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Stocks

Chinese IPOs: a zero-sum game

HONG KONG -- A wave of initial public offerings in China over the coming months may only serve to cap gains by Shanghai-listed blue chips.

     In the first new Chinese IPOs in about four months, three companies went public Thursday on the Shenzhen Stock Exchange. Information security provider Feitian Technologies and Wuxi Xuelang Environmental Technology debuted on the Nasdaq-style ChiNext Board, while Shandong Longda Meat Foodstuff, a meat processing company, listed on the main board.

     Investors pounced on the newcomers, whose shares opened at the maximum 20% above their offer prices and kept climbing to the first-day limit of 44%, at which point trading in the new issues was suspended.

      When the government gave the go-ahead for IPOs to resume in January following a 14-month break, it had already taken steps to make China's capital markets sounder, paying particular attention to protecting investors. Beijing "made a serious effort to deal with the problem of overpriced IPOs," according to an official at HSBC.

     Feitian and Xuelang Environmental were priced at around 16 times last year's earnings; Longda Meat, at around 15 times. While these multiples are higher than the average for the Shanghai market, they are far lower than the 40s and 50s once taken for granted.

     Indeed, 43 of the 48 companies that went public on the Shanghai and Shenzhen exchanges in January and February are currently trading above their IPO prices. Investors have mostly been spared the bitter aftertaste of shares that peak on their first day.

     More IPOs are on the way. Eight companies have set their offer prices and are awaiting the green light from regulators. According to the Securities Regulatory Commission, more than 540 companies have pre-disclosed prospectuses for IPOs. But the commission's chairman, Xiao Gang, said last month that about 100 would be cleared for listing this year, adding that approvals will come at a balanced pace from June to year's end. That would fall short of 2012's tally of 154 -- before the hold was imposed.

     "IPOs will remain popular for some time," predicts Liu Lin, an analyst at Aizawa Securities Investment Research Center.

     If that is true, companies long in the tooth stand to lose out. State-owned enterprises, now at the mercy of President Xi Jinping's structural reform campaign, come across as particularly unattractive. To investors eager to chase IPOs, shares of SOEs may look ripe for the selling.

     The popularity of small- and mid-cap stocks is shifting the focus of stock trading in China from Shanghai to Shenzhen. The Shanghai Composite Index, heavy with SOEs, is down more than 4% for the year. By contrast, the Shenzhen Composite Index has eked out a small gain, while the ChiNext index is up 4%. Trading on the Shanghai Stock Exchange has hovered around 50-80 billion yuan ($8-12.8 billion) in recent sessions, compared with 70-110 billion yuan on the Shenzhen market.

     But with "wealth-management products" touting 5%-plus yields as matter of course, high-risk stocks will find it hard to attract new money, Liu says.

     In this view, IPOs are simply grabbing a bigger piece of a limited pie. Thursday's feeding frenzy thus leaves somewhat of an empty feeling.

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