- Luoyang Jianlong closed below its offer price last week to become the worst debuting stock since 2012
- Postal Savings Bank’s shares might fall below their IPO price in Shanghai, Jingxi Investment says
Initial public offerings no longer promise spectacular profits for mainland Chinese investors, with days of 44 per cent gains in some instances in first trading sessions fast becoming a thing of the past.
Returns from a slew of companies debuting on mainland exchanges have been disappointing. Shares in Jiangsu Bioperfectus Technologies, a biotechnology company, for instance, rose only 17 per cent on their debut on the Science and Technology Innovation Board, or Star Market, on Thursday, missing expectations. Its IPO was floated for a multiple of 49 times against an industry average of 34 times.
Luoyang Jianlong Micro-Nano New Materials, listed on the Star Market, closed 2.2 per cent lower on its first trading day on Wednesday, making its trading debut the worst in seven years. About 16 per cent of companies trading on China's new technology board are currently trading below their IPO prices.
Hangzhou-based China Zheshang Bank rose less than 1 per cent on its debut in Shanghai last week and dropped below its IPO price the following day.
New offerings are no longer risk-free bets that guarantee profits, as regulators increase supply by approving more listings, and test a registration-based system that prices new shares on the basis of market demand. Interest among traders has also declined, as price swings fall to their lowest level in 22 months in the absence of trading catalysts.
"There are too many IPOs. Some are of good quality and some are not," said Wang Zheng, chief investment officer at Jingxi Investment Management in Shanghai. "We need to be selective while buying IPOs. The days are gone when as long as it's an IPO, it will be chased."
Beijing has approved 182 companies for listing so far this year, against 105 for the whole of 2018, according to Bloomberg data.
Demand has also been affected by the prevailing sentiment of caution. The combined turnover of the Shanghai and Shenzhen bourses dropped to a four-month low last week, while the 30-day volatility on the Shanghai Composite Index was at its lowest since February 2018. Traders are waiting on the sidelines, watching for any progress in the US-China trade talks and hints about policy loosening by the Chinese central bank.
Chinese regulators typically allow issuers to sell IPO shares at no more than 23 times their earnings to ensure that each deal is successful, and caps first-day gains at 44 per cent to rein in speculation. Such caps are waived for companies listing on the Star Market, a five-month-old trading board for home-grown technology companies under the Shanghai exchange.
This means IPOs on the Star Market can be priced much higher than industry peers, building up potential risks for subscribers. Luoyang Jianlong, which makes chemicals used in refining, metallurgy and environment protection, sold its stock at 53 times its earnings, more than three times as expensive as the industry average. Its shares fell 0.6 per cent to 42.10 yuan for a second straight day of declines on Thursday, a day after its debut, taking its two-day losses to 2.7 per cent.
All eyes will be on the upcoming first-day performance of Postal Savings Bank of China, which could be mainland China's biggest IPO in about five years. But early signs do not bode well for its debut. The stock has been oversubscribed " by retail investors mostly " 79 times, but interest in listings is at its lowest in more than four years.
China's biggest IPO in four years faces a woeful start ahead of debut
"Although it's a very big state-owned bank … it has no valuation edge over existing listed banks. There's still a chance the stock will breach the offer price on the first day of trading," said Jingxi Investment's Wang.
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