China’s World-Beating IPOs Get Help From the Regulators

China’s initial public offerings are vastly outperforming IPOs in the U.S. and Europe so far this year -- and investors can thank Chinese regulators for much of the gains.

The 48 companies that completed IPOs in 2014 have surged an average 54 percent to date when adjusted for deal size, compared with a 9 percent gain for 194 first-time sales outside China, according to data compiled by Bloomberg.

That performance owes much to efforts by China’s securities regulator to protect small investors in an initial offering process that had been riddled with fraudulent practices. Facing pressure from the watchdog, most companies that went public this year did so at below-average valuations as they rushed to raise money following a 15-month IPO freeze.

“The current round of IPOs has the most administrative intervention in the history of China,” said Ding Yuan, an accounting professor at the China Europe International Business School in Shanghai. “The securities regulator is burdened with the responsibility for price swings.”

The resumption of stock sales in China helped push the value of IPOs in the Asia-Pacific region to $17.7 billion so far in 2014, more than triple the amount raised in the year-earlier period, data compiled by Bloomberg show.

Western Europe’s IPO market was also strong, more than tripling to $15.6 billion. The value of U.S. initial offerings fell 19 percent to $12.7 billion, the data show. The biggest in the U.S. involved Santander Consumer USA Holdings Inc., the U.S. auto-lending unit of the Spanish bank, which raised $2.07 billion in January.

New Rules

Chinese regulators began tightening oversight of IPO pricing in January after ending their moratorium on new offerings. The intervention stands in contrast to Chinese Premier Li Keqiang’s call for a U.S.-style IPO system where supply and demand -- not government meddling -- determines valuations.

New rules from the China Securities Regulatory Commission take aim at a practice in which companies and certain investors collude to drive up bids in share sales. The regulator said it would now spot-check investor offers for IPO shares and blacklist those who fail to “bid cautiously.” Another rule requires a company to disclose risks early if it is seeking a valuation above the industry average.

Winners, Losers

The tightening had the desired effect of constraining valuations, said Catherine Yeung, Hong Kong-based equity investment director at Fidelity Investment Management Ltd.

“The retail investors are the winners and the companies are the losers,” she said. Individual investors typically account for as much as 40 percent of an IPO in China’s domestic market, compared with 10 percent in Hong Kong.

Of the 48 companies that went public this year, only eight priced shares above the average valuation of their sector, according to the CSRC. Guangdong East Power Co., a maker of electronic devices, for instance, sold stock at 14.5 times earnings, compared with the average multiple of 26.6 for manufacturers.

In all, the companies could have raised almost 50 percent more than the $5.3 billion they did this year when taking into account how Chinese IPOs outperformed those in other markets since they started trading, according to calculations by Bloomberg News.

IPO Cancellation

At least one company canceled its IPO amid the regulator’s renewed focus on pricing. Jiangsu Aosaikang Pharmaceutical Co., a Nanjing-based maker of cancer drugs, shelved its 4.05 billion yuan ($652 million) sale in January after seeking a valuation at 67 times earnings, a premium to other drugmakers.

Aosaikang dropped the share sale because it was “relatively big,” the company said in a Jan. 10 statement. After Aosaikang pulled its IPO, some companies started to reject high investor bids.

Yangzhou Yangjie Electronic Technology Co., which makes electronic components for Royal Philips NV, turned down the highest 94 percent of investor offers when it set a price for its $64 million IPO, according to filings. The shares have rallied 122 percent from the offer price.

The company acted “based on guidance from the CSRC,” board secretary Liang Yao said in response to online investor questions in January.

CSRC Vice Chairman Yao Gang said in an interview in Beijing earlier this month that the regulator “didn’t overly intervene when IPOs were resumed” in January, adding that it is “consistently deregulating the process.”

Still, the government intervention has drawn criticism from some money managers, who say that it runs counter to Premier Li’s goal to give markets greater sway.

“If you tell people how much they should pay for a stock, that’s not a market-based system,” said Thomas Deng, deputy general manager of Invesco Great Wall Fund Management Co. “The regulator should believe in the power of the market and give the power back to the market.”

— With assistance by Fox Hu, Shidong Zhang, and Aipeng Soo

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