Xingquan/MSports … Why Trading Below Their IPO Prices

The two Chinese companies listed in Bursa Malaysia have been trading below their IPO prices, although both recently reported improved earnings.

The entry of both companies into Bursa Malaysia garnered much attention as they provide an avenue for local investors to tap the Chinese market, but investors have yet to respond with confidence to the stocks.

There are many views on why the share price performance and trading volume of the Chinese counters are poor.

One is that their IPOs were overpriced. Industry players familiar with the listing process point out that the pricing was done through a market mechanism and that it is unlikely the stocks were mispriced at the time of the IPO.

Industry observers attributing the poor performance of the counters to a lack of understanding of the Chinese market among local investors.

Malaysian investors do not understand the Chinese market yet. That is why they are still staying on the sidelines.

Their IPO prices were not too high. At a PER of around five times, their IPO prices were quite low compared to the PERs of Malaysian manufacturing companies of about seven to eight times. In Malaysia, we only have a population of 27 million, so our market is quite limited. But in China, the market is much larger for the same manufacturing company. Despite this, the pricing of the Chinese companies were lower than that of Malaysian manufacturers … the investment bankers had no choice because Chinese stocks are new to the market here.

It is not surprising that investors are cautious when it comes to investing in Chinese companies, given reports of fraud at some of those listed Singapore, ranging from missing cash to management using company cash to secure personal credit facilities from Chinese banks.

The rational is that Chinese companies are quite difference from Malaysian companies. The SGX bourse has developed due diligence guidelines through experience. These evolved over time and have been significantly enhanced following reports of fraud in a few Chinese companies.

It is understood that while Malaysia does not have guidelines for foreign listing, the due diligence undertaken by the advisers here is thorough.

Moreover, the drop in the share prices op the two Chinese companies happened at the same time as a correction on the Shanghai Stock market. The fall in the prices of the two shoemakers was likely due to recent (Aug 2009) poor marker sentiment. Their performance of the Chinese market, which has been on a downtrend since early August 2009. If you track back, the price patterns of both these counters have a correlation with trading on the Shnaghai market.

When market improves in China, these two counters should rise in tandem. Both are trading at a PER of four times at the present time (Aug 2009), which is half the PERs of shoemakers listed on the Singapore and HKSEX.

These could be local investors have adopted a cautious stance on the Chinese counters. The two companies may have cheap PERs – way below the market’s PER of 20 times – but investors may still adopt for a cautious approach when it comes to investing in them. This is not because the companies are not good per se … it is believed that it has more to do with the industry they are in. These are challenging times and the industry is facing declining margins and is not monopolistic or oligopolistic in nature. The barriers to entry are also very low.