Stricter regulation helps improve quality, boost investment prospects, say experts
With the slowdown in new initial public offerings in China in 2018, due to global trade tensions and stricter supervision, the number of companies waiting for IPO approval from the China Securities Regulatory Commission has contracted to a five-year low, according to an EY report released on Thursday.
A total of 105 companies went public on the A-share market this year, down 76 percent from a year earlier. The total funding raised hit 138.7 billion yuan ($20.2 billion), down 40 percent year-on-year, the global consulting firm's report said.
The five sectors that attracted the largest amount of funding were tech, media and telecom; finance; industry; retailing and consumer products; and healthcare. But it should be noted that banks and securities firms comprised the largest proportion of the IPOs in the financial sector, which is different from mature markets where there is greater diversification, said Wang Yang, partner at EY Assurance Services.
On Tuesday, the State Council, China's central government, released a guideline to encourage qualified cultural companies to securitize their assets and seek further development via the capital market.
"Cultural companies were absent from the IPO deals in the TMT sector, indicating the sector's development is imbalanced. But with the new guideline, it can be predicted that there will be more cultural companies going public in 2019," said Wang.
The pace of IPO approval by the commission's Issuance Appraisal Committee has slowed, which has helped to stabilize the market, said EY. By Dec 20, there were 278 companies on the CSRC's IPO waiting list. That number was 307 in the middle of last year, and peaked at 900 in 2013.
Around 30 percent of IPO applications were rejected in 2018, while the figure was only 17 percent a year earlier. Some 150 companies' IPOs were terminated this year, up 36 percent from 2017.
"Stricter scrutiny has forced companies to be more self-disciplined. Some companies have suspended their IPO applications to adjust their businesses first. Some are waiting for a significant pickup in their business performance. In the long term, a more stringent IPO application review process will help to enhance the quality of listed companies," said Wang.
Given the central government has emphasized the capital market's important role in the real economy again, as well as the fact the science and technology innovation board is set to launch next year, the A-share market's IPO activity will rise in 2019, she added.
Globally, Chinese companies represented half of the top 10 IPOs by value, according to EY. The mainland's telecom assets operator China Tower, which went public in Hong Kong in August, reported the largest funding amount among Chinese companies, and was second globally only to Japan's SoftBank Corp.
The A-share market's National Equities Exchange and Quotations reached an agreement with Hong Kong Exchanges and Clearing Ltd in April, under which NEEQ-listed companies can list in Hong Kong without delisting from the A-share market.
This will result in the continued interest of mainland companies in the Hong Kong market, said Lawrence Lau, partner of EY Assurance Services.