china: a-share portfolio strategy ipo deep dive: the sword ...€¦ · investors’ hot topics in...

January 23, 2013

China: A-share Portfolio Strategy

IPO deep dive: The Sword of

Damocles or Paper Tiger?

Portfolio Strategy Research

China A-share Market Knowledge Series #1

IPOs to pick up in 2013E but IPO/market cap ratio still low at 0.7%

The impact of an IPO pipeline overhanging A-shares has been investors’

key focus. We forecast 2013E IPOs at Rmb180bn (up 80% yoy) (calculation

on page 4), but the IPO/market cap ratio at 0.7% is still well below the

average 2.1% since 1994, and the last five years’ average at 0.9%, so the

IPO impact on the equity market seems not as significant as before. We

also introduce our A-share Market Knowledge Series reports, focusing on

investors’ hot topics in the China A-share equity market.

Economic cycle drives IPOs/index/valuation in China and globally

Our analysis shows that IPO/market cap ratios have been pro-cyclical,

positively correlated with GDP growth, equity returns and valuations in

China since 2005 with correlations at 80%+. Our analysis for 1997-2011 data

from the US, UK, HK, SGP, Korea, India and Indonesia also supports this,

with correlations at 21%-60%. Therefore, investors’ concerns that IPOs will

compress index/valuations seem overdone, in our view. We believe the

potential IPOs will not materially change our positive stance on the China

A-share market, supported mainly by a fundamentally improving economy.

Incremental IPO supply can be easily absorbed by investors

Our analysis shows that the potential incremental annual IPOs in 2013E at

Rmb80bn could be easily digested by only a 0.8ppt increase of the equity

position changes of institutional investors and 0.6mn retail accounts

opening vs average annual 13mn during 2008-2012. Separately, there is no

evidence that higher IPO ratios for SME/GEM boards have compressed

valuations vs the main board in past years. Similar conclusions are found

for different sector analyses since 2005 in China.

IPOs have been pro-cyclical, hence not a drag on index returns

Source: Wind, Gao Hua Securities Research, Goldman Sachs Global ECS Research

Jason Sun

+86(10)6627-3187 [email protected] Beijing Gao Hua Securities Company Limited

Helen Zhu

+852-2978-0048 [email protected] Goldman Sachs (Asia) L.L.C.

Timothy Moe, CFA


Ben Bei


Chenjie Liu

+86(10)6627-3324 [email protected] Beijing Gao Hua Securities Company Limited

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Goldman Sachs

-8%

121%162%

-66%

97%

-13% -25%

8%

-100%

-50%

0%

50%

100%

150%

200%

250%

0%

3%

6%

9%

12%

15%

2005 2006 2007 2008 2009 2010 2011 2012 2013E

CSI 300 return (RHS) IPO ratio (LHS) GDP growth (LHS)

January 23, 2013 China

Goldman Sachs Global Economics, Commodities and Strategy Research 2

Table of contents

Summary: IPOs have been pro-cyclical; concerns overdone 3

IPOs to pick up in 2013E but IPO ratio still low at 0.7% 4

IPO ratio has been pro-cyclical: positively correlated with economy, index returns and valuation in China 8

IPO ratio has been pro-cyclical: positively correlated with economy, index returns and valuation in China 8

Global experience also proves pro-cyclical bias of IPO ratios 11

Other issue 1: IPO ratios vs. different boards’ valuations 14

Other issue 2: IPO ratios vs different sectors’ valuations 15

Other issue 3: IPO ratios vs IPO returns 16

Other issue 4: Unlocking the shares overhang concentrates on SME/GEM boards 17

Appendix 20

Disclosure Appendix 22

All prices in this report are as of the market close of January 17, 2013.



Summary: IPOs have been pro-cyclical; concerns overdone

The impact of an IPO pipeline overhang over A-share has been investors’ key focus. In

theory, IPOs are a natural part of equity markets and are part of their development,

especially at the early stage. In our opinion, investors should judge IPOs by their quality

and pricing, and not fear them. Here, we analyze the correlation between IPO ratios (IPO

value as % of last year-end’s total market cap) and other key investors’ focus (macro

backdrop, equity index returns, and equity index valuations), and try to quantify the

potential impacts.

The bottom line for our analysis is that IPO ratios have been positively correlated with GDP growth, equity index returns and valuations in China and globally. Investors’ concerns seem overdone, in our view.

We forecast 2013E IPOs that we value at Rmb180bn IPO, up 80% yoy, but the IPO ratio

at 0.7% is still well below the average 2.1% since 1994, and it is below the last five years’

average at 0.9% as well. Two key assumptions for our estimates: 1) No. of companies

to be listed. We forecast 349 companies to be listed in A-share, which assumes companies

at CSRC IPO Stage 3 (pre-disclosure of IPO prospectus, see Exhibit 4) and later to list

successfully on A-share. 2) Average IPO value size per company. We separate main

board, SME board and GEM board for our analysis, and used Rmb0.88bn, Rmb0.39bn and

Rmb0.31bn IPO value per company respectively.

