China IPO market dries up after bubble bursts

By Lu Jianxin - Analysis

SHANGHAI (Reuters) - When stocks in three big Chinese companies sank below their IPO prices this week, investors who bought shares in last year's offers suffered. China's once-roaring IPO market is another casualty.

After spectacular growth last year, when mainland China eclipsed the United States as the world's biggest market for initial public offers of equity, sliding stock prices and concern about oversupply threaten to stifle activity this year.

"The bubble is bursting after rampant speculation pushed prices of newly listed shares to ridiculously high levels at the peak of China's stock bull run late last year," says Zheng Weigang, head of research at Shanghai Securities.

"This will slow equity fund-raising in coming months and deter the overpricing of new offers and new listings."

Investors bought a staggering $100 billion of equity in almost 200 newly listing firms between May 2006, when China lifted a year-long ban on IPOs, and February this year.

The IPO flood, which saw many deals massively oversubscribed by frenzied investors, appeared to be a major achievement of China's financial reforms, for the first time making the stock market an important source of funding for many companies.

But a collapse of confidence, due to factors including slowing corporate profit growth and plans for huge cash calls by already-listed firms, has sent the main Shanghai index plunging more than 40 percent below October's record peak.

That led to a virtual halt in IPOs in March -- small laser equipment maker Fujian Fujing Casttech's 002222.SZ $53 million offer this month was the only one. By contrast, five firms raised $300 million in March last year.

This week, Jinduicheng Molybdenum and Jiangsu Yuyue Medical Equipment & Supplies announced IPOs next month. They are among about 30 firms which have initial regulatory approval for IPOs.

DEAL VALUES TO FALL

But a lack of big offers in the pipeline means China's IPO activity this year is set to shrink substantially from 2007.

Last year, the market expected several of China's big Hong Kong-listed "red chips", such as telecom giant China Mobile (0941.HK), to list in Shanghai in 2008. That now looks unlikely.

"Because China is now the nation that adds the most value to global economic growth each year, its demand for funds will remain huge in the long run," said Jun Ma, chief China economist at Deutsche Bank.

"So we are still optimistic about China's IPO market in the next five years. But under current conditions, it is very unlikely for China's IPO value this year to reach last year's."

Executives at a dozen firms, which have initial IPO approval but await final notice from the China Securities Regulatory Commission to launch offers, told Reuters this week that their plans were delayed by market conditions and regulatory guidance.

Sanjin Seeks $133 Million in First China IPO in 2009 (Correct)

By Bloomberg News

(Corrects to say retails subscriptions start June 29 in ninth paragraph.)

June 26 (Bloomberg) -- Guilin Sanjin Pharmaceutical Co., China’s biggest producer of herbal lozenges, plans to raise 910.8 million yuan ($133 million) in the nation’s first initial public offering since September.

The Guilin, southwestern China-based company will sell 46 million shares, or a 10.1 percent stake, at 19.80 yuan each, it said in a statement to Shenzhen’s stock exchange late yesterday.

Funds from Sanjin’s IPO will exceed the 634.1 million yuan the company said it estimated would be raised in its offering as investors sought shares in the first new listing in nine months. China’s benchmark Shanghai Composite Index has gained 60 percent this year, making it the world’s third-best performing in the period.

“Some investors are welcoming IPOs to have new investment alternatives for their portfolios,” said Yu Jun, Beijing-based chief strategist at Citic Securities Co.

Sanjin, controlled by Chairman Zou Jiemin and his wife, packages traditional Chinese medicine in modern forms including pills, sprays and injection to make it more convenient to take. The company’s best-selling products include Watermelon Frost, a lozenge to sooth irritation of the mouth and throat. Sanjin, founded in 1967, also sells tablets to treat urinary tract and kidney inflammation, and capsules for stomachaches and ulcers.

Profit Gains

Net income rose 9.8 percent to 273.7 million yuan in 2008 from 249.2 million yuan a year earlier. The company plans to use proceeds from the IPO to add technology to its production lines for herbal medicines and to also build a storage and logistics center, it said.

Profit may rise to 316 million yuan this year and 369 million yuan in 2010, according to estimates by Bohai Securities Co. analyst Ma Feifei. She estimates Sanjin’s shares will trade at 17.50 yuan to 21 yuan after its listing on Shenzhen’s exchange. The company’s initial offering price of 19.80 yuan exceeds Ma’s estimates of 15 yuan to 18 yuan per share.

“Sanjin being the first IPO since September is the main reason for why the offering price was set at this level,” Ma said today by telephone. “At this price, I don’t think there is a lot of room for gains once trading starts.”

Sanjin announced it had received final approval for its IPO on June 19. China Merchants Securities Co. is arranging Sanjin’s stock sale. Retail investors will be able to subscribe to the offering on June 29, the company said. Sanjin didn’t give a date for when its shares would start trading in Shenzhen.

IPO Candidates

Zhejiang Wanma Cable Co. said June 24 it won regulatory approval for a listing in Shenzhen. Other companies awaiting approval include Shenzhen Salubris Pharmaceuticals Co., people familiar with the matter said last week. Wanma and Salubris plan to raise less than 650 million yuan each, according to documents they filed with the regulator.

The China Securities Regulatory Commission halted IPOs in September last year after the Shanghai Composite Index fell almost 60 percent in the first nine months of 2008.

China announced in January it will spend 850 billion yuan over three years to create a nationwide health insurance net. The State Council, China’s cabinet, in May pledged that traditional medicines will be included in the basic medicines covered by the insurance plan, the official Xinhua News Agency reported.

“The Chinese traditional medicine market has a lot of potential,” said Bohai’s Ma. “Competition in the over-the- counter market in China is very intense. Sanjin’s advantage is that it has a fairly well-known brand they’ve built through advertising and so compete well.”

--Yidi Zhao, Dune Lawrence, Jiang Jianguo. Editors: John Liu, Lena Lee

To contact Bloomberg News staff for this story: Yidi Zhao in Beijing at +86-10-6649-7575 or yzhao7@bloomberg.net

Last Updated: June 26, 2009 01:23 EDT