Down, as well as up

Every country has its certainties. In Britain, vegetables will be overcooked, a quick drink won’t be quick, and the average person will be able to name far more X Factor contestants than they can cabinet ministers.

In China, you can be sure no city will look the same in five years time, the guy with the bad teeth and the gold cigarette lighter is a billionaire, and the national team won’t lose at table tennis.

But perhaps the biggest certainty of all has been this: Chinese IPOs go up, and usually by large amounts. According to Bloomberg, the average first day trading gain for Shanghai-listed IPOs last year was 152%.

No more, perhaps. If Chinese IPOs always looked to be a sure thing, they don’t appear to be quite as reliable any longer.

In the last three weeks, six consecutive IPOs for Chinese firms listed in Hong Kong all fell below their offer prices in early trading.

China Metallurgical Group Corp (CMGC) – the state-owned metallurgy giant – dropped 23% on its Hong Kong debut on September 24. Peak Sport Products, which debuted two weeks ago, tumbled 17% on its first day. Investors breathed a sigh of relief when menswear retailer China Lilang lost just 0.8%.

The IPOs of property developers fared even worse. Shanghai-based Glorious Property failed to live up to its name, falling as much as 20% on its debut last Friday.

Meanwhile, China South City’s shares suffered the year’s worst first-day performance so far, falling 30% below IPO price last Wednesday. In fact, the Shenzhen property developer is Hong Kong’s worst-ever debutante (for IPOs exceeding $50 million). Previously, the largest first-day fall in this category was a 19% tumble by Pacific Online in December 2007, according to data compiled by Dealogic.

Last but not the least, China Resources Cement – China’s second largest producer of concrete – plunged 4.4% on its first day of trading on Tuesday despite a 83-fold oversubscription in the retail tranche.

Some critics see the drooping interest as symptomatic of a renewed focus on fundamentals.

Metallurgical Corp, for example, is exposed to projects connected to China’s steel sector, where overcapacity is rife.

“It shows the market is not indiscriminately buying all IPOs,” Nicholas Yeo, head of China and Hong Kong equities at Aberdeen Asset Management, told Reuters.

Companies in the IPO queue have been taking notice. Powerlong, a Fujian-based real estate developer, quickly adjusted its price down by 17%. Retail investors were also given a chance to cancel their orders.

A source close to the deal told FinanceAsia.com that it would have been a mistake for Powerlong to force the deal out at a price where it was likely to trade down. Instead it was decided to “price at a point where people had greater conviction in the face of new information, namely a terrible IPO market.”

“Some offerings were well received initially but interest gradually faded away,” says Carmen Wong, a corporate finance officer at Phillip Securities. “Some investors even withdrew their orders.”

Analysts believe upcoming share issuers will need to follow Powerlong’s example in lowering prices to attract subscribers.

The recent IPO fatigue is hardly surprising, analysts say. The pool of available investment funds is probably dwindling after the flurry of new listings. 75 Chinese companies have gone public this year, triple the number in America, says Dealogic. And in the third quarter of this year, China accounted for 38% of the total number of global IPOs.

Perhaps it all signals that markets have been moving too fast and a breather is required.

After all, the Shanghai Composite Index is up by more than 50% this year. The Hong Kong’s benchmark Hang Seng Composite Index is also ahead over 40% so far this year

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