The key findings: IPO ratio has been pro-cyclical. Our analysis shows that IPO has been

positively correlated with GDP growth, index returns and valuations, as shown in Exhibit 9

and 10. We believe those findings are in contrast to some local investors’ concerns over the

IPO overhangs. We believe the potential IPOs will not materially change our positive stance

on the China A-share market, supported mainly by fundamentally improving economy

(2013 Outlook: Recovering mildly, with hopes pinned on reform dated Nov, 29, 2012).

The key logic: economic backdrop is more critical to equities than IPO ratios. We have

been holding the view that the economic backdrop is the most critical factor driving equity

markets, as it will have a fundamental impact on earnings and valuations, and we believe

some investors’ pure or significant focus on liquidity itself is not sufficient. Our analysis

shows that the potential incremental IPOs in 2013E at Rmb80bn (2013E IPOs at Rmb180bn

minus 2012 IPOs at Rmb100bn, to reflect the incremental impact to equity market vs 2012)

can be digested easily by a 0.8ppt increase of the equity position changes of institutional

investors and 0.6mn retail accounts opening. In this analysis, we assume institutional/retail

investors accounting for 30%/70% of total trading volume respectively per the latest

available equity holding structure as of 1H2012. We ignored equityholder corporates’

participation in IPO subscriptions during the analysis.

Global experience also proves pro-cyclical bias of IPO ratios. We also did global

analysis to check whether globally IPO ratios will compress equity valuations materially.

Our analysis includes 1997-2011 annual data from the US, UK, HK, SGP, Korea, India,

Indonesia and China, and it shows that globally IPO ratios also show clear positive

correlation with GDP growth, index returns, and index valuations. There was no evidence

showing that IPO ratio increase will impact on index returns or valuations meaningfully.

Other issues: IPO/unlocking impacts on different boards/sectors/IPO returns. Our

analysis shows there was no evidence that higher IPO ratios for SME/GEM boards have

compressed more the valuations compared with the main board in the past years. Similar

conclusions were found for different sector analysis. Our analysis on unlocking shares

shows that unlocking pressure peaked in 2009, the pressure in 2013E looks to be not as

significant as before and is concentrated in the SME and GEM boards.



IPOs to pick up in 2013E but IPO ratio still low at 0.7%

Gauging 2013E A-share potential IPOs at Rmb180bn

2013E IPO ratio still well below historical level despite potential 80% yoy increase

We expect the value of IPOs to be up 80% yoy to Rmb180bn in 2013E, but the IPO ratio (IPO

value as % of last year-end’s total market cap) at 0.7% is still well below the average 2.1%

since 1994, and it is below the last five years’ average at 0.9% as well. If we assume 2013E’s

IPO ratio at 2.1% and 0.9% of 2012 total market cap, the A-share market is able to afford

Rmb577bn (a record high) and Rmb246bn IPOs, up 480% and 150% yoy respectively. We

note from sina.com that a third party, PWC, estimated Rmb150bn IPO in 2013. Here, our

IPO ratio using last year-end’s total market cap for calculation reflects the potential IPO

expectation impact on current equity markets.

In theory, total floatable market cap may be a better metric to calculate the IPO ratio. In that

case, the IPO impact on the equity market could be even less given the significant rise in

floatable market cap since 2004. The CAGRs for total market cap, annual turnover and

floatable market cap were 29%, 27% and 42% respectively during 2004-2012. Using annual

turnover as a metric for analysis is similar to total market cap. As shown in Exhibit 3, we

expect the 2013 IPOs as % of 2012 total floating market cap and 2012 total turnover to be

1.0% and 0.6% respectively, well below historical average level at 7.9% and 1.9% since 1994.

Two key assumptions for our IPO value estimates

We use an “estimated no. of companies to be listed multiplied by estimated average IPO

value size per company” approach to gauge the IPO potential in 2013E.

1) No. of companies to be listed. We forecast 349 companies to be listed on A-share,

which assumes companies at CSRC IPO Stage 3 (pre-disclosure of IPO prospectus, Exhibit

4) and later to list successfully on A-share. This number (despite a smaller IPO value for

each company) is a record high, slightly more than the 347 companies listed in 2010, and

an average 247 companies listed pa in the past five years. We believe the 349 companies to

be listed factor in an aggressive pick-up in the pace of approvals (Exhibit 8).

2) Average IPO value size per company. We separate main board, SME board and GEM

board for our analysis, and use Rmb0.88bn, Rmb0.39bn and Rmb0.31bn IPO value per

company respectively. This assumption is the average size between 2012 actual IPO

companies and the 99 potential IPOs with CSRC approval. We note only IPO size data is

available for the potential 99 IPOs that have approval.

We also estimate Rmb370bn equity placements in 2013E

The potential equity placement estimates in 2013E account for c.1.4% of 2012E year-end

market cap, assuming the placement ratio at the average level during the past five years.

We believe it looks reasonable given a relatively stable placement ratio and a potential

modest yoy pick-up (+18%) following modest macro recovery.

Progress update on CSRC IPOs

We note from sina.com that CSRC has just started a financial inspection of all companies

on the IPO waitlist, to avoid fake accounting issues. According to sina.com, the CSRC may

resume IPOs after May 2013 (China A-share IPOs have been suspended by CSRC since

October 2012).



