Neway Valve (Suzhou) Co. (603699), China’s first initial public offering in more than 15 months, surged as much as 44 percent in its Shanghai debut after a regulatory freeze aimed at curbing overvalued share sales.
The maker of industrial valves was suspended within the first 10 seconds of trading after reaching price limits that triggered a 30-minute halt. The shares closed at 25.34 yuan, up 43 percent from the IPO price, and had the highest turnover among companies on the Shanghai Stock Exchange. The Shanghai Composite Index fell 0.9 percent amid concern that IPOs will divert funds from existing shares.
The company is among new offerings that will pose a first test of the securities regulator’s attempts to revive confidence in stocks after a 38 percent tumble in the benchmark index during the past four years. China, the world’s largest market for new share sales in 2010 with a record $71 billion raised, hasn’t had an IPO since October 2012 as policy makers drafted rules aimed at tightening supervision.
“The market has a history of speculating on new stocks,” said Mao Sheng, an analyst at Huaxi Securities Co. in Chengdu. “After such a long freeze on IPOs and a price that isn’t high, this is totally within expectations.”
Fifty companies are expected to be ready to list by the end of January, the China Securities Regulatory Commission said Nov. 30 after pledging to move toward a U.S.-style IPO registration system.
About 1.3 billion yuan of Neway Valve shares changed hands, according to data compiled by Bloomberg. The stock was halted after trading 10 percent above its opening price of 21.19 yuan, a limit introduced by the bourse in December to curb speculative first-day trading. The Shanghai exchange said today it will watch closely for speculation in trading of newly listed stocks such as Neway Valve.
The Shanghai Composite Index dropped to 2,004.95 today, the lowest level since July. The gauge has slumped 5.3 percent this year amid concern slowing economic growth will curb profits while a growing supply of shares weighs on prices. It trades at 7.5 times projected earnings for the next 12 months, the lowest level since Bloomberg began compiling the weekly data in 2005.
Neway Valve’s 1.5 billion yuan ($241 million) share sale valued the company at 46.5 times 2012 earnings, compared with 33.9 times for listed industry peers.
First-time sales that perform well after they start trading are key to the CSRC’s efforts to restore confidence in IPOs. Among companies that went public between June 2009, after the end of a previous IPO freeze, and September 2012, 41 percent are trading below their offer price, data compiled by Bloomberg show. That’s even after the stocks surged an average 35 percent on their trading debut.
“If the first few IPOs do well and bring good returns, that’s going to attract some attention,” David Gaud, a senior money manager at Edmond de Rothschild Asset Management, which oversees about $120 billion, said by phone from Hong Kong on Jan. 14.
The CSRC said this week it started spot checks on IPO pricing with 13 underwriters, including China International Capital Corp., and 44 institutional investors. The regulator said Jan. 12 it will suspend offerings by companies found to have disclosed information not contained in IPO prospectuses and other public releases.
That announcement came two days after Jiangsu Aosaikang Pharmaceutical (300361) Co. announced it was delaying an IPO on Shenzhen’s ChiNext board for startups, which it said was priced at a 21 percent premium to the industry. Nanjing-based Aosaikang, which makes cancer drugs, said it delayed the 4.05 billion yuan offering because the sale would have been “relatively large.”
Chinese companies marketing IPOs are now settling for lower valuations than most investors were offering to pay. Beijing Utour International Travel Service Co. (002707), Hebei Huijin Electromechanical Co. (300368) and Yangzhou Yangjie Electronics Technology Co. (300373) priced IPO shares at below-average valuations for their respective industries after rejecting most investor bids for stock as too high, according to statements on the Shenzhen Stock Exchange’s website on Jan. 14.
“It’s a good thing that the regulator has already realized some issues in the IPO process, such as over-pricing and a fast sales pace, and began to take action,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. “We’ve already seen some IPO prices fall to reasonable ranges.”
The number of Chinese IPOs will accelerate to a record pace in coming months, dragging down small-company stocks, according to UBS AG. (UBSN) The securities regulator has approved 52 companies for first-time share sales since last month, according to Bloomberg News calculations.
There will be some 60 to 80 IPOs each month from March to June, Chen Li, chief China equity strategist at UBS, said at a Jan. 13 briefing in Shanghai. Increased stock supply will hold back share prices of smaller companies listed on the ChiNext board, which surged last year, he said.
The securities regulator said Nov. 30 it will crack down on practices that led to overpriced deals, including investors colluding with companies to drive up valuations by making high bids with no plans to actually buy the stock.
Shaanxi Coal Industry Co. (601225), China’s third-largest producer, said yesterday it cut the size of its initial public offering by 59 percent to 4 billion yuan. That’s down from the 9.83 billion yuan it estimated on Jan. 8 and compares with an IPO target of 17.2 billion yuan announced in 2011.
“The CSRC is going to make some adjustments to make it smoother,” Gaud said. “It’s a learning curve right now, which is why the domestic market is not benefiting from these reforms yet.”