China’s IPO promised land turns into a desert as the regulator stokes confusion, find Natalie Thomas and Pete Sweeney of Reuters

Dozens of Chinese companies have abandoned plans to list in the mainland this year, as confusion reigns among executives, bankers and investors over an opaque regulatory review that's clouding what was touted as a banner year for new stock debuts.

When the China Securities Regulatory Commission (CSRC) ordered underwriters to update application materials once again in April, there had been no new China listing applications published for the past eight weeks. Sources at investment banks say many firms that once planned initial public offerings have given up as they wait for the CSRC to explain exactly what its listing requirements will be after publishing 16 different sets of guidelines in the span of six months.

As a cloud hung over how the CSRC will proceed, or which companies might be approved to list, the regulator unveiled on April 30 that it had approved three applications of initial public offerings, ending a freeze on such approvals.

The slow pace is a setback for investment bankers and underwriters who had hoped the relaunch of IPOs in China in 2014 would unlock around $40 billion worth of new issuance, bringing profits after a 14-month freeze from late 2012 when the regulator effectively halted new listings. It's also bad news for hundreds of companies who have been waiting, for years in many cases, to tap stock markets for funds.

"In terms of a time frame, I think it [the next listing] will be the middle of the year," said Du Changchun, an analyst at Northeast Securities in Shanghai. "It won't happen very quickly because of the reforms and then the annual earnings reports, and once these have concluded, then these companies might have to give some supplementary materials like quarterly or annual reports."

Since the year began, more than 24 companies have shelved applications to list, according to CSRC data released in April.

The move in April by the CSRC to seek updated documentation at least countered swirling local media reports of another IPO lockdown, as the regulator seeks to raise the quality of companies listing on the Shanghai or Shenzhen exchanges.

CITIC Securities said in a report shortly after that the move meant the approval process was starting earlier than predicted.

Debut deluge

The current limbo will be resolved as soon as the CSRC moves decisively - which it can do. The CSRC let around 50 previously approved companies list in January and February, marking the end of an IPO suspension that began in late 2012, a halt that itself was never officially confirmed.

Prior to the resumption, the regulator had committed to ultimately moving to a registration-based system for IPOs similar to that deployed in the U.S., where market reception dictates how they are priced, when companies list, and how their shares perform. Many investors read this as a signal that Beijing was preparing for a flood of new issuance this year.

Global accountancy firm PwC said in a report released on Jan. 2 that the number of IPOs could "possibly reach a record high in 2014,” raising as much as 250 billion yuan ($40.24 billion).

But Beijing quickly qualified its statement to emphasise that the project would take time. It has kept its hands tightly on the wheel since then, closely managing IPO pricing and investigating numerous investment banks and underwriting firms.

Market participants in China always understood it would take time for firms to update corporate annual performance results to the end of 2013, and assure compliance.

The regulator has also created fresh headaches for applicants by publishing new rules one after the other. These included three further sets of regulations in March and April, on top of 13 sets of fresh guidelines published since November.

"Imagine you're revising for an exam, and you've spent ages preparing and have worked really hard, then the exam is on a different topic, or then the exam disappears," said a source who works closely with the regulators, regarding the revisions to the securities law. "You never know what question you're answering."

A source at a leading investment bank, who says he has been working on getting some of the companies under his charge to list for four years, expressed similar frustrations. "At the moment, we're just updating the information that we've already uploaded for approval. It's all a bit meaningless," he said.

"At the start of the year, everyone was so optimistic and I thought perhaps 200 to 300 of the 700 or so companies in the queue would list this year," the banker said, speaking anonymously because he was not authorised to speak to the press. "I think we can only expect to see 100 companies list this year. But this is very optimistic."

Market booster

The queue for listings remains lengthy, equal to almost a third of all the currently listed companies in China.

The sheer number of companies also means regulators must balance efforts to reinvigorate the stock market as a fund-raising channel, reducing dependence on bank loans, against fears that too many new IPOs will swamp the market and drain funds from already listed firms.

Many suspected the 2012 freeze was a sop to angry investors, who had began publicly lobbying for change as China's stock indexes continued to plunge. They argued that the new listings were diluting net valuations by encouraging money to abandon existing tickers in order to speculate on new IPOs in search of a quick buck.

A Reuters analysis of the post-listing performance of the last batch of IPOs shows an average appreciation of 81 percent from the original IPO price so far.