Exhibit 1: We forecast Rmb180bn IPOs in 2013E, 0.7% of

2012 year-end market cap, well below historical levels

Exhibit 2: We forecast Rmb370bn placements in 2013E,

1.4% of 2012 year-end market cap, historical average

level



Exhibit 3: The 2013E IPO impact on total floating market cap seems even less, at only 1.0%,

vs historical average at 7.9%

Source: WIND, Gao Hua Securities Research, Goldman Sachs Global ECS Research

1.0%

6.4%

0.1%

4.7%

0.3%

1.4%

1.7%

0.9%

0.4%

0.7%

0%

1%

2%

3%

4%

5%

6%

7%

0

100

200

300

400

500

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

IPO value

IPO ratio (as % of last yearend mkt_cap)

(Rmb bn)

GSe

1994-2012 avg. 2.1%, last 5 year avg. 0.9%

0.4%

3.5%

0.6%

2.1%

1.7%

1.4%

1.3%1.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0

100

200

300

400

500

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Placement

Placement ratio (as % of last yearend mkt_cap)

(Rmb bn)

1994-2012 avg. 1.6%, last 5 year avg. 1.4%

GSe

0.6%1.0%

0%

5%

10%

15%

20%

25%

30%

0

100

200

300

400

500

IPO value

IPO as % of last year turnover

IPO as % of last year floating market_cap

(Rmb bn)

GSe

Avg. 7.9%

Avg. 1.9%



Exhibit 4: The CSRC IPO approval process

Source: CSRC, Gao Hua Securities Research, Goldman Sachs Global ECS Research

Exhibit 5: Rmb61bn potential IPO with approval ready pending listing, i.e. at IPO Stage 5


Exhibit 6: There was a total of 988 companies on the IPO waiting list at different stages,

and we estimate all the companies at Stage 3/4/5 will list in 2013


IPO application

accepted by CSRC

IPO application

distribution by CSRC

Meeting

between CSRC and the

Company

Meeting

between CSRC and Sponsor

IPO application

draft review by CSRC

Draft review Qs

clearance by the Company

IPO application

filing closing

Second round

formal review Qs clearance

CSRC IPO

formal review-second round

Preliminary

round formal review Qs

clearance

CSRC IPO

formal review-preliminary

round

Pre-disclosure

of IPO prospectus

Follow-up

between file closing and

final approval

IPO approval

ready pending final listing

IPO Stage 1

IPO Stage 2IPO Stage 3IPO Stage 4

IPO Stage 5

No of listcos

% of total

IPO shares (bn)

IPO value(Rmb bn)

% of total

Median size (Rmb bn)

Main board 10 10% 6.7 34.6 57% 0.95

SME board 37 37% 1.3 12.3 20% 0.27

GEM board 52 53% 1.2 13.8 23% 0.23

Total 99 100% 9.2 60.8 100% 0.26

99 companies IPO waitlist--Approved yet issuance

No of Cos

Stage 1-IPO

application accepted by

CSRC

Stage 2-Draft review

Qs clearance by

the Co.

Stage 3-Pre-

disclosure of IPO

prospectus

Stage 4-CSRC IPO

formal review-preliminary

round

Stage 5-IPO approval

pending final listing

Total

Main board 32 70 20 63 10 195 SME board 66 182 32 102 37 419 GEM board 56 233 7 26 52 374 Total 154 485 59 191 99 988

349 Assume listing in 2013E

Totally 988 companies on the waitlist



Exhibit 7: Median size (IPO value per company) has been declining


Exhibit 8: Our forecast of 349 companies (historical high) listing appears to factor in an

aggressive pick-up in the pace of approvals, not to mention the timing impact of current

financial inspection


(Rmb bn/co.) 2005 2006 2007 2008 2009 2010 2011 20122013 median

99 potential IPOs)2013 GSe

Main Board 1.18 4.03 14.18 9.98 11.04 2.85 1.75 0.81 0.95 0.88

SME Board 0.22 0.26 0.26 0.32 0.67 0.78 0.69 0.51 0.27 0.39

GEM Board n.a. n.a. n.a. n.a. 0.53 0.72 0.50 0.40 0.23 0.31

0

50

100

150

200

250

300

350

400

450

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E

IPO CSRC formal review--Passed

IPO CSRC formal review--Failed

No. of companies



IPO ratio has been pro-cyclical: positively correlated with economy,

index returns and valuation in China

The findings: IPO ratio has been pro-cyclical

Whether and how IPO will impact on the A-share equity market has been a hot topic

among investors. Our analysis shows that IPO has been positively correlated with GDP

growth, index returns and valuations, as shown in Exhibit 9 and 10. We believe those

findings are in contrast to some local investors’ significant concerns over the IPO

overhangs.

We notice China’s IPO ratios were at the high end in 2006-2007, when GDP growth was

pretty high at c.14%, as shown in Exhibit 9, and CSI 300 returns were strong at annually

140% as well. Although the economy cycles are not as volatile as before, the pro-cyclical

character of the IPO ratio has been obvious at a positive correlation at 81% between IPO

ratio and GDP growth and 85% between IPO ratios and CSI300 returns, as shown in Exhibit

9.

More frequent quarterly data also shows that IPO ratios are positively correlated with GDP

growth at 62% since 2Q 2006(consistent quarterly data available), and the IPO rise does not

necessarily hurt valuations, a positive 45% correlation instead (Exhibit 10).

