We've said it before [5] and we'll say it again: China's equity mania truly is the gift that keeps on giving, and not just for those who are riding the wave, but also for those who, like us, appreciate the humor in a giant, margin-fueled bubble that’s captivated millions upon millions of semi-literate housewives and banana vendors [6] turned day traders.
While there are some signs that the bubble in Chinese stocks may be set to peak — such as brokers looking to curb [7] margin trading — rest assured that the PBoC is on the case, cutting policy rates [8] twice in a month in an effort to ensure the country's stock market miracle continues to overshadow a bursting real estate bubble and a decelerating economy in the minds of Chinese investors.
One area that's been particularly hot this year is the Chinese IPO market, which has spawned companies like the now famous Beijing Baoefung Technology which, until Thursday, had traded limit-up every single day [9] since its March IPO. Here to shed some light on just how ridiculous the IPO market in China has become is Morgan Stanley:
Since January 1, 2014, a total of 225 companies have IPO'd in China's A share markets. The mean performance since IPO is 418%, with trailing P/E currently at 92x and EV/EBIT at 105x. Mean yoy EPS growth in the year prior to IPO was 4%. Total market cap is now over US$500bn.
We have used an 'interstellar' metaphor before to discuss China's A share markets. In this context the IPO markets are Blue-White, the hottest stars in the A-share universe...
[10]
In every industry group except the two IPOs in Energy, performance on the IPO date was between 43% and 44%. What this means is that for the vast majority of the other 223 of 225 IPOs, the stock rose limit up (20%) at the open and then by the additional limit restriction to a 20% gain during the day.
To put it mildly, this suggests a market that has not been discriminating in relation to pricing, at least early on.
It also explains the huge subscription volumes for IPOs and the surge in new account openings since China allowed individuals to open more than one account in mid-April. Investors have come to see IPOs as a sure-fire way of making high returns over a short period of time.
Performance over longer time horizons has been more variable. The average return has been 418%, since the date of IPO (itself an eye-opening number). However, energy IPOs have lagged, returning “only” 160%. Media (773%), and Software and Services (1125%) are way out in front.
[11]
The mean trailing P/E is 92x trailing, with no sector trading below 50x trailing. The most expensive industry groups are Software (311x), Media (140x) and Retailing (134x); the cheapest are Diversified Financials (53x) and Semiconductors (53x).
We also provide in the Exhibit historical EPS growth for 2014 yoy vs 2013. The mean EPS growth for the stocks that have IPO'd is just 4%. The only industry groups with double-digit historical EPS growth at the time of IPO are Food & Staples Retailing and Diversified Financials (securities firms helped by strong stock market volumes). In seven sectors, the mean EPS growth was negative in the year prior to IPO.
[12]
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In sum: since the beginning of 2014, the 225 companies that have gone public in China have returned an average of 418% on their way to an average P/E of nearly 100X while growing earnings by an average of just 4%. Most absurd of all, software IPOs have returned 1,124%, have an average P/E of 311X on earnings growth of -5%.
But remember, HSBC's Head of China Equity Strategy Steven Sun "wouldn't call [Chinese stocks] a bubble [13]."
