China’s regulator warns companies not to inflate IPO valuations

Jun 19, 2018
New-economy IPO swings cause concerns about overpricing

China’s securities regulator has warned new-economy companies not to inflate their valuations in the pre-IPO stage.

Pointing to China Literature, Ping An Good Doctor, Razer, Yixin Group and ZhongAn Insurance, the China Securities Regulatory Commission (CSRC) notes in a statement that the valuation swings after their IPOs have caused concerns about overpricing.

The CSRC has requested that issuers, underwriters and institutional investors ‘exercise caution’ in the IPO ‘book-building process’ after it launched a pilot program to support innovative companies to list on domestic exchanges and allow overseas listed mainland companies to issue Chinese depositary receipts.

Book building is the process by which an underwriter attempts to determine at what price to offer an IPO based on demand from institutional investors.

Several new-economy companies have quickly plunged from their peaks or fallen below their offer prices after being listed in Hong Kong. Ping An Good Doctor, the biggest listing in Hong Kong so far this year, dropped below its IPO share price of HK$54.9 ($7) on its second trading day in May.

China Literature, Razer, Yixin Group and ZhongAn Insurance were the four biggest technology listings in 2017. Of those, three have already fallen below the offer price.

Yixin Group is the worst performer, trading at HK$3.73 at the end of last week, down 51 percent from its IPO price of HK$7.7. ZhongAn and Razer have fallen 9 percent and 42 percent, respectively.

Compared with their peaks, the combined market value of these companies has seen a mass loss to the tune of more than HK$160 bn.

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