Exhibit 9: IPO ratios and stock returns both show strong pro-cyclical character in China


-8%

121%

162%

-66%

97%

-13%-25%

8%

-100%

-50%

0%

50%

100%

150%

200%

250%

0%

3%

6%

9%

12%

15%

2005 2006 2007 2008 2009 2010 2011 2012 2013E

CSI 300 return (RHS) IPO ratio (LHS) GDP growth (LHS)

CorrelationIPO ratio and GDP growth: 81%IPO ratio and CSI 300 return: 85%



Exhibit 10: More frequent quarterly data also shows that IPO ratios are positively

correlated with GDP growth at 62% since 2Q2006(consistent quarterly data available), and

the IPO rise does not necessarily hurt valuations, a positive 45% correlation instead


The key logic: economy is more critical to equities than IPO ratios

Economic cycles most critical to drive equity returns

We have been holding the view that the economic backdrop is the most critical factor

driving equity markets, as it will have a fundamental impact on earnings and valuations,

and we believe some investors’ pure or significant focus on liquidity itself (some on equity

liquidity only) is insufficient.

We agree that a clear understanding of general liquidity within the economy is needed to

judge trends as per the Fisher economic equation MV=PY, but it seems difficult to calculate

MV exactly because MV and PY seem a circular reference to each and subject to change. As

such, under a modest GDP recovery backdrop in 2013E as forecast by our economists, we

believe liquidity for the whole economy should see a modest improvement in 2013E, which

normally would bring inflows to the equity markets either through institutional investors or

through retail investors.

Quantifying the incremental IPO liquidity impact: it can be easily digested

Thus, the key question is: what is the potential liquidity dilution from the IPOs compared

with the potential inflows of institutional and retail investors? Our analysis shows that the

potential incremental IPOs in 2013E at Rmb80bn (2013E IPOs at Rmb180bn minus 2012

IPOs at Rmb100bn, to reflect the incremental impact to equity market vs 2012) can be

easily digested by a 0.8ppt increase of the equity position changes of institutional

investors and the opening of 0.6mn retail accounts. In this analysis, we assume

institutional/retail investors account for 30%/70% of total trading volume respectively, per

the latest available equity holding structure at 1H2012. Our analysis ignores equityholder

corporates’ participation in IPO subscriptions.

0

5

10

15

20

25

30

35

40

45

50

55

0%

3%

6%

9%

12%

15%

2Q

2006

3Q

2006

4Q

2006

1Q

2007

2Q

2007

3Q

2007

4Q

2007

1Q

2008

2Q

2008

3Q

2008

4Q

2008

1Q

2009

2Q

2009

3Q

2009

4Q

2009

1Q

2010

2Q

2010

3Q

2010

4Q

2010

1Q

2011

2Q

2011

3Q

2011

4Q

2011

1Q

2012

2Q

2012

3Q

2012

4Q

2012

SH Composite Index LTM P/E (RHS) IPO ratio (*10) (LHS) GDP growth (LHS)

CorrelationIPO ratio and GDP growth: 62%IPO ratio and SH Composite Index LTM P/E: 45%



CSRC has been initiating positive steps to improve IPO transparency and qualities

Despite the aforesaid limited quantitative impact, some investors may argue the qualitative

issues about IPO impacting on confidence, such as low quality of new listcos, negligence of

shareholder returns, insufficient punishment for those IPOs with fake documents. However,

in our view:

1) The long queue in the IPO pipeline information has been available to the public since

February 1, 2012, which was actually one of the initiatives that CSRC proposed to improve

transparency, rather than a sudden swelling in the pipeline. So the potential liquidity

overhang also depends how many companies can be processed by CSRC in a given time,

which means a self-regulating aspect to the IPO supply issue in addition to investor

demand.

2) As mentioned on Hu Jintao’s report at the 18th Party and CPC National Congress, China

wants to build a multi-level capital market system, thus some smaller or lower quality

companies would list on those lower-tier capital markets, as evidenced by the newly

opened National Equities Exchange and Quotations System on January 16, 2013. Those

initiatives may potentially dilute the IPO supply overhang, point to more reasonable supply

pressure on the main-board equity market (CSI 300 index in particular), and support the

broad conclusion of the report.

3) CSRC has been showing clear efforts to resolve investors’ concerns on listco quality

issues since 2012, as evidenced by: a) IPO guidelines revision in April, 2012; b) a recent

public speech on improving IPO quality by the CSRC Chairman Guo Shuqing on Jan 16

2013 as reported by sina.com [such as the IPO candidates financial inspection]; c) our

previous research on improving dividend payout entitled Cashing in on cash dividends and

share buybacks dated Oct. 25, 2012.

