Fox Hu at Bloomberg
In most stock markets, a 77 percent return in four days would leave investors feeling ecstatic.
In China, it’s just the opposite -- at least when it comes to initial public offerings. That four-day advance in Guotai Junan Securities Co., which completed China’s biggest IPO in five years last month, is the worst start among 190 initial share sales on mainland bourses this year. Every other one recorded a gain at or near the 92 percent maximum allowed, according to data compiled by Bloomberg.
While regulatory pressure on companies to keep their IPO prices low has led to instant gains once the shares start trading, returns are coming under pressure from a flood of new equity and a tumble in the Shanghai Composite Index. The Bloomberg China IPO Index has dropped 25 percent since the end of May, even as authorities considered a suspension of new deals to ease supply concerns.
“Insanity has a limit,” said Francis Lun, the chief executive officer at Geo Securities Ltd. in Hong Kong. “If Guotai keeps rising like a penny stock, it will soon become the biggest company in the world, bigger than Apple.”
China’s second-largest brokerage rose 1.4 percent to 34.82 yuan in Shanghai on Wednesday, its first day without a limit-up move. China restricts daily gains to 44 percent for IPO debuts and 10 percent thereafter. The stock dropped 9.8 percent on Thursday.
Guotai Junan raised the equivalent of $4.9 billion from investors, the biggest IPO in China’s domestic market since 2010, according to data compiled by Bloomberg. The company, whose $43 billion market value is in line with that of Deutsche Bank AG, received $379 billion of orders, equivalent to Indonesia’s entire stock market.
Returns on IPOs this year have started shrinking for the first time in six months. On June 30, stocks that began trading in China this year were 393 percent higher than their initial offering prices, down from 603 percent at the end of May. They’re valued at an average 71 times earnings, versus 96 a month earlier.
Companies and their shareholders have raised $23.7 billion through IPOs in China’s domestic market this year, more than four times the amount for the same period of 2014, data compiled by Bloomberg show.
Regulators are considering suspending IPOs to stabilize the stock market, people familiar with the matter said on June 29. The Shanghai Composite sank 5.2 percent on Wednesday, extending its drop from a June 12 high to 22 percent. Citic Securities Co., China’s biggest brokerage, has declined 33 percent from its high in April.
“There is a lot of supply,” said Philippe Espinasse, the former head of equity capital markets for Asia at Nomura Holdings Inc. and author of “IPO: A Global Guide.” “After sharp corrections, investors are looking more closely at fundamentals.”