March 29, 2024

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Debutants Surge 500% on China’s Already Sizzling Tech Board

(Bloomberg) — A medical instrument manufacturer and a cable maker surged more than 500% in their debuts on China’s ChiNext index on Monday, among a flood of new offerings trading under revamped rules that remove daily price limits for new stocks.

A batch of 18 firms traded for the first time under so-called registration-based initial public offerings, gaining by an average 168% as of 10:54 a.m. Ningbo KBE Electrical Technology Co. rose as much as 581% from its IPO price, while Contec Medical Systems Co. soared more than 500%. The ChiNext gauge fluctuated, rising 1.5% after falling by the same amount earlier.

The gauge was performing better than expected, said Hao Hong, chief strategist for Bocom International in Hong Kong “Many had expected a big slump under the new trading rules. The swings are normal compared with its historical volatility.” He added that he expected China’s state-backed funds to support in the event of potential big declines, given the significance of the reforms to Beijing’s efforts to liberalize its capital markets.

Authorities will want a smooth implementation of changes to the $1.3 trillion ChiNext board. Yet demand for new shares may suck funds from existing equities which are looking expensive after the index surged more than 40% this year. New share sales won’t be subject to price caps in the first five trading days, while daily limits on existing stocks will double to 20%. On Monday vehicle battery maker Shaanxi J&R Optimum Energy Co. rose as much as that amount.

“There is no doubt we will see greater volatility in ChiNext market after new rules are implemented, especially given the recent pressure it has faced following huge gains this year,” said Jiang Liangqing, a fund manager at Beijing-based Ruisen Capital Management. “If new shares keep rushing to the market at a fast pace, it will put pressure on existing stocks which already trade at high valuations.”

Some stocks were temporarily halted after surging from their opening prices on Monday. Tansun Technology Co. shares were paused after jumping 60% from the opening price, while Academy of Environment Planning and Design Co. and Yangling Metron New Material Inc. triggered a similar halt after shares jumped 30% from their levels at open.

The ChiNext trades at 37 times forward 12-month earnings versus a 14 multiple for the CSI 300 index. The measure is down around 8% from its July peak. The new companies raised a combined of 20 billion yuan ($2.9 billion) from their ChiNext listings, with retail demand outstripping supply by an average of around 5,700 times, according to data compiled by Bloomberg.

The reforms will serve as a testing ground for whether Beijing can loosen its tight grip on markets without triggering out-of-control moves. Around 800 existing ChiNext stocks are now trading under the wider 20% daily range, compared to 10% previously — a measure that has not yet been extended to the main boards of Shanghai and Shenzhen.

“It’s a big milestone because it shows that reforms have now entered core areas of China’s capital markets after last year’s Star board debut,” said Jiang, referring to the Nasdaq-style market in Shanghai that has relatively relaxed rules. Investors greeted its opening last year with exuberance, as all stocks jumped an average of 140% by the close on the first trading day.

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