China IPOs: A Look Ahead

An important dynamic that is fueling China’s growing middle class is an increasing access to global capital, not just for large state-run enterprises, but for small entrepreneurial businesses that continue to draw more people from the countryside, driving urbanization. The first half of 2010 saw over 200 Chinese business go public. Despite a slower pace of new offerings in the second quarter of 2010, the number of Chinese IPOs still could hit 400 for 2010.

Although big IPOs such as that of China Agricultural Bank dominate the headlines, many of the offerings that are driving China’s growth occur on the Shenzhen Stock Exchange (SZSE) rather than the better known Hong Kong and Shanghai markets. In May of 2004, the Small and Medium Enterprise Board (SMEB) was launched in the SZSE to provide small and medium sized enterprises greater access to capital and liquidity. In October of 2009, the ChiNext board was launched, for the purpose of meeting the capital needs of independent innovation and growth enterprises. As of June 2010, over half the companies listed on the SZSE are either on the SMEB or ChiNext board.

In 2009 and so far in 2010, the majority of the IPOs occurred in the manufacturing sector (although the most money was in financial due mostly to the $22B raised by China Agricultural Bank) however this is likely to change as the government plans to place greater emphasis on new areas that include alternative energy, biotech, IT/Internet and advanced materials. Alternative fuel automobiles is another likely area of focus for the government’s next five year plan.

Although the IT/Internet industry in China has received substantial attention, surveys by the China Venture Capital Association indicate that foreign investors have put more money recently into alternative energy, consumer goods and services and healthcare. Success stories in the Internet sector, such as Tencent and Baidu are tempered by not just by the stringent regulations that govern Internet use in China, but the complexity of complying with them. Internet companies in China must comply with laws set by multiple agencies, and failing to comply with any one agency can result in penalties. One well-publicized example was the shutdown of the popular World of Warcraft game, in which Netease was accused by China’s General Administration of Press and Publication (GAPP) of charging users without proper approval despite a blessing its Ministry of Culture.

Looking ahead, we can expect to see a growing level of IPO activity in China with a continued short-term focus on materials, finance and manufacturing, and a gradual transition towards alternative energy, consumer goods and healthcare. Internet IPOs also will grow, but unless there is some reform of how Internet regulations are enforced the pace could be slower than in other sectors. Some companies to watch in 2011 include:

• China Huadian Corporation one of China’s largest energy state-owned energy firms that should debut on the Hong Kong exchange
• Jinchuan Group, Ltd., a nickel and ferrous metal mining and chemical company that produces close to 90% of the nickel and platinum produced in China
• China Huarong Financial Leasing Co., a state-owned asset management firm initially set up to manage non-performing loans
• Jiang Tai Insurance Brokers, Ltd., China’s first comprehensive insurance broker
• Spring Airlines, an independent budget air carrier that could become the first independent Chinese LCC to list in Shanghai
• Oak Pacific Interactive, an Internet conglomerate that produces social games and networks, and consumer oriented network services