Hong Kong's IPO Market Bounces Back Quickly
China Railway Signal and Communications Corporation's plans to test Hong Kong's initial public offering market with a $2 billion IPO may be proof that China's IPO market has bounced back sooner than even the most optimistic expected it to after the closure of Shanghai and Shenzhen's IPO markets in early July.
By ansaradaMon Jul 20 2015IPO
On the State Council of the People’s Republic of China’s official website, Premier Li Keqiang says China would push forward with “stable and healthy development of the capital market and the currency market in the long term”. That includes doing away with multiple administrative procedures and permissions that Chinese companies need before their plans for an IPO are approved. The Premier recognises such bureaucracy is a breeding ground for corruption. He wants to do away with such practices. “China has been reforming and refining its IPO process for years," says Alex Wolf, emerging markets economist at Standard Life Investments. "If the market appears to stabilise and volatility decreases, they will push ahead with reforms.” It is hard to believe that just three months ago the prospects of a freeze on IPOs from China would have been judged as far-fetched. China’s IPO markets were on top of the world. As of June 9, Hong Kong had seen $12.5 billion worth of new listings this year and Shanghai $11.1 billion, more than any other stock market in the world, according to Dealogic data. For a time, Chinese companies’ demand for capital was met by equally voracious demand for new stock by Chinese individual investors after Beijing formally announced the end of a 14-month IPO ban in November 2013 amid President Xi Jinping's anti-corruption drive and capital markets liberalisation efforts. Chinese individual investors engaged in frenzied buying of IPO stocks in 2014 and 2015. One Hong Kong-based banker says this year Chinese IPOs on average rose about 44 percent on their first day of trading. Such IPOs sometimes rose by their 10 percent daily limit for a few days after that. “IPOs were thought of as an easy way to make a return," says Huang Pei Hao, an executive director on UBS’s China equity capital markets team. "Retail investors tend to chase momentum and focus less on valuation or fundamentals.”
But Shanghai and Shenzhen’s stock markets' valuations were excessive compared with their fundamentals, according to investors. In the 12 months to May, Chinese stocks available to mainland investors soared 119 percent in Shanghai and 121 percent in Shenzhen. In mid-April, BNP Paribas estimated, more than 70 percent of stocks on these markets were commanding prices exceeding 50 times earnings, while 40 percent fetched more than 100 times earnings. “The A share stock market sell-off became a rout from mid-June amid a wave of panic selling after a huge rally,” says BlackRock’s Ms Zhu. Fast-forward to today when the plunge in stock prices from mid-June has wiped as much as $4 trillion off the market values of Chinese exchanges, Beijing’s intervention in the stock market reinforces widespread perceptions that China will do what it takes to pump up confidence and spur economic activity. “We believe that policymakers have the willingness, the desire and the ability to support the economy,” says Stuart Rae, chief investment officer, Asia-Pacific ex Japan value equities, at AllianceBernstein. Another signal that all is well for China’s IPO market may be the successful de-listing of Chinese companies from the New York Stock Exchange and their subsequent listing on their home market, where they can enjoy much higher valuations than as mid-cap companies on the NYSE. “In the past, a lot of Chinese companies looked for investors overseas but now their focus is on China,” says Zhang Yi, co-chief executive, Hong Kong, of law firm King & Wood Mallesons.