IPOs: New Listings Creak Back to Life with China RE Pricing

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Bottom line: The offshore market for Chinese IPOs will see a brief resurgence in the next month as China’s stock markets stabilize, but the window will be short-lived as China’s economy shows new signs slowing sharply.

Imax China jumps in HK debut

After an extended period with few new listings, a new wave of IPOs by Chinese firms in offshore markets could be coming, led by stodgy insurer China RE. Sources are saying the re-insurer has taken a major step forward in its creaky IPO process by setting a price range for its stock after receiving strong feedback from investors.

This particular deal has been in the works for the last month, but it’s still relatively encouraging to see that it’s moving closer to the end. But the fact that it comes in the conservative and unexciting insurance sector means we’ll probably have to wait for a more controversial offering to see if the fall IPO season will really take off. Such a riskier deal could come in the next week or so if we see renewed activity for the other major offering in the pipeline, a $1 billion IPO by faded investment banking superstar CICC.

Observers are pointing out that strong debuts in Hong Kong this week for shares of Imax China (HKEx: 1970) and an apparel maker bode well for future listings as we head into the traditionally strong fall season. New listings in China were suspended during the summer due to the market’s volatility, while listings of Chinese companies in Hong Kong, New York and other global markets also slowed sharply.

China RE’s offering would test the market’s strength due to its huge size, up to $2 billion. The company has set a price range of HK$2.25 to HK$2.70 per share, with plans to offer up to 5.77 billion shares, according to the latest media reports. (English article) The company met with Hong Kong securities regulators last month, and got permission to go ahead with the offering. (previous post) CICC also met with regulators about the same time, though we haven’t heard yet if its offering is moving forward.

China RE looks quite unexciting as a high-growth company, with profit growth slowing to just 15 percent in the first quarter of this year from about 60 percent for all of 2014. The company could see even more profit erosion in the current volatile climate due to falling value of its investments. Still, I expect its government ties and position in the conservative reinsurance space should attract interest from big China-based investors.

The latest signs certainly look positive for a strong pricing and debut for China RE, and for others who can make it to market in the next month or so. Hong Kong’s benchmark Hang Seng Index has rallied nearly 10 percent since the end of September, and China’s own Shanghai composite index rose 3 percent in the first trading day after China returned to work from the week-long National Day holiday.

Imax China Jumps in HK Debut

Imax China also rose 10.5 percent in its Hong Kong trading debut this week, as investors bet on strong growth prospects for the Chinese unit of the world’s largest maker of big-screen cinema technology. The generally upbeat sentiment is fueling optimism that the worst of the summer downturn, led by a 40 percent drop in China’s stock markets, may finally be in the past.

The reality is that investors are probably looking for any reason they can find to be bullish about the market, following the summertime volatility in China that sent chills through global stock markets. Conservative plays like China RE and companies with strong growth prospects like Imax China look like a relatively safe bets in such a climate, and other solid companies could also do well amid a brief resurgence in IPO activity.

But I also expect this resurgence could be relatively short-lived, since new signs of weakness from China’s sputtering economy are inevitable and will almost certainly bring more volatility to domestic stock markets by the end of the year. That volatility will quickly spread to Hong Kong and other offshore Chinese stocks, which would bring a sudden end to this brief resurgence in IPO activity.

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