Against the backdrop of the comprehensive registration-based system, a growing number of companies in emerging industries have entered China's A-share capital market, bringing new vitality as well as more changes. Faced with the current situation of economic structural adjustments and an increasingly diverse group of companies in terms of industry categories and business models, participants in both the primary and secondary markets are attaching greater importance to enhancing their valuation and pricing capabilities, while also facing pressure to verify expectations.
I. Pricing Supervision Rules Under the Background of the Comprehensive Registration-Based System
Regulatory authorities have guided the formation of a more sound pricing system through various means, such as enriching trading varieties, introducing incremental funds, and improving the pricing rules for IPO issuance and underwriting. In the A-share market, the supervision of listed company pricing mainly covers multiple links, including IPO issuance and underwriting, refinancing, mergers and acquisitions (M&A) and restructuring, and secondary market transactions (including block trades and agreement transfers). Among these, the pricing of refinancing, M&A and restructuring, and secondary market transactions is mainly determined based on the market price within a certain period as a benchmark. Although the details of the rules are continuously revised, the rule framework system is relatively stable.
The pricing of IPO issuance and underwriting is affected by many factors, and there have been multiple adjustments in the history of the A-share market. Each adjustment has brought a series of effects to market participants. There have been three major adjustments in the past decade:
The first adjustment was to curb the "three highs" phenomenon in new share issuances — "high issuance price", "high issuance P/E ratio", and "excessively high raised funds". In January 2014, the China Securities Regulatory Commission (CSRC) issued the Measures on Strengthening the Supervision of New Share Issuance, which clearly stipulated that issuers should take the static average P/E ratio of the most recent month released by China Securities Index Co., Ltd. as a reference. This marked the beginning of an era of window guidance on the 23x P/E ratio for new share issuances, which lasted for many years.
The second adjustment occurred after the pilot registration-based system was launched on the STAR Market and ChiNext Board successively starting from 2019, when the "23x P/E ratio" red line was gradually broken.
The third adjustment was triggered by institutional investors "banding together" to offer low prices during the inquiry phase, which led to a number of new share issuers failing to complete their fund-raising plans within a certain period. In September 2021, the CSRC issued a series of rule adjustments on issuance and underwriting under the registration-based system. By adjusting the proportion of high-price exclusions and lifting the restriction that pricing should not exceed the "lower of four values" (the median and weighted average of valid quotes from offline investors, and the median and weighted average of valid quotes from five types of long-term funds), it jointly rectified the "banding" behavior and promoted balanced competition.
II. Introduction to Major Valuation Methods
Valuation serves as the anchor for various investment decisions. Commonly used valuation methods can be broadly classified into relative valuation methods, absolute valuation methods, and other methods used in specific scenarios. Each valuation method has its own scope of application and limitations due to differences in calculation logic, as detailed below:
In general, valuation methods are a way of thinking for pricing a company. Relative valuation methods are widely used at present: they identify similar companies in the market as a value benchmark, and derive the value of the target company through coefficient adjustments. The accuracy of relative valuation depends on whether the value of the reference company is priced correctly. However, it is difficult to find completely similar companies, and sometimes the industry average may not reflect the actual situation of the target company. In this regard, absolute valuation methods provide alternative valuation ideas.
Considering the scope of application and limitations of various valuation methods, the selection of methods in practice needs to be based on the company’s life cycle and business characteristics. Usually, multiple valuation methods are used for cross-validation.
Under the background of the comprehensive registration-based system, cases of valuation verification using the "market-research ratio" (the ratio of a company’s market value to its R&D expenditure in the most recent 12 months) and "product pipeline" (commonly used for valuing biotech companies, which estimates the discounted future cash flow based on the number of products under development and the progress of R&D) have emerged in the A-share market. However, with changes in IPO review practices, these methods have not been widely adopted.
III. Brief Analysis of the Valuation System Under the Background of the Comprehensive Registration-Based System
(I) Overview of Listed Companies in the A-Share Market
Data Source: iFind
Since the development of the A-share market, the total number of listed companies on various exchanges has exceeded 5,000, with a total market value of over RMB 80 trillion. In the past year, the net number of newly listed companies increased by approximately 6%, while the total market value decreased slightly.
From the perspective of individual sectors: due to a low: due to a low base, the Beijing Stock Exchange (BSE) saw significant growth in both the number of listed companies and total market value; the ChiNext Board and STAR Market developed relatively steadily; and the Main Board’s total market value declined.
