China IPOs: fizzy pops will fade as reforms bed in

Monday brought a windfall for many investors in Chinese equities. Ten companies debuted on the main exchanges in Shanghai and Shenzhen, raising a combined $3.1bn. Pops in the share prices of as much as 200 per cent reflected undervaluation rather than strong growth expectations.

The 10 are the largest group to list after China overhauled listing regulations. The reforms gave its main markets a US-style registration-based public offering system. They removed daily trading limit for the first five trading days following a listing.

Previously, new stocks on China’s main exchanges could rise no more than 44 per cent. Shares had to be priced at 23 times earnings or below, to ensure a strong debut.

The removal of that valuation cap meant sector-relative discounts for Monday’s group of listings were much narrower than for previous initial public offerings. Energy group Shaanxi Energy, for example, was priced at 90 times earnings.

Still, all 10 stocks were heavily oversubscribed. Price gains beat expectations. Shares of Shenzhen CECport Technologies, an electronic components company, and Dencare Chongqing Oral Care, an oral products maker, more than tripled. Even the worst-performing of the other eight companies gained 50 per cent.

The lack of an upper limit was the reason. But the gains also reflect a shift in market sentiment. Mainland stocks have been among the world’s most undervalued stocks on a forward earnings basis. Foreign investors have become aggressive buyers this year, purchasing more than $22bn worth of stocks in the first two months.

The overhaul of the IPO system streamlines equity cash calls just when companies need access to easier fundraising amid slowing growth and tighter credit conditions. A key requirement for Chinese company listings used to be a record and strong growth prospects. Now, the focus is on meeting disclosure requirements.

Expect a steady flow of new deals with tighter pricing as issuers and banks adjust to the new environment.