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Guidelines set for resumed IPOs

By Wang Bo and Hu Yuanyuan (China Daily)
Updated: 2009-06-08 09:40

Investors check share prices on screen at a securities trading firm in Shanghai.[Agencies]

New listings on the mainland stock market may get a green light as early as this month, prompting worries that a flood of new shares could depress the recent market rally, but analysts note the long-term outlook for a continued uptrend remains intact.

The China Securities Regulatory Commission (CSRC) released new listing reform guidelines on May 22 for public feedback and pledged to restart IPOs after June 5, when the consultation period for the new draft rules ends. It did not set a specific date for the actual resumption.

Related readings:  Jittery market braces for IPO flood  IPOs need bold reforms  Market rally spurs wave of new IPOs  China to resume IPO after June 5: regulator

An upward trend in mainland stocks has slowed over the past two weeks, partly on worries that a heavy supply of new equity will divert capital from the secondary market and dampen the market recovery.

"We used to see new IPOs as the biggest bad news for the stock market this year," said James Yuan, chief investment officer of Everbright Pramerica Fund Management Co Ltd. "But now it is not as daunting, thanks to the improved economy, more liquidity and new listing rules."

The new scheme limits subscription channels to either the Internet or through agents - but prohibits investors from using both. Institutional investors were before permitted to use both outlets.

The plan also sets the maximum subscription amount for each investor who subscribes on the Internet. The new rules will reduce the amount of money frozen by new IPOs, Yuan said.

With the launch of the new guidelines, China's securities regulator pledged to introduce a more market-oriented pricing mechanism and provide individual investors with a fair chance to subscribe to new shares.

It is necessary to reform the IPO rules to suit the rapidly developing capital market, as companies are increasingly showing interest in obtaining funds through issuing shares, the CSRC said.

The securities watchdog suspended new listings last year in a bid to prop up the sagging market. The mainland benchmark index tumbled more than 60 percent for the whole of 2008, hit by fears that global financial turmoil could lead to a sharp slowdown in the domestic economy.

China has now halted new share offerings on five occasions.

News of resumption in new issues traditionally has had some negative impact in the short run, analysts said, but it will not change the long-term trend.

Zhu Junwei, general manager of the equity market at UBS, said the growing supply brought by new IPOs will not necessarily lead to a market slump.

"There have been a number of new IPOs on the Hong Kong bourse this year, but the market remained robust," said Zhu.

The mainland index has jumped over 50 percent since last October. Given the strong rally in shares and the upbeat outlook for the economy, analysts said this might be the proper time to launch new IPOs.

"The door to IPOs will reopened in mid-June at the soonest and probably ahead of the start of growth enterprise board (GEB), as regulators have yet to collect IPO documents from would-be listed companies for the GEB," a top manager of a large Beijing-based brokerage was quoted by the 21 Century Business Herald as saying.

The GEB, the country's NASDAQ-style second board, will reportedly open later this year with dozens of listed firms.

Since Jiangsu Huachang Chemical Co debuted in Shenzhen as the last company to go public before the listing ban took effect last year, 32 companies have been waiting to float new shares when the government announces the go-ahead for new offerings.

In fact, supply and demand in such a fully tradable era turns out to be a bigger factor influencing the market, Yuan said.

"Compared with last year, we have a strong feeling that it is much more difficult to buy shares than sell shares," he added.

Based on the number of new shares to be issued and the average price-earning ratio on the secondary market, analysts said the 32 companies now waiting could raise as much as 70 billion yuan in their IPOs.

One of the most eye-catching issuers of impending IPOs is China State Construction Engineering Corp (CSCEC), the country's biggest home builder, which is expected to issue 12 billion new shares and raise about 42 billion yuan, the fifth-largest in mainland IPO history, according to analysts' estimates.

Two brokerages Everbright Securities and China Merchants Securities, are likely to raise about 6.5 billion yuan and 6.3 billion yuan respectively, becoming the second and third-largest fund raisers in the new round of IPOs.

Yet analysts said large cap companies like CSCEC are not likely to be listed immediately after the resumption of new IPOs due to concerns a sudden massive equity supply could stifle the market rally.