China’s First Shares to Go Public in Four Months Surge by Limit

Jun 26, 2014 3:28 am ET

June 26 (Bloomberg) -- China’s first companies to go public in four months jumped 44 percent on their first day of trading, while technology shares led gains in benchmark indexes.

Shandong Longda Meat Foodstuff Co., Wuxi Xuelang Environmental Technology Co. and Feitian Technologies Co. surged by the maximum limit in Shenzhen within the first half hour of trading after their initial public offerings were each oversubscribed by at least 120 times. Han’s Laser Technology Co., a supplier to Apple Inc., advanced 5.8 percent.

The Shanghai Composite Index rose 0.7 percent to 2,038.68 at the close, while the ChiNext Index of small-company shares jumped 2 percent. Chinese IPOs during the first two months of 2014 surged an average 43 percent in their trading debuts as the securities regulator pressured companies to price the deals at below-average valuations. Investors have flocked to new offerings this year as the Shanghai Composite declined, property prices dropped and slowing economic raised concerns of defaults in wealth-management products.

“New shares will be the major play for the market for a while,” said Wei Wei, an analyst at West China Securities Co. in Shanghai. “Valuations that are lower than rivals provide adequate reasons for buying into them.”

Ten companies have started the share-listing process since June 10, with an average price-to-earnings ratio of 17.8, according to the China Securities Regulatory Commission. That’s a 69 percent discount versus the ChiNext index’s multiple of 55.5, according to data compiled by Bloomberg. The securities watchdog’s chairman said in a May 19 statement that it plans to allow about 100 IPOs from June through the end of the year.

Technology Valuations

The CSI 300 Index advanced 0.7 percent today, while the Hang Seng China Enterprises Index climbed 1.2 percent. Trading volumes in the Shanghai index were 9.2 percent above the 30-day average today, according to data compiled by Bloomberg.

Feitian Technologies priced its shares at the biggest discount to rivals. The maker of information security products sold the IPO shares at 16.6 times its reported earnings, compared with the industry average of 52 times over the past month, according to the prospectus.

Yonyou Software Co. gained 1.9 percent in the CSI 300. Han’s Laser had its biggest gain in a month. Shanghai Wangsu Science & Technology Co. jumped for a fifth day in the ChiNext, rising 3.7 percent. Leshi Internet Information & Technology Co., the biggest company in the ChiNext, advanced 1.8 percent.

China Life Insurance Co. gained 0.7 percent and Jiangxi Copper Co. rose 1.2 percent to lead gains for financial and material companies in Shanghai today.

Stocks Forecast

The Shanghai Composite is valued at 7.5 times 12-month projected earnings, compared with the five-year average multiple of 11.6, according to data compiled by Bloomberg. The index has fallen 3.7 percent this year amid concern falling property prices will slow the economy. That compares with a 6.3 percent advance for the ChiNext.

“IPOs will most likely do well as they’re priced at quite attractive levels and local investors appear to be very enthusiastic about IPOs,” David Cui, China equity strategist at Bank of America Corp., said in a phone interview yesterday.

Bank of America forecasts the Shanghai index will reach 2,069 by the end of the year, implying a 2.1 percent gain from yesterday’s close. A property market downturn may last for a few years given high interest rates and slowing income growth, Cui said.

Pu Yonghao, chief investment officer for Asia Pacific at UBS Wealth Management, said China’s property prices may decline over the next three to four years.

“I think falling property prices is not positive for stocks,” he said in a phone interview today. “When the adjustment period is over for the property market, then stocks may have a chance of a recovery.”

--With assistance from Jack Gao in Shanghai.