Issuers have leeway, but regulator keeping close eye on valuations
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China reopened its IPO market this month after a year-long ban, and 51 listing hopefuls immediately rushed to launch their transactions and tap the market’s massive pent-up demand.
But the initial euphoria didn’t last long, after drugmaker Aosaikang Pharmaceutical in early January unexpectedly postponed its listing on ChiNext – a Nasdaq-style board – despite an enthusiastic response from investors.
Market participants believe the company came under pressure from the China Securities Regulatory Commission.
And those concerns appeared to be confirmed when the CSRC issued an urgent notice on January 12 about the supervision of IPOs.
The message was loud and clear: While issuers are free to set terms on IPOs, CSRC is still monitoring the market. Any company setting an IPO price higher than the valuation of industrial peers in the secondary market must publish repeated risk warnings three weeks before opening books to retail investors.
The regulator also said it would carry out random checks on price consultations and the pre-marketing of IPOs – and halt any listing that discloses information not publicly available or in the IPO prospectus.
After the notice was issued, five A-share listing hopefuls postponed their floats on the eve of bookbuilding: Beijing Forever Technology, Netposa Technologies, Hebei Huijin Electromechanical, Nsfocus Information Technology and CiMing Health Checkup Management Group.
No change of control
The developments have sent shivers through a market whose confidence has already been badly shaken once.
It is no surprise that Aosaikang caught the regulators eye. The pharmaceutical had set a high price for its IPO and significantly increased the size of the deal – to Rmb4.05bn (US$670m) from Rmb794m – while including a large number of secondary shares.
The postponement underscored the fact that the regulator is not yet ready to allow for the setting of valuations freely.
“When the regulators said they wanted to develop a market-driven IPO mechanism in China, they meant a mechanism which they can accept,” said a banker at one of the top investment banks in the country.
“The regulators will not give up control over the market entirely until they find the investors are mature enough.”
China had shut the market for more than a year, after a string of new stocks slumped, in order to weed out weaker issuers and win back some trust from investors whose faith in the process had waned.
The market’s reopening has come with several strings attached. Rules introduced last November require issuers to reject at least the highest 10% of bids on new listings. Since then 40%–60% of orders were removed from final books on IPOs. The urgent notice has boosted that number further.
On January 13 – the day after the notice – Beijing UTour International Travel Service, Yangzhou Yangjie Electronic Technology and Hebei Huijin Electromechanical each removed more than 90% of the total orders on their books during price consultation.
“The CSRC are keeping a close eye on the pricing of IPOs right now,” said another banker. “So issuers and arrangers are very cautious on setting the prices, as no one wants to upset the regulator again.”
Fiona Lau, Ken Wang
