China’s decision to end a 15-month freeze on initial public offerings may unleash at least $11 billion of share sales in next year’s first half.
More than 760 mainland Chinese companies are waiting to go public, their plans halted when regulators imposed the moratorium in September 2012 as they drafted rules aimed at curbing price manipulation.
State-owned companies are expected to be among the first to list. Shaanxi Coal Industry Co. plans to seek as much as $2 billion, two people with knowledge of the matter said, while China Postal Express & Logistics Co., the nation’s biggest package shipper, may raise $1.5 billion. The IPOs underscore companies’ pent-up need for cash even as Chinese stock valuations are near a decade-low.
“It’s going to be good for everyone,” said Eric Jackson, president of Ironfire Capital LLC, a Naples, Florida-based hedge fund that invests in Chinese stocks. “The Chinese can only invest in domestic stocks, so deciding to loosen the rules on IPOs will give Chinese more places to invest and hopefully take some air out of the property bubble.”
The $11 billion estimate for IPOs was calculated by Bloomberg News based on the filings of 76 companies that have been approved or are close to getting approval to sell shares on the Shanghai and Shenzhen main boards. It doesn’t include IPOs on the ChiNext market for startup companies.
Fifty companies will be ready for share sales by the end of January, according to the China Securities Regulatory Commission. The proceeds could help ease the pressure on increasingly indebted Chinese companies, who owe interest equal to 12.5 percent of the country’s economic output, according to a Sept. 18 report from Fitch Ratings. That’s up from 7 percent in 2008.
In the first half of 2013, only the U.S. hosted more than $11 billion of initial offerings, data compiled by Bloomberg show. Companies planning IPOs in China must include figures outlining the use of proceeds in their draft prospectuses. The final amount raised may deviate from those estimates.
Shaanxi Coal, based in Xi’an city in western China, plans to raise money in next year’s first half to finance increased production, said the people familiar with the matter, who asked not to be named as the deliberations are private.
China Postal Express, which has more than 45,000 outlets, is struggling to keep pace with a domestic delivery market growing 20 percent a year. The courier, which has trailed industrywide growth since 2009, intends to use the proceeds to increase its trucks, airplanes and distribution centers, according to its IPO prospectus.
China Railway Materials Co., a logistics firm and steel supplier, may raise about $1 billion to expand its logistic bases and operating networks, a person with knowledge of the proposed deal said. Huaibei Mining Co., a coking-coal producer in eastern China, may seek about $1 billion, according to a person with knowledge of its plan.
Officials at the four state-owned companies declined to comment or weren’t immediately available.
Chinese regulators announced the plan to end the freeze on Nov. 30, while also introducing new rules intended to stamp out price manipulation that had produced excessively high valuations for companies going public.
The regulator “has made it abundantly clear that it is determined to clamp down on” overpriced deals, said Zhang Qi, a Beijing-based analyst at Zero2IPO Group. “Companies and underwriters will definitely be more rational in pricing 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, the data show.
Price-to-earnings ratios in Chinese IPOs averaged 58 times in 2010 and 48 times in 2011, according to former CSRC Chairman Guo Shuqing. Valuations fell 36 percent in 2012, the CSRC said in March. The Shanghai Composite Index trades at 11.2 times earnings.
The CSRC blamed the pricing misconduct in part on underwriters who succumbed to pressure from companies selling shares, according to a question-and-answer document posted on its website last month. It also cited institutional investors who colluded with issuers to drive up bids.
At least 21 bankers, auditors, executives and lawyers have been barred from the securities industry since May due to IPO misconduct.
Seeking to protect retail investors, the new rules require individuals interested in buying IPO shares to hold a minimum amount of equities in their brokerage accounts. They will also require underwriters to disclose details on institutional bidding for shares and put more pressure on them to provide accurate information in prospectuses.
The rules follow reform pledges made in a 60-point document released by the Communist Party on Nov. 15, vowing to support a move toward a U.S.-style IPO system that relies on improved transparency.
“The measures are a dose of encouragement for the investor community,” said Steve Wang, chief China economist at Reorient Financial Markets Ltd. in Hong Kong. “They are putting sponsors on the line and making them liable for wrongdoing.”