17 JANUARY 2014
Stay Cautious! IPO Fever Heats Up Chinese Stock Market
Currently, no matter if you are looking at the Singapore or Hong Kong stock markets, things look pretty boring if you are just interested in the indices, which are basically going nowhere. However, punters are still pouncing on the initial public offering (IPO) shares in Hong Kong and the feverish energy is not dissimilar to the tail end of a bull run. With many IPO shares appreciating by as much as three times within a month of listing, I can only use ‘craze’ to describe this phenomenon.
As the stock market becomes more polarised, we are also seeing a steady increase in the volume of cheap second- and third-rung stocks being transacted. As an example, on 10 January, more than HK$200 million worth of shares were traded. Out of the popular second- and third-rung concept stocks that have made it into the top 50 hot stocks of the Hong Kong Exchange, more than 10 are even posing a challenge to the blue chips. Apparently, some heavy-weight investors are starting to join in the fray to punt after these popular concept stocks.
Recently, China Packaging Holdings Development, a very modest share and an easy target for punters, has just gone public with a market capitalisation of a mere HK$100 million. Yet, it was over-subscribed by more than 200 times. Eventually, the counter rose by 70 percent on its first day of trading. The only explanation for this is speculations.
For some IPO stocks, if you apply before their listing or bought at the first moment they are traded on the first day, you can basically sit back and watch their share prices rise and fall. However, if you jump in two weeks after they are listed, just because you saw their prices going up, you should be prepared to face some correction two months later, and even suffer losses when you do cut-loss.
In other words, if you are eyeing on any counters, you should take actions decisively and not hesitate or waste time observing. There can be two outcomes to your decision to ‘wait for a few days’: one, the prices will continue to rise and you end up buying at a higher price; two, prices will fall, and you end up not daring to buy.
As I have said many times, Jack Ma of Alibaba is one man who knows very well how to hype up share prices. Back when Alibaba went public, it was listed at an unprecedented 100 times price-to-earnings ratio (PER). Today, any shares related to Alibaba are guaranteed to appreciate immediately. Kingdee International and Fosun International are good cases in point. These two companies have signed partnership agreements with Alibaba. Of course, Fosun International’s market capitalisation is larger, so it is not as easy to speculate on as compared with small-cap shares. However, even for larger-cap shares that have been around for some years and have sound operating results to back them up, there are still some room to play with in the future even after they have exhausted their run.
As a large number of Chinese A-shares are lining up to be listed, many investors worry that this might limit their rise. However, there was also a large number of IPOs in Hong Kong in 4Q13 last year. Not only was the Hang Seng Index unscathed, many of these IPOs even went on a bull run.
On Sunday, 12 January, which was not a business day, the Chinese Securities Regulatory Commission (CSRC) issued an urgent circular overnight entitled “Measures to strengthen monitoring of IPOs”. The surprise announcement caused the few IPOs that were scheduled to announce their offer prices on 13 January to put off their listing for the time being. After suspending IPOs for more than a year, China lifted its halt order early this year. All of a sudden, there is a glut of IPOs, and speculators are also prepared for a field day.
The move by the CSRC has halted the IPO of some new shares. The good thing that came out of this is the temporary respite from new shares fighting for capital, and that would allow sufficient funds to get circulated in the stock market. The bad thing is, in the absence of IPOs to punt on, investors are now weary about channelling their money out of banks and into existing shares that are already being traded in the stock market. Without speculators, the stock market will become stagnant and even slip ever so gently.
It has been more than a year since the CSRC suspended IPOs, but there has been no improvement in the Chinese stock market and the Shanghai Composite Index is even sliding slowly. It is not due to a lack of funds in the market, but rather the absence of targets for speculators to pounce on. Since existing shares do not offer up much incentives, both investors and speculators have given up on the market, leaving it to the more foolhardy. Only when new shares that attract big players to speculate on are allowed to be listed, which will in turn attract other speculators, can the stock market regain its verve.
The Third Plenum of the 18th CPC Congress will indeed introduce many positive impetus to the stock market, but due to the large number of parties with vested interests, the reformation will also face substantial resistance. For example, the Third Plenum calls for the separation of government from enterprises, yet many Communist Party cadres are wearing two hats concurrently – one as Party Secretary, the other as General Manager.
Amidst Chinese President Xi Jinping’s fight against corruption, the luxury goods business in China will definitely be hit hard. In 2014, its impact will only intensify further. Today, the size and number of outbound investment delegations from the various provinces and cities have dropped drastically; gone are the hay days of such groups booking dozens of suites in five-star hotels. Gone also from the wrists of cadres are luxury watches. Therefore, now is not the time to go bargain-hunting for high-end consumer goods stocks.
Short of a collapse of the US stock market, I believe the current bulwark stocks of the Hong Kong market will continue to dominate. Chances of higher short-term interest rates are not high, which could be the best favourable factor in 2014.
Singapore’s Oversea-Chinese Banking Corporation looks set to acquire Wing Hang Bank, and rumours in the market have it that the bid price is not very high. This time round, there is no news of any Chinese-backed banks competing in the bid. In the past, when Singapore’s DBS Bank acquired Dao Heng Bank at a very high price-to-book value ratio (PB), it was because Dao Heng is a medium sized bank. Buying a bank of this size would help DBS gain a foothold in Hong Kong. Today, the DBS sign can be seen all over Hong Kong. By comparison, Wing Hang Bank is a small bank, so expectedly it would not command a high PB value.
Publish date: 17/01/14