China IPOs

By George P

China went IPO-crazy last year. A few notable IPOs included PetroChina, Ping An Insurance, as well as a few large banks.

It is not a strange phenomenon to see share issues jump up on the first day of issue, but as has been observed in the Shanghai market, new IPOs aren’t quite as attractive as they were previously. Another characteristic of the Shanghai IPO is a very apparent correction in price shortly (or a while) after, as short-term vultures lose interest and hunt for other scraps.

The subscription process is very much unbalanced, working in favour of private investors and is the main reason for the correction – individual investors don’t have the same level of resources as institutional investors. With the situation described above, the institutions get the attractive gains after the first day’s trading, whist individuals pick up shares at inflated prices, and watch the price plummet after the ‘big boys’ have moved on.

PetroChina, whose share price rocketed to 48.6 yuan (leading it to become one of the world's largest company by market capitalisation), ended at sub-issue price yesterday at market close, after (steady) declines. China Pacific Insurance shares floated in December 2007, and were down 6.9% from their subscription price. Ping An has also been falling since issue.

China Railway Construction Corporation's recent debut on the SSE was unimpressive when compared to the standards set by last year's issues. The A-shares (only) gained 28.19%, which was lower than the price forecast by analysts (China Railway Group Ltd, a rival railway construction company, gained 69% after listing in December).

On the Hong Kong stock exchange, companies are delaying or retracting IPO offers as a consequence of the jittery market conditions. There is no longer the guarantee that investors will dive in, so it proves to be better to be safe than sorry.

All the strange happenings do not deter some Chinese companies though, but one has to question what the money is being raised for. For example, China is trying to cool down the property markets, handle inflation worries, but property developers still have IPOs in the pipeline.

The Shanghai market is still relatively young, and hopefully people will continue to become more mature in regards to their own investment behaviour. It is nice to see investors being more clued-up regarding new IPOs. There may be hope for China's markets after all.

Saying this though, the SSE bounced back to end at 3580.15 (+168.65 points, 4.94%) after a shocking day yesterday (closing 5.4% down) – knee-jerk reaction? Probably.

-GP