China’s First IPO in 14 Months
Last Friday marked a monumental day for China’s public equity markets, as the initial public offering (IPO) of Neway Valve, a Suzhou-based industrial valve manufacturer, signaled the conclusion of the self-imposed listing freeze that Chinese regulators imposed on the exchange in November 2012. The 14-month-long ban provided regulators an opportunity to implement new trading regulations aimed at alleviating concerns that new stock issuances would continue to destabilize the already-deteriorating Chinese equity market.
Prior to the implementation of the issuing freeze, the recurring trend was for a company’s stock to price at a significant premium to its listed peers, surge on the first day of trading, and then underperform thereafter. Under the new trading rules enacted by the China Securities Regulatory Commission (CSRC), stocks that experience in excess of a 10% price movement (up or down) on its first day of trading will be subject to a 30-minute trading halt in an effort to allow the stock to stabilize. Additionally, stocks will be limited to no more than a 44% rise or fall on its opening day of trading. The new regulations also detail acceptable behavior after a stock’s first day as a public company.
As for Neway Valve’s trading debut on Friday, the pent-up demand caused by the 14-month lack of issuance allowed the stock to surge 43%. Shortly after the opening bell, the share price surged 10%, requiring a 30-minute trading halt of the stock under the new regulations. According to analysts, at pricing, the share price represented approximately 30 times the company’s estimated 2013 earnings, a discount to its peers. However, after the 40-plus percent increase (which was not unexpected giving the circumstances), the stock prices now represents a P/E of around 40 times, in excess of its peers. It will be interesting to monitor the stock moving forward in order to judge how effective the CSRC was in their efforts to correct the issues plaguing the SSE.
To highlight the struggles of the Chinese equity market, consider that the Shanghai Stock Exchange (SSE) was one of the world’s worst performers amongst major indices over the past few years. In 2013 alone, the SSE dropped nearly 7.5% while the S&P 500 (the preeminent index in the U.S.) gained over 29.5%; in 2014, the SSE is already down 5.1%.