摩根大通--中国IPO改革与历史 2013

www.jpmorganmarkets.com Asia Pacific Equity Research 05 July 2013 IPO reform and history The past, present and future Greater China Strategy Michael Yu, CFA AC (852) 2800 8511 michael.yu@jpmorgan.com Joanne Cheung (852) 2800-8596 joanne.cy.cheung@jpmorgan.com Asia Pacific Equity Strategy Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited See page 14 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.  We think the latest IPO reform is slightly below market expectation as the consultation paper doesn’t solve the hotly-debated issues, such as the structure of equity capital, the mechanisms of issuance and the "three high" phenomenon.  We estimate that IPO listings could start sometime between the end of July and mid-August. The CSRC is likely to follow the pattern of IPO approvals in 2011-12. Currently, 83 companies have passed trial and another 249 companies are in first step, implying the markets will need 12-15 months to digest them. The monthly capital demand is about RMB30 billion to 37.5 billion.  Historically, A-share markets were driven by macro factors, instead of IPO activity, in our view. The IPO resumption may have a negative impact on investor sentiment in the short term due to weak economic growth prospects and a tighter credit/liquidity environment. However the reform rules are a long-term positive for the equity markets, given the improved quality of listing companies and investor confidence.  The new IPO rules are likely to have a significant impact on the Chinese brokers’ business models as the regulations are likely to enhance the due diligence process. We see the leading broker firms as well positioned to benefit from the reform and the capital market diversification. Our China banking team initiated coverage on China Galaxy Securities with an OW rating in June. Figure 1: Shanghai A share index performance over eight IPO suspension periods Source: Bloomberg, Datastream. Remark: Grey areas are the IPO suspension periods. Figures in blanket are performance relative to MXEM. 0 1000 2000 3000 4000 5000 6000 7000 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 +77% (+72%) +24% (+20%) -15% (-21%) -12% (-4%) -7% (-20%) +56% (+16%) +57% (+57%) -3% (0%) +258% (+252%) -21% (-73%) +19% (+17%) -35% (-63%) -13% (-16%) +47% (+41%) China 1:01 2 Asia Pacific Equity Research 05 July 2013 Michael Yu, CFA (852) 2800 8511 michael.yu@jpmorgan.com Table of Contents Part I. Conclusions and market implications .........................3 Part II. Investors’ questions regarding the latest IPO Reform ...................................................................................................4 How many IPO cases are pending in the process? ....................................................4 What is the exact timeline of IPO resumption and Listings? .....................................4 How much amount of equity capital is expected to be raised after IPO resumption?..5 Why do the regulators reform the IPO market again? ...............................................5 What are the problems solved through the reform?...................................................6 What is the gap between the current IPO mechanism in China and the international practices? ................................................................................................................7 What would be the impacts to the domestic secondary markets?...............................7 Background: The history of IPOs reform in China ...............8 The eight times of IPOs suspension .........................................................................9 A wide dispersion of domestic equity market performance during IPO suspension periods....................................................................................................................9 Appendix .................................................................................12 A summary of new listing rules .............................................................................12 The investigated fraud cases ..................................................................................13 3 Asia Pacific Equity Research 05 July 2013 Michael Yu, CFA (852) 2800 8511 michael.yu@jpmorgan.com Part I. Conclusions and market implications IPO reform is one of a few unavoidable topics in the Chinese stock markets. Since 1999, Chinese stock markets have experienced at least four rounds of IPO reform, demonstrating the challenges and the gradual move towards a market oriented regime. On June 09, 2013, the China Securities Regulatory Commission (CSRC) announced a consulting paper of new shares listing reform (关于进一步推进新股发行体制 改革的意见》, 简称《新股发行改革意见》征求意见稿) to the public for comments. The public consulting phase ended on June 21, 2013. This means the latest IPO reform and listing is formally put on the agenda. We summarize a few takeaways regarding the latest IPO reform through in-depth digest of the new rules presented in the consulting paper and the studies of historical cases and international practices.  