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GRAY TUESDAY: Tepid record China bank IPO sinks sentiment
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Written by Andrew Vanburen (China Correspondent)
Monday, 28 June 2010 17:00
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Move Along Joe: Workers around Shenzhen's stock market were in no mood to talk today after the local A-share index fell 5%. Photo: NextInsight

AGRICULTURAL BANK of China still probably managed to pull off the world’s largest ever initial public offering today, likely to net some 23 bln usd, but the lender would have preferred a more enthusiastic reception.

The eight month-old ChiNext board, China’s version of the Nadsaq, took the biggest hit, falling nearly 8% today and reaching a historical low.

Meanwhile, the benchmark Shanghai Composite Index lost 4.3% to 2,427.05, breaking through the psychologically significant 2,500-point threshold.

The Shenzhen Composite took an even bigger hit, shedding 5.0% to 9,508.91, which put a damper on enthusiasm around the local bourse on Shennan East Road and made white collar staff in the area very unreceptive to photographers this afternoon, as can be seen in the above photo.

The benchmark Hang Seng in Hong Kong didn’t fare much better, losing 2.3% to 20,248.90 on the day.

Analysts say lukewarm response to Agricultural Bank of China’s likely record IPO was the chief culprit behind today’s selloff, while concerns about additional property macromeasures are a continuous overhang.

China Merchants Bank's A-shares fell 1.6%, while China Vanke, the country’s largest listed developer, lost 1.3%.

LAG-ricultural Liftoff
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Latecomer: Agricultural Bank is the last of the 'Big Four' lenders to list

China Agricultural Bank, which today launched its much-anticipated IPO, is the last of the ‘Big Four’ state-owned banks to go public.

But the massive lender was forced to offer its A shares in Shanghai at a lower price than originally hoped for.

Analysts say this is a wake-up call for the Chinese markets, and that domestic investors will no longer part with their money for perceived “over-priced” issues, no matter how high profile the road show campaign or how recognizable the listing candidate.

A Shanghai-based investment analyst told NextInsight that the state-owned lender's listing today was not received by investors as enthusiastically as hoped for for a variety of reasons, and this had a general dampening effect on overall market sentiment, not only today but during the prolonged runup.

"The ABC IPO will account for 6% of the market cap for the A share market, but the banking sector already accounts for 20% of the 300 index.

  


What an analyst says:


"Agricultural Bank’s IPO pricing is lower than what the market expected (or that the market has rumored about). It may give a perception that investors have become very cautious about ‘valuation’.

“So, they are looking for ‘cheap’ stuff and will only BUY when the stocks are ‘cheap’ enough. In such a case, market sentiment will naturally turn to a feeling that the current market is a bit ‘expensive’ or ‘not cheap.

"Finally, any selloff would then trigger a linked effect and it will cause some heavy selling pressure like what we have seen this afternoon."
After ABC, Everbright Bank and Shanghai Bank are also lining up to list. That being said, banks are not lacking names in the composite. Thus, A-share investors are not as hungry as H-share investors for banking names,” he said, a phenomenon which would explain the warmer reception given the bank in Hong Kong.

ABC said late Tuesday it had set a price range of 2.52 to 2.68 yuan a share for the Shanghai listing, which would raise up to 10.1 bln usd. That was lower than the range for the Hong Kong portion of the IPO which has been set at 2.88-3.48 hkd per share.

But the Shanghai-based analyst also felt that today’s declines are not a one-off event.

"People think that A shares have entered into a stage where we will continue to see new lows for this year.”

He also said that industry insiders were beginning to add kindling to already smoldering chatter about the possibility of more measures to slow the real estate sector.

"The A-share market is leading the decline in Asian markets with new rumors of pilot property taxes in Shanghai, which might start on August 1 of this year. So A shares also fell today on rumors that one of the local tycoons -- Mr. YQ Liu -- will probably liquidate all his stock holdings including several property names like Poly, Beijing Capital Development, etc...

"It's said he will face bankruptcy risks and this may only be the tip of iceberg.

The investment analyst also said that a 4-5 bln yuan selling pressure “is real.”

"Especially upon the maturity of lockup of those privately placed shares.

"Also I think the bearish sentiment is rooted in the slowdown of economy plus the uncertainty of policy, and tightened liquidity. Fear of a certain investor is an excuse, but a good one. Investors are still cautious on government's tightening policy and concerned about uncertainties in European market to affect Chinese exports,” he added.

Value Investing with Chinese Characteristics
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'A shares also fell today on rumors that one of the local tycoons -- Mr. YQ Liu -- will probably liquidate all his stock holdings including several property names like Poly, Beijing Capital Development, etc...' said a Shanghai-based analyst.

NextInsight learned from a Hong Kong-based investment analyst today that the massive bank IPO today may have taken for granted a more demanding investing public in the PRC.

"Agricultural Bank’s IPO pricing is lower than what the market expected (or that the market has rumored

about). It may give a perception that investors have become very cautious about ‘valuation’.

"So, they are looking for ‘cheap’ stuff and will only BUY when the stocks are ‘cheap’ enough. In such a case, market sentiment will naturally turn to a feeling that the current market is a bit ‘expensive’ or ‘not cheap. Finally, any selloff would then trigger a linked effect and it will cause some heavy selling pressure like what we have seen this afternoon."

He added that investors have been becoming cautious about the possible slowdown in China’s growth.

"Given that recovery in the west remains sluggish, investors worries on this have been mounting recently. Hence, any news could become a good excuse to sell down the market. So, the plunge in today could be seen as a reflection of negative outlook to the fundamentals. It is natural, but of course sad to equity investors.”

He urged caution in the coming weeks, as few silver linings were evident.

"Over the short-term I remain cautious given there are no signs of immediate loosening on policies or liquidity domestically. Also, the external environment remains fragile and any bad news in the US or Europe may become a good excuse for a selloff too.”

See also: CHINA/HK SHARES: World's largest IPO weighs on sentiment

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