The average price increase of small companies listing in Shenzhen was 88 percent, led by a textile equipment manufacturer called Geron Co Ltd, which was up a whopping 329 percent in April from its IPO price since it began trading Jan. 28.

In comparison, the CSI300 index which tracks the largest blue-chip tickers in Shanghai and Shenzhen, gained a modest 4 percent since Jan. 17, the day the first new listing, by Neway Valve, took place in Shanghai.

This is good news for investors who managed to get a piece of the IPOs, but it's another point of caution for regulators trying to guide China's retail investors away from small-cap shares toward value investing in large-capitalisation blue chips.

Even as uncertainty continues, some in the market equate the process to growing pains, an inevitable part of the maturing of China's domestic stock markets as regulators and companies take time to adjust.

"China is taking all the right steps, and making all the right noises," said Peter Fuhrman, chairman of investment bank China First Capital.

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Next batch of companies hope to raise $3.6 billion through China IPOs
By Lu Jianxin and Pete Sweeney of Reuters

China's regulator posted draft initial public offering (IPO) prospectuses for 18 Chinese firms in April, bringing the total number of potential issuers up to 46, with state media estimating they could raise as much as 22.6 billion yuan ($3.6 billion) from investors.

The anticipated resumption follows a two-month flurry of IPOs in January and February this year, after regulators let the IPO market go dark for 14 months beginning in 2012, which some said was an attempt to boost sagging mainland stock indexes.

The official China Securities Journal said that 23.9 billion yuan worth of capital exited the domestic stock market on April 21 as some Chinese investors became concerned that new IPOs would divert funds from existing shares.

"The flight of main stock investment funds amid a sharp fall of the main index means that damage to the market by the resumption of IPOs cannot be overestimated," the newspaper said.

But uncertainty about how many of these prospective companies will be allowed to actually list, and how soon, appears to have blunted the impact of the announcement on stock markets, and investment bankers have expressed uncertainty as to how hot the China Securities Regulatory Commission (CSRC) will let the IPO market actually get in 2014.

Some analysts have predicted the mainland IPO market could hit 250 billion yuan in 2014.

Only three of the 46 firms have been approved to launch IPOs, but the CSRC is expected to review more applications in May, local analysts have forecast.

The three approved companies are Nanjing Kangni Mechanical & Electrical Co Ltd, Ellington Electronics Technology and Kuaijishan Wine Company, in which Zhejiang China Light & Textile Industrial City Group has a 34 percent stake. The CSRC said a fourth IPO application, by edg (China) Corp Ltd, had been rejected, though it did not state any reasons.

IPOs paused in March as the CSRC ordered companies and underwriters to update application materials, including applicants' 2013 annual results.

In reaction to the new rules, and possibly to signs that the CSRC was cracking down on pricing misbehaviour by underwriters and inside stakeholders, dozens of Chinese companies have already shelved their listing plans, according to CSRC data published in April.

The total number of firms on the IPO waiting list dropped to 606 in the week ended on April 18, down from 675 firms, according to the list published on the regulator's website, www.csrc.gov.cn.

Big names yet to come

The 46 applicants that have published prospectuses are dominated by firms in the new materials, environment protection and manufacturing sectors. Hua'an Securities Co Ltd is the only financial institution among these firms.

Medium-sized Hua'an, based in the eastern Chinese city of Hefei, plans to issue 800 million yuan-denominated A shares on the Shanghai Stock Exchange to raise an unspecified amount of money to consolidate its capital base, it said in its draft prospectus.

State-owned Shanghai Film Co Ltd plans to raise nearly 1 billion yuan to build new cinemas and update existing ones to meet increasing entertainment demand in China's financial hub, its prospectus said.

Another film producer, Beijing-based Wanda Cinemas plans to raise 2 billion yuan for similar purposes.

However, a slew of big names still on the CSRC's waiting list have yet to publish their prospectuses.

These include large brokerages such as Shanghai-based Guotai Junan Securities and Shenzhen-based First Capital Securities, as well as a cluster of city commercial lenders including the Bank of Shanghai, the Bank of Hangzhou and the Bank of Chengdu.

There are also a number of conglomerates owned by China's central government in line, including China National Nuclear Corp, Huadian Heavy Industries Co Ltd and China Film Group Corp.