China’s Record Number of IPOs to Curb Small-Cap Rally, UBS Says

Jan 13, 2014 7:13 am ET

Jan. 13 (Bloomberg) -- The number of Chinese initial public offerings will accelerate to a record pace in coming months, dragging down small-company stocks, according to UBS AG.

There will be some 60 to 80 IPOs each month from March to June, Chen Li, chief China equity strategist at UBS, said at a briefing in Shanghai. Increased stock supply will hold back share prices of smaller companies on the ChiNext Index after they surged last year, he said.

The regulator approved about 50 companies to sell stock in China following new rules in November aimed at strengthening investor protection and stamping out price manipulation. The ChiNext gauge of Shenzhen-listed companies with an average market capitalization of $1.5 billion is more than four times more expensive than the Shanghai Composite Index.

“The sales pace is unprecedented,” Chen said. “Starting March, that’ll pose a big challenge to the valuation of ChiNext companies.”

The ChiNext, which is dominated by private companies in industries such as technology and health care, rallied 83 percent last year while the Shanghai measure fell 6.75 percent.

Chen predicted in May last year the “bubble” in small-cap stocks would burst within two months. Since then the ChiNext has climbed more than 30 percent.

The securities regulator has failed to curb over-pricing of IPO shares after introducing new rules aimed at making share sales more market-oriented, Chen also said today.

Spot Checks

Jiangsu Aosaikang Pharmaceutical Co. decided last week to push back its 4.05 billion yuan ($670 million) IPO after pricing the sale 21 percent higher than the industry average.

The China Securities Regulatory Commission is planning spot checks of investor roadshows held for first-time sales and will suspend companies found to have disclosed information not contained in IPO prospectuses and other public releases. Underwriters will also be penalized for sharing non-public information with institutional investors, the CSRC said in a statement on its website yesterday.

Chen said China’s liquidity will probably worsen this year with cash crunches taking place five or six times, hurting both equities and bonds, as the government pushes forward with liberalization of interest rates.

UBS recommends stocks that will benefit from reforms of state-owned enterprises and land as well as financial innovation, Chen said.

--Zhang Shidong. Editors: Allen Wan, Richard Frost