SocGen to Stay Away From China IPOs

Simon Rabinovitch in Beijing, Financial Times

A Société Générale venture in China has delivered a sharp rebuke to the Chinese stock market, saying that it will stay away from initial public offerings because their quality has become too difficult to assess.


Fortune SG – a fund management company owned by Société Générale and Baosteel – announced that it would stop participating in IPO pricing and would also turn away visits from issuers and underwriters until market conditions improve.

The declaration of such a halt is extremely rare, highlighting deep flaws in the Chinese stock market despite numerous attempts at reform by regulators. Weak investor sentiment is also to blame as the Shanghai Composite Index fell 22 per cent this year, putting it towards the bottom of global rankings.

China has still managed to remain one of the world’s top centers for share offerings in 2011, but newly listed stocks have fared abysmally. Nearly three-quarters have fallen on their first day of trading, compared with just 42 per cent last year, according to local media.

Compounding that poor performance has been the challenge of conducting due diligence on the bewildering number of smaller companies listing on the Shenzhen stock exchange and ChiNext – China’s version of Nasdaq.

Together, they have hosted 228 IPOs with an average size of just $112m, according to Dealogic.

“In view of the recent concentrated number of new equity issuance's, the breadth of the issuers’ industries and their wide geographic distribution, our company is unable in the short term to complete full research into issuers or to give reasonable pricing opinions,” Fortune SG said in the statement.

Fortune SG had Rmb 62 billion ($9.8billion) under management at the end of 2009, making it the 13th biggest – just outside the top tier – in China’s crowded fund industry.

It is not the only foreign-backed financial institution to have grown uncomfortable with the state of China’s equity markets.

Foreign securities joint ventures have taken an ever-smaller share of the country’s underwriting income in recent years. Goldman Sachs has not underwritten a single IPO in mainland China since 2009. Bankers have said that the fees from underwriting small IPOs are outweighed by the legal and reputational risks of backing a dud.

Over the past year, global investors have also turned against many of the Chinese companies listed on foreign exchanges after a number were involved in accounting fraud.

Analysts say that part of the problem in China’s domestic markets is purely technical, arising from a rigid approval process for IPOs.

Valuations tend to be too low in bull markets and too high in bear markets, as has happened this year. IPOs in Shanghai have been priced at nearly 40 times earnings on average, but the price/earnings ratio for listed stocks has slumped to just over 13.