IPO funds diverted, analysts fear
Daniel Ren in Shanghai
Aug 30, 2010
From www.scmp.com
The fanfare and enthusiasm that greeted the mainland's Nasdaq-like second board for start-up firms in October last year has given way to concerns that the vast majority of the money raised could be misused.
The 109 small firms floated on the ChiNext market since its launch have raised 72.6 billion yuan (HK$83.08 billion) in initial public offerings, but only 7.75 billion yuan, roughly a tenth of the total proceeds, has been used by the companies to fund their own growth, the China News Service says, citing the firms' interim reports.
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The data has fuelled analysts' and investors' suspicions that the start-up firms, which were supposed to be future profit stars, could be ploughing the IPO funds into the property and equity markets.
When the China Securities Regulatory Commission launched the ChiNext market at the Shenzhen Stock Exchange after nearly a decade of preparation, thousands of mainland investors were eager to jump in. The first firms to list offered shares at lofty prices, and many raised more than double their targets.
Beijing hoped the second board would give promising small companies capital to fund their growth.
However, the excess funds appear to have distracted the attention of company founders and executives from their core businesses.
The Shenzhen exchange required the small firms to disclose how they proposed to use the extra funds, but many have yet to find a place to park the money other than in deposit accounts at the banks or in the property and equity markets.
"The size of the funds may not be enough to plague the two markets, but the question is whether investors realise the innovative companies they bought into have turned into investment firms," said Huatai Securities analyst Zhou Lin.
Many of the start-ups were expected to double their annual profits in the years to come once they listed on the second board. Although investors were warned by analysts of the huge potential risks, they rushed to buy the new shares regardless of the elevated prices.
Several ChiNext-listed firms completed IPOs at prices that represented more than 100 times their earnings. For instance, East Money Information's IPO price translated into 117 times its earnings last year.
"The IPO bonanza was music to the founders' ears at that time," said Wei Wei, a trader at West China Securities. "Now they have to convince the investors that they can bring handsome returns through investment in lucrative deals."
However, Beijing, spooked by fears of growing asset bubbles and social disunity, has stepped up efforts to cool the red-hot real estate market this year. The stock market has been stuck in bearish mode following an 80 per cent rally last year - the Shanghai Composite Index has lost more than 20 per cent so far this year.
Investors have always taken it for granted that IPO shares would be safe bets, bringing them substantial first-day gains when the firms made their debuts on the exchanges.
As the regulator had the final say in the pricing of new shares, these were normally set at a price-to-earnings ratio of about 20 to facilitate the raising of funds by state-owned companies. Nearly all the newly listed stocks surged on their first day of trading, since the IPO prices were set artificially low.
Beijing reformed the IPO mechanism in June last year following a nine-month suspension of new offerings, giving underwriters and companies a bigger say in the pricing.
However, the move failed to curb the IPO frenzy.
"It's still up to the regulators and investment banks to further fine-tune the IPO mechanism," Zhou said. "Since retail investors are still not well educated, problems will crop up from IPOs in future."
Daniel Ren in Shanghai
Aug 30, 2010
From www.scmp.com
The fanfare and enthusiasm that greeted the mainland's Nasdaq-like second board for start-up firms in October last year has given way to concerns that the vast majority of the money raised could be misused.
The 109 small firms floated on the ChiNext market since its launch have raised 72.6 billion yuan (HK$83.08 billion) in initial public offerings, but only 7.75 billion yuan, roughly a tenth of the total proceeds, has been used by the companies to fund their own growth, the China News Service says, citing the firms' interim reports.
Click here to find out more!
The data has fuelled analysts' and investors' suspicions that the start-up firms, which were supposed to be future profit stars, could be ploughing the IPO funds into the property and equity markets.
When the China Securities Regulatory Commission launched the ChiNext market at the Shenzhen Stock Exchange after nearly a decade of preparation, thousands of mainland investors were eager to jump in. The first firms to list offered shares at lofty prices, and many raised more than double their targets.
Beijing hoped the second board would give promising small companies capital to fund their growth.
However, the excess funds appear to have distracted the attention of company founders and executives from their core businesses.
The Shenzhen exchange required the small firms to disclose how they proposed to use the extra funds, but many have yet to find a place to park the money other than in deposit accounts at the banks or in the property and equity markets.
"The size of the funds may not be enough to plague the two markets, but the question is whether investors realise the innovative companies they bought into have turned into investment firms," said Huatai Securities analyst Zhou Lin.
Many of the start-ups were expected to double their annual profits in the years to come once they listed on the second board. Although investors were warned by analysts of the huge potential risks, they rushed to buy the new shares regardless of the elevated prices.
Several ChiNext-listed firms completed IPOs at prices that represented more than 100 times their earnings. For instance, East Money Information's IPO price translated into 117 times its earnings last year.
"The IPO bonanza was music to the founders' ears at that time," said Wei Wei, a trader at West China Securities. "Now they have to convince the investors that they can bring handsome returns through investment in lucrative deals."
However, Beijing, spooked by fears of growing asset bubbles and social disunity, has stepped up efforts to cool the red-hot real estate market this year. The stock market has been stuck in bearish mode following an 80 per cent rally last year - the Shanghai Composite Index has lost more than 20 per cent so far this year.
Investors have always taken it for granted that IPO shares would be safe bets, bringing them substantial first-day gains when the firms made their debuts on the exchanges.
As the regulator had the final say in the pricing of new shares, these were normally set at a price-to-earnings ratio of about 20 to facilitate the raising of funds by state-owned companies. Nearly all the newly listed stocks surged on their first day of trading, since the IPO prices were set artificially low.
Beijing reformed the IPO mechanism in June last year following a nine-month suspension of new offerings, giving underwriters and companies a bigger say in the pricing.
However, the move failed to curb the IPO frenzy.
"It's still up to the regulators and investment banks to further fine-tune the IPO mechanism," Zhou said. "Since retail investors are still not well educated, problems will crop up from IPOs in future."
