CLSA China JV completes inaugural A shares IPO

China Euro Securities Limited has completed its first A share IPO.

Acting as sole sponsor and sole lead underwriter, China Euro Securities (CESL) has raised Rmb322 million (US$39 million) for Hunan Xinwufeng through a listing on the Shanghai Stock Exchange.

Hunan Xinwufeng is a major pork supplier to Hong Kong and Macau and is an associate of the previously Hong Kong listed, and now privatized, Ng Fung Hong group. Trading in Hunan Xinwufeng's A shares is expected to start on Wednesday, June 9.

The offer was priced at 16.73 times 2003 profit and was 2,143 times over-subscribed. However, due to the skewed nature of mainland stock market leading to excess demand, oversubscription levels of 1000 plus are very common.

"Underwriting is a one-way ticket in China" comments Tim, Ferdinand, vice-chairman of CESL. "The stock always sells out due to high demand and the ceiling on the price-to-earnings ratio at which we can sell it."

This is because PE ratios are fixed at around 15 times during the primary market but will trade up to 40 times during the secondary market, guaranteeing investors a profit and thereby increasing demand for the IPO.

Given the closed capital account, demand is also pushed up by the lack of alternative investment options.

Underwriting is also different to Hong Kong as allotment of shares is done through computers via a lottery system. Only the biggest domestic IPOs have an institutional tranche and a public offer. Generally, IPOs are aimed at retail investors through just a public offer.

The number of deals any one investment bank can carry out is currently limited by new regulations introduced earlier this year. Bankers can only work on a deal if they have a newly-established qualification, which is obtained through a testing examination process.

So far only around 600 bankers have passed. Yet every deal must have two qualified bankers working on it and during that time they are not allowed to work on any other deals.

They are also responsible for the listing candidate's corporate governance, including making sure the correct documents are filed with the relevant authorities. CESL has eight such licensed bankers, so the bank can work on four deals simultaneously.

CESL, which was set up in June 2003, only has an underwriting license, not a brokerage license. This could make follow-on offerings for the JV difficult, since CESL does not have the customer contacts brokers obtain through carrying out trades on behalf of their clients.

One possibility is that CESL could team up with another broker.

However, Ferdinand says these issues are being addressed through regulatory changes and is confident they will not stand in the way of more deals in the pipeline.

Since commencing business, CESL has been mandated by two major A-share listed companies to undertake follow-on offers, each expected to raise in excess of Rmb1.5 billion (US$180 million). One of these companies is in the heavy-equipment sector and the other is in the auto parts sector.

CESL is also undertaking an A share IPO for a media company which, when completed, is expected to be the first of its kind in China. In addition, CESL has been appointed as the lead underwriter for a corporate bond transaction by a company in the power sector, a deal now awaiting final approval by the regulators.

The reason for the time lag between the bank being set up last year and its first IPO derives from the the one-year time period needed to restructure companies before they are brought to market. Then, it takes between two and six months for the China Securities Regulatory Commission to review the listings candidate and sign off on the IPO.

"With regard to IPOs, a bank's role as a sponsor is much more important than its role as underwriter," Ferdinand notes.

The other parent company of the JV, Xiangcai Securities, is finishing off deals it had in its own pipeline before the signing of the JV arrangement. After this it will not pursue any other deals to ensure the two firms do not cannibalize each others deals.