Exhibit 11: The logic - IPO impact on equity markets —GS views and investors’ concerns


Macro backdrop: Higher GDP growth, despite mildly

HigherIPO ratio

Better liquidity for

whole economy

Positive equity

return/valuation

Higher IPO

ratio

Quantitive:Worse liquidity

for Equity

Negative equity

return/valuation

Retail liquidity

inflow

Institutionalliquidity inflow

Tiny negative impact: equal to only

0.8ppt mutual funds position increase; and 0.6mn retail accounts opening

Qualitative:Listcos low quality;

Shareholders

negligence

CSRC has shown clear

efforts to improve discussed above

GS views

Some investors’

concerns

GS arguments

Inherent:

MV=PY



Exhibit 12: We estimate only a 0.8ppt position change

for institutional investors can digest 30% of incremental

IPOs in 2013E…

Exhibit 13: …and we estimate only 0.6mn retail accounts

opening for retail investors can digest the 70% of

incremental IPOs in 2013E



Global experience also proves pro-cyclical bias of IPO ratios

We also did some global analysis to check whether IPO ratios will compress equity

valuations. Our analysis includes data from the US, UK, HK, SGP, Korea, India, Indonesia

and China, and it shows that IPO ratios also show clear positive correlation with GDP

growth, index returns, and index valuations. There was no evidence showing that IPO ratio

increase will meaningfully impact on index returns or valuations.

IPO ratios vs GDP growth: positively correlated

Our analysis of the global markets during 1997-2011 shows that global IPO ratios have a

positive 43% correlation with annual GDP growth, while the correlation is not as significant

as China’s70% during 2003-2011.

60%

65%

70%

75%

80%

85%

2008 2009 2010 2011 2012 2013E

MF position at yearend

Only0.8ppt needed to digest 30%

of incremental Rmb80bn IPO

0

2

4

6

8

10

12

14

16

18

20

2008 2009 2010 2011 2012 2013E

New retail accounts opened yearly

Only 0.6mn retail accounts

neededto digest 70% of

incremental Rmb80bn IPO

mn



Exhibit 14: In China, the IPO ratio has a strong positive

correlation (70%) with GDP growth (2003-2011)

Exhibit 15: Globally it also works well, with a positive

correlation at 43% (1997-2011)

Source: www.world-exchanges.com, Gao Hua Securities Research, Goldman Sachs Global ECS Research


IPO ratio vs index return – positively correlated

Our analysis of the global markets during 1997-2011 shows that global IPO ratios present a

positive 21% correlation with annual GDP growth, while the correlation is not as significant

as China’s 59% during 2003-2011.

Exhibit 16: In China, the IPO ratio has a strong positive

correlation (59%a) with CSI300 annual return (2003-

2011)…

Exhibit 17: …also globally, with a positive correlation at

21% (1997-2011)



R² = 70%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

8.0 10.0 12.0 14.0 16.0

China IPO ratio vs. GDP growthIPO ratio

(%)

GDP growth

(%)

R² = 43%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

-2.0 0.0 2.0 4.0 6.0 8.0

Global IPO ratio vs. GDP growthIPO ratio

(%)

GDP growth

(%)

R² = 59%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-100% -50% 0% 50% 100% 150%

China IPO ratio vs. Index returnIPO ratio

(%)

CSI300 index annual return

(%)

R² = 21%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

-60% -40% -20% 0% 20% 40% 60% 80%

Global IPO ratio vs. Index returnsIPO ratio

(%)



IPO ratio vs index valuations: positively correlated

Our analysis of the global markets during 1997-2011 shows that US (index valuation data

available) IPO ratios have a positive 54% correlation with annual GDP growth, while the

correlation is not as significant as China at 60% during 2003-2011.

Exhibit 18: In China, IPO ratio has a strong positive

correlation (60%) with CSI300 valuations (2003-2011)

Exhibit 19: There is also a similar situation in US (1997-

2011)



R² = 60%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

- 10.0 20.0 30.0 40.0 50.0 60.0

China IPO ratio vs. ValuationIPO ratio

(%)

SH Composite index LTM P/E

(%)

R² = 54%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

10.0 15.0 20.0 25.0 30.0

USA IPO ratio vs. ValuationIPO ratio

(%)

S&P 500 NTM P/E

(%)



Other issue 1: IPO ratios vs. different boards’ valuations

To be more specific, whether higher IPO ratios in different boards will have a negative

impact on valuations has been also a focus among onshore investors. Our analysis shows

there is no evidence that higher IPO ratios for SME/GEM boards have compressed the

valuations compared with the main board in the past few years. We believe the underlying

reason is similar to what we mentioned in Exhibit 11.

Exhibit 20: The IPO ratios for the main and SME boards

show a similar pattern

Exhibit 21: Valuation premiums between SME and main

boards are pro-cyclicals of IPO ratios



0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2005 2006 2007 2008 2009 2010 2011 2012

SME Board (LHS) Main Board (RHS)

0%

20%

40%

60%

80%

100%

120%

140%

-

2

4

6

8

10

12

14

16

18

2006 2007 2008 2009 2010 2011 2012

SME/Main Board IPO ratio (RHS)

SME/Main Board P/B premium (LHS)



Exhibit 22: Detailed data regarding historical IPO in different boards


Other issue 2: IPO ratios vs different sectors’ valuations

Further to our analysis, we are trying to find out whether the valuation compression for

higher IPO ratios will be more significant than those sectors with IPO ratios. Our analysis,

however, shows there was no evidence of those IPO ratios among different sectors

impacting on the valuations of those sectors.

