China’s IPO shares turn from sure-fire bets to potential loss-makers amid shaky sentiment and changing regulations
- Cases of IPO flops have been on the rise as regulators increase the supply of new stocks and push for a market-based pricing mechanism
- Traditionally undervalued and oversubscribed, Chinese IPO shares have until now been a virtual guarantee of big day-one trading gains
China’s initial public offering shares, traditionally a sure-fire bet for investors looking to make a quick buck, have been losing their lustre, with some even generating losses on the first day of trading.
Mainland Chinese IPO shares, which are usually massively oversubscribed in the primary market, typically ensure a 44 per cent gain on their debut as their price rockets up to hit the ceiling put in place by the exchange watchdog.
The main reason for their early gains is that nearly all such shares are floated at a price of no more than 23 times earnings, under guidelines designed to make sure every deal is successful. Although the price cap is not official, it is an unwritten rule well known to stockbrokers and issuers, and eagerly enforced by regulators.
But the trend is showing signs of unravelling as market sentiment turns shaky, and as the regulator increases the supply of new stocks and pushes for a more market-based mechanism for pricing the shares.
In the past month, cases of IPO flops have been on the rise.
Luoyang Jianlong Micro-Nano New Materials, which began trading on the new technology board in Shanghai early this month, fell 2.2 per cent below the offer price on its first day of trading, making it the worst-performing debutant in seven years.
China Zheshang Bank rose less than 1 per cent on its debut last month and dropped below its IPO price the following day. Postal Savings Bank of China, the mainland’s biggest new listing in five years, is struggling to trade above the offer price since its listing this month.