daily, a designated newspaper by the CSRC to disclose listed company information, quoted officials from the agency as saying on Friday.

Ping An Good Doctor, the biggest listing in Hong Kong so far this year, dropped below its IPO price of HK$54.9 on its second trading day on May 7. On Friday, it closed at HK$55.35, down 0.4 per cent from the previous close.

ZhongAn Insurance, China Literature, Yixin Group, and Razer were the four biggest technology listings in 2017.

Among them, three have already fallen below the offer price. Yixin Group was the worst performer, trading at HK$3.73 by Friday close, down 51 per cent from its IPO price of HK$7.7. ZhongAn and Razer have fallen 9 per cent and 42 per cent respectively.

Compared with their respective peaks, the combined market value of these companies has evaporated by more than HK$160 billion.

“Investors are worried about the inflated valuations of these companies and they fear a share price bubble, which is also a warning sign for us,” the officials told executives from more than 200 securities firms, funds and insurance companies involved in book building during a conference in Beijing recently.

“Hong Kong is a mature market dominated by institutional investors. But declines below the IPO price still gets questioned. The A-share market is more fragile as it’s dominated by individual investors who are less capable of identifying risks and bearing risks. We should learn a lesson from it as we price our companies.”

In a separate report by state-run Xinhua News Agency on Friday, officials from CSRC said they will design rules to better protect investors in the IPO trial programme.

The regulator will “strengthen the supervision of securities companies” and “urge institutional investors to exercise caution in book building”, they said.