Equity Thursday : China and The IPO Gravy Train

I thought I would write about something to take our minds off the ECB and the Non Farm Payrolls tonight before the US holiday tomorrow and their long weekend.

Global IPO Stats Year To Date :

2014 total IPO and additional equity offerings announced USD 484.23 bio.

Asia Pacific companies have overtaken Europe and North America in their offerings.

2014 ipo

China is on a roll with daily headlines like these.

2 Jul 2014  Three China IPO Companies Jump by Daily Limit in Debut Today

July 2 (Bloomberg) — Zhejiang Shapuaisi, Huibei Forbon and
Yunnan Hongxiang started trading on Shanghai and Shenzhen stock
exchanges today.
• All three cos. jumped by 44% daily limit from offer prices after being suspended for 30 minutes

PwC Expects 150 New Listings in China to Raise up to 150b Yuan

July 2 (Bloomberg) — The total amount raised by cos. through IPOs in China this yr is expected at 100-150b yuan, according to a press release from PwC.
• About 30-50b yuan will be raised through listings of 30 cos. on Shanghai and Shenzhen main boards.
• 120 cos. are expected to raise 70-100b yuan by listing on Shenzhen’s medium-small co. board and Chinext

China Statistics

  • Announced IPOs and additional share offerings 1,209 +325% yoy
  • Pending 834 + 5112% yoy
  • Priced 460 +78% yoy

Even WH Group (who had bought US’s largest pork producer last year) is reviving their IPO dream (and their massive chance to cash out).  http://online.wsj.com/articles/wh-group-considers-relaunching-ipo-1404294860?mod=_newsreel_5

What I wrote in April. ..
But people are wising up. Remember the Chinese takeover of Smithfield ? Borrowing the entire sum of 7 bio and then trying to IPO on top of that ? https://tradehaven.net/market/sgd-new-issue-review-vallianz-2y-7-5-and-a-story-of-listing-pigs/

Boo ! They are halving their IPO because not a lot of suckers left for the current owners to dump on. http://www.ft.com/intl/cms/s/0/70efeb56-cab2-11e3-9c6a-00144feabdc0.html?ftcamp=published_links%2Frss%2Fcompanies_asia-pacific%2Ffeed%2F%2Fproduct&siteedition=intl#axzz2zrIYJTaw

In April, we also hailed a strategic move by China to allow cross border trading with Hong Kong, allowing certain shares to be traded daily, subject to daily quotas and limits. http://www.ifrasia.com/china-to-allow-cross-border-trading/21141051.article


All these say that China is reducing reliance on the offshore markets, looking inwards to tap on investments and taking money back home.  The offshore money will have to go to China to chase for investments now because they are opening up and you have to go to them instead of them coming to you.

The trouble is that we have little avenues still to access these luscious IPOs that are raining mini windfalls daily on the local Chinese market with their top blue chip companies still looking peakish.

There is not much to dig in the offshore universe of stock indices, ETFs and futures besides the usual 2823 HK ETF which is the iShares FTSE A50 China Index and the iShares China Large Cap ETF (FXI US).  These mirror the FTSE China A50, the top 50 heavyweights which are the bluechips.

The FTSE China A50 also has an active futures market.

We also have the following relatively liquid avenues to China.

1. Hang Seng China Ent Index (HSCEI)  futures – is a freefloat capitalization-weighted index comprised of H-Shares listed on the Hong Kong Stock Exchange and included in the Hang Seng Mainland Composite Index. Traded in HKD with 40 companies in the index.

2. LYXOR UCITS ETF China Enterprise HSCEI (ASI SP) – Traded in USD, it mirrors the performance of the above mentioned HSCEI.

3. SPDR S&P China ETF (GXC US) –  SPDR S&P China ETF is an exchange-traded fund incorporated in the USA. The Fund’s objective is to replicate the performance of the S&P China BMI Index. The Index measures publicly traded companies domiciled in China, but legally available to foreign investors. (641 companies).

4. CSI 300 Index – The CSI 300 Index is a freefloat-weighted index that consists of 300 A-share stocks listed on the Shanghai or Shenzhen Stock Exchanges. Listed in China and accessible via DB X-Trackers CSI300 UCITS ETF (3049 HK).

IPOs are the life blood of the Chinese and Hong Kong retail market. This gravy train has just started off the block and does not look like it will stop any time soon.

The main beneficiaries will be the higher risk beta names that will enjoy the lift from the IPOs while the heavyweights of the index which are mainly the banks and financial institutions will feed off the crumbs.

It does look like we have to go down to the individual stocks there are available out there. Names such as CTrip which is available as an ADR in the Nasdaq that Zico (my fund manager friend) has recommended to me because of their high takeover potential by the Alibabas of the world. I shudder that their stock has returned almost 500% in the past 2 years.

Getting your hands on the right exposure is the key and diversified indices such as the CSI 300 index (largest weights Ping An Insurance 3.76%, China Merch Bank 3.39%, China Minsheng Bank 3.37%), the S&P China BMI index (largest weights Tencent 8.37%, CCB 5.89%, ICBC 5.23%, China Mobile 5.14%) and others would be preferable to the A50, for instance.

Whilst I have had my reservations about China in the past, their reforms are too determined to ignore these days. And once the gravy train starts, it would be pretty hard to derail for a while.