To Chinese stock markets We believe the reform rules are a long-term positive for the equity markets, given the new IPO framework is likely to improve the quality of listing companies, to lower listing valuation multiples and hence to rebuild investors’ confidence towards domestic stock markets. However, it is likely to take time for the full impact to materialize. Meanwhile, we view the release of the draft listing rules as a clear indicator that the A-share markets will soon open for new listings, which may concern some investors, especially given recent episodes of intra-banks and money market liquidity crunch, as well as weak economy. Currently over 715 companies are queuing for public listing on the A-share markets. Our analysis suggests that if the average IPO cases approved were around 20-25 per month, then the monthly capital demand is around RMB30 billion to 37.5 billion in the next 12 months.  To the Chinese brokerage sector The new IPO rules are likely to have a significant impact over the Chinese brokers’ business model as the regulations are likely to force brokers to substantially tighten up their due diligence process. We see the leading broker firms well positioned to benefit from the restart of IPO activity, the improved quality of listing companies, and the restoration of investor confidence in the capital markets. As the regulators are also promoting capital market diversification, such as the development of corporate bond markets, the leading broker firms are likely to benefit from such a trend as well. Meanwhile, Chinese brokers are now encouraged to provide more flexible investment products to investors via equity, bond, private equity, mutual fund and futures, making them the most flexible and comprehensive financial investment product providers in China. As a result, we expect Chinese brokers’ profitability to be meaningfully improved from today’s mid-single-digit to high double digits, thanks to 1) the recovering capital market confidence; 2) the higher operating leverage an fast growth derived from new businesses (such as margin finance and stock lending); and 3) a expanded business scope into other areas like fund management and future products. Our China banking team initiated coverage on China Galaxy Securities with OW rating in June. For details, please read China Galaxy Securities - Its focus on brokerage business and broad client base is bearing fruit; Initiate with OW, Lei et al, 25 June 2013. Table 1: Market share of CITIC securities, Haitong Securities and Galaxy Securities (Market share as of 2012) CITIC Securities Haitong Securities Galaxy Securities Securities brokerage 2.6% 4.3% 5.2% Margin financing and securities lending 6.8% 9.4% 6.8% Client deposits 4.8% 5.0% 5.6% Investment banking 11.3% 3.8% 3.0% Equity underwritten 12.5% 2.5% 2.2% Debt underwritten 5.1% 1.8% 1.6% Asset management 8.4% 1.1% 1.2% Total revenue 9.0% 7.1% 4.3% Securities brokerage revenue 2.6% 4.4% 5.1% ROE - FY1 7.0% 7.1% 8.9% ROE - FY2 8.4% 8.2% 9.2% H share brokers ROE - FY1 7.1% H share brokers ROE - FY2 8.3% Source: Securities Association of China, Wind, Bloomberg, Company, J.P. Morgan estimates. Figure 2: Industry growth in asset, revenue, and profit Source: Wind, Securities Association of China. 4 Asia Pacific Equity Research 05 July 2013 Michael Yu, CFA (852) 2800 8511 michael.yu@jpmorgan.com  To ordinary investors: Our analysis reveals that IPO activities are having a psychological/short-term impact on stock markets. We believe that a numbers of investors fear IPOs. Secondly, it has become a widely shared view that IPOs are bad for A-share market performance. As a result, the suspension or restart of IPOs has become an important news item, causing the stock market volatility. The IPO resumption in the end-July or early August may continue to have negative impact on investors' sentiment in the short term due to the weak economic growth prospect and a tighter credit/liquidity environment. However, the restart of IPO listings simplify gives investors more choices of new investment products, which may have an impact on sector allocation, stock picks and portfolio construction. Beyond that, the real impact of IPOs on the equity markets is not that big, in our view.  