Basically, the Securities Act of 1933 prohibits selling unregistered shares to American investors.
On April 30, Zhongwang priced 1.4 billion shares at HK$7 each (or about 90 U.S. cents) to raise US$1.26 billion, according to various reports. The IPO is to be traded on the Hong Kong Stock Exchange on Friday, May 8.
Zhongwang is believed to be one of Asia’s largest extruded-aluminum product makers.
But there are major differences between the U.S. underwriting procedures and those in China and Hong Kong.
In the United States, IPOs are priced after the close of business one day and start trading the following day; not so in China and Hong Kong. In those countries, there is a four-day delay between the pricing date and the trading date.
And stock market can become unraveled in the interim.
Here’s what the timing of a Chinese/Hong Kong offering looks like:
- Public offering commences: Business Day 1
- Public offering closes: Business Day 4
- Pricing of offering: Business Day 4
- Final allocation of shares announced: Business Day 7
- Trading of shares: Business Day 8
For American investors, here’s what to watch for when a Chinese IPO is registered with the SEC. It is where the stock is to be traded.
- If the deal is to be traded in the U.S. exclusively, then the American underwriting procedures are followed.
- If the deal has a dual listing (in Honk Kong/Shanghai and in the United States), then the Chinese underwriting procedures are followed. (Translation: There will be a four-day wait between the deal’s pricing date and its trading date.)
When Wall Street started underwriting Chinese IPOs in 1996, (Guangshen Railway – NYSE: GSH), the dual listing presented no problems – until the unexpected happened. That came in March 2004, when a couple of Chinese IPOs’ aftermarket performances did not live up to expectations.
The March 2004 backdrop
Hong Kong’s Hang Seng Index had surged 65.5 percent by March 1, 2004, to 13,918.65, UP from 8,409.01 on April 25, 2003, its previous closing low. Then it tanked. From March 1 to March 11, 2004, the Hang Seng fell 6.4 percent to close at 13,024.06.
The March 2004 IPOs
TOM Online, a Beijing-based Internet portal provider, was to be traded on both the NASDAQ and on the HKSE. The Chinese IPO pricing rules were followed.
Bankers offered 11.3 million American Depositary Shares (ADS) at US$15.552 each on March 5. The trade date was set for March 11.
The Hang Seng Index was in the process of being hammered. By March 11, a lot of steam had been taken out of the stock market. TOM Online opened at $15.75 on NASDAQ and closed its opening day at $15.58, UP 2.8 cents per share from its initial offering price.
Running into the pricing, the IPO handicappers had given the TOM Online deal a 4-Star SCOOP rating (i.e. an opening-day premium of $4 per share or more.)
(For details, please see the IPOScoop.com homepage: SCOOP Track record, click on the green download found at the bottom of the page and then click on 2004.)
(In April 2007, TOM Online was taken private for cash at $15.55 per ADS.)
Semiconductor Manufacturing (NYSE: SMI), a Shanghai-based semiconductor company, was to be listed on both the NASDAQ and on the HKSE. The Chinese IPO pricing rules were followed.
Bankers offered 97.9 million ADS at $17.50 each on March 11. The trade date was set for March 17.
Semiconductor opened at $17 on the New York Stock Exchange and closed its opening day at $15.52, down 11.3 percent from its initial offering price.
Running into the pricing, the IPO handicappers had given the Semiconductor deal a 2-Star SCOOP rating (i.e. an opening-day premium of 50 cents to $1 per share.)
Good News, Bad News
Let’s back up and take a second look at the China Zhongwang Holdings offering.
The good news is the stock market has been strong. The Hang Seng Index closed on Friday, May 1, at 15,520.99, UP 20.9 percent from 12,833.51 on March 20, its recent low.
The bad news is the deal was priced at HK$7, on the lower end of its HK$6.80 to HK$8.80 per share price range. That’s not a sign the deal was multi-times oversubscribed.
But for American investors, it’s moot. They are just spectators in the Chinese/Hong Kong IPO game.