Reuters Edge

China IPO market dries up after bubble bursts

SHANGHAI (Reuters) - When stocks in three big Chinese companies sank below their IPO prices this week, investors who bought shares in last year’s offers suffered. China’s once-roaring IPO market is another casualty.

A panel inside a bank displays the closing Hang Seng Index in Hong Kong January 22, 2008. REUTERS/Bobby Yip

After spectacular growth last year, when mainland China eclipsed the United States as the world’s biggest market for initial public offers of equity, sliding stock prices and concern about oversupply threaten to stifle activity this year.

“The bubble is bursting after rampant speculation pushed prices of newly listed shares to ridiculously high levels at the peak of China’s stock bull run late last year,” says Zheng Weigang, head of research at Shanghai Securities.

“This will slow equity fund-raising in coming months and deter the overpricing of new offers and new listings.”

Investors bought a staggering $100 billion of equity in almost 200 newly listing firms between May 2006, when China lifted a year-long ban on IPOs, and February this year.

The IPO flood, which saw many deals massively oversubscribed by frenzied investors, appeared to be a major achievement of China’s financial reforms, for the first time making the stock market an important source of funding for many companies.

But a collapse of confidence, due to factors including slowing corporate profit growth and plans for huge cash calls by already-listed firms, has sent the main Shanghai index plunging more than 40 percent below October’s record peak.

That led to a virtual halt in IPOs in March -- small laser equipment maker Fujian Fujing Casttech's 002222.SZ $53 million offer this month was the only one. By contrast, five firms raised $300 million in March last year.

This week, Jinduicheng Molybdenum and Jiangsu Yuyue Medical Equipment & Supplies announced IPOs next month. They are among about 30 firms which have initial regulatory approval for IPOs.


But a lack of big offers in the pipeline means China’s IPO activity this year is set to shrink substantially from 2007.

Last year, the market expected several of China's big Hong Kong-listed "red chips", such as telecom giant China Mobile 0941.HK, to list in Shanghai in 2008. That now looks unlikely.

“Because China is now the nation that adds the most value to global economic growth each year, its demand for funds will remain huge in the long run,” said Jun Ma, chief China economist at Deutsche Bank.

“So we are still optimistic about China’s IPO market in the next five years. But under current conditions, it is very unlikely for China’s IPO value this year to reach last year’s.”

Executives at a dozen firms, which have initial IPO approval but await final notice from the China Securities Regulatory Commission to launch offers, told Reuters this week that their plans were delayed by market conditions and regulatory guidance.

“The CSRC told us that we need to wait some more time,” said Fang Jiqing, spokesman at Anhui Jiangnan Chemical Industry Co, which was given initial approval on January 7. “We understand market conditions have now become very weak.”

Shares in three large firms -- China Shipping Container Lines 601866.SS, China Coal Energy Corp 601898.SS and China Pacific Insurance 601601.SS -- this week fell substantially below the prices of their IPOs in recent months. They were the first major stocks to do so since the ban on offers was lifted.

The country's biggest stock, PetroChina 601857.SS, has so far escaped that fate but only just. On Friday morning PetroChina's 601857.SS local-currency A shares hit a low of 16.70 yuan, the price of its IPO last October, leaving it 62 percent below its close on its first day of trade in Shanghai.

PetroChina ended the day up 5.2 percent at 17.87 yuan, but some investors believe authorities or big institutions might have artificially supported it to avert panic in the market.

Even after IPO activity picks up, offerings will be priced more conservatively and enjoy smaller rises on listing day, analysts predicted.

After China Railway Group 601390.SS priced its IPO last November at 21 times analysts' forecast for 2008 earnings, rival China Railway Construction 601186.SS, the last big IPO in February, was priced at 28 times.

That sort of valuation premium is likely to increasingly rare.

And while it was common in the second half of 2007 for big IPO stocks to jump over 50 percent on their first day of trade -- PetroChina soared 163 percent -- such debuts may not be repeated, except for small firms in fashionable areas such as solar energy.

Editing by Andrew Torchia and Tony Munroe