[Editorial] Smaller IPOs Restore Sense to China’s A-share Market

[Editorial] Smaller IPOs Restore Sense to China’s A-share Market

Xu Yunfeng

Date: Tue, 05/22/2018 - 17:27 / source:Visual China Group Imagine China
[Editorial] Smaller IPOs Restore Sense to China’s A-share Market
[Editorial] Smaller IPOs Restore Sense to China’s A-share Market

(Yicai Global) May 22 -- Attention has continued to focus this year on the amount of money companies raise in initial public offerings, even as the overall proceeds from listings on China’s A-share market have shrunk.

Take a few recent examples. The securities regulator gave lithium-ion battery unicorn Contemporary Amperex Technology Co. the green light on April 4 to raise CNY5.4 billion (USD847 million), but that was about 60 percent less than expected. Cloud computing firm Sangfor Technologies Co. aimed for CNY1.3 billion on April 20, but secured CNY1.2 billion. Electronics firm Fuda Alloy Materials Co. eyed CNY282 million, but raised CNY209 million. 

Moreover, cleaning-robots maker Ecovacs Robotics Co. and architecture firm Hanjia Design Group Co. won approval on May 4 with a combined value of CNY1.1 billion, but the latter’s proceeds were marked down to CNY751 million from CNY912 million.

The overall scale of financing raised through IPOs on China's A-share market has been trimmed. Smaller offerings have become the new trend in the mainland, showing the market is more cautious and the process for allocating funds has become more rational.

Companies should raise money in line with their actual business needs. But the long and costly IPO application process has forced them to target more than needed. Consequently, some of the proceeds have not been used effectively, while the market has been widely criticized for excessive financing.

Gathering Pace

This has not stopped the listing of new stocks. The pace has accelerated over the past couple of years. IPO numbers hit a new record of 438 last year after reaching a five-year peak of 227 in 2016.

The China Securities Regulatory Commission reaffirmed its intention this year to continue with listing reforms, aiming for increased ‘routinization.’ The acceleration in stock issuance is a contentious issue. The authorities are fully aware of how the gathering pace could drain cash in the secondary market, while they recognize the long-term need to ensure the market’s financial support for growth in the real economy.

Unicorns are among those worst hit by the shift toward smaller IPOs. Despite the massive market boom and excitement following the listing of unicorn stocks, the regulators cannot ignore the risks that may arise from a cash drain. Given the enormous size of these companies and their share offerings, investors are naturally worried about the diversion of money away from existing stocks, if the deals attract excessive funding or create big bubbles.

The CSRC approved 360 Security Technology Inc.’s return to the A-share market after the anti-virus software developer delisted from New York in 2016. It listed in Shanghai in February. The stock proved very popular, and it soared multiple times on the back of sustained profit growth. However, the market has questioned the tech firm’s high valuation. Suspicions are still heard today.

CDRs

The most recent unicorn listings are connected with the introduction of the Chinese Depository Receipt program and ongoing listing reform for New Economy companies. If the market fluctuates significantly or investors develop an aversion to these stocks, it will adversely affect future market reforms.

Tightening the IPO regulations would not hurt unicorns disproportionally. Even if the size of the initial funding was more limited, companies could raise money later through placements and bond offerings. 

What really matters is that these companies should make sensible plans on how much money they truly need and how it will be used, while the A-share market must shed its negative image of being an easy financer by overhauling its regulations.

Editor: Emmi Laine

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Keywords: A-Shares, IPO, Unicorn, Funding, Editorial