(II) Analysis of P/E Ratio Changes Across A-Share Sectors
1. Issuance P/E Ratio
Companies applying for listing cannot conduct equity financing to the public from the benchmark date of their application to their IPO listing, and the "financing quiet period" is generally more than 1.5 years. Therefore, the fund-raising from IPO new share issuance is an important financing channel to support the sustainable development of enterprises after listing.
Note: Abnormal values (negative P/E ratios and P/E ratios greater than 200) have been excluded.
From the perspective of the changing trend of the median IPO issuance P/E ratio: the Main Board, ChiNext Board, and STAR Market all saw increases in varying degrees in 2023 compared with 2023 compared with 2022 (for the Main Board, although the median remained unchanged because many companies still issued shares at a P/E ratio not exceeding 23x in the first quarter of 2023, the average issuance P/E ratio rose from 22.16x in 2022 to 27.41x in 2023). However, the BSE’s IPO issuance P/E ratio decreased from 21.35x in 2022 to 16.00x in 2023.
The changes in the IPO issuance P/E ratio are mainly related to the supply in the IPO market. The number of newly listed companies on the Main Board, ChiNext Board, and STAR Market decreased in 2023; the BSE, which is in a period of opportunity for high-quality expansion, saw an increase in the number of newly listed companies, leading to compressed issuance P/E ratios.
In terms of the absolute value of the median IPO issuance P/E ratio, the order is: STAR Market > ChiNext Board > Main Board > BSE, which is consistent with general market expectations.
2. Secondary Market P/E Ratio
The issuance P/E ratio affects the fund-raising amount of IPO enterprises, while the secondary market P/E ratio mainly affects investors’ trading strategies and exit returns.
Note: Abnormal values (negative P/E ratios and P/E ratios greater than 200) have been excluded.
From the perspective of the changing trend of the median secondary market P/E ratio: the P/E ratio centers of the Main Board and STAR Market moved downward, the ChiNext Board saw an increase, and the BSE experienced a particularly significant rise — from 16.06x in 2022 to 27.37x in 2023.
In terms of the absolute value of the median secondary market P/E ratio: the STAR Market and ChiNext Board are significantly higher than the Main Board and BSE; the BSE’s figure exceeded the Main Board in 2023 due to the upward shift of its valuation center. Combined with the median IPO issuance P/E ratio, stocks on the ChiNext Board and STAR Market usually face the possibility of valuation regression after listing, while BSE stocks have a certain room for valuation recovery after listing in the current stage.
Since the secondary market P/E ratio is mainly used to measure trading strategies and exit returns, it should be noted that new share issuances generally involve a 25% additional issuance ratio, which dilutes the shareholding ratio of original shareholders. Calculating the pre-dilution P/E ratio based on the 2023 median secondary market P/E ratio of each sector (by deducting 25%), the secondary market P/E ratios of the Main Board, ChiNext Board, STAR Market, and BSE would drop to 14.70x, 25.88x, 28.60x, and 20.53x respectively. In other words, when investing in a company applying for listing at a 20x P/E ratio: if the company is eventually listed on the ChiNext Board or STAR Market, investors can enjoy not only the premium from performance growth but also the premium from the improvement of the valuation system during the investment period; if listed on the BSE, investors can only enjoy the premium from performance growth and not the premium from the improvement of the valuation system; if listed on the Main Board, investors may not even fully enjoy the premium from performance growth (the Main Board has a long development history, and the presence of many large-cap blue-chip stocks affects the median P/E ratio, which may lead to deviations in conclusions).
IV. Summary
Companies applying for listing can raise funds, enhance their credit, realize the value of their equity, and gain liquidity through IPOs. IPOs remain the most important exit method for primary market investments at present.
In terms of new share pricing, the overall orientation of the mechanism is to promote balanced competition, and it will continue to be optimized in regulatory practice. Under the background of the comprehensive registration-based system, various valuation methods need to give full play to their respective roles based on their scope of application and limitations. Faced with an increasingly diverse group of companies, it is even more necessary to strengthen cross-validation.
Against the backdrop of the comprehensive registration-based system, the Main Board, STAR Market, ChiNext Board, and BSE have formed clear sector positioning. The qualifications of companies applying for listing and capital preferences affect the new share issuance and secondary market valuation of each sector.
Although the differences between individual enterprises and their respective sub-sectors, as well as valuation differentiation, may affect the judgment of valuation returns for specific projects, in general, during the window period of a downward shift in the valuation center, promoting corporate profit growth, improving the IPO success rate, and balancing valuation expectations are important focus areas for all market participants to navigate the cycle.
Source: Peng Hao, Risk Control Department
Review: Xue Yao
Release: You Yi
