China has slowly reopened its market for initial public offerings (IPOs), a market that had been closed by the country’s regulators since October 2012.
In 2010 China was the world’s most active market for IPOs.. That year, 349 companies went public in China through IPOs and raised $71 billion. The decision to close the IPO market in October 2012 was made by China’s securities regulators to draft rules to curb market manipulation, fraud and misconduct by companies going public and their advisers.
Since then, China’s securities regulator, the China Securities Regulatory Commission, indicated a desire to move toward a U.S. style registration system for IPOs.
Right before the new year, China’s Securities Regulatory Commission announced that it had re-opened the country’s IPO market. The commission gave a green light to five companies to go public. Together these companies are seeking to raise $353 million.
The companies approved for IPOs were Neway Valve (Suzhou) Co which intends to raise about $138 million through a listing on the Shanghai Stock Exchange. Four other companies, Truking Technology Ltd., Guangdong Qtone Education Co., Guangdong Xinbao Electrical Appliances Holdings Co. and Zhejiang Wolwo Bio-Pharmaceutical Co. were approved to list on the smaller Shenzhen Stock Exchange.
There are approximately 760 companies in line to go public in China, many of whom have been seeking IPOs for several years. Despite the opening of China’s IPO market, it’s questionable as to how many of these companies will go public in China this year, or for that matter at all.
Concerns remain as to the market’s ability to absorb hundreds of new offerings, the impact of IPO pricing either being too low or too high, and whether significant IPO after-market buying can be generated to support the potentially huge number of new offerings.
PriceWaterhouseCoopers LLP (PWC) indicated that Chinese IPOs may raise as much as $250 billion this year. PWC indicated that about 40 companies could list on Shanghai’s main stock exchange this year, raising around $16.5 billion, and that 260 companies could list in Shenzhen, raising around $24.8 billion. This total of 300 companies is slightly less than 40 percent of the 760 companies queued up to go public.
One state-owned company, the China Postal Express & Logistics Co., indicated a few days ago that it had withdrawn its application for an IPO on the Shanghai Stock Exchange. The company indicated a need to “adjust its strategy.” This company is likely the first of many Chinese companies hoping to go public in China who will for a variety of reasons decide not to proceed. with a Chinese IPO. A key factor is their inability to meet the new regulatory requirements being imposed by China’s Securities Regulatory Commission.
A greater number of companies will likely succeed in going public in China this year than the record of 2010, and a record amount of capital may be raised. But, I view China’s newly reopened IPO market as being in for a roller-coaster ride of a year. It’s likely that many of 760 companies lined up to go public will abandon their plans to go public in China and either decide to stay private, seek out private equity funding, or take advantage of increased interest in Chinese IPOs in the U.S., Europe and elsewhere in Asia.
The Hong Kong Market for Chinese IPOs
Since the China IPO market was closed in late 2012, the Hong Kong Stock Exchange has been the preferred listing venue for Chinese companies wanting to go public.
In late December, Harbin Bank China announced that it intended to go public through a Hong Kong IPO with the intent to raise around $1 billion.
Three other Chinese banks completed IPOs in Hong Kong since the beginning of October. China Everbright Bank Co., Bank of Chongqing Co. and Huishang Bank Corp. raised a combined total of $4.9 billion.
It’s questionable how many Chinese companies will go public in Hong Kong this year, as the Hong Kong regulators have tightened their standards for Chinese companies and underwriters of IPOs.
The U.S. Market for Chinese IPOs
Hong Kong is not the only beneficiary of increased interest in Chinese IPOs. Qunar Cayman Islands, completed a U.S. IPO and its shares doubled on its first day of trading. The company is owned by Baidu, China’s leading search engine company, often referred to as the Google of China.
The shares of 58.com, a Chinese classified ad website operator, often compared to the U.S. Craigslist, increased 42 percent on their first day of U.S. trading. The company’s IPO raised $187 million. Sungy Mobile, a mobile applications company, also went public with Credit Suisse and JP Morgan as the lead underwriters, and Deutsche Bank led the offering of online sports-lottery operator, 500.com,
Other Chinese companies who have taken advantage of the interest by American and global investors are LightInTheBox, an online retailer,which raised almost $91 million in June; the micro-lender China Commercial Credit which raised $8.9 million, and Montage Technology Group which raised $80 million.
The increased interest in IPOs of Chinese companies by American and global investors is a major change from 2012, when only two Chinese companies went public through American IPOs.
The Prospects for Chinese, Emerging Market and Frontier Market Companies Going Public in 2014
With the renewed interest by U.S. and global investors in Chinese IPOs, and the inability of most of these investors to be able to participate directly in IPOs in Shanghai or Shenzhen, 2014 should be a strong year for Chinese IPOs in the United States. But, I don’t believe that the floodgates have opened for U.S. IPOs of Chinese companies. It’s likely that the United States will be a viable alternative for many of the 760 companies planning to go public in China.
The market for companies in other emerging and frontier markets for IPOs or strategies to become public outside of their home countries will also likely be strong. This will benefit companies in countries in Southeast Asia, peripheral Europe and Latin America, including Brazil, Indonesia, Thailand and Poland. There will be viable alternatives for companies in many of these regions to go public in the United States, the United Kingdom, Singapore and Germany, and for some in the resource sector, Australia and Canada.
Author: Jeffrey Friedland
Email: firstname.lastname@example.org Twitter: @jeff_friedland
Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.
He is the CEO of Friedland Global Capital., a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives.