Hong Kong’s IPO prowess is weaker than it looks. The bourse’s world-beating performance in attracting new issues this year is impressive given the mainland’s stock market boom and bust – and should ease angst about the city’s future as a venue for raising capital. But quantity comes with a worrying lack of quality.
Thomson Reuters data shows the Hong Kong Stock Exchange hosted $30.3 billion worth of new equity offerings in the year to Dec. 4 – not far off the combined $33.6 billion raised on the New York and Nasdaq exchanges. So even though Chinese e-commerce giant Alibaba last year chose the United States for its mammoth listing – complete with eyebrow-raising governance – it’s hard to argue that Hong Kong is being bypassed as a financial centre.
Investors in the city are no longer clamouring to finance margin-lending by mainland brokerages – the spur for many big share issues in 2015. But the pipeline still bulges. Next year could see tens of billions of dollars raised by Chinese financial institutions such as Postal Savings Bank, Guangfa, Lufax, China Merchants Securities, and Bank of Beijing.
That’s the good news. But there are two big problems. First, the market has grown over-reliant on investors who pledge ahead of time to support offerings. Like the companies raising money, these so-called cornerstone investors are often Chinese state-owned enterprises. Cornerstones bought an amazing 70 percent of China Energy Engineering’s $1.8 billion equity issue this week, IFR says. The system makes it very hard to gauge genuine demand for a company’s stock – while also creating a small free float and a nasty overhang of likely future sellers.
Alongside this distortion is a second problem: a lacklustre aftermarket. As of the Dec. 3 close, Hong Kong’s ten biggest IPOs this year are down an average 8.3 percent from their issue price, Breakingviews calculations show.
True, it’s been a choppy year for stock markets. But if investors had instead bought the Hang Seng index on the day each big IPO priced they would have suffered a slightly lower average loss of 7.8 percent. So what inducement do investors have to take a chance on a new stock?
Better pricing and a higher-quality investor base would help safeguard Hong Kong’s status.