Air China debacle reveals fears over capital inflows

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Air China debacle reveals fears over capital inflows

The scaling back last week of Air China's planned US$1 billion (HK$7.8 billion) IPO is a reflection of investor jitters over the market's ability to absorb a raft of new floats, analysts say.


(Woldnews Monday, August 14, 2006) The scaling back last week of Air China's planned US$1 billion (HK$7.8 billion) IPO is a reflection of investor jitters over the market's ability to absorb a raft of new floats, analysts say.
Since regulators reinstated share sales in mid-June after a year-long freeze, about US$6 billion in stock has hit the market, sparking investor concerns that capital flows could dry up and send the market tumbling.
"The key problem is whether the capital inflows will be enough," said Zhang Qi, an analyst at Haitong Securities in Shanghai.
Investors had earlier greeted new China issues with unabashed enthusiasm, with Bank of China raising 19.99 billion yuan (HK$19.52 billion) on July 5, in the biggest mainland initial public offering so far.
Air China, the national flag carrier, had hoped to capitalize on the run for new shares, but instead fell dramatically short of its fund-raising target, forcing it to slash this week its offering in Shanghai by about 40 percent.
It now plans to issue 1.639 billion A shares at 2.80 yuan per share later this month, a reduction of about one billion shares. This means the Hong Kong- and London-listed airline would raise only about US$570 million.
Analysts say that the lack of investor interest in the carrier is a confluence of tough times for airlines amid surging global fuel prices as well as regulations that force institutional investors to tie up capital in new issues for three months.
"Investors are not optimistic about airlines," Zhang said. "If institutional investors think the profit they can make might be lower than the yield they get from the bank, then they won't purchase."
Fortunately for Air China, retail investors bucked up this week, subscribing to 15.38 billion A shares, compared with 819.5 million on offer, according to China Securities Journal.
Their small vote of confidence in the share sale reflects little, however, on the overhang of poor liquidity that continues to dog mainland bourses.
When investors lack or are unwilling to sink fresh funds into the bourse, they must trim back other holdings, thus depressing the value of the investments they sell.
Since January, the Shanghai Composite Index has been one of the world's best performers, up about 35 percent, in part due to structural reforms of state- owned share enterprises that effectively made mainland companies public.
This week, the index held its ground closing up over two percent at 1,605.93, but trading volumes were thin, which Zhang Yidong, an analyst at Industrial Securities attributed to the lack of funds amid "lingering worries over the rapid pace of IPO approvals."
Since July, however, the index has tumbled 5.4 percent as a dozen new companies listed following the official restart on June 19.
"The sharp decrease on the stock market recently is because new IPO approvals are coming too fast," said Shanghai-based Guosen Securities analyst Tang Xiaosheng.
Many market players believe that regulators worried about the market turning south amid the flood of IPOs, especially ahead of the expected listing of Industrial and Commercial Bank of China, the country's biggest lender, have introduced a de facto suspension.
The China Securities Regulatory Committee denied this in the official Shanghai Securities News on August 8.
A spokesman for the oversight body also said such talk was mere speculation. "We have not officially said the IPO approval process is suspended or stopped."
But investors believe that the market regulator has not approved any new sales over the past two weeks. On average they approve about three to four IPOs a week.