To regulators Regulators are focusing on strict supervision and restoration of market discipline. We think lawmakers will continue to work vigorously against financial fraud, fraudulent listing, insider trading, market manipulation and other activities that are harmful to the normal order and health of Chinese capital markets. The CSRC has a goal of promoting adequate information disclosure and risk warning in advance of an IPO, a condition whereby the market and investors will be able to make reliable judgment by themselves. What the regulators have to do is to enhance post IPO supervision, to impose appropriate penalties over wrongdoing and to establish a sound system for the investors’ compensation. Part II. Investors’ questions regarding the latest IPO Reform We address a few key questions that overseas and domestic investors are interested in the latest IPO reforms and its implications to the markets. How many IPO cases are pending in the process? According to the CSRC, as of June 27, 715 companies are in IPO trial queue for permission to list on the Shanghai or Shenzhen stock exchange. 83 companies have passed the trial; 41 are under pre-disclosure phase, 342 are in the feedback loop, and 249 companies are in first step of application. Out of 715, nearly one-third (253) of companies are to be listed on the GEM board. 269 companies have been terminated after the initial IPO examination process, of which the number listed on the GEM is 134. Figure 3: IPO pipeline Source: CSRC What is the exact timeline of IPO resumption and listings? According to Reuters, Yao Gang, the vice chairman of CSRC, told brokerages at a meeting on June 18, 2013 that "it is almost certain" that the IPO market would resume at the end of next month. Since the consulting paper was released to public for discussion on June 09, 2013, and the market consulting process ended on 21 June. The regulatory authorities will modify and officially release new IPO reform scheme based on the results of the consultation. Historically, it took roughly 1-1.5 months before the consulting paper turning into a real execution plan. Thus, the earliest timeline will be in 1H July. However, by then some IPO companies will need to submit 1H 2013 financial statements in order to meet regulatory requirements. As a result, we estimate that the starting point for this round of IPO listing could be sometime Passed trial 83 Pre-disclosure 41 Feedback loop 342 First step 249 5 Asia Pacific Equity Research 05 July 2013 Michael Yu, CFA (852) 2800 8511 michael.yu@jpmorgan.com between the end of July and mid-August. This is roughly inline with what Mr. Yao said earlier. Moreover, according to the consulting paper, the issuer can choose IPO date within the coming one-year period as the CSRC will relax the validity period of the IPO approval documents to 12 months from six months. Obviously, the regulatory body attempts to slow down the space of equity issuance by extending the IPO approval document's period of validity. However, we think most companies pending for IPO are eager to get listed as soon as possible. Therefore, it is likely to be crowded in the coming months after IPO resumption. Figure 4: Timeline of IPO resumption Source: J.P. Morgan estimates IPO pending companies that have already passed trial and matched the requirement of the new IPO scheme will be the first batch qualified to issue new shares. Based on the current market environment, the CSRC is likely to follow the pattern of IPO approvals in 2011-12, during which the average monthly IPO cases approved were around 20-25 per month. Currently, 83 companies have passed trial and another 209 companies are in the first step, implying the A-share markets will need about 12-15 months to digest upcoming IPO cases. Figure 5: Historical IPO pass rate Source: Wind and J.P. Morgan. How much amount of equity capital is expected to be raised after IPO resumption? Wind statistics show that 83 companies that passed trial are expected to raise funds totaling approximately RMB55.8 billion. Most funds to be raised are concentrated on five companies -- Shaanxi Coal and China Post Express which are expected to raise RMB17 billion and RMB10 billion, respectively. Haitian Soy Sauce, Jordan Sports, Sinoma are expected to raise amount of RMB1-2 billion each, according to Wind. Historically, the monthly average amount of capital raised after IPO resumption in 2009 has been about RMB1.5 billion. Thus, if the average monthly IPO cases approved were around 20-25 per month, then the monthly capital demand is about RMB30 billion to 37.5 billion in the next 12 month. Figure 6: Monthly fund raised per company Source: Wind and J.P. Morgan estimates Why are the regulators reforming the IPO market again? Poor A-share market performance has