Thursday 2 July 2009

Chinese IPOs are back - but for how long?

Here we go again. The thirst of Chinese investors to own stocks appears undiminished despite the recent bloodbath.

I have been surprised by the strength of the recovery in the stockmarket and the return of IPOs is an interesting development that needs watching carefully.

Thirst-quenching [Economist]

IT IS like a downpour after a drought. In 2007 and early 2008, hundreds of Chinese companies worked feverishly with accountants and bankers to prepare for initial public offerings. Their work came to nothing. Collapsing share prices, a contracting economy, unrealistic expectations on the part of sellers and, finally, restrictions from regulators crushed the IPO market. Now the companies and bankers that have managed to survive a brutal year are once again seeking capital, through listings on bourses in the mainland and beyond.

The first raindrop in China has been Guilin Sanjin, a manufacturer of Chinese medicine, which is expected to issue shares on June 29th on the Shenzhen Stock Exchange, the market for the country’s smaller companies. The size of the offering is likely to be a bit under $100m—a mere rounding error compared to the mega-deals of two or three years ago, but a sign, nonetheless, that business has resumed.

Another 30 companies have reportedly received regulatory approval to list and have begun final preparation and marketing; 400 more sit in a queue waiting to be approved. Several state enterprises that went public on offshore markets, including China Mobile and CNOOC, an oil firm, are also expected to list at some point in Shanghai. So too may a handful of non-Chinese companies, with interest already expressed by HSBC, in deference to its Shanghai roots, and the New York Stock Exchange (NYSE).

In Hong Kong, a few companies did manage to float in the past few months but the going was tough, with price estimates cut repeatedly prior to the offering, buyers corralled from friends, families and affiliates, and a lacklustre aftermarket. Conditions have turned. Many of these deals are now up significantly. Three small companies have gone public since June 16th, with shares in each case rising by at least 20%.

Bawang, a Chinese toiletries company, is in the final stages of a roadshow and appears likely to price at the top of its pre-marketing estimate. More sizeable deals are expected by the year’s end, including a listing of the Asian life-insurance operations of AIG, and dual China-Hong Kong listings for Agricultural Bank of China and two Chinese electrical-distribution firms.

America’s capital markets are benefiting too. Two Chinese companies, one producing specialty chemicals (Chemspec) and another water-treatment equipment (Duoyuan Global), made splashy debuts on the NYSE on June 23rd. In every case, regardless of where the listing venue might be, the underlying appeal is the same. Says Jonathan Penkin of Goldman Sachs in Hong Kong: “People are looking for growth. You can find it here.”



Micah said...

Many observers think that the recent stock market boom in China is largely coming from speculative cash inflows from the government-encouraged lending boom finding their way into the market rather than into investment-worthy projects (Prof Pettis mentions this in a recent post). I would imagine that IPOs are benefiting from this as well, and it's probably an equally bad sign in their case (perhaps even worse, if one assumes that IPOs might attract more speculation than would the market as a whole).

China Economist said...

Thanks for the comment - I tend to agree with you. Once the lending boom petters out teh stock market may well fall again.

If I were a betting man.......