Reform in need of time to fix overpriced IPOs

Although public listings on the A-share market have been given the green light after a long moratorium, 2014 will be a transition and learning period

Having resumed on the last day of 2013, the A-share market has seen the approval of 51 new stocks in fewer than two weeks after a 13-month freeze.

However, following the Jiangsu Aosaikang Pharmaceutical Co event, many planned listings have been suspended.

The regulator's announcement on Wednesday to step up scrutiny and monitoring of the initial public offering process also cast a shadow over the reform.

In the ensuing market uproar, analysts said real change takes time.

Late on Wednesday night, the China Securities Regulatory Commission announced through its Weibo account that it has been looking into the process of IPO offerings. Apart from China International Capital Corp Ltd, the major sponsor of Aosaikang, which postponed its 4.05 billion yuan ($669 million) listing because its shares were considered too costly, another 12 underwriters, including Guosen Securities Co Ltd and Minsheng Securities Co Ltd, are also being checked.

In addition, 44 institutional investors involved in offline book-building are being targeted in the scrutiny.

On Jan 12, the commission reiterated its vow to strengthen supervision of IPO activities.

"An IPO shall be suspended if the issuer and underwriter use information other than that publicly disclosed in the prospectus during a roadshow," said the stock market regulator in its notice. "Investors who are not capable of pricing in offline subscriptions, or those who failed to offer reasonable prices, shall be blacklisted by the Securities Association of China and prohibited from book-building in the upcoming listings."

In addition, the watchdog has ordered companies to issue weekly risk warnings three weeks before opening online subscriptions to retail investors, if their price-to-earnings ratios are higher than the average price-to-earnings ratios of related sectors in the secondary market.

Following the commission's move, five companies postponed their listings on Jan 12.

Among them, Hebei Huijin Electromechanical Co Ltd and Beijing Forever Technology Co Ltd stepped forward and carried out online offerings on Wednesday. The rest haven't got a new timetable yet.

So far, among the 51 companies the commission has given the green light to for an IPO, only Neway Valve (Suzhou) Co Ltd announced — on Thursday — that it is due to list on the Shanghai Stock Exchange on Friday, making the company the first stock finishing the listing process after IPO activity resumed in the A-share market.

Drugmaker

Aosaikang, a Nanjing-based anticancer injection maker, suspended its IPO on Shenzhen's ChiNext board on Jan 10, the day its online offering was due to begin. "As the scale of the offering and old share transfer were relatively big, the issuer and major underwriter, China International Capital Corp Ltd, decide to suspend the offering," said the company.

Just one day before, Aosaikang announced that it planned to issue 55.466 million shares at 72.99 yuan apiece. The sale would value the drugmaker at 67 times its 2012 earnings compared with the average 55.3 times for its peers listed on Shenzhen's growth enterprise board. What's more, 43.6 million stocks of the offering are old shares released from its major shareholder, Nanjing Aosaikang Investment Management Co Ltd, which would have pocketed 3.18 billion yuan. The company to be listed would have raised only 866 million yuan.

Although the commission has denied any heavy-handed intervention, it is widely believed that Aosaikang's surprising move was based on the regulator's intervention.

"The Aosaikang IPO was stopped obviously because of its sky-high offering price and out-of-range P/E," said Kenny Tang, general manager of AMTD Financial Planning Ltd. "In order to bring down the share price, the commission allowed a reduction of the old shares to boost the stock supply on offer. But the regulator's approach is not comprehensive.

"However, what's different this time is that the commission intervened immediately when they found things were wrong. That means they are serious about bringing down issue prices. Rules that suit developed markets don't necessarily suit China," he said

"It's not the right time yet. The reform has to be carried out gradually. At this moment, administrative intervention is still an effective tool." He adding further moves from the authority are expected to fill the regulatory loopholes.

"The Aosaikang scenario is an independent event. It wouldn't change the fact that, ultimately, the pricing power will be given back to the market," said Chen Yuanfei, chief analyst of the finance sector at Haitong International Securities Group Ltd.