Chinese IPOs are at record lows

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I was back in Hong Kong’s RTHK 3 radio studio this morning, interviewed by anchor Reenita Malhotra Hora in the “Money for Nothing” programme, to talk about Chinese IPOs, both in the mainland and in the Special Adminstrative Region.

There has been a sharp drop in Chinese IPOs in both Hong Kong and the mainland over the last few years. Year-to-date statistics for Chinese IPOs compiled by Dealogic (1 January – 4 March) paint a pretty bleak picture:

Mainland China exchanges:

2010: 58 deals US$11,964 million
2011: 63 deals US$11,443 million
2012: 27 deals US$3,142 million
2013: 0 deals

Hong Kong exchange:

2010: 6 deals US$920 million
2011: 4 deals US$190 million
2012: 6 deals US$347 million
2013: 3 deals  US$524 million

The reasons for this are several:

– a low proportion of State-owned enterprises (SOEs) within IPOs (in Hong Kong, this was about 70-80% in 2005-2006 when we had the mega IPOs of the banks in particular, to well below 30% now). The deals are now from private mainland enterprises, much smaller offerings that are not as widely distributed, that offer lower liquidity to investors and in some cases lower quality companies that have not been in business for as long, or that are basically sub-contractors of larger corporates, with only a handful of suppliers or with a narrow range of customers;

– disappointing share price performances for many of the Chinese IPOs in recent years as a result of a weak book of demand constituted at the time of the IPO (and low aftermarket buying by investors after the listing) – and weak prospects for these businesses after the IPO;

– the nature of cornerstone investors has changed for Chinese IPOs. Where we used to have tycoons and bona fide institutional investors, we now have corporates, SOEs and “friends and family” types of investors who are not natural buyers of stock in the aftermarket, and will not top up their allocations and drive share prices higher;

– uncoordinated syndicates of underwriters for Chinese IPOs. There is a tendency to think that appointing more banks is safer and that this will leave no stone unturned when it comes to demand from investors but that is a fallacy. Most of the banks talk to the same investors. This results in diluting the fee pool, demotivating the banks that have been appointed, no focus from senior and experience staff at these institutions, and in many banks calling upon the same investors in an uncoordinated manner, which not only annoys investors but also results in them ultimately not putting in orders into these transactions;

– scandals about financial and corporate disclosure, for Chinese companies listed in the U.S. in particular (but also in Hong Kong and Canada), which have made investors more cautious about deals that are not “must own”, large, visible liquid transactions (like PICC);

– for IPOs in the mainland in particular, the government and the CSRC still control the tap for approvals for new issues. This was put on hold late last year. One of the reasons was the weak performance of the deals that came to market in recent years and a revamp of the IPO rules. Another was the change of leadership on the mainland but at this stage there are still no indications as to when the flow of deals will resume; and

– in Hong Kong, RMB-denominated IPOs haven’t really materialized. We have had one IPO only (Hui Xian REIT) and one small placement (Hopewell) but the dual currency scheme encourages more investors to buy in HKD than in RMB and to my mind this will continue to be the case for as long as the restrictions on the convertibility of the Yuan remain in place.

A podcast of my interview is available from the RTHK 3 website, through this LINK.