Huatai share sale ends golden age of China's IPO market

Huatai Securities, one of the leading brokerages in China, has priced its initial public offering at the bottom of the indicated range. That makes it the second company this month to fail to raise the maximum amount from a Shanghai listing and signals that the IPO frenzy in China is history.

Despite the lukewarm response from investors, however, Huatai still pulled off the biggest A-share IPO so far this year, exceeding the $1.67 billion raised by China First Heavy and China XD Electric's $1.5 billion offering.

Huatai raised Rmb15.69 billion ($2.3 billion) by selling 784.6 million primary A-shares at Rmb20 apiece. The shares were offered in a range between Rmb20 and Rmb22. The deal was arranged by Haitong Securities.

Although the pricing contrasted sharply with Chinese IPOs of the past, which despite high valuations were typically still able to price at the top, it didn't come as a surprise. China's securities regulators are attempting to bring down high IPO prices following a speculative fever that was driving new listings to gains of as much as 200% on their first day of trading last year.

Last week, China First Heavy raised $1.67 billion in its Shanghai IPO, compared to a target of $1.7 billion. While the difference may seem insignificant, the heavy machinery maker was the first company to price an IPO below the top of the indicated range since China reopened its IPO markets last July. And this trend of downsized deals is expected to continue.

The final price values Huatai at 29.4 times its projected net earnings for 2009, which is at a discount to its domestic competitors. Everbright Securities is currently trading at a 2009 price-to-earnings (P/E) ratio of 34.4 times and China Merchants Securities is quoted at a 2009 P/E of 34 times. Both companies are listed in Shanghai.

Nanjing-based Huatai sold 14% of its enlarged share capital. The institutional tranche, which accounted for 30% of the deal, was 3.05 times covered with 50 accounts submitting orders. The remaining 70% tranche, which was targeted primarily at retail investors, was 6.9 times covered. By comparison, the IPOs of Everbright Securities and China Merchant Securities in the second half of 2009, were approximately 100 times subscribed by both institutional and retail investors. Some observers argued that the difference may be partly due to Huatai's valuation.

"The IPO price is not that low. We think a price range between Rmb16 and Rmb20 is reasonable for Huatai," said Deng Shubin, an analyst at Central China Securities in Shanghai. "The shares' secondary market trading is not promising given the current volatile market," she added.

Market watchers expect the China Securities Regulatory Commission (CSRC) to continue to approve new share sales at a rapid pace after the Chinese New Year holiday, in an effort to increase the new equity supply and to stave off asset bubbles that may be triggered by high offering prices and high valuations.

In China, the bulk of IPOs (around 60% to 70%) are allocated to retail investors who are not involved in the pricing process, while the remaining shares are offered to a smaller group of institutional investors who have strong bargaining power.

"Some institutions are simply profit-driven and are not responsible when proposing a price. This has helped drive up IPO prices," Zhu Congjiu, assistant to the CSRC chairman, was quoted as saying by official state-run media China Daily, at a recent seminar on IPO reform.

Limited investment channels on the mainland have also driven retail investors to participate in the new share sales at almost any price, their fear of overpaying overshadowed by a fear of missing out. There are no official statistics showing how many people out of the 1.3 billion population invest in the stock market, but observers say about 50% of urban citizens in China buy equities, and IPOs have been their favourite bets until recently.

"The 'golden age' of China's IPO market will become history, the market will become more rational," said Central China Securities' Deng.

However, other analysts argue that the trend towards more modest pricings will eventually rekindle investor interest in new listings.

Investor enthusiasm about the stockmarkets has fuelled the growth of brokerages, and analysts say Chinese securities companies will likely see a surge in revenues this year after the regulators announce a clear timetable for the launch of a futures index, margin trading and short selling.

Bigger brokerages, including Huatai, are hoping to share a slice of this expected surge. Huatai made a net profit of $4.5 billion during the first nine months of 2009. It plans to use the net proceeds from the IPO to boost its asset management business and to prepare for stock index futures and margin trading, it said in the listing prospectus.

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