China's stocks hit most, but IPOs score big
Sunday, 30 May 2010
NEW YORK, May 29 (Bloomberg): China has the world's worst performing equity market this year and the best returns on initial public offerings.
While the Shanghai Composite Index has slid 19 per cent for the steepest drop among the 10 largest stock markets, IPOs are beating the country's benchmark equity indexes by 33 percentage points on average in their first month of trading, data show.
Chinese individuals restricted from international investments have helped snap up $25 billion in IPOs this year, three times more than were sold in the US, as inflation erodes savings and the government clamps down on property speculation.
The rally by newly listed companies has made their shares almost twice as expensive relative to profits as the broader stock market, a sign to firms from KBC-Goldstate Fund Management to hedge fund Platinum Partners that a bubble may be forming.
"Most of the China IPOs are overvalued," said Larry Wan, Shanghai-based deputy chief investment officer at KBC-Goldstate, which oversees about $583 million. "It's difficult to believe they are going to be able to deliver the sort of exponential growth that the valuations imply."
The fastest expansion among the 20 biggest economies has helped spur the surge in China's IPO market. The country's gross domestic product grew 11.9 per cent in the first quarter, the most in almost three years and about four times the US GDP.
The amount raised from Chinese IPOs may double after the sale by Beijing-based Agricultural Bank of China. The nation's third-largest lender by assets will seek at least $30 billion in Shanghai and Hong Kong, according to the Beijing Times.
That would be the world's biggest initial offering, exceeding the $22 billion deal by Industrial & Commercial Bank of China of Beijing in 2006. Chinese IPOs have advanced 32 per cent on average in their first month of trading, while the Shanghai Composite Index and the Shenzhen composite declined, data show.
The rally by newly listed companies has been primarily fueled by individual investors, even as concern that Europe's debt crisis will hamper the global economic rebound spurred a selloff in equities around the world, according to Andy Xie, an independent economist in Shanghai.
"Chinese investors have this traditional belief that you can't lose money buying new stocks," said Xie, formerly Morgan Stanley's chief economist for the Asia-Pacific region. "This is not sustainable. China's economy has big bubbles, so does the IPO market.
Investors can't be fooled forever." Local investors who have a total of 146-million brokerage accounts are seeing their investment choices outside of equities limited by inflation that's eroding China's $7.2 trillion of savings and government curbs on mortgage loans.
Consumer prices climbed 2.8 per cent last month, surpassing the one-year savings rate of 2.25 per cent. The pace of inflation is forecast to rise 3.4 per cent this year, the median estimate of 18 economists shows.
Citigroup of New York and Paris-based BNP Paribas project that home prices will drop 20 per cent this year, after Chinese policy makers increased bank reserve requirements three times in the past three months to slow lending. Property prices surged the most on record in April, according to the National Development and Reform Commission.
"Chinese investors can't allocate their money off-shore," said Lei Wang, who helps oversee $20.2 billion at the Santa Fe, New Mexico-based Thornburg International Value Fund. "Most of the money is locked up at the home market, so for some of those investors, IPOs are a good short-term profitable trade."
Gains by Chinese IPOs have pushed valuations to an average 46 times estimated profits, Bloomberg data show. That's almost three times as much as companies traded in Shanghai, valued at 16 times earnings, and about double the ratio for Shenzhen-listed stocks.
Chongqing Water Group is valued at 34.9 times its estimated profit after a 59-per cent advance in its first month of trading. That's more than double the average price-earnings ratio for companies in the Shanghai gauge, which fell 5.2 per cent over the same period.
The $511 million IPO in March gave the supplier of water to the southwestern municipality of Chongqing a market capitalisation of $4.9 billion.
Investors in East Money Information, the Shanghai-based provider of online financial information, paid 56 times the company's estimated profits in its IPO, or 117 per cent more than the average company in the Shenzhen measure of equities, data show.
The company gained 93 per cent in its first month of trading, helping to push its valuation to 92 times earnings, or more than three times the broader market. The Shenzhen index rose 4.9 per cent in the same span.
"A lot of the ones trading were really rocket shots," said Uri Landesman, president of New York-based hedge fund Platinum Partners, which oversees more than $500 million. "It definitely does look like there could be bubble-like tendencies in the Chinese IPO market."
