It was mid-September, and ¬Chinese automaker Great Wall Motors was courting institutional investors for its initial public offering (IPO) on the Shanghai Exchange. Though the fall of 2011 would hardly seem to be the time for aggressive fundraising, the company would not back down on its price. It announced plans to raise up to US$1.05 billion in what would be one of the country’s largest offerings of the year.
Great Wall’s enthusiasm shows just how sharply the mood in China’s IPO markets contrasts with that of the rest of the world. New listings have lumbered nearly to a halt in most places since the end of July, when gut-¬wrenching volatility deterred even the most hardened equities investors.
China is not entirely insulated from global woes: The Shanghai Composite Index has lost roughly 10% of its value since January, and the number of IPOs in Shanghai and Shenzhen is down from the previous year. Comparatively, however, the country remains an incongruous bright spot.
The strength of this market stems in part from the mainland’s pent-up liquidity, said Joseph Schuster, the managing director of IPOX Schuster: It’s almost as hard for Chinese to get their money out of the country as for foreigners to get their money in. In addition, Chinese investors have grown accustomed to some of the most spectacular day-one increases, or “pops,” in the share price of newly listed companies.
“You see companies being underpriced, and the average IPO pops 20-30%,” said Schuster. “That just incentivizes people to participate again and again … For investors who buy at the IPO price, the returns are actually quite substantial.”
Increasingly, many of these offerings are taking place outside of Shanghai: Twice as much equity capital has been raised on Shenzhen’s smaller market this year. That’s because Shenzhen is home to the ChiNext, a NASDAQ-type exchange for high-tech start-ups that was launched in late 2009. As elsewhere in the world, much new financing in China is going into technology and internet companies.
There’s likely to be plenty of demand for mainland markets in the months to come; surveys show seven out of 10 Chinese companies would prefer to list in their own country. In other markets, activity will probably be slow for at least the rest of the year, said Nick Einhorn, an analyst at IPO investment firm Renaissance Capital. “That said, sentiment of US investors toward Chinese companies has traditionally been very quick to change.”
One thing is certain: Chinese companies seeking capital abroad must price their offerings modestly. Bargains are the only way to tempt long-term investors back to market.