From Credit Suisse:
The resumption of IPOs has come a bit earlier than market’s expectations, and has got some investors worried about the market being caught in a cross-correction as the stock supply would increase. However, we believe the upcoming IPOs will be positive for a market rebound because it will introduce more funds from individual investors to the market. These individual investors believe the upcoming IPOs will bring them ‘risk-free’ returns as usual—they will move their money from the money market and WMPs (wealth management products) to the equity market to chase better opportunities.
…Retail investors are parking their money in the money market after the A-share market fell. So, the A-share rebound will continue if the individual investors begin to move their money back.
…Usually, the returns from an IPO subscription are very good—higher than those of money market funds and WMPs. In 1H 2015, the returns were around 15% as there was a big gap between the valuation of new stocks and the listed ones.
In 1H 2015, the new stocks were priced at 20-23x P/E, while the ChiNext market was traded above 70x P/E. Therefore, the new stocks generally increased 2.5x in the first 20 trading days. The new stock prices were controlled by regulators at “reasonable valuation” to protect the interests of small retail investors. Therefore, the investors believe the return of buying new stocks is risk-free return, which is sort of guaranteed by the regulator.
The main board is now traded at 22x P/E, but the Chi-next board (small caps) is at 88x P/E. We believe the new stocks will be priced between 20x and 30x P/E as the regulator still wants to protect the interests of small investors. The possible big gap between new stocks and listed stocks should also generate high returns.Furthermore, investors need to have some stocks before their online subscription to new shares, and the market value of their stocks decides how much they can subscribe. We see more new funds coming from retail investors that will allow them to join the game of IPO subscription
The changes in the IPO process will bring higher returns to retail investors than before. (1) There is no need to full payment of shares in advance when an investor bids to subscribe new shares. Individual investors can use smaller funds to subscribe more new stocks. (2) Every small IPO, whose share number is lower than 200 mn, will be only subscribed online. There will be no institutions purchasing offline. For small IPOs, more shares will be allocated to small investors.
Weren’t IPOs suspended to lift the market? Now they’re back and will do the same thing? I remain of the view that participating in the Shanghai shocker is nothing more than walk through an illicit Communist casino. If you call that investment then I have a bridge I will sell you.
