Major Chinese IPO Underwriters Prepare to Turn to Small Business Amid Political Push

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IPO underwriting for small and medium-sized companies in China is expected to become more competitive as Beijing pushes small companies to go public while increasing restrictions on listings of tech behemoths.

The leading investment banks and brokerage houses in China, which have focused on large IPOs due to lucrative fees and strong business relationships, are poised to expand into the SME space more aggressively that the Beijing Stock Exchange – a new trading platform only for small businesses – will soon be online, analysts say.

The country’s deep scrutiny of the tech and real estate sectors, which have been the biggest sources of IPO issuers in recent years, is also forcing underwriters to diversify more quickly into others. market segments, add analysts.

“[The Beijing Stock Exchange] provides a more flexible rating mechanism for small and medium-sized businesses. [These companies] will focus on the capital market to find funding opportunities, and this will become the mainstream, ”said Cody Leung, executive director of the wealth management unit of China Industrial Securities International.

The Chinese IPO market in China has grown rapidly in recent years, thanks in large part to mega offers. Through major IPOs such as China Three Gorges Renewables (Group) Co. Ltd. and China Telecom Corp. Ltd., the Shanghai Stock Exchange was the third largest listing destination in the world for the first three quarters of 2021, after the NYSE. and the Nasdaq.

Needs of SMEs

China had more than 4 million SMEs with fewer than 500 employees in 2020, which accounted for more than 60% of the country’s economic output, according to an April report by US research firm IDC. Expanding access to the capital market for SMEs is China’s latest effort to support small businesses, which have been hit hard by the coronavirus pandemic and ongoing trade tensions with the United States.

In the first nine months of this year, 39% of funds raised on the Shanghai and Shenzhen stock exchanges came from IPOs below 1 billion yuan, up from 33% for the same period in 2020, according to a report by September from consulting firm Deloitte. . During the period 2021, the two exchanges hosted 373 IPOs which raised a total of 370.4 billion yuan, compared to 294 offers which raised 355.7 billion yuan a year ago, according to the report. .

“Chinese investment banks, in light of the opportunities [the Beijing Stock Exchange], will need to restructure the current mindset – shifting the priorities of large and state-backed companies to high-quality companies, regardless of size, ”said Lawrence Chen, Hong Kong-based analyst at CCBIS.

He said that even the major brokers, who mainly pursued mega-IPOs, will increasingly become aggressive in obtaining underwriting agreements for small businesses.

“This echoes policy directions and the growing need to transform investment banking activities to respond to new sectors of the economy that require [financing]”Chen added.

Shanghai-based Guotai Junan Securities Co. Ltd., one of the largest brokers in China, for example, said it would continue to advise more small businesses in the future, especially with the establishment of the Stock Exchange. from Beijing.

“We will seize the opportunity of the reform. The Beijing Stock Exchange will provide new opportunities for the investment banking, trading and other activities of securities brokers,” Guotai Junan said in his response to S&P Global Market Intelligence.

Comparative advantages

Besides the political push, Chen said that focusing more on SMEs is also “strategic” for brokers, especially for smaller players.

“The Chinese large-cap space is probably too competitive. The country has more than 135 brokers, and it is difficult for them to achieve the same goals. The pipeline of brokers outside of the top 30 on the list is already not strong enough, and it makes sense that they are targeting SMEs, ”Chen added.

In 2020, the top five brokers in China pocketed around 45.2% of underwriting commissions in the IPO market, up from 29.1% in 2015, according to Chen, who added that it is even more crucial for small brokers to seek opportunities in SMEs. field.

China’s Ministry of Industry and Information Technology has identified 2,930 innovative SMEs since 2019, so-called “small giant enterprises”, most of which are in technology and manufacturing. In early August, more than 300 of these companies were listed in Chinese A-shares.

Bruce Pang, head of macro and strategic research in Hong Kong at China Renaissance, sees this as an opportunity for brokers and said smaller brokers have an advantage in advising these firms.

“[Smaller brokers’] business operations are more flexible, specialized and determined for the blue ocean market, ”said Pang. Therefore, he added that compared to top brokers who focus more on mega-IPOs, smaller brokers spend more time advising SMEs.

“This gives them an advantage in finding targets, providing ongoing advisory services and building pipelines,” he said.

Clamping handle

Along with pressure from regulators to support SMEs, China’s tightening regulation on mega-IPOs is also prompting brokers to consider smaller listings.

The IPO of the financial technology arm of Alibaba Group Holding Ltd. Ant Group Co. Ltd. in Shanghai and Hong Kong, for example, was suspended less than two days before the scheduled start. New data security rules also emerged in August, days after rideshare company DiDi Global Inc.’s app was pulled from the App Store after it registered in the United States.

According to the new data security rules, Chinese companies with a large amount of data will have to go through a security exam before going public overseas.

Earlier in April, China banned companies primarily engaged in financial activities or real estate investments from listing on the Nasdaq-style Star Market. The secondary board of the Shanghai Stock Exchange was a key destination for technology IPOs.

“The mega IPO pipeline is running out. So the next phase [for brokers] is to identify companies with strong research and development capacity, key technologies and specialties in niche markets, many of which are SMEs, ”said Pang.

As of September 29, US $ 1 is equivalent to 6.47 Chinese yuan.


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