The flow of big initial public offerings from China’s state-owned companies continues despite the weak market conditions. Sinochem Corp, the country’s biggest supplier of chemical products, is bravely pushing ahead with a new Rmb35 billion ($5.5 billion) IPO in Shanghai, less than a month after the massive $2.1 billion IPO of Sinohydro, a builder of hydroelectric dams.
Sinochem’s deal is the latest indication of the contrast between primary and secondary markets in Shanghai. The benchmark Shanghai Composite Index has slumped around 13% this year, but that has hardly dented the supply of issuance — around 243 new securities have listed on the A-share market so far this year, raising a total of Rmb238 billion, according to Wind Information, a Shanghai-based financial data provider.
There has been at least one IPO on every trading day this year, with an average value of Rmb979 million. The Wind data also shows that these new shares have typically been over-priced, with an average valuation of 45 times their earnings — much higher than values in the secondary market.
“The current A-share market has a very weak ability to keep value,” said Zhou Zhengqin, former chairman of China Securities Regulatory Commission (CSRC), in the official 21st Century Business Herald. “It fails to let investors share listed companies’ profits over the long term.”
The Shanghai Composite Index has crawled up just 18% during the past 10 years, compared to gains of more than 1,200% in Russia and more than 300% in India during the same period, Zhou said. “If most investors are losing their money, it shows the market doesn’t have much vigour.”
Nevertheless, chunky deals are still coming. If it succeeds, Sinochem’s deal could be Shanghai’s sixth-biggest IPO. And companies such as New China Life Insurance, China Communications Construction and Shaanxi Coal Industry are reported to be kicking off IPOs worth billions of dollars during the coming months.
Sinochem plans to sell as much as 26.5 billion new shares, or 40% of its enlarged capital, to raise Rmb20 billion to Rmb35 billion, depending on the final share price, according to a statement posted on the website of the environment ministry, which pre-approves all fund-raising from polluters such as chemical plants, miners and oil refinery operators.
Sinochem is involved in a wide range of businesses, from oil exploration to chemicals and property. It will use the proceeds to fund a refinery project in Quanzhou, in southeast China’s Fujian province. It won approval from the environment ministry in July this year for the 240,000 barrel-per-day refinery plant.
It will hope for a better outcome than Sinohydro achieved with its $2.1 billion IPO, which priced at the bottom of the indicated price range and raised 22% less than the company’s original $2.7 billion target. Despite a strong trading debut, when the shares rose 17% on the first day, the stock has fallen ever since and is currently trading at around 7% below its IPO price.
Sinochem said it had a profit of Rmb9.1 billion last year on Rmb335.3 billion of revenue. The company is the parent of a number of listed companies such as Sinochem International Corp, Sinofert Holdings, Franshion Properties China and Far East Horizon, according to the company’s website.