China’s Record Number of IPOs to Curb Small-Cap Equities

January 16, 2014 Leave a comment

China’s Record Number of IPOs to Curb Small-Cap Equities

The number of Chinese initial public offerings will accelerate to a record pace in coming months, dragging down small-company stocks, according to UBS AG.

There will be some 60 to 80 IPOs each month from March to June, Chen Li, chief China equity strategist at UBS, said at a briefing in Shanghai. Increased stock supply will hold back share prices of smaller companies on the ChiNext Index after they surged last year, he said.

The regulator approved about 50 companies to sell stock in China following new rules in November aimed at strengthening investor protection and stamping out price manipulation. The ChiNext gauge of Shenzhen-listed companies with an average market capitalization of $1.5 billion is more than four times more expensive than the Shanghai Composite Index.

“The sales pace is unprecedented,” Chen said. “Starting March, that’ll pose a big challenge to the valuation of ChiNext companies.”

The ChiNext, which is dominated by private companies in industries such as technology and health care, rallied 83 percent last year while the Shanghai measure fell 6.75 percent. The ChiNext briefly surpassed a closing record on Jan. 9, rebounding 13 percent from a December low, on rule changes that require investors to have existing stock holdings before participating in IPOs and allow insurers to buy shares of smaller companies.

Spot Checks

Chen predicted in May last year the “bubble” in small-cap stocks would burst within two months. Since then the ChiNext has climbed more than 30 percent.

The securities regulator has failed to curb over-pricing of IPO shares after introducing new rules aimed at making share sales more market-oriented, Chen also said today.

Jiangsu Aosaikang Pharmaceutical Co. decided last week to push back its 4.05 billion yuan ($670 million) IPO after pricing the sale 21 percent higher than the industry average.

The China Securities Regulatory Commission is planning spot checks of investor roadshows held for first-time sales and will suspend companies found to have disclosed information not contained in IPO prospectuses and other public releases. Underwriters will also be penalized for sharing non-public information with institutional investors, the CSRC said in a statement on its website yesterday.

Chen said China’s liquidity will probably worsen this year with cash crunches taking place five or six times, hurting both equities and bonds, as the government pushes forward with liberalization of interest rates.

UBS recommends stocks that will benefit from reforms of state-owned enterprises and land as well as financial innovation, Chen said.

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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