China’s New Stock Venue Is Losing Its Luster

(Bloomberg) --

Excitement is fading in China’s Star market as traders await the next batch of initial public offerings.

Prices of many of the 25 newly listed companies fell after their average 140% first-day surge, while daily turnover was less than half the first day’s level. Though traders viewed the launch positively, the question is whether interest in existing shares will be maintained as more firms come to the table. There was already some demand to short the stocks in the first week.

Three more firms will begin subscriptions for share sales this week, while Northeast Securities Co. analyst Fu Lichun estimates about 200 companies will be trading after 12 months. Initial public offerings on the Star market are attractive to mainland investors and companies alike because firms are free to set their own valuations and there are no price limits in the first week of trading. Starting the sixth day, moves are subject to a 20% daily cap.

“With just a few trading days since its launch, it’s difficult to assess the success of the Star board,” said Tiffany Hsiao, a portfolio manager at Matthews Asia in San Francisco. “It has attracted a lot of interest from investors, which is positive, and companies are trading at prices that are significantly higher than their IPO prices.”

Semiconductor manufacturer Anji Microelectronics Technology (Shanghai) Co. is down 6.9% since its 400% first-day jump. The biggest stock on the board, China Railway Signal & Communication Corp., has lost 16% after doubling on its debut. The Star market rose 6.8% at the close Monday, according to a Bloomberg-complied index that’s weighted by market value.

The massive first-day gains also spurred demand to borrow shares -- a tool often used to bet prices will decline. The Star market is less restrictive than other venues on this practice, allowing some institutional investors to lend their holdings to brokers. For six of the firms, there were more shares on loan than there were purchased on leverage, according to Bloomberg-compiled data as of July 25.

Investors are willing to pay more for the growth: tech board stocks that posted profits in the past two years saw 2018 earnings grow by an average 88%. That compares with 25% growth for firms on the Shanghai Composite Index, and a 16% expansion rate for those on Shenzhen’s ChiNext.

More than 120 companies have joined the queue to list on the tech board. The Shanghai Stock Exchange halted its reviews of four applicants over the weekend. All of them have as an auditor Ruihua Certified Public Accountants, which is being investigated by the China Securities Regulatory Commission.

“There’s room for some serious arbitrage with returns of five times in one day, but there’s nothing to get overly excited about just now,” said Wang Mingli, executive director at Shanghai Youpu Investment Co. “We’ve yet to see if the people trading right now will come out of this in one piece.”

©2019 Bloomberg L.P.

With assistance from Bloomberg