HONG KONG (Bloomberg) - In most stock markets, a 77 per cent return in four days would leave investors feeling ecstatic.
In China, it's just the opposite - at least when it comes to initial public offerings. That four-day advance in Guotai Junan Securities Co, which completed China's biggest IPO in five years last month, is the worst start among 190 initial share sales on mainland bourses this year. Every other one recorded a gain at or near the 92 per cent maximum allowed, according to data compiled by Bloomberg.
While regulatory pressure on companies to keep their IPO prices low has led to instant gains once the shares start trading, returns are coming under pressure from a flood of new equity and a tumble in the Shanghai Composite Index. The Bloomberg China IPO Index has dropped 25 per cent since the end of May, even as authorities considered a suspension of new deals to ease supply concerns.
"Insanity has a limit," said Mr Francis Lun, chief executive officer at Geo Securities Ltd in Hong Kong. "If Guotai keeps rising like a penny stock, it will soon become the biggest company in the world, bigger than Apple."
China's second-largest brokerage rose 1.4 per cent to 34.82 yuan (S$7.58) in Shanghai on Wednesday (July 1), its first day without a limit-up move. China restricts daily gains to 44 per cent for IPO debuts and 10 per cent thereafter. The stock dropped as much as 8.1 per cent Thursday (July 2) before paring losses to 2.8 per cent at 10:42 a.m. local time.
Guotai Junan raised the equivalent of US$4.9 billion (S$6.62 billion) from investors, the biggest IPO in China's domestic market since 2010, according to data compiled by Bloomberg. The company, whose US$43 billion market value is in line with that of Deutsche Bank, received US$379 billion of orders, equivalent to Indonesia's entire stock market.
Returns on IPOs this year have started shrinking for the first time in six months. On June 30, stocks that began trading in China this year were 393 per cent higher than their initial offering prices, down from 603 per cent at the end of May. They're valued at an average 71 times earnings, versus 96 a month earlier.
Companies and their shareholders have raised US$23.7 billion through IPOs in China's domestic market this year, more than four times the amount for the same period of 2014, data compiled by Bloomberg show.
Regulators are considering suspending IPOs to stabilise the stock market, people familiar with the matter said on June 29. The Shanghai Composite sank 5.2 per cent on Wednesday, extending its drop fro2m a June 12 high to 22 per cent. Citic Securities Co., China's biggest brokerage, has declined 33 per cent from its high in April.
"There is a lot of supply," said Mr Philippe Espinasse, former head of equity capital markets for Asia at Nomura Holdings Inc. and author of "IPO: A Global Guide." "After sharp corrections, investors are looking more closely at fundamentals."