IPO Value (Rmb bn) 2005 2006 2007 2008 2009 2010 2011 2012 2013 GSeMain Board 3 146 410 74 134 193 99 35 82

SME Board 3 18 37 30 46 201 101 32 67

GEM Board ‐ ‐ ‐ ‐ 22 97 73 32 27

Total 6 164 447 103 202 491 272 100 176

No of IPO listcosMain Board 3 15 25 7 11 30 40 27 93

SME Board 12 56 96 70 60 201 115 54 171

GEM Board 0 0 0 0 40 116 122 69 85

Total 15 71 121 77 111 347 277 150 349

Yearend Mkt_cap (Rmb bn)Main Board 3,448 10,154 39,086 14,219 27,242 26,256 21,512 23,012

SME Board 47 198 1,044 619 1,670 3,529 2,756 2,896

GEM Board ‐ ‐ ‐ ‐ 161 737 743 873

Total 3,495 10,352 40,130 14,838 29,073 30,521 25,012 26,780

IPO ratio Main Board 0.1% 4.2% 4.0% 0.2% 0.9% 0.7% 0.4% 0.2% 0.4%

SME Board 7.4% 38.1% 18.8% 2.9% 7.4% 12.0% 2.8% 1.2% 2.3%

GEM Board 60.4% 9.9% 4.3% 3.1%

Total 4.7% 4.3% 0.3% 1.4% 1.7% 0.9% 0.4% 0.7%

Valuation LTM P/BMain Board‐‐CSI 300 1.7 3.4 6.7 2.1 3.3 2.3 1.7 1.6

SME Board 2.4 3.9 8.0 3.0 5.6 5.3 3.0 2.6

GEM Board 5.0 5.0 2.9 2.7

Total 1.7 3.2 6.6 2.1 3.6 2.8 1.9 1.8

Valuation prem. over CSI300Main Board‐‐HS300 0% 0% 0% 0% 0% 0% 0% 0%

SME Board 40% 15% 20% 46% 67% 131% 72% 64%

GEM Board 50% 115% 68% 67%

Total 1.7 3.2 6.6 2.1 3.6 2.8 1.9 1.8



Exhibit 23: For the top 5 sectors with high IPO ratios

since 2005, there is no clear correlation between IPO

ratios and P/B premium over index

Exhibit 24: Similar to the bottom 5 sectors



Exhibit 25: Detailed data regarding historical IPO in different sectors


Other issue 3: IPO ratios vs IPO returns

Our analysis shows that IPO returns-first day are generally positively correlated with IPO

ratios, which probably attributes to positive sentiments during positive economic cycles

when IPO ratios are high. We also note the IPO returns-first day are trending down

significantly since 2007 without rebound even in 2009 (bull A-share market), suggesting

investors may be becoming more rational than before. CSRC’s new regulations on IPO

pricing may also help to lower the first-day return (see China A-share Strategy: Changes in

the new IPO rules and their impact June 20 2012). Interestingly, it seems a much better

strategy to cash out on the first-day of IPO, as the returns in the next 5 days (consistently

negative since 1998) or one year (less than first day) both seem discouraging, as shown on

Exhibit 27. We used the median return for all those new listcos in a certain year for our

analysis.

R² = 18%

‐20%

‐15%

‐10%

‐5%

0%

5%

10%

15%

20%

25%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

Correlation between IPO Top 5 sectors' IPO ratios and their P/B preium over index

IPO ratio

P/B premium

R² = 16%

‐10%

‐8%

‐6%

‐4%

‐2%

0%

2%

4%

6%

8%

‐0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4%

Correlation between IPO Bottom 5 sectors' IPO ratios and their P/B preium over index

IPO ratio

P/B premium

2005 2006 2007 2008 2009 2010 2011 2012 Median AverageBanks 23.1% 0.0% 39.7% 3.5% 0.0% 0.0% 1.4% 0.0% 0.0% 3.5% 14.9%

Diversified financials 3.1% 0.0% 0.0% 0.0% 0.0% 7.8% 2.6% 1.2% 0.3% 1.9% 3.0%

Consumer durable 3.0% 0.6% 2.2% 0.6% 0.5% 1.9% 4.5% 2.2% 1.6% 1.7% 1.8%

Capital goods 10.9% 0.2% 1.2% 4.6% 1.3% 9.4% 3.9% 2.1% 0.8% 1.7% 2.9%

Materials 10.6% 0.0% 0.9% 1.3% 0.7% 0.5% 1.5% 1.3% 0.5% 0.8% 0.8%

Pharmaceutical 3.4% 0.0% 0.3% 0.3% 0.1% 2.1% 4.3% 1.3% 0.5% 0.5% 1.3%

Food and Beverage 4.7% 0.2% 0.6% 0.2% 0.1% 1.6% 1.9% 0.8% 0.2% 0.4% 0.7%

Utilities 3.0% 0.6% 1.0% 0.0% 0.0% 0.2% 0.8% 0.2% 0.1% 0.4% 0.5%

Transportation 3.3% 0.1% 11.4% 4.1% 0.0% 0.5% 1.2% 0.1% 0.3% 0.4% 2.2%

Real Estate 4.1% 0.0% 3.6% 0.4% 0.1% 0.3% 0.1% 0.0% 0.0% 0.3% 0.9%

Insurance 4.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% 0.0% 0.2% 0.2%

Energy 14.0% 0.0% 1.3% 14.7% 0.3% 0.0% 0.1% 0.1% 0.0% 0.1% 2.4%

Total 100.0% 0.1% 4.7% 4.3% 0.3% 1.4% 1.7% 0.9% 0.4% 1.1% 1.7%

Sector IPO ratio2012 sector

weighting



Exhibit 26: IPO returns-first day are generally positively

correlated with IPO ratios, but trend down since 2007

Exhibit 27: IPO returns-first day are generally better than

holding for a longer period



Other issue 4: Unlocking the shares overhang concentrates on

SME/GEM boards

We believe the unlocking share overhang seems more significant than the IPO pipeline,

given its much bigger size. However, locked-in shares becoming tradable does not

necessary mean shareholders will sell their stake, especially for controlling shareholders.

