China’s stock markets might be volatile and its economy weakening, but policymakers are nevertheless mulling measures to improve the pricing of initial public offerings and further open the country’s capital markets to foreign investors.
The grim market conditions have certainly not dampened enthusiasm among would-be issuers. Domestic exchanges have been inundated with as many as 690 companies vying to launch IPOs, though very few have actually succeeded in launching sizeable deals so far and overall volumes are down considerably.
Chinese companies raised a total of Rmb59 billion ($9.3 billion) from IPOs in the A-share market during the first five months of this year — a fraction of the Rmb152 billion raised during the same period in 2011, according to data from CapitalVue, a Shanghai-based research firm.
“Just look at the size of the pipeline,” said a banker. “The primary equity markets remain a very attractive fundraising platform for Chinese companies. Even if they can only sell shares at less than 20 times P/E [price-earnings ratio], chances are they can still get a significant amount of capital.”
There are other reasons for listing hopefuls to be optimistic. China’s securities regulator said last week that it will greatly reduce the administrative procedure for IPO approvals and authorities are reported to have started reviewing the feasibility of an international trading board in Shanghai.
Bros Eastern, a Chinese producer of dyed melange yarn, is the latest issuer to bring a sizeable deal. The Ningbo-based company raised Rmb2.04 billion ($323 million) after pricing shares at the bottom of an indicated range, according to a statement filed to the Shanghai Stock Exchange on Monday.
The company sold 150 million shares at Rmb13.6 each, the lower end of a price range that extended up to Rmb15, which values the company at 12.5 times to 13.8 times its 2011 earnings. That compares to an industry average P/E of 22.3 times as of May 31, the day when Bros closed its ordering books, according to the statement.
Bros initially aimed to split the offering equally between institutional and retail investors. But strong demand from retail, which subscribed 15.8 times more shares than they were allocated, triggered a clawback.
About 30% of the offering, or 45 million shares, will go to institutional investors after the allocation adjustment, while retail investors will take 70%, or 105 million shares.
There were 34 institutional investors, consisting of funds and asset managers, that took part in the deal, placing orders for 3.44 times the number of shares on offer to them.
Bookrunner Citic Securities claims a fair value of Rmb18.39 to Rmb22.03, citing the company’s core competitiveness and its growth potential.
Based on the IPO price range, Bros will raise between Rmb2.04 billion and Rmb2.25 billion. However, the company said in its prospectus that it needs only Rmb1.06 billion of working capital, raising questions about how effectively the proceeds will be used — though it is hardly the only Chinese company to raise far more money than it needs.
Bros produces mid- to high-level melange yarn with diverse specifications. It operates a number of cotton-ginning, spinning and dyeing factories across the country. Apart from mainland China, it exports worldwide, including sales to Europe, the US, Asia and Africa, the company says on its website.
Separately, Huanghai Machinery raised Rmb431 million in a Shenzhen IPO. The company sold 20 million shares at Rmb21.59 each.
