'Shadow stocks' surge in anticipation of floats

Ten of the 28 listings suspended during summer rout will disclose prospectuses next week

Stocks related in some manner to the forthcoming initial public offerings surged in Chinese stock markets on Friday, some by the 10 percent daily trading limit.

The so-called IPO shadow stocks, which refer to shares of companies that are either major shareholders in to-be-listed companies or operate in the same industry as the IPO-bound companies, surged in anticipation of the floats.

The securities regulator said on Friday that 10 of the 28 companies whose IPOs were suspended during the summer market crash will be among the first batch to disclose their IPO prospectuses.

This indicates new share sales will likely start as early as next week. Shares in Shenzhen-based Invengo Information Technology Co Ltd rose 5.44 percent on Friday, extending a 58 percent gain in two weeks.

Speculative investors have been chasing the stock as the company is the third-largest shareholder in Henan Thinker Automatic Equipment Co Ltd, a manufacturer of automatic equipment of high-speed trains, whose IPO next week is among the most-sought-after new shares.

Surging IPO shadow stocks reflect the market's positive sentiment toward the resumption of floats, analysts said.

New shares are considered as almost risk-free as they tend to record high trading volumes that drive their prices up after listing.

Wu Xiaohui, head of the IPO business at accounting firm Deloitte China, said that the A-share market will likely see about 380 to 420 IPOs next year, raising capital up to 260 billion yuan ($40.7 billion).

The resumption of IPOs would pave the way for the eventual introduction of a registration-based IPO mechanism that is being reviewed by the country's top legislature, Wu said.

Analysts have estimated that the 28 IPOs listed in the first batch will likely lock up about 3.5 trillion yuan. But the market consensus is that new offerings are unlikely to change the A-share market dramatically as the summer rout had erased $5 trillion of market value. On Friday, the benchmark Shanghai Composite Index rose 0.37 percent to close at 3,630.3 points.

"The key logic behind a mid-term rise remains intact," Zhang Yidong, a strategist at Industrial Securities Co Ltd, wrote in a research note. "But we keep reminding investors to take risk into careful consideration amid the rise of the market which could face bottleneck when trending up in the future."