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In the past, when companies made inquiries to large institutions about how much they were willing to pay for their stocks, institutions would try to bid low. Companies were worried their ipo's might fall through and they would have to settle for less. Huang says the best example is petrochina. Even though most anlysts expected the stock to trade around 30 yuan. Institutional investors managed to drive the offering price down to 16 yuan per share. Eyeing the potential upside in the stock, retail investors rushed to buy on the exchange the first day petrochina was listed. Pushing prices up to 44 yuan per share, but after making a handsome profit for its initial investors. Petrochina went into a steady decline. Today it trades at around 15 yuan, a price that puts many retail investors under water. Under the new rules, institutional investors who bid lower than the final offering price in the inquiry stage cannot participate in the offline offering that follows, which puts a phychological floor to how low they may want to bid. Also, if they put in a bid in the inquiry stage, successful or not, they would not be allowed to participate in the online portion of an offering, which in Sanjin's case accounts for 80 percent of the entire offering. Finally, it wouldn't make much sense for investors to get involved in the online subscription anyway, because each account cannot subscribe to more than 1-tenth of a percent of the entire offering. In Sanjin's case, with the oversubscrition, it would only leave each account 80-thousand yuan worth of stock, too small a number to be worthwhile to institutions. With all the changes, Sanjin's offering price reached the upper end of analysts predictions, a result which transfers profit from the primary market to the secondary market. And sends risks the other way, also it lets the company walk away with more cash in hand.
The balance between risk and return is vital to any functioning capital market, and for stocks to drop below ipo prices is a lot more common in mature markets than in China. Analyst's say the government wants that risk to be there, so investors can learn to evaluate companies more carefully and reward those with good quality and potential. But why did it take so long for some qualified companies to go public?
Sanjin's journey to go public was an agonizingly long one. The
company got its intial approval in late june of last year. But before it could
manage to get the final o-k, the global financial crisis
hit.
The market went into a free fall, and in order to buy into each new offering, which promised a safe return, investors pulled more money out of existing stocks, precipitating the drop. Finaly in september, after the overall market dropped some 60 percent, regulators slammed the door on new offerings. And it wasn't the first time it happened. In the past 15 years, regulators halted ipo's 6 times, each after a dramatic downturn, in part to protect retail investors with nest eggs in the market. But today is a different world. With the shanghai composite index gaining 62 percent in the first half of the year, confidence is coming back to the market, and some bubbles may be coming as well.
Ma Jun, Chief Economist, Deutsche Bank China
The
valuation of the market is really rich, if you look at 2009 PE, it's about 22
times. It's much higher than the Asian average. The average of other Asian
markets is about 14 times, so there is a concern of the bubble being built up in
the market, so we need to have some more supply to recap the potential emergence
of the bubble of capital market.
Bubble or not, the relaunch is definitely good news for companies like Sanjin. In its intial ipo application, the company said it needs the money to update product lines, build a new warehouse and develope more drugs. Projects, which because of the ipo, now may be able to begin. Economists say the relaunch came at a crucial time, because other funding sources are running out.
Ma Jun, Deutsche Bank China
Now that
lending I think is gonna slow, and also bond issues have been fairly
concentrated in the first half this year, so if companies need to increase
money, it has to look more for the equity
market.
And the public financing platform offers a lot more than just one round of cash injection.
Huang Ting, Pharma Analyst, SinoLink Securities
The pharma
sector is growing very fast, we expect to see a lot of mergers and aquisitions
in it. So if you are a listed company, you always have the choice to raise money
from the stock market if you need to buy up a
competitor.
Of course, with intensive media coverage on ipo's, companies tend to boost their profiles. But for a pharmaceutical company, there are even more realistic gains.
Zhao Bing, Shanghai Securities
Our
government sponsored medical care system tends to hand out more benefits to
public pharmaceutical companies than private ones. Sanjin's drugs have a larger
chance to be covered by that system if it becomes a public
company.
Most analysts agree the government is still testing the waters with the Sanjin i-p-o, which is relatively small compared with other i-p-os coming down the pipeline. But even with china construction's 40 billion yuan offering approaching. Most analysts don't believe they are putting much pressure on the overall market.
Andre Loesekrug-Pietri,
Managing Partner, Cel Partners
I
personally think it's very positive, because we have seen in the last few years
companies which probably were not prepared to be public just went public because
there was just general appetite for it. Right now we are actually seeing better
quality companies that cna go over the
hurdles.
Lode Vermeersch, CIO, KBC Goldstate Fund Mgmt
If you look
at the past six of the reopenings of ipo's, the moment the news goes out that
ipo's start again, that typically has a little bit of impact. it typically
doesn't last more than a week.
But that doesn't mean the market will not come under pressure again. And when that happens, another hiatus is always possible. The strong government hand is in some ways unique to china. In last year's crisis, the u-s government took many extraordinary moves but it didn't stop ipo's. Analysts say most companies in the u-s sensed the stress on wall street, and chose not to go public at that time, having china's government halt ipo's can have a downside.
Li Nian, SYWG
Research
Government
intervention might be good for the market overall, but for individual companies
who have good opportunities, if they can't raise the money when they need it, it
is going to slow their growth.
Some industry watchers say, companies need to become more market-oriented before the government does.
Huang Yongdong, China Business News
A
market-oriented company wouldn't issue shares in a stressed market because it's
extremely dilutive. But the people who run most Chinese companies don't care
what's best for shareholders, they barely hold a stake in the company anyway.
They'll always choose to raise money from the stock market if they can, because
that's the money they don't have to return.
Analysts say the attention Sanjin got was disproportionate to its size and importance . In fact they believe the relaunch, artificially created a market event for people to speculate on, and speculation is what regulators don’t want. After Sanjin, electric wire maker -zhejiang wanma-, and hunan join door - a supermarket operator - are expected to go public soon. And regulators are hoping the impact of the relaunch will fade and investors will go back to focusing on the fundamentals.
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