China IPOs No Lure as Investors Empty Trading Accounts; A-share markets shed US$176bn after China’s IPO ban lifted

China IPOs No Lure as Investors Empty Trading Accounts

Yao Lina, an accountant in Shanghai, says the 43 percent opening-day gain for China’s first initial public offering in more than a year isn’t enough to bring her back to the $3.2 trillion equity market.“If they jump a lot, that means bigger risks,” Yao, 34, who sold all her equity holdings in November, said on Jan. 17 as Neway Valve (Suzhou) Co. (603699) jumped in its Shanghai Stock Exchange debut. “And if they fall, that means shares are overpriced.”

Yao’s reticence toward Chinese stocks is being repeated across the country, a sign that the campaign by regulators to crack down on overvalued IPOs and improve corporate disclosures is failing to boost confidence among individual investors. The number of Chinese stock accounts containing funds shrank to a three-year low of 53.7 million on Jan. 17, a drop of 3.6 million from the June 2011 peak, data compiled by Bloomberg show.

The retreat, spurred by slowing economic growth and a shift toward higher-yielding wealth management products, is fueling losses in the Shanghai Composite Index (SHCOMP) that erased $571 billion of market value in the past four years and sent the gauge to a five-month low on Jan. 20. While Societe Generale SA says bearish sentiment is a buy signal, Asian Capital Holdings Ltd. and Calibre Asset Management Ltd. predict it will weigh on stocks in a market where individuals account for more than 80 percent of trading volume.

Record Low

Neway Valve, the first of what PricewaterhouseCoopers LLP estimates will be $41 billion of Chinese IPOs this year, has tumbled 14 percent since the close on its first day of trading. Almost half of the companies that have gone public in China since June 2009 now trade below their IPO price, while the Shanghai Composite’s valuation is the lowest on record versus global equities, according to data compiled by Bloomberg.

“Stocks may be cheap enough for long-term investors to consider, but they need to have holding power,” said Norman Chan, the Hong Kong-based head of investment at Calibre Asset Management, which oversees about $115 million.

Liu Xi, a 36-year-old hotel marketing official in Shanghai who hasn’t made any money since she invested 90,000 yuan ($14,875) in the stock market two years ago, is losing patience.

“I feel sad and frustrated about stocks,” Liu said on Jan. 17. “Even if IPOs rise on the first day, you’ll need to keep an eye on the movement. Why should I bother to put money in a market I need to worry about every day?”

Biggest Loser

Liu invests in wealth management products offered by banks that advertise returns of about 6 percent, she said. The Shanghai Composite has declined 5.1 percent this year, the biggest drop among benchmark equity gauges in 14 Asian markets tracked by Bloomberg, and closed at 2,008.31 yesterday.

Individual investors don’t expect “large upside in the Chinese market and their investment horizons are short,” said Anthony Neoh, a visiting professor at the National University of Singapore who is part of the Chinese securities regulator’s international advisory body. “Retail sentiment may come back if there is a clearer message that the markets will be better regulated.”

Investments that have lured money from the stock market, including wealth management products, trusts and real estate, carry their own risks.

A troubled 3 billion-yuan trust product distributed by Industrial & Commercial Bank of China Ltd. that matures Jan. 31 has fueled speculation of looming defaults by similar products. Cities including Shanghai and Shenzhen (SZCOMP) have tightened local property policies since November to contain price increases.

Buy Signal

When individual investors exit the stock market, it’s usually a buy signal because it leads to lower valuations, David Poh, the regional head of portfolio-management solutions at Societe Generale’s private bank, said by phone from Singapore on Jan. 17. The Shanghai Composite trades for 1.3 times net assets, a record 35 percent discount versus the MSCI All-Country World Index, data compiled by Bloomberg show.

Efforts by the China Securities Regulatory Commission to prevent overvalued IPOs may help protect investors against losses, Tai Hui, the chief market strategist for Asia at JPMorgan Asset Management, said in Singapore yesterday.

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

Seven of the eight companies that started trading in Shenzhen yesterday surged at least 45 percent from their IPO prices, triggering trading halts under exchange rules designed to prevent excessive swings.

IPO Optimism

Xu Nan, a 26-year-old construction worker in Harbin whose 10,000 yuan of stock investments have so far lost money, says he’s still keen to buy shares in IPOs.

“I am more optimistic than others, maybe because I haven’t participated in any IPOs before and would like to try,” Xu said from the northeastern city famous for its annual ice sculpture festival. “The point about investing is to find out what’s hot and get in there.”

The CSRC crackdown on IPO pricing may encourage investors to sell on the first day of trading to lock in gains, Dai Ming, a money manager at Hengsheng Hongding Asset Management Co., said by phone on Jan. 17.

Neway, a maker of industrial valves, had the highest turnover among companies on the Shanghai Stock Exchange in its debut, with more than 1.3 billion yuan of shares changing hands.

Offer Price

Forty percent of companies that went public between June 2009, after the end of a previous IPO freeze, and September 2012, are trading below their offer price, data compiled by Bloomberg show. That’s even after the stocks surged an average 35 percent on their debut.

“When the issue is launched in the market, it’s set at a peak,” Ronald Wan, chief China adviser at Asian Capital in Hong Kong, said by phone on Jan. 20. “If the situation doesn’t change, it’s bad for the IPO market.”

A phone call to the CSRC’s press office wasn’t answered and there was no response to faxed requests seeking comment.

Joyce Jin, who works at a bank in Shanghai, said China’s slowing economy is one reason she won’t participate in IPOs after her stock investments in 2008 lost more than half their value.

The nation’s factory output and investment-spending growth slowed last month, while economists surveyed by Bloomberg predict the world’s second-largest economy will expand 7.4 percent this year, the weakest pace since 1990. Chinese leaders, including President Xi Jinping, have signaled their willingness to sacrifice short-term growth to reduce the economy’s reliance on debt-fueled infrastructure spending and tackle pollution.

Home Decoration

“I have given up investing in the stock market for a couple of years,” said Jin, 33, who owns three properties in China. “For us who want more stability, the macro economy doesn’t look too good.”

Yao, the accountant who sold her stock holdings two months ago, plans to use the proceeds to redecorate her apartment near the Lujiazui financial district in Shanghai, where new home prices have climbed 18 percent during the past year.

“The speculation on IPOs will probably be short-lived,” she said. “I am not positive on this market.”

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net; Weiyi Lim in Singapore at wlim26@bloomberg.net; Allen Wan in Shanghai at awan3@bloomberg.net

A-share markets shed US$176bn after China’s IPO ban lifted

Staff Reporter

2014-01-22

Since the introduction of the first batch of long-banned IPOs in China’s A-shares markets on Dec. 30, total market value has dropped 1.067 trillion yuan (US$176 billion) in just 13 trading sessions as of Jan. 17. IPOs have scared the money away, reports the China Business Journal.

The stagnant market was jolted by a plan from regulatory authorities to launch 33 IPOs within one week. One company, Jiangsu Aosaikang Pharmaceutical, even plans to use old shares to cash in 3.2 billion yuan (US$530 million) with a high price-to-earning (P/E) ratio of 67, challenging market stability and the bottom line of the regulator.

The market responded by a sharp fall over the past 13 trading sessions. As of Jan. 17, the total market value of A-shares fell to 26.099 trillion yuan (US$4.3 trillion) from 27.166 trillion yuan (US$4.5 trillion) on Dec. 31, losing 1.067 trillion yuan, according to statistics from iFinD.

China, the world’s largest IPO market in 2010 with a record US$71 billion raised, has forbid the launch of IPOs since Oct. 2012 in an effort to crack down on fraud and misconduct among advisers and issuers. Regulators announced the end of the freeze on Nov. 30. Immediately following, more than 700 companies have applied to sell shares and are waiting for approval from the China Securities Regulatory Commission.

Of those, 50 companies proposed to launch IPOs in January, with 33 beginning from the week of Jan. 13. Aosaikang’s announcements on Jan. 9 that its online purchasing showed a PE ratio of 67 and that it used old shares to cash in 3.2 billion yuan (US$530 million) caught the attention of regulatory authorities.

One unnamed private equity fund executive said he purchased Aosaikang shares as they could be easily arbitraged without risk.

The online purchases of Wolwopharma on Jan. 8, in which more than 300 public equity funds invested, also raised alarms. The highest bidding price was 36.1 yuan (US$6), 80% higher than the issue price.

Such high prices will bleed out of the market, similar to what happened when PetroChina, whose highest bidding price was 48 yuan (US$7.90) per share when it debuted on Nov. 5, 2007. Its issue price was 16.8 yuan (US$2.77) per share. On Jan. 15, 2014, PetroChina shares fell to 7.58 yuan (US$1.25) a share.

In the future, balancing the benefits of the primary market and the secondary market and making investors aware of the risks involved will be major determinants of the market’s direction, experts said.

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 (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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