historically been a good excuse to freeze the IPO. Domestic stock markets have been underperforming since 2009. From 2009 to 2012, CSI300 index, daily turnover value, turnover ratio and broker’s revenue declined 36%, 37%, 50% and 32% respectively, while GDP growth was 8.7% in 2010, 10.3% in 2011 and 9.2% in 2012 . There is a question mark to the IPO resumption, if the poor market sentiment continues until end of July. We have already seen Huijin resume buying blue chips in the market, so the A-share markets may see some policy support down the road. To announce the consulting paper on 7th June To launch the official IPO scheme in early to mid of July To submit semi-annual financial report in mid to end of August in 1 to 1.5 months in 0.5 or 1 month To determine the IPO date in one year after approval To list on domestic stock exchange 194 248 438 346 264 72 74 76 78 80 82 84 86 0 100 200 300 400 500 2008 2009 2010 2011 2012 No of companies that passed the trial IPO pass rate (%, RHS) 0 2000 4000 6000 8000 10000 Monthly fund raised per company (RMB mn) 6 Asia Pacific Equity Research 05 July 2013 Michael Yu, CFA (852) 2800 8511 michael.yu@jpmorgan.com Figure 7: GDP growth and CSI300 performance Source: CEIC and Bloomberg. Figure 8: CSI 300 ADT in RMB bn Source: CEIC and Bloomberg. Moreover, we think the Chinese authorities froze the IPO market in late October last year as part of its efforts to clean up the equity market. The regulators have been inspecting IPO applicants' books for evidence of fraud after a series of scandals were revealed, such as Wanfu Biotechnology Hunan, etc. What are the problems solved through the reform? On June 19, Vice Chairman Yao Gang said in the industry consultant meeting that the existing IPO process has several major problems: 1) the quality of information disclosure of listed companies is not satisfied with CSRC’s criteria; 2) some institutions didn’t perform due diligence well; 3) shareholders have strong impulse to cash out once locked up period expired; 4) ordinary investors have tied IPOs to the volatility of secondary markets. Based on the latest CSRC & brokerage meeting, the latest IPO reform will focus on: 1) Put emphasis on information disclosure, strengthening the supervision through the entire IPO process, especially the post-IPO supervision. Detailed measures include: disclose in advance the timing of the IPO prospectus; disclose the change in major shareholders’ holding intentions before IPO; strengthen supervision on the implementation of public commitment, emphasize the IPO sponsors’ accountability if the listed companies’ profit declined sharply, etc; 2) Promote the market-oriented IPO mechanism. Detailed measures include: allow the issuer to select the timing of IPO; to cancel specific requirements over the IPO price inquiry and to abolish of 25% rule (in April 2014, CSRC requested the reexamination of IPO cases if their PE ratios is 25% above the industry average); to link the cash out threshold of industrial investment with the issue price, i.e. if within two years after the expiration of the lock up shares, the major shareholders’ placement price shouldn’t be less than the IPO price. The lockup period will be extended if the share price is less than the new regulatory requirements; 3) To adjust the IPO placement mechanisms. Detailed measures include: to introduce the self-placement mechanisms for lead underwriters, and at least 40% of new shares will be rationed to mutual funds and social security funds. 4) To encourage the IPO issuers to raise capital through corporate bonds, instead of through stock market, in order to reduce the financing’ pressure on the domestic equity markets. We think the latest IPO reform is slightly below consensus’ expectation. The consulting paper did not mention the hotly-debated topics, such as equity capital structure (the proportion of circulation and restricted shares), the mechanisms of issuance (GEM packaged issuance; shares and options issuance) and the "three high" phenomenon (high IPO price, high PE multiple, high fundraising size). Accordingly, another goal for the latest IPO reform is to prevent issuing new share with higher PE multiple. The consulting paper also recognize that the "three highs” phenomenon may still exist. The new IPO reform includes expanding the scope of inquiry price, and linking issue price with the exiting point of industrial investment. The new rules require institutions not to reduce their stake when share prices drop below IPO price, aiming at providing cushion to share performance for new listed company. -100 -50 0 50 100 150 200 250 300 6 7 8 9 10 11 12 13 14 15 03 04 05 06 07 08 09 10 11 12 13 Real GDP growth (oya