Our arguments are that the peak unlocking period seems to have past, as the unlocking

value in 2009 was accounting for 33% of total market cap as of 2008 (defined as unlocking

ratio), but the CSI 300 index return seems not to have been affected too much, with 97%

gains in 2009 against the backdrop of a macro recovery. We expect the unlocking pressure

in 2013E seem less significant vs previous years and the pressure is concentrating on SME

and GEM boards, as shown in Exhibit 30.

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

0%

1%

2%

3%

4%

5%

6%

1998 2000 2002 2004 2006 2008 2010 2012

IPO ratio (as % of last yearend mkt_cap) (LHS)

IPO return-first day (RHS)

Correlation: 1998-2012 56%2005-2012 64%

-60%

-30%

0%

30%

60%

90%

120%

150%

180%

1998 2000 2002 2004 2006 2008 2010 2012

IPO return-first day (RHS)IPO return-one year (RHS)IPO return-five day (RHS)



Exhibit 28: The peak of unlocking pressure was in 2009 and 2013E looks not so significant


Exhibit 29: 2012-2013E monthly unlocking for main board

Exhibit 30: 2012-2013E monthly unlocking for SME and

GEM boards



33.1%

4.9%

8.8%

6.2% excl. ABC

-100%

-50%

0%

50%

100%

150%

200%

0%

5%

10%

15%

20%

25%

30%

35%

2005 2006 2007 2008 2009 2010 2011 2012 2013E

CSI 300 index return (LHS) Unlocking ratio (RHS)

0

100

200

300

400

500

600

700

800

900

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

Value of A-share unlocking (Main Board)(Rmb bn)

(Rmb 900 bn in 2012) (Rmb 1.5 trillion in 2013)

Rmb 665 bn of shares

unlocking from Agricultural

Bank of China in July 2013

0

20

40

60

80

100

120

140

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

Value of SME&GEM unlocking (Rmb bn)(Rmb bn)

(Rmb 320 bn in 2012)

(Rmb 842 bn in 2013)



Exhibit 31: 2013E unlocking by sectors for A-share

Exhibit 32: 2013E unlocking by sectors for SME and GEM

boards



1%

1%

2%

2%

3%

4%

4%

4%

5%

6%

6%

7%

9%

9%

10%

10%

11%

11%

11%

11%

12%

12%

13%

15%

16%

16%

18%

21%

29%

0% 10% 20% 30% 40%

Telecom

Oil,gas& petrochemical

Insurance

Property

Shipping&Other transportation

Coal

Food&beverage

Non-ferrous metal & Others

Construction Materials & Others

Auto&parts

Steel

Airlines

Overall (ex. Financials)

Textile&Apparel

Overall

Hotel &tourism&Others

Health Care

Construction&Other Industrial Services

Utilities

Retailing

Consumer Durables

Chemical

Banks

Transportation Infrastructure

Capital Goods

Securities& Others

IT&equipment/components

Media

Household & Personal Products

Value of shares unlocking as % of market caps (A-share)

1%

11%

13%

13%

14%

14%

14%

16%

18%

20%

20%

21%

21%

22%

22%

22%

23%

25%

25%

25%

27%

33%

33%

36%

40%

44%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Airlines

Auto&parts

Food&beverage

Banks

Transportation Infrastructure

Textile&Apparel

Telecom

Construction Materials

Construction

Health Care

Shipping&Other transportation

Retailing

Overall

Overall (ex. Financials)

Capital Goods

Consumer Durables

Non-ferrous metal

Media

IT

Securities

Chemical

Oil,gas

Household Products

Utilities

Steel

Tourism&Others

Value of shares unlocking as % of market caps (SME&GEM board)



Appendix

Exhibit 33: Detailed data on historical IPO and equity placements


No. of

listcos at

yearend

No. of new

IPO

companies

No. of listcos

with

placements

Total market

cap at

yearend

IPO

value

Placement

value

IPO ratio (as %

of last yearend

mkt_cap)

Placement ratio (as

% of last yearend

mkt_cap)