While the Shanghai Composite Index has slid 19 per cent for the steepest drop among the 10 largest stock markets, IPOs are beating the country's benchmark equity indexes by 33 percentage points on average in their first month of trading, data show.
Chinese individuals restricted from international investments have helped snap up $25 billion in IPOs this year, three times more than were sold in the US, as inflation erodes savings and the government clamps down on property speculation.
The rally by newly listed companies has made their shares almost twice as expensive relative to profits as the broader stock market, a sign to firms from KBC-Goldstate Fund Management to hedge fund Platinum Partners that a bubble may be forming.
"Most of the China IPOs are overvalued," said Larry Wan, Shanghai-based deputy chief investment officer at KBC-Goldstate, which oversees about $583 million. "It's difficult to believe they are going to be able to deliver the sort of exponential growth that the valuations imply."
The fastest expansion among the 20 biggest economies has helped spur the surge in China's IPO market. The country's gross domestic product grew 11.9 per cent in the first quarter, the most in almost three years and about four times the US GDP.
The amount raised from Chinese IPOs may double after the sale by Beijing-based Agricultural Bank of China. The nation's third-largest lender by assets will seek at least $30 billion in Shanghai and Hong Kong, according to the Beijing Times.
That would be the world's biggest initial offering, exceeding the $22 billion deal by Industrial & Commercial Bank of China of Beijing in 2006. Chinese IPOs have advanced 32 per cent on average in their first month of trading, while the Shanghai Composite Index and the Shenzhen composite declined, data show.
The rally by newly listed companies has been primarily fueled by individual investors, even as concern that Europe's debt crisis will hamper the global economic rebound spurred a selloff in equities around the world, according to Andy Xie, an independent economist in Shanghai.
"Chinese investors have this traditional belief that you can't lose money buying new stocks," said Xie, formerly Morgan Stanley's chief economist for the Asia-Pacific region. "This is not sustainable. China's economy has big bubbles, so does the IPO market.
Investors can't be fooled forever." Local investors who have a total of 146-million brokerage accounts are seeing their investment choices outside of equities limited by inflation that's eroding China's $7.2 trillion of savings and government curbs on mortgage loans.
Consumer prices climbed 2.8 per cent last month, surpassing the one-year savings rate of 2.25 per cent. The pace of inflation is forecast to rise 3.4 per cent this year, the median estimate of 18 economists shows.
Citigroup of New York and Paris-based BNP Paribas project that home prices will drop 20 per cent this year, after Chinese policy makers increased bank reserve requirements three times in the past three months to slow lending. Property prices surged the most on record in April, according to the National Development and Reform Commission.
"Chinese investors can't allocate their money off-shore," said Lei Wang, who helps oversee $20.2 billion at the Santa Fe, New Mexico-based Thornburg International Value Fund. "Most of the money is locked up at the home market, so for some of those investors, IPOs are a good short-term profitable trade."
Gains by Chinese IPOs have pushed valuations to an average 46 times estimated profits, Bloomberg data show. That's almost three times as much as companies traded in Shanghai, valued at 16 times earnings, and about double the ratio for Shenzhen-listed stocks.
Chongqing Water Group is valued at 34.9 times its estimated profit after a 59-per cent advance in its first month of trading. That's more than double the average price-earnings ratio for companies in the Shanghai gauge, which fell 5.2 per cent over the same period.
The $511 million IPO in March gave the supplier of water to the southwestern municipality of Chongqing a market capitalisation of $4.9 billion.
Investors in East Money Information, the Shanghai-based provider of online financial information, paid 56 times the company's estimated profits in its IPO, or 117 per cent more than the average company in the Shenzhen measure of equities, data show.
The company gained 93 per cent in its first month of trading, helping to push its valuation to 92 times earnings, or more than three times the broader market. The Shenzhen index rose 4.9 per cent in the same span.
"A lot of the ones trading were really rocket shots," said Uri Landesman, president of New York-based hedge fund Platinum Partners, which oversees more than $500 million. "It definitely does look like there could be bubble-like tendencies in the Chinese IPO market."