18 May 2006
Xinhua Financial Network (XFN) News
(c) 2006 Xinhua Financial Network, Ltd. All rights reserved
---- by Chris Myrick ----
SHANGHAI (XFN-ASIA) - Chinese regulators will likely take a cautious stance on new initial public offerings to help market sentiment and prevent a liquidity-draining flood of new shares, analysts said.
They said that the first offerings will be small but mainly from better managed companies.
"The resumption of IPO approvals will not have a substantial impact on the market in the long term, because IPOs are a key element to a healthy market, as long as the new listings are of good quality," said Shen Jun, an analyst at Guosen Securities in Shanghai.
The China Securities Regulatory Commission said in a statement on its website that China will resume granting approvals for IPOs from today, ending a year-long moratorium on new issues.
While the Shanghai A-share market fell today on concerns that the new issues will soak up existing cash, analysts said they expect regulators to proceed slowly to avoid disrupting the recent recovery of mainland China's stock markets.
"The first one could be a small-sized listing as the regulators will try to minimize the impact of the new issuance and cautiously take steps towards a fully functional market," Guosen's Shen said.
The timing of the IPO resumption is generally considered favorable, as mainland markets have seen a recent recovery on attempts to correct structural issues.
In particular, over the past year regulators have moved to float untraded state-held shares on the market. The overhang of state-held shares was considered a structural problem that had been weighing on mainland China's bourses for years.
The benchmark Shanghai Composite Index has gained nearly 70 pct since June 2005 after suffering a steady slide from 2,245 points in mid-2001 to a low of 998 points in mid-2005.
The index, which covers both A- and B-shares listed on the Shanghai Stock Exchange, closed down 7.87 points today, or 0.48 pct, at 1,617.28, largely on liquidity concerns.
Peter So, China head of equity research for Macquarie in Hong Kong, said that some immediate weakness can be expected due to liquidity fears but he does not see this as being a long-term concern. He said he is expecting some weakness in the second quarter and early in the third quarter.
"Liquidity will be a concern because new IPOs will drain liquidity and because the Bank of China IPO in Hong Kong will also drain some liquidity," So said, referring to the big Chinese bank's stock offering, which is now under way. "Plus interest rate hikes in the US and Europe will also drain liquidity," he added.
But So said new rules that allow qualified domestic firms to invest offshore are not expected to cause a major drain of funds from the mainland markets.
"This will initially be allowed in relatively small amounts compared to the overall market cap."
So said he expects the initial batch of new listings to be from quality firms that will not disrupt the recent gains on the Shanghai and Shenzhen stock markets.
"There will be listings of both state-owned and private companies -- and those with stable earnings will get priority," So said. "The market needs stability and the relevant authorities will want IPOs to perform well in the initial stage."
He added that there will be listings of new shares from listed companies that need to fund announced projects.
"For the A-share market there will not be just IPOs, but there will be new issues from existing companies which want to issue new shares to finance their expansion plans," So said. "I think those companies will also come to market at the early stage."
He specifically noted Guangshen Railway Co Ltd had been seeking to issue new A shares to fund the acquisition of assets from its parent and the 4.8 bln yuan expansion of the Guangzhou-Shenzhen railway line.
Ye Xincai, an analyst at Industrial Securities in Shanghai, agreed that authorities will likely seek to ease fears over liquidity with their choices for new listings.
"We expect that the government will first let small and medium-sized companies issue shares and see how the market will respond," said Ye.
"In the short run, the resumption of IPOs may bring some liquidity pressure to the market, but we think the liquidity of the market is sufficient unless there are many large-caps raising money."
Ye also added that the resumption would be a long term advantage for mainland bourses as the listing of better managed companies could provide support.
"A healthy stock market must have the function of financing. In the long run, investors will enjoy the growth from more listed companies with good quality." Chang Chun, professor of finance at the China Europe International Business School, said that more privately held companies will seek to tap the mainland markets to take advantage of relatively high price-earnings ratios.
"Right now a lot of (private companies) are going to Hong Kong or the United States for listing but Chinese pricing in terms of P/E ratios is higher so I think we will see the A-share market becoming attractive.
"We expect to see more private companies listing as well," he said.
He also noted that more retail investment will likely flow into A shares as sentiment continues to improve and as better quality investments become available.
"There is so much liquidity in the China market because Chinese people save so much money. But a lot of that is in the bank and with deposit interest rates so low, there is a lot of money ready to jump in (to the stock market)," Chang said.