1994 291 58 54 405 6 6 1.7% 1.6%

1995 323 34 79 394 4 6 1.0% 1.4%

1996 530 203 41 1,090 25 7 6.4% 1.7%

1997 745 207 97 1,900 69 21 6.4% 1.9%

1998 852 111 167 2,092 42 38 2.2% 2.0%

1999 949 94 123 2,816 50 38 2.4% 1.8%

2000 1,088 145 191 5,076 85 79 3.0% 2.8%

2001 1,160 68 142 4,633 56 57 1.1% 1.1%

2002 1,224 71 53 4,097 52 25 1.1% 0.5%

2003 1,287 66 41 4,565 45 18 1.1% 0.4%

2004 1,377 98 37 3,990 35 29 0.8% 0.6%

2005 1,381 15 5 3,495 6 27 0.1% 0.7%

2006 1,434 71 60 10,352 164 105 4.7% 3.0%

2007 1,550 121 184 40,130 447 357 4.3% 3.5%

2008 1,625 77 144 14,838 103 232 0.3% 0.6%

2009 1,718 111 143 29,073 202 311 1.4% 2.1%

2010 2,063 347 186 30,521 491 495 1.7% 1.7%

2011 2,342 277 202 25,012 272 430 0.9% 1.4%

2012 2,494 150 147 26,778 100 319 0.4% 1.3%

2013E 2,843 349 176 377 0.7% 1.4%

IPO and Placement (Rmbbn)Number of listcos



Exhibit 34: Detailed data on global key countries IPO related data

Source: www.world-exchanges.com, WIND, Bloomberg, GS Global ECS Research

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GDP (current US$ bn)

United States 7,751 8,257 8,741 9,301 9,899 10,234 10,590 11,089 11,798 12,564 13,315 13,962 14,219 13,898 14,419 14,991

Hong Kong SAR, China 160 177 169 166 172 169 166 161 169 182 194 212 219 214 229 249

Indonesia 227 216 95 140 165 160 196 235 257 286 365 432 510 540 708 847

Korea, Rep. 558 516 345 445 533 505 576 644 722 845 952 1,049 931 834 1,015 1,116

India 400 423 429 464 475 492 523 618 722 834 949 1,239 1,224 1,361 1,684 1,848

China 856 953 1,019 1,083 1,198 1,325 1,454 1,641 1,932 2,257 2,713 3,494 4,522 4,991 5,931 7,319

Singapore 95 105 96 86 96 91 91 93 109 124 139 168 167 176 213 240

United Kingdom 1,220 1,368 1,462 1,504 1,476 1,468 1,602 1,856 2,197 2,296 2,453 2,826 2,649 2,184 2,256 2,445

IPOs (current US$ bn)

United States 74 55 57 122 126 36 32 34 70 56 55 77 2 24 42 39

Hong Kong SAR, China 4 11 1 2 17 3 7 8 12 21 43 37 8 31 58 33

Indonesia 1 1 0 0 0 0 0 1 0 0 0 2 3 0 3 2

Korea, Rep. 2 0 0 2 1 0 5 1 11 2 3 3 NA 2 9 4

India NA NA NA NA NA NA 5 5 12 4 8 13 7 4 14 3

China - - - - - - 7 6 4 1 14 63 15 28 74 44

Singapore NA NA NA NA 2 0 0 1 2 4 5 5 1 NA NA 8

United Kingdom 17 12 7 7 14 8 8 8 14 31 56 50 13 3 20 NA

Market cap ( USD bn)

United States 8,354 10,617 12,522 16,642 15,132 13,766 11,010 14,173 16,240 16,915 19,286 19,664 11,458 15,077 17,283 15,641

Hong Kong SAR, China 449 413 344 609 623 506 463 715 861 1,055 1,715 2,654 1,329 2,305 2,711 2,258

Indonesia 91 29 22 64 27 23 30 55 73 81 139 212 99 215 360 390

Korea, Rep. 139 42 115 306 148 194 216 298 389 718 834 1,123 471 835 1,092 996

India NA NA NA NA NA NA 112 253 363 516 774 1,660 600 1,225 1,597 985

China - - - - - - 463 513 448 402 1,145 4,479 1,779 3,573 4,028 3,412

Singapore 153 106 96 198 155 117 101 149 218 257 384 539 265 481 647 598

United Kingdom 1,643 1,996 2,373 2,855 2,612 2,165 1,856 2,460 2,865 3,058 3,794 3,852 1,868 2,796 3,613 3,266

Stock index level

United States-S&P 500 741 970 1,229 1,469 1,320 1,148 880 1,112 1,212 1,248 1,418 1,468 903 1,115 1,258 1,258

Hong Kong SAR, China-HSI 13,452 10,723 10,049 16,962 15,096 11,397 9,321 12,576 14,230 14,876 19,965 27,813 14,387 21,873 23,035 18,434

Indonesia-JKSE 637 402 398 677 416 392 425 692 1,000 1,163 1,806 2,746 1,355 2,534 3,704 3,822

Korea, Rep.-KS11 651 376 562 1,028 505 694 628 811 896 1,379 1,434 1,897 1,124 1,683 2,051 1,826

India-Sensex 3,085 3,659 3,055 5,006 3,972 3,262 3,377 5,839 6,603 9,398 13,787 20,287 9,647 17,465 20,509 15,455

China-SH Composite 917 1,194 1,147 1,367 2,073 1,646 1,358 1,497 1,267 1,161 2,675 5,262 1,821 3,277 2,808 2,199

Singapore-STX 2,217 1,530 1,393 2,527 1,977 1,634 1,303 1,730 2,000 2,281 2,919 3,466 1,762 2,898 3,190 2,646

United Kingdom-FTSE 4,119 5,136 5,883 6,930 6,223 5,217 3,940 4,477 4,814 5,619 6,221 6,457 4,434 5,413 5,900 5,572

IPO overview of global major countries



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