Small firms, miners expected to dominate potential list of offerings

Initial public offerings are expected to resume in the Chinese mainland stock market in the second half, mostly driven by small enterprises, but the issues will have little impact on the A-share market, Ernst & Young said on Thursday.

The draft of IPO issue reforms, released by the China Securities Regulatory Commission earlier this month, was "a big step" toward a market-oriented system, which is expected to lower the administrative limit and encourage more enterprises to go public based on their needs, the company said.

In the first half, there were no IPOs in the mainland, as the CSRC suspended approvals for such issues in November.

In January, the securities regulator began a re-examination of the financial records of enterprises waiting for IPOs.

As of this month, 269 companies had withdrawn their applications, mostly because of unqualified financial reports. Just under 50 percent of the withdrawals were high-growth, high-tech enterprises aiming to debut on ChiNext, the Nasdaq-style board.

According to the CSRC, 83 companies have passed the examination of the IPO committee and are waiting for the market to give an indication of their valuations.

Terence Ho, the leader of Ernst & Young's greater China strategic growth markets practice, said that these 83 enterprises will raise 55.8 billion yuan ($9 billion).

Mining companies will account for 31 percent of the total.

The benchmark Shanghai Composite Index has been declining since June 3. So far this week, it has slumped 5.94 percent to a four-year low.

"It may have delayed the restart of IPOs, which is expected to occur in July according to market signals, because of the current sluggish market that cannot provide satisfactory valuations," said Ho.

The A-share slump has dragged Chinese companies out of the world's 10 biggest stocks by market value for the first time since 2006.

In comparison, the US stock market has shown signs of a rebound.

Chinese stocks in the US have been on an uptrend since April, and the index of Chinese telecommunications and technology companies showed a better performance in the second quarter compared with the first three months, Ernst & Young said.

In the first half, only one Chinese company listed on the New York Stock Exchange, raising $79 million.

The Hong Kong stock exchange raised $5 billion for 21 deals in the first half.

Hoffman Cheong, assurance leader of China North at Ernst & Young, said that Hong Kong has recorded a 26 percent increase in capital raised in the first half, compared with a year earlier.

"The stronger Hong Kong IPO market is due to stronger investor confidence, better economic fundamentals and supportive global monetary conditions," said Cheong.

"Recent market volatility has delayed some IPOs, but historically there were IPO windows in the last four months in Hong Kong, and we expect this trend to continue.

"Companies need to prepare earlier and be ready to move fast once a viable market window opens," he added.

Lin Guoen, a partner at Deloitte China, said that the Hong Kong IPO listing situation could be better than the first half, although economic volatility and competition from other foreign stock exchanges may increase challenges.

"Chinese enterprises still have a strong demand to raise funds from markets outside the mainland, and Hong Kong will be one of the most popular targets," Lin said.

The yuan's further internationalization and improved IPO listing procedures will support more enterprises from the mainland that are looking for opportunities in Hong Kong, he added.

According to Ernst & Young, global IPO activity has been stable in the second quarter, with 151 deals raising about $33.9 billion.

Global IPO activity has been up 40 percent in terms of deal value but down 3 percent in terms of deal numbers in the second quarter, compared with the first three months.

chenjia1@chinadaily.com.cn

(China Daily USA 06/28/2013 page17)