Chinese regulators warn IPOs of zero-Covid winners subject to tight checks

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Chinese regulators have warned that a wave of initial public offerings from companies claiming to be involved in China’s booming Covid-19 testing sector will be subject to added scrutiny over concerns that their high growth is unsustainable.

A group of companies including Dakewe Biotech, a medical equipment distributor, that have prospered under Beijing’s pandemic policies have filed IPO applications in Shanghai, Shenzhen and Hong Kong. Some of them, such as CoWin BioSciences, a biotech company, have already been given the green light to list.

Shares of CoWin BioSciences gained 13.6 per cent in Shanghai since it listed on October 25, while the benchmark Shanghai Composite index added 3.7 per cent during the period.

Earlier last month, Shanghai-based food supplier Pang Pang Xiang also filed its prospectus to Hong Kong Stock Exchange. Pang Pang Xiang’s profit margin spiked in the first five months of 2022 to 74 per cent, driven by huge growth in its deliveries during Shanghai’s lockdown.

The listing attempts and the profit disclosure of zero-Covid beneficiaries have unleashed criticism on social media site Weibo and WeChat about their fundraising plans.

“We pay close attention to the listing applications of companies involved in nucleic acid testing, and insist on strict reviews, especially in the front of business sustainability,” Shenzhen Stock Exchange said in a late Monday statement on its official WeChat account.

For those already listed, the exchange said it had “earnestly reviewed applications from those companies, with a focus on whether the nucleic acid testing business is their core business and whether related revenues are sustainable”.

“We’ll strictly control the quality of IPOs, and push forward IPOs of relevant companies in a prudent manner,” it added. The Shanghai Stock Exchange also issued a similar statement.

Dakawe said in a statement on Tuesday that the testing tube business only accounted for a limited portion of its full business portfolio.

Businesses such as tourism, aviation and catering services significantly suffered over the past three years due to Beijing’s strict social distancing rules, while prices of vegetables and meat soared during lockdowns, leaving residents suffering from higher living costs.

But the coronavirus testing companies and some food delivery services posted bumper profits. The net profit of Dakewe jumped sixfold in 2020 from a year earlier, the company’s March filing showed. Residents in most major Chinese cities still need to take regular PCR tests every 24 to 72 hours to meet strict requirements by local authorities.

The gross profit margin of Pang Pang Xiang skyrocketed to 74.7 per cent in the first five months of this year, its prospectus filed in October showed.

“I would probably see this as a short-term benefit that the company was able to take advantage of,” said Ben Cavender, managing director at China Market Research Group in Shanghai.

China reported 28,000 new Covid-19 cases on Tuesday, with an increasing number identified in the capital Beijing, the southern manufacturing hub of Guangzhou and the southwestern metropolis of Chongqing.

Officials are once again locking down large swaths of the cities and closing restaurants and sports venues, despite the latest easing measures of zero-Covid policies.

CoWin BioSciences and Pang Pang Xiang did not immediately reply to requests for comment.

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