China is gearing up to introduce a registration-based IPO system, but doubts remain over the regulators’ ability to relinquish control. At least initially, the market-oriented regime will be heavily supervised.
After years of preparations and setbacks, China is finally set to introduce a registration-based IPO system, possibly as early as this March, replacing the approval-based model in place since 2004.
The reform, one of the most important the country’s capital markets have seen in a decade, is designed to facilitate access to capital and to allow market forces, rather than regulators, to determine which companies should go public and at what valuation.
Bankers reckon that, in the long run, the new IPO system will have a profound impact. It should simplify the approval process, increase the numbers of listings and, ultimately, lead to more rational valuations in both the primary and secondary equity markets.
“Issuers are very interested in Shanghai’s new board. Not only because the listing threshold is lower than the main board, but also because they can list much faster as they don’t have to wait in a long queue.”
However, that transition will take years to complete and few expect major changes in the short term.
“The reform is in the right direction towards a market-oriented system, but the next one or two years will likely still be a transition period to the registration-based IPO system,” said Peihao Huang, executive director on the China ECM team at UBS.
The China Securities Regulatory Commission said the reform would be gradual to ensure a smooth transition to the registration-based system. It will not let new shares flood the market and will not immediately remove controls on the pace and pricing of IPOs.
“During this period, the pace of issuance is expected to be accelerated, compared to the past few years, but the unwritten valuation cap is unlikely to be removed in the near term,” said Huang.
Since June 2014, the regulator has imposed an unwritten valuation cap of 23 times historical earnings for IPOs.
China originally aimed to implement a registration-based system last year, but the plan was delayed after last summer’s equity rout wiped off around 40% from the value of mainland stocks and led authorities to impose a four-month ban on IPOs.
The regulator revamped rules at the beginning of this year to tackle some of the problems that had plagued listings and ease the pressure on the secondary market.
The new regime removes the need for investors to make upfront payments for subscriptions and allows small issuers to set prices themselves without a wide consultation process. They also improve the vetting and information disclosure mechanisms and place stricter requirements on IPO sponsors.
The rule changes are seen as the prelude to the adoption of a registration-based system. The pace and valuation of new listings, however, remained under tight control.
Thanks to artificially low prices and the removal of the upfront payment requirement, the first batch of IPOs under the new rules sparked a frenzy among investors, even as the Shanghai stock market was registering a 23% fall in January.
Guangzhou Goaland Energy Conservation Tech, the first A-share IPO in China this year, saw its Rmb259m (US$39m) ChiNext float about 4,335 times covered. Six other floats were also more than a thousand times covered on average.
Shanghai’s new board
The State Council (China’s cabinet) has been given the authority to introduce a registration-based IPO system within the next two years, starting on March 1, at the Shanghai and Shenzhen stock exchanges.
Under the new system, responsibility for vetting IPOs will shift from the CSRC to the stock exchanges. Meanwhile, the vetting mechanism will focus more on information disclosure instead of the profitability of the listing candidates.
Bankers believe that the reform will allow more high-quality and fast-growing companies to access the domestic capital markets, especially internet and technology firms.
As a key part of the IPO reform, China has been working on amendments to securities laws to allow unprofitable companies to list domestically.
Meanwhile, the Shanghai Stock Exchange is looking to open a strategic emerging enterprises board later this year to facilitate market access for start-ups in the computer, information technology, internet and biopharmaceutical industries.
“Issuers are very interested in Shanghai’s new board,” said a banker. “Not only because the listing threshold is lower than the main board, but also because they can list much faster as they don’t have to wait in a long queue.”
The first order of business this year will be to begin clearing the backlog of 747 IPO candidates awaiting approval from the CSRC as of January 28. However, some high-profile companies, such as some internet financial firms, may have the opportunity to list on the new board this year, said the banker.
Analysts at Shenwan Hongyuan Securities estimate the number of IPOs may reach 400 this year with a total fundraising size of Rmb235bn, if the transition to the registration-based IPO system and the launch of Shanghai’s new board are successfully achieved.
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