China’s moves to cap first-day IPO gains prove to be a winning ticket for issuers and investors
More than 480 IPOs launched since 2017 have risen by the maximum permissible limit of 44 per cent on the first day of trading
For A-share IPOs, the measures introduced by the Shanghai and Shenzhen stock exchanges in June 2015 to cap the first-day gains at 44 per cent to tame speculative price swings, have turned out to be a “sure win” for issuers and investors.
All 432 initial public offerings in 2017, and 53 in the first five months of this year have ended with price gains of 43-44 per cent on the first day of trading, according to Bloomberg data. Moreover, the downward price limit of 64 per cent from the offer price set by the bourses has never been triggered.
In China, regulators have emphasised that such attempts to control first-day trading is to maintain market order. This is in stark contrast to other markets where market forces determine the prices as dictated by demand and supply.
Another form of price control, which has been in place since 2001, allows daily stock swings of 10 per cent in either direction. This means that if the price of a stock rises above or falls below 10 per cent from the previous day’s close, then any buying or selling can only be done at prices within that upper or lower limit.
Ringo Choi, Asia-Pacific IPO leader and a managing partner at EY, says the two price controls combined mean that investors in A-share IPOs were almost “guaranteed” they have been given a “sure-win” ticket. Once they have their new share allotment they could then profit by selling their holdings within the first few days of the debut.
“In previous years, share prices of newly listed stocks have shown to be on a continuously upward trend for a period of 11-12 days. This has dropped to a few days during this quarter as some of these stocks traded down briefly after,” said Choi.
For the 432 stocks that were listed in 2017, all but two stocks traded below their offer price six months after their debut, according to data from Bloomberg.
What this means is that the price-to-earnings multiples of these stocks will continue to go up post-debut, which can be a much-desired outcome for issuers. This is because in China, while there are no explicit regulations mandating the multiples that new issuers should price their IPO at, the industry has long respected a “23-time max” implicit rule that stems from a China Securities Regulatory Commission guidance issued in 2014.
The guidance requires issuers to make more frequent mandatory disclosures before the IPO launch to highlight the fact that their new issue has been priced higher than the prevailing multiples that industry equivalents are trading at in the secondary market. This effectively deters aggressive pricing for A-share IPOs.
Wanlin Liu, managing director at Carlyle Group, said such continuous upward price trend post-debut has successfully attracted some Chinese issuers to choose the A-share market over other offshore markets, such as Hong Kong.
“It could be an advertising or marketing event for the company if their customers know that the company’s A-share price is going up,” Liu said at a private equity industry conference in Beijing back in April.
Ultimately, however, Choi said positive post-debut trading performance is only one of the attractions for an issuer. There are also other factors that a listing candidate would consider when deciding where to list their stocks.
“Some of the technology or new economy companies, such as biotech, they tend to get priced at very aggressively high multiples when they launch their new share offering. This naturally will then attract some of these companies to get listed in Hong Kong, instead of China,” said Choi.