Date
19 September 2017
This is how it's done. JD.com founder and chairman Richard Liu Qiangdong celebrates a winning US debut. Photo: Bloomberg
This is how it's done. JD.com founder and chairman Richard Liu Qiangdong celebrates a winning US debut. Photo: Bloomberg

The joy of IPOs and the Viagra effect

Initial public offerings are like relationships — it can be tough sometimes to guess if you’re on the right track.

Just last week, China’s No. 2 e-commerce company, JD.com, debuted on the Nasdaq with a 10 percent gain, a perfect example of what makes selling shareholders and buying investors happy.

The online retailer fared much better than train maker China CNR Corp. which dipped below the surface on the first day in Hong Kong but managed to end the week flat. But even that was a better than many overseas IPOs such as British clothing retailer Fat Face, whose offering was pulled because of poor investor appetite after a series of non-performing London offerings such as online takeaway food service Just Eat.

What does that say for the prospects of Alibaba Group, which is tipped to tap up to US$15 billion in the world’s largest and most widely watched IPO in August?

To some institutional investors, buying into an IPO is like consummating a relationship, providing the kind of excitement that satisfies the animal spirits of fund managers. But in many cases, the exercise is more like a one-night stand, with investors heading for the exit because they did not have much concern for track record.

A look at Hong Kong’s IPOs over the last two years shows that there have been as many plums as lemons. Of the 180 debuts in that time, half of them are still above water.

A closer look of the IPO table also shows that the bigger the scale, the poorer the post-market performance. The biggest IPO in Hong Kong this year has been HK Electric, tycoon Li Ka-shing’s utility spinoff, which raised US$3.1 billion but is still 3 per cent underwater.

The hottest Hong Kong IPO so far for 2014 has been nightclub operator called Magnum Entertainment. It was the talk of the town for weeks and had the city in a frenzy resulting in it being oversubscribed a record 3,558 times by retail investors. Magnum almost doubled its price on debut only for it be worth half, four months into listing.

That is typical of an IPO’s Viagra effect, one that rarely lasts for more than a trading day and that investors who tempted to get in should try to avoid.

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BK/JP/SK

EJ Insight writer

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