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Quick killings in mainland IPOs face slow death
By Louise Ho |
March 9, 2012, Friday
|
Print Edition
Print Edition
STAG profits" used to be a sure-fire way for investors to earn some quick money from initial share offers in China.
Such profits are made when a speculator buys into an IPO, betting that its price will rise on the first day of trading. When it does, he cashes out.
That strategy worked when IPO jackpots were the norm in China. But those days are fast fading.
From 2010 to 2011, about 14 percent of the 730 new issues in China's A-share market fell below their IPO price on the first trading day. When the stock market was in bullish mode in 2009, no new share fell on its first day of trading.
There are many reasons for lackluster trading debuts. The sluggish stock market is certainly one culprit.
When the Shanghai-Shenzhen 300 index dropped 12.5 percent in 2010, 7.45 percent of new shares fell on their debuts. When the index fell 25 percent in 2011, the percentage increased to 27.
The Shanghai-Shenzhen 300 index tracks the biggest 300 listed companies on both stock exchanges.
Worse than a bad trading debut is the situation where a new share continues its decline beyond the first day, delivering big losses to those who bought the initial public offering.
The losses were greater for institutional investors, who are required to hold on to their shares for a certain lock-up period.
According to the Shanghai Securities Research Institute, about 27 percent of 700 new shares from 2009 to 2011 fell below their IPO prices after three months of lock-up. If the lock-up period was a year long, the proportion rose to 35 percent.
Aside from bear markets, another factor in the abysmal performance of many new shares is overpriced IPOs.
From 2002 to 2008, the average price-earning ratio of IPOs fluctuated between 17 and 30, according to the Shanghai Securities Research Institute.
But the average P/E ratio of new share rose to 53 in 2010, 59 in 2011 and 47 so far in 2012. The ratios exceeded those of the average of all A shares in the same periods.
Remedial steps
Regulatory authorities are naturally concerned about the damage IPOs may be causing to the overall stock market and have taken remedial steps.
The Shanghai Stock Exchange has recently imposed trading restrictions on some accounts involved in "abnormal" price fluctuations. Yesterday, the bourse issued rules to boost oversight of IPO trading debuts with more suspensions in trading likely if prices soar or slump.
The China Securities Regulatory Commission Chairman Guo Shuqing has an alert to investors, warning them about the risks of speculating in new shares.
Speaking on the sidelines of the National People's Congress in Beijing this week, he said if a new share is priced high, it is likely to fall and "investors have nothing to gain."
Another factor in the IPO equation is the role of investment banks. During a share offer, many banks serve as underwriters, consultants and then even shareholders. That suggests some conflict of interest.
As a result, investment banks are eager for high IPO prices because they stand to make bigger profits.
Many industry insiders have suggested that securities firms sponsoring new share issues settle for more "reasonable" IPO prices.
I'm afraid that probably doesn't go far enough. Securities regulators need to force a change in the current price-setting system so that an IPO price isn't decided solely by the company that issues the shares and the firm that underwrites them.
The market itself should have a role. And one last factor to consider: investors themselves. People need to be disabused of the notion that the stock market is a merely a quick way to easy money.
The Shanghai Stock Exchange Chairman Geng Liang alluded to that in comments at the February 28 board meeting. He pointed out that investors should be encouraged to think longer-term and show maturity by "investing only in quality shares of companies with steady and sound operations."
Such profits are made when a speculator buys into an IPO, betting that its price will rise on the first day of trading. When it does, he cashes out.
That strategy worked when IPO jackpots were the norm in China. But those days are fast fading.
From 2010 to 2011, about 14 percent of the 730 new issues in China's A-share market fell below their IPO price on the first trading day. When the stock market was in bullish mode in 2009, no new share fell on its first day of trading.
There are many reasons for lackluster trading debuts. The sluggish stock market is certainly one culprit.
When the Shanghai-Shenzhen 300 index dropped 12.5 percent in 2010, 7.45 percent of new shares fell on their debuts. When the index fell 25 percent in 2011, the percentage increased to 27.
The Shanghai-Shenzhen 300 index tracks the biggest 300 listed companies on both stock exchanges.
Worse than a bad trading debut is the situation where a new share continues its decline beyond the first day, delivering big losses to those who bought the initial public offering.
The losses were greater for institutional investors, who are required to hold on to their shares for a certain lock-up period.
According to the Shanghai Securities Research Institute, about 27 percent of 700 new shares from 2009 to 2011 fell below their IPO prices after three months of lock-up. If the lock-up period was a year long, the proportion rose to 35 percent.
Aside from bear markets, another factor in the abysmal performance of many new shares is overpriced IPOs.
From 2002 to 2008, the average price-earning ratio of IPOs fluctuated between 17 and 30, according to the Shanghai Securities Research Institute.
But the average P/E ratio of new share rose to 53 in 2010, 59 in 2011 and 47 so far in 2012. The ratios exceeded those of the average of all A shares in the same periods.
Remedial steps
Regulatory authorities are naturally concerned about the damage IPOs may be causing to the overall stock market and have taken remedial steps.
The Shanghai Stock Exchange has recently imposed trading restrictions on some accounts involved in "abnormal" price fluctuations. Yesterday, the bourse issued rules to boost oversight of IPO trading debuts with more suspensions in trading likely if prices soar or slump.
The China Securities Regulatory Commission Chairman Guo Shuqing has an alert to investors, warning them about the risks of speculating in new shares.
Speaking on the sidelines of the National People's Congress in Beijing this week, he said if a new share is priced high, it is likely to fall and "investors have nothing to gain."
Another factor in the IPO equation is the role of investment banks. During a share offer, many banks serve as underwriters, consultants and then even shareholders. That suggests some conflict of interest.
As a result, investment banks are eager for high IPO prices because they stand to make bigger profits.
Many industry insiders have suggested that securities firms sponsoring new share issues settle for more "reasonable" IPO prices.
I'm afraid that probably doesn't go far enough. Securities regulators need to force a change in the current price-setting system so that an IPO price isn't decided solely by the company that issues the shares and the firm that underwrites them.
The market itself should have a role. And one last factor to consider: investors themselves. People need to be disabused of the notion that the stock market is a merely a quick way to easy money.
The Shanghai Stock Exchange Chairman Geng Liang alluded to that in comments at the February 28 board meeting. He pointed out that investors should be encouraged to think longer-term and show maturity by "investing only in quality shares of companies with steady and sound operations."
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