Market watchers declared themselves pretty pleased when the China Securities Regulatory Commission (CSRC) announced late last year that it was overhauling the country’s moribund domestic IPO market into one that was more transparent, market oriented and — most importantly of all — open for business after having been shut for a year.
Two weeks into the New Year, however, and the CSRC seems to be panicking. Some fear that something of a U-turn could be on the cards.
On paper, the new IPO regime boasted one of the most extreme examples of capital markets transparency, with brokers required to reveal all bids in the order book, for example.
But now that the reforms have actually been put to work, with more than 20 A-share IPOs priced since the start of 2014 and another 20 scheduled to come before the end of the month, some worry that the system is already creaking.
No fewer than six companies have now decided to delay their IPOs after launch — and in three cases, even after having priced the deals. The biggest of them was Jiangsu Aosaikang Pharmaceutical’s Rmb4.05bn ($669m) deal, which priced last Wednesday before pulling the plug on the deal on Friday evening.
It looks like Aosaikang fell foul of an apparent regulatory push to curb excessive valuations. It priced its deal at a staggering 2012 P/E multiple of 67 times, much higher than the industry average of 40 to 50 times. The official message from the company for the delay was because the deal was “too big” — an odd explanation that somehow suggests that the issuer would have preferred to raise less money than it had originally targeted.
Hiccup
A more feasible explanation for the hiccup — and certainly the one that many bankers prefer to believe — is that the CSRC intervened and told the pharmaceutical company not to go through with the float. The CSRC’s sensitivity to valuations is understandable: before the year-long moratorium on IPOs, it was common to see stocks tumble on their trading debuts. Many investors, particularly retail, began to shun the Chinese equities market after getting their fingers burned one too many times.
It was clear back in November when the CSRC announced its reforms that it was committed to having investor protection at their heart — the requirement for sponsors to disclose the order book was one example, chopping the top 10% of institutional orders out was another. But now another ingredient has been thrown into the mix.
This is unhelpful. In a market-driven system, the role of a regulator ought to be to supervise and then intervene only when it must — such as when banks, brokers or issuers are found to have not played by the rules.
That is obviously not the case for Aosaikang’s IPO, where the final pricing was derived from a process that was unquestionably transparent by any standard. Issuers will always try to get the best deal for themselves. If investors, having done their due diligence and having had every opportunity to examine the equity story, are willing to pay a 2012 P/E multiple of 67 times for Aosaikang shares, on what basis should the CSRC prevent them from doing so?
It was only to be expected that there would have to be tweaks to the system after such a long break in issuance and such a radical change of direction. The CSRC announced a package of supplementary rules on Sunday that included a warning to any investors found trying to game the price discovery process that they risked being blacklisted. That was sensible, as was the announcement of spot checks on roadshows to check that disclosure rules are being adhered to.
But disrupting the nascent dealflow on the basis of a premium valuation means that already the gloss has been taken off the reforms. Rightly or wrongly, the commitment to change is starting to be questioned. With a theoretical pipeline of about 700 deals, the stakes are obviously high, but now the regulator should let the process run its course without interference — unless there has been malpractice.
The reforms had been in discussion for many months before they were put in place. If the CSRC cannot resist meddling after setting the deal train in motion again, investors and issuers will have little idea where they stand. Their faith in the market will be sorely tested and what had been billed as a revolutionary reform risks being remembered as just another setback in the troubled history of Chinese IPOs.