Allmed Medical Products Co. Ltd. became the 111th and last Chinese corporation to receive an initial public offering (IPO) permit in 2018 after its application was approved by the China Securities Regulatory Commission (CSRC) at the last meeting of its Issuance Appraisal Committee on December 25, 2018. The year marked the lowest annual IPO approval rate in the last 10 years.

By industrial sector, technology hardware and equipment became the industry that attracted the largest amount of capital in 2018, according to a report from the 21st Century Capital Research Institute.

The report said although the approval rate for IPO applications and the number of corporations going public were both low in 2018, the financing scales of single corporations were higher than those in previous years, indicating that the capital market is better supporting the real economy and facilitating transformation of the economy. These new features are likely to continue in the yuan-denominated A-share IPO market in 2019.

Declining rate

In 2018, 199 IPO applications were reviewed by the CSRC's Issuance Appraisal Committee, with 111 approved and 59 rejected, according to figures from Wind Information Technology Co. Ltd., China's leading financial information provider. In addition, 19 applications were canceled and another 10 were postponed.

Based on this calculation, in 2018 the approval rate of IPO applications in the A-share market was only 55.78 percent, while the rejection rate was 29.65 percent, the highest rejection rate in the past 10 years. By comparison, in 2017, the rates stood at 76.31 percent and 17.27 percent, respectively.

In January 2018, the CSRC reviewed 50 IPO applications but approved only 18, with an approval rate of only 36 percent. The approval rate rose to around 60 percent from February to July, and then dropped to 55 percent in August. In November and December, the rate climbed to 75 percent and 69.23 percent, respectively.

According to the 21st Century Capital Research Institute report, the change was largely due to the gradual decline of the number of enterprises on the IPO waiting list. CSRC figures showed that at the outset of 2018, 484 corporations were waiting for IPO approval, while at year's end the figure had fallen to 244.

"When the number of corporations on the waiting list was high, a faster appraisal process helped reduce the total. As the number of corporations waiting declined, the appraisal process was also slowed down," an anonymous Beijing-based investment banker told the 21st Century Business Herald. "But looking at the overall approval rate, the Issuance Appraisal Committee still maintained a strict standard of approval."

Due to the low approval rate, the number of canceled IPO applications surged in 2018. According to CSRC figures, nine corporations suspended IPO applications, and as many as 195 corporations chose to terminate their applications.

"There are two reasons why corporations cancel their applications. First, some applications are destined to be rejected because of the low approval rate and strict appraisal process," said the anonymous banker. "Second, the CSRC has strengthened spot inspections, and if it finds flaws with the IPO, the regulatory authority sometimes will persuade the corporation to give up its IPO application on the spot."

New economy features

The number of enterprises going public in 2018 was also at its lowest over the last 10 years. However, companies like Foxconn Industrial Internet Co. Ltd. and Contemporary Amperex Technology Co. Ltd.—part of the new economy and high-end manufacturing—have brought a new atmosphere to the A-share market.

In 2018, a total of 103 corporations went public on the Shanghai and Shenzhen stock exchanges, much lower than the 438 in 2017, and the lowest since 2009, with the exception of 2013, when IPO appraisals were completely suspended in China.

Although fewer corporations succeeded in getting an IPO approval, single IPOs raised more capital. In 2018, 103 IPOs raised a total of 136.2 billion yuan ($19.85 billion), with each raising an average of 1.32 billion yuan ($192.42 million). In 2017, the total was only 525 million yuan ($76.53 million). Such a surge may be caused by some star IPOs. Foxconn Industrial Internet raised 27.12 billion yuan ($3.95 billion), the largest in 2018, followed by the People's Insurance Co. (Group) of China Ltd., which raised 6 billion yuan ($873.9 million).

In addition, the approval process for new economy enterprises was quicker, a signal that the regulatory authority supports these companies entering the A-share market. It took Foxconn Industrial Internet only 36 days from submitting its prospectus to the CSRC to getting IPO approval. For Wuxi AppTec Co. Ltd., it took a month and 20 days from pre-application disclosure to IPO approval.

Concepts of new economy and high-end manufacturing have become new highlights in the A-share market. Calculations by the 21st Century Capital Research Institute showed that in 2018, the technology hardware and equipment industry raised 42.58 billion yuan ($6.2 billion) via IPOs, the largest among all industries, accounting for 31.26 percent of the total IPO financing scale. The medical equipment, services and pharmaceutical industries, as well as the biotechnology and bioscience industry, raised 6.75 billion yuan ($983.97 million) and 4.51 billion yuan ($657.32 million), respectively, via IPOs.

Moreover, it became increasingly difficult for traditional businesses to get IPO approvals. Many real estate enterprises, such as Dalian Wanda Commercial Management Group Co. Ltd., have been waiting a long time for IPO approval, but none of them received permits in 2018.

Peng Wenyu, a strategic analyst with Shenwan Hongyuan Securities Co. Ltd., said since equity financing assumes the responsibility of optimizing resource allocation, it must serve the ongoing economic restructuring in China. Since 2017, most of the enterprises newly listed in the A-share market are from industries such as computing and telecommunications, reflecting the change in pillar industries from traditional industries to emerging ones.

Copyedited by Rebeca Toledo

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