Is equity cheap? The case of Chinese transportation initial public offerings

Compared with the developed market economies such as the United States and the United Kingdom, the public listing of Mainland Chinese shipping companies is a relatively recent phenomenon, with most companies entering the stock markets in the 1990s. Hong Kong, on the other hand, has a much longer tradition in trading listed transportation (mostly shipping) companies, with some companies coming to the capital markets from as early as the 1970s; Eastern Asia Navigation Company Ltd., IMC, Wah Kwong Shipping & Investment Company and Orient Overseas Container (Holdings) Limited were among the earliest to be publicly quoted. In recent years, following the global trend of liberalization and deregulation of industries, China has spun off many of its formerly State-owned Enterprises, with the result that many transportation companies have had to resort to the emerging Chinese stock market for its funding needs—(See Page 30) depicts the growth trend for a sample of mainland Chinese and Hong Kong companies over the period 1986-1999. On a worldwide scale, as the transport industry becomes more and more capitalintensive, it is expected that the industry will be more and more reliant on the capital markets for its future growth. According to a Lloyds’ List report (June 1998), as much as 40% of financing for the shipping industry could come from public investors.

An initial public offering (IPO) of stocks is a major event through which a large amount of capital can be raised within a relatively short period of time. Whether or not a company will find public-listing an attractive option depends, among others, on the costs of going public. While direct costs such as legal fees, accountants’ fees, and printing expenses represent a considerable part of the total costs of public-listing, a greater cost is the underpricing of new shares (generally about 15% of total equity offered). Underpricing is deemed to occur when the final offer price of the new shares is lower than the market-clearing price that prevails during first-day trading. If the cost of underpricing is considered to be too high, companies may be discouraged from seeking a public listing. On the other hand, overpricing a new issue may result in the issue being aborted due to lack of demand. It can thus be seen that appropriate pricing of an IPO has an import ant bearing on the ability or willingness of companies to raise funds in the stock market.

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