SZSE has recently released results of a study on characteristics of new share offering and trading since late April, 2012.
China Securities Regulatory Commission (CSRC) issued Guidelines for Further Deepening IPO Reform on 28th April, 2012. The guideline raised allotment for institutional investors in off-line offering and removed the three-month lock-up requirement. A t same time it requires increases in supply of free-float shares during offering. According to the guideline, issuers shall further disclose risk factors when the price-earning ratio at issuance is 25% higher than industrial average. Furthermore, the guideline requires that the exchange strengthen supervision over first-day trading in such new shares and improve information disclosure on their trading features. From commencement of the reform until 8th June, 2012, 18 companies have completed IPOs and 12 of them have listed shares on SZSE. By comparing data with the 48 newly-listed stocks from 1st February through 27th April, SZSE has made analysis into post-reform IPO stocks and reached the following observations:
First, institutional investors play an increasingly prominent role in pricing of new shares through active off-line subscription. The 18 post-reform IPO stocks received 118 bids on average in off-line allotment, 69% higher than an average of 70 bids before the reform. The average size of subscription increased to 6.5 million shares, representing a 72% rise over an average of 3.78 million shares before the reform.
Second， IPO pricing has become more rational, easing the situation of high issuing price-earning ratio, high offering prices and excessive proceeds. The average issuing price-earning ratio of the 18 post-reform IPO stocks stands at 30.61 times, only 4.23% higher than the industrial average and considerably lower than the pre-reform level of 22.56% above industrial average. An average of RMB 134 million yuan (USD 21.3) was raised in excess of the target proceeds, 38% lower than the RMB 217 million yuan (USD 34.4) before the reform.
Third, volatility on first day of trading was significantly reduced, indicating further improvement in the pricing mechanism. With cancelation of three-month lock-up requirement and increasing supply of free-float shares, the market provides conditions for adequate participation on both buy and sell sides for price discovery. The reform has demonstrated effectiveness in curbing first-day speculation and leading the way toward more rational pricing of new shares. The average price increases at opening and closing for the 12 newly-listed stocks is 7.48% and 7.62% respectively, while the pre-reform levels were 26.03% and 24.15%. Before the reform, only 7 of the 48 IPO stocks fell below the offering price at the close of first trading day. By contrast, six out the 12 issuers after the reform saw their stocks underperform their offering prices, highlighting risk in new shares subscription.
Fourth, the percentage of Institutional investors’ trade in newly-listed shares increased slightly. For each of the 12 post-reform IPO stocks, an average of 52.41% of shares purchased through off-line offering were sold on first trading day. And on average 10.67% were sold within the following 10 trading days, amounting to a total of 63.08% of total off-line subscription in each stock. By the same token, Institutional investors bought in 1.58% of all new shares in each of the 12 IPO stocks on the first trading day, higher than the prior level of 1.08%. And they bought in 2.32% in subsequent 10 trading days, slightly higher than the prior level of 1.85%.
Statistics indicates improvement in pricing mechanism on the first day of trading, gradual return to inherent value of stocks and easing of speculation on IPO stocks. An initial milestone of success has been achieved with improved coordination and harmonization of primary and secondary markets.
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