China’s newest equity market gets off to a stumbling start - Financial Times

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The latest addition to China’s capital markets got off to a stumbling start this week, as shares dropped on their debut just days after traders raced to snap them up.

Two-thirds of the 32 stocks listed on the so-called New Third Board Select, a Beijing-based trading venue for small firms, fell on Monday. That came as a blow to many investors, who have grown used to shares surging on their first day of trading — apparently regardless of fundamentals.

“I am very disappointed about [the] performance,” said Zhou Yunnan, founder of Beijing-based fund Nanshan Investment, which owns NTBS-listed stocks. “It has undermined our confidence in the market.”

Government-imposed lockdowns due to the pandemic have squeezed millions of small companies in China, which accounted for more than 60 per cent of GDP and 80 per cent of jobs at the end of 2018, according to government data.

Authorities have responded by relaxing controls on equity financing to help some of the biggest access capital. The new board has looser requirements for profits and revenues than China’s main stock exchanges in Shanghai and Shenzhen.

Investors had high hopes for the new venue, as demand for shares in initial public offerings on the NTBS outstripped supply by more than 100 times. That was despite allegations of questionable financials among some of these companies.

One NTBS company, Shanghai-based software maker I2Finance, was denied a Shenzhen IPO last year after regulators queried its reported margins and related-party transactions. Another, Welltrans O & E Co of Wuhan, which makes video surveillance products, was allowed to list after regulators rejected an earlier IPO request due to unusually high levels of accounts receivable compared with revenue.

Those matters did not initially deter investors: I2Finance’s IPO was 2,339 times oversubscribed.

“There is no need to look at the fundamentals,” said Zhang Chi, a Beijing-based fund manager who was unable to secure an allocation to the company’s IPO prior to the first day of trading. I2Finance’s shares rose 6 per cent on their debut while Welltrans O & E Co dropped 9.8 per cent.

The NTBS board’s performance on Tuesday was brighter, with 30 of its stocks rising. But 20 of the 32 remained lower than their IPO price.

China’s retail investors — an influential force in the country’s markets — have long been enthusiastic backers of IPOs.

Following a secondary listing in Shanghai earlier in July, shares in Chinese chipmaker SMIC surged 246 per cent on their first day of trading. Stocks listed on the Star Market, billed as the country’s answer to the Nasdaq, rocketed by as much as 520 per cent on their debut a year ago.

Public records show that more than 95 per cent of new listings in Shanghai and Shenzhen over the past two decades have jumped on their first day of trading. “There is no easier way to profit from China’s stock market than investing in an IPO,” said Wang Yihe, a Shanghai-based fund manager, ahead of the new market’s launch.

Chinese traders have also been emboldened by a recent rally in the country’s main stock markets, as the world’s second largest economy shakes off the damage of Covid-19.

“New share offerings are one of the safest and most profitable investments for Chinese retail stock buyers,” added Mr Wang. “If the strategy stops working, investors will exit the market, making future IPOs difficult.”

The poor performance of NTBS suggests these companies are not worth that much even after offering a discount

The tradition of red-hot debuts is due partly to a government policy that forces companies to cut the price of shares sold during an IPO in order to lure retail investors. That results in an influx of buy orders from traders who believe they are getting bargains.

Critics say the practice has made China’s markets — the world’s second-largest by total capitalisation — inefficient and prone to volatility.

Regulators had originally earmarked the NTBS as a testing ground for reforms, as the market has no limit on the valuations at which companies can sell shares during an IPO. But investors pointed out that some businesses still low-balled their stock prices, in an apparent effort to ensure a day-one surge.

However, shares of most NTBS-listed stocks took off during the first 10 minutes of trading on Monday before reversing course. Analysts said it was likely institutional investors had tried to offload their shares to retail traders en masse, driving down prices.

Investors say NTBS’s reputation may already be tarnished. “The market will become a failure if stocks don’t gain 50 per cent on the first day of trading,” said Mr Zhou of Nanshan Investment.

The board’s sluggish performance has also called into question Beijing’s efforts to encourage small businesses hit by coronavirus to shore up their balance sheets by selling equity.

“The government thinks it would be easier for troubled firms to sell shares by offering a discount,” said Zhuang Bo, an economist at TS Lombard. “But the poor performance of NTBS suggests these companies are not worth that much even after offering a discount.”

Additional reporting by Xinning Liu in Beijing

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