When outlandish stock market events of 2009 are tallied up, the initial
public offering in Hong Kong of Chinese herbal shampoo maker Bawang
International will be a standout. Within 10 minutes of the June 22 opening
of the subscription period for shares, one local brokerage, Bright Smart
Securities, was swamped with the equivalent of $129 million in orders. In
all, the shampoo company received more than $9 billion in orders from Hong
Kong retail investors for an IPO that initially sought to raise just $215
million.
Such examples of excessive investor ardor for new Chinese stocks aren’t hard
to find. Shares of Chinese water treatment equipment supplier Duoyuan Global
Water soared 37% on June 24, its first day of trading on the New York Stock
Exchange. Back in Hong Kong, Chinese thenardite producer Lumena Resources
rang up 19% in gains on June 17. On
June 22, the IPO of China Metal Recycling closed 22% higher.
Have Ben Bernanke’s green shoots magically turned into tropical forests
overnight Hardly. There may be some justification for stock market indices
in the U.S. and Hong Kong soaring from their lows in March, when it seemed
the global economy was sliding off a cliff. But this incipient IPO mania is
a different story. Investors are bidding up the stocks of Chinese companies
not because their shares had been unfairly pummeled, but because of
expectations for future growth that may or may not pan out.
The thread that binds them is the China story. The Organization for Economic
Cooperation and Development recently revised its GDP growth forecasts for
the country from 6.3% to 7.7% in 2009 and from 8.5% to 9.3% in 2010, on the
back of government stimulus spending that appears to be making up for a
steep drop in exports. The World Bank has also raised its 2009 forecast from
6.5% to 7.2%, and projects that China will replace Japan as the world’s
second-largest economy in two years.
With China one of the few economies that’s showing an economic pulse, a lot
of the cash that’s been sitting on the sidelines is piling into almost
anything Chinese, driving stocks to lofty valuations. Bawang’s IPO, for
example, which begins trading July 3, is expected to be priced at more than
20 times the earnings it reported as a private company last year.
Such rich multiples are unjustified in a recession. Duoyuan is seen as a
direct play on China’s $585 billion stimulus spending program, which is
focused on infrastructure projects like water and sewer systems. But for the
company to benefit , government money must actually go to infrastructure-building
and not be wasted through inefficiencies and corruption. Bawang, which
competes with P&G and Unilever, among other personal-care products
companies, is supposed to ride China’s rising personal consumption. That may
be a dicey proposition in a country of thrifty citizens who have long been
accustomed to saving nearly 40% of their disposable household income.
Like the dotcom and property bubbles before it, the nascent IPO mania is
being inflated by outsized expectations and good old-fashioned greed. Retail
investors are growing tired of keeping their cash in banks that pay
next-to-nothing in interest and are increasingly fearful of missing out on
the stock market’s continuing rise.
With the IPO market suddenly booming, China’s companies are only too happy
to indulge pent-up investor demand. The crash in global markets had
virtually shut down new listings. Only two Chinese enterprises went to
market in the U.S. last year, down sharply from 29 in 2007. Now there’s a
rush to list. Accounting firm Ernst & Young says it is currently working on
108 IPOs; most of the offerings are by Chinese companies planning to list in
China, Hong Kong or both. Meanwhile, Chinese technology firms are expected
to head to the U.S., which has long been the market of choice for
cutting-edge companies.
All bubbles eventually have the air let out of them, sometimes with
disastrous results. The danger today is that overheated enthusiasm for
Chinese offerings may end very badly, particularly if the vaunted green
shoots of global economic recovery were to turn out to be no more than
yellow weeds.
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