Circular on Issues Relevant to the Pricing of New Share Offerings

Initial contact may not be made in a public manner or in a disguised public manner, and information of the issuer, other than public information, such as the prospectus (submission version) disclosed in advance, may not be provided to the inquiry recipients.

2. If an issuer is to estimate the offer price range, it shall submit to the department of public offering supervision a written report on the estimation of the offer price before the announcement of the meeting of the Public Offering Review Committee. The written report shall include specifics on the initial contacts, the method of determining the offer price, the offer price range and its corresponding price-earnings ratio (or, here and hereafter, other valuation metric), a comparative analysis of the average price-earnings ratio of listed companies in the same industry, the reason why the estimated offer price-earnings ratio is higher than the industry price-earnings ratio and an analysis of relevant risk factors. The issuer's lead underwriter shall additionally submit a dedicated opinion on the estimated price and disclose the same at the time of the initial inquiry.

3. An issuer shall determine the industry into which it falls based on the industry classification criteria formulated in the guidelines of the China Securities Regulatory Commission on the classification of the industries of listed companies, and analyse and explain the basis on which it determined the industry into which it falls. The relevant information shall be disclosed in the initial inquiry report. If the industry into which an issuer falls has several sub-categories, the industry shall be determined based on the sub-category most consistent with the company's actual circumstances. When conducting the comparative analysis of the industry price-earnings ratio, the analysis shall be carried out by selecting the most recent month's average rolling price-earnings ratio for the industry in which the issuer falls as published by the China Securities Index Co., Ltd. If no relevant industry price-earnings ratio data are available, the comparison shall be made by referring to the secondary market average price-earnings ratio for the same period of the relevant market sector.

4. The offer price-earnings ratio shall be calculated based on the issuer's audited net profit for the most recent financial year, or its net profit for the 12 months preceding the reference date of its most recent audited financial report (both being the lower of the net profit before and after deducting non-recurring profits and losses). If the calculation is made based on the latter, a review opinion issued by the reporting accountant shall be required, and such review opinion and the offer price-earnings ratio information shall be disclosed simultaneously. The review report must be submitted to the regulator for the record.

If the estimated offer price-earnings ratio is higher than the industry price-earnings ratio, the issuer shall give a supplementary explanation of the relevant risk factors in the officially disclosed prospectus, and shall bring the potential valuation and investments risks to the attention of investors in the initial inquiry announcement.

5. Based on the estimated offer price, if the anticipated proceeds exceed the needs of the investment project to which the proceeds are to be applied, the issuer shall give a supplementary explanation in the prospectus of the purpose to which the excess proceeds are to be put and their effect on the company; if the investment project to which the proceeds are to be applied has a funding shortfall, the issuer shall analyse the effect that such shortfall will have on the normal implementation of the project, reasonably determine a method of resolving the shortfall and provide supplementary disclosure in the prospectus regarding the same.

6. Once the prospectus is officially disclosed, if the offer price (or, here and hereafter, the upper limit of the offer price range) price-earnings ratio drafted based on the price inquiry results is 25% greater than the average price-earnings ratio of listed companies in the same industry, the issuer shall convene a board meeting to confirm the offer pricing and to discuss and analyse the pricing risk factors and their relevant effects.

7. The issues discussed by the issuer's board of directors shall include but not be limited to the following:

(1) whether the board agrees to the draft offer price, and the offer price ultimately determined by the board;

(2) an analysis of whether the final offer pricing took into account all of the risk factors publicly disclosed by the issuer; and

(3) an analysis of the contribution that the use of the anticipated proceeds will have on the company's main business and its effect on the company's performance, particularly the risk of fluctuations in the company's absolute and relative performance indicators.

The independent directors shall issue their opinions on the sufficiency of the board discussions. The issuer shall publish an announcement within two working days after holding the board meeting, disclosing the details of the quoting by inquiry recipients, the resolutions of and the discussion and analysis by the board of directors, and the opinions of the independent directors. Details of the board discussion shall be submitted to the regulator for the record after the announcement.

8. If the offer price-earnings ratio determined by the board of directors of the issuer is 25% greater than the average price-earnings ratio of listed companies in the same industry, the issuer and its lead underwriter shall analyse in the submitted pricing report the reasonableness of the offer pricing and the risk factors.

(1) Stating whether the pricing fully took into account the quote and purchase intentions of the inquiry recipients, the differences between the pricing and the average values and median values of all the quotes and between the pricing and the average values and median values of the quotes of the fund-type inquiry recipients, and the reasonableness of the pricing, while additionally conducting a comparative analysis by taking into account other pricing methods suitable to the issuer.

(2) Analysing the specific advantages that the issuer has in comparison to listed companies in the same industry and whether the issuer, when assessing the effects of the aforementioned advantages on the offer pricing, did so prudently and appropriately.

(3) Analysing whether the offer pricing took into account all of the risk factors publicly disclosed by the issuer and whether such risk factors were properly assessed.

(4) Taking into account the purchase multiple when the price for other new shares was determined based on the initial inquiry results and their market performance after listing, and conducting a comparative analysis of whether the pricing of the contemplated offering is prudent and appropriate.

The foregoing analyses shall be disclosed in the offer announcement and the special investment risk announcement and expressly state that such pricing may expose investors to the risk of losses due to the overly high valuation.

9. If the offer price-earnings ratio determined by the board of directors of the issuer is more than 25% greater than the average price-earnings ratio of listed companies in the same industry, the issuer shall, in principle, additionally provide the profit forecast report reviewed by an accounting firm, and, once such report has been announced, conduct a new price inquiry. If the issuer provided a profit forecast report at the time of its application, but failed to give a sufficient explanation of the reasonableness of the pricing, it shall conduct a new price inquiry.

10. If the offer price-earnings ratio determined by the board of directors of the issuer is more than 25% greater than the average price-earnings ratio of listed companies in the same industry and any of the following circumstances applies, the department of public offering supervision will, pursuant to provisions for the oversight of post-meeting material events, re-submit the issuer's IPO application to the Public Offering Review Committee for review. Once the application has passed review, a new price inquiry shall be conducted.

(1) If the amount of the proceeds calculated by the issuer based on the determined offer price greatly exceeds the funding demand for the project in which the proceeds are to be invested, resulting in a material change in the basic circumstances of the issuer, the issuer shall additionally disclose the fund use plan and other such relevant matters and analyse and disclose risks that could affect investors' decisions.

(2) If the amount of the proceeds calculated by the issuer based on the determined offer price greatly exceeds the amount of the proceeds calculated using the estimated offer price, resulting in a material change in the basic circumstances of the issuer, the issuer shall additionally disclose the fund use plan and other such relevant matters and analyse and disclose risks that could affect investors' decisions.

(3) A matter specified in the Memorandum for Review Standards for Share Offerings No.5: Operational Rules for the Oversight of the Post-meeting Matters and the File Sealing Work of a Company that has Passed the Review of the Public Offering Review Committee and Intends to Offer Securities where re-submission to the Public Offering Review Committee for review is required applies to the issuer.

11. If an issuer is required to conduct a new price inquiry or re-submit its application to the Public Offering Review Committee for review, it and its lead underwriter shall suspend the offering and make an announcement to that effect. After suspension of the offering, the offering may be restarted after record filing with the issue regulator or new approval by the China Securities Regulatory Commission.

clp reference:3710/12.05.23promulgated:2012-05-23