The registration-based initial public offering (IPO) system has been extended to the A-share main board. The China Securities Regulatory Commission (CSRC), the country’s top securities watchdog, released the official trading mechanism and rules to adopt registration-based IPOs throughout the A-share market, 16 days after it rolled out the draft version. Such registration system shifts financial enforcement from prior approval and evaluation before IPOs are launched to requiring companies to fully disclose all material facts to investors. Penalties for false disclosure or nondisclosure have also been increased. The system was used experimentally for the technology-heavy STAR Market at the Shanghai Stock Exchange starting from July 2019. In August 2020, its use was encouraged on the Nasdaq-style ChiNext at the Shenzhen bourse. The Beijing Stock Exchange, seen as a place to nurture technologically advanced small and medium-sized enterprises, has implemented the system since it was officially launched on November 15, 2021.
Now the system will be implemented at the A-share main board. Data from market tracker Wind Info shows that the total market capitalization of the companies listed on the main board at the Shanghai and Shenzhen bourses reached CNY70.25 trillion by the end of 2022, accounting for 80.05% of the total A-share market cap. The main board heavyweight sectors include finance, property, steel and oil. The total market cap for the STAR Market in Shanghai, where “hard technology” companies such as chipmakers and biomedicine companies are listed, reached CNY6.13 trillion as of December 31, 2022. The combined market cap of ChiNext companies in Shenzhen, which feature integration of traditional industries and state-of-the-art technologies and business models, reached CNY11.31 trillion at the end of 2022, according to Wind Info.
The IPO process will be simplified under the new system, with approval given by the Shanghai and Shenzhen bourses, so more IPOs are anticipated to be launched. Securities firms’ income will naturally increase as their IPO underwriting and sponsoring businesses grow, according to GF Securities experts. Securities firms’ incremental revenue generated from expanded main board businesses is expected to reach CNY13.8 billion in 2023, according to GF Securities. The investment banking business is anticipated to contribute an additional income of CNY4.6 billion, while that of the brokerage and margin trading business is expected to come in at CNY4.4 billion and CNY4.8 billion, respectively.
Under the new IPO system, Chinese securities firms are expected to extend their business to private equity investment and co-investment at the upstream end, and market making and equity financing on the downstream end. According to CITIC Securities, a total of 65 securities firms took part in A-share IPO underwriting and sponsorship last year, while the top three firms accounted for 45.1% of annual revenue. In the short term, the wider adoption of the registration-based IPO system will benefit securities brokerages for which the investment banking business makes a bigger contribution to their annual sales and that have many IPO applications in the pipeline. In the long run, brokerages’ investment banking services will link primary and secondary markets under the new IPO system.
Securities firms that have expertise in margin trading are also likely to overtake their competitors under the new IPO system as margin trading rules have been optimized. Margin trading is expected to become more active. Securities firms with strength in that business, including CITIC Securities, Huatai Securities and Guotai Junan Securities, would likely see faster growth. Competition among securities firms is also expected to intensify after the implementation of the registration-based IPO system throughout the A-share market, to the advantage of large securities firms.
Fifty-two public securities firms made a total income from underwriting business of CNY32 billion in 2022, with CITIC Securities as the largest single earner at CNY5.1 billion of income from that source, according to Hithink RoyalFlush Information Network Co. Ten brokerages saw underwriting income of less than CNY40 million each, including Huajin Securities and TF Securities. Foreign investment banks have applauded the progress. Qian Jing, General Manager of Morgan Stanley Securities, said that foreign firms have established a great deal of knowledge about registration-based IPO systems, which have been implemented in overseas markets for a very long time. Qian said they can provide more precise valuation and pricing based on their overseas experience and crosschecks to help Chinese companies meet their goals in the A-share market more easily, the China Daily reports.
