China’s IPO Freeze Ends as Neway to Debut Amid Pricing Crackdown

China’s IPO Freeze Ends as Neway to Debut Amid Pricing Crackdown

Neway Valve (Suzhou) Co. (603699), a maker of industrial valves, will become the first company to start trading in China today after a freeze on initial public offerings that lasted more than 15 months.The company and existing owners raised 1.5 billion yuan ($241 million) after selling 82.5 million shares at 17.66 yuan each, according to a statement on the Shanghai stock exchange. The deal values Neway Valve at 46.5 times its 2012 earnings, compared with 33.9 times for its listed industry peers, the company said Jan. 8.

Neway Valve is among new offerings that will pose a first test of the securities regulator’s attempts to revive confidence in IPOs by cracking down on overpriced deals. China, the world’s largest IPO market in 2010 with a record $71 billion raised, hasn’t had an IPO since October 2012 as regulators drafted rules aimed at tightening IPO supervision.

“If the first few IPOs do well and bring good returns, that’s going to attract some attention,” David Gaud, a senior money manager at Edmond de Rothschild Asset Management, which oversees about $120 billion, said by phone from Hong Kong on Jan. 14. “It’s a bit painful. It may take a few more IPOs to fully understand how it’s going to work.”

Fifty companies are expected to be ready to list by the end of January, the China Securities Regulatory Commission said Nov. 30 after pledging to move toward a U.S.-style IPO registration system.

The Shanghai Composite (SHCOMP) has slumped 4.4 percent this year amid concern slowing growth will curb profits and the resumption of IPOs will divert funds. It trades at 7.6 times 12-month projected earnings, the cheapest going back to at least 2007, based on weekly Bloomberg data.

Spot Checks

First-time sales that perform well after they start trading are key to the CSRC’s efforts to restore confidence in IPOs. Among companies that went public between June 2009, after the end of a previous IPO freeze, and September 2012, 41 percent are trading below their offer price, data compiled by Bloomberg show. That’s even after the stocks surged an average 35 percent on their trading debut, according to the data.

The CSRC said this week it started spot checks on IPO pricing with 13 underwriters, including China International Capital Corp., and 44 institutional investors. The regulator earlier said Jan. 12 it will suspend offerings by companies found to have disclosed information not contained in IPO prospectuses and other public releases.

‘Good Thing’

That announcement came two days after Jiangsu Aosaikang Pharmaceutical (300361) Co. announced it was delaying an IPO on Shenzhen’s ChiNext board for startups, which it said was priced at a 21 percent premium to the industry. Nanjing-based Aosaikang, which makes cancer drugs, said it delayed the 4.05 billion yuan offering because the sale would have been “relatively large.”

Chinese companies marketing IPOs are now settling for lower valuations than most investors were offering to pay. Beijing Utour International Travel Service Co. (002707), Hebei Huijin Electromechanical Co. (300368) and Yangzhou Yangjie Electronics Technology Co. (300373) priced IPO shares at below-average valuations for their respective industries after rejecting most investor bids for stock as too high, according to statements on the Shenzhen Stock Exchange’s website on Jan. 14.

“It’s a good thing that the regulator has already realized some issues in the IPO process, such as over-pricing and a fast sales pace, and began to take action,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. “We’ve already seen some IPO prices fall to reasonable ranges.”

Record Pace

The number of Chinese IPOs will accelerate to a record pace in coming months, dragging down small-company stocks, according to UBS AG. (UBSN) The securities regulator has approved 52 companies for first-time share sales since last month, according to Bloomberg News calculations.

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 Jan. 13 briefing in Shanghai. Increased stock supply will hold back share prices of smaller companies listed on the ChiNext board, which surged last year, he said.

The securities regulator said Nov. 30 it will crack down on practices that led to overpriced deals, including investors colluding with companies to drive up valuations by making high bids with no plans to actually buy the stock.

Shaanxi Coal Industry Co. (601225), China’s third-largest producer, said yesterday it cut the size of its initial public offering by 59 percent to 4 billion yuan. That’s down from the 9.83 billion yuan it estimated on Jan. 8 and compares with an IPO target of 17.2 billion yuan announced in 2011.

“The CSRC is going to make some adjustments to make it smoother,” Gaud said. “It’s a learning curve right now, which is why the domestic market is not benefiting from these reforms yet.”

To contact the reporter on this story: Weiyi Lim in Singapore at

About bambooinnovator
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 (, 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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