28 October 2016
IMAX China Holding Inc. is going public in Hong Kong next week. Will investors be able to obtain a share of the profits the firm is making? Photo: HKEJ
IMAX China Holding Inc. is going public in Hong Kong next week. Will investors be able to obtain a share of the profits the firm is making? Photo: HKEJ

Insights from IPOs

“Lost in Hong Kong”, a Chinese comedy set in the city, raked in more than 800 million yuan (US$126 million) within five days of its release in mainland China.

The megahit is the latest example of the astonishing growth of the mainland’s movie industry.

Among China’s top 10 blockbuster movies of all time, seven were released last year or this year.

The biggest hit pulled in 2.44 billion yuan.

Will investors be able to obtain a share of the profits?

IMAX China Holding Inc. is going public in Hong Kong next week. 

One of China’s leading cinema operators, IMAX has more than 250 movie theaters.

Revenue soared 67.7 percent to US$78.22 million last year from 2012, while profit surged 77 percent to US$22.58 million over the same period.

The fundamentals look fantastic, so why do the big shareholders want to list the company and share the profit?

Stock analysis should not be limited to financial figures; sometimes, common sense is even more important.

IMAX sold a combined 62 million shares, nearly three-quarters of which were existing shares held by big shareholders.

It has raised US$248 million through the IPO. Most of the proceeds will go to the major shareholders.

So, is the IPO a way to raise funds for expansion or an opportunity for shareholders to take profit?

IMAX has the option to sell up to 15 percent more shares, and these would be existing shares, which would allow shareholders to take even more profit.

Major shareholders should know the company’s value best, so why did they want to sell now?

Do investors know more about the outlook for the industry than the big shareholders?

More importantly, why are these large shareholders still willing to sell shares after the Hang Seng Index has tumbled from 28,000 points in April to about 21,000 points, rather than wait for a better time?

Value investors don’t like new shares, since the sell side determines the price and timing of the transaction.

And investment banks will spell out all the strengths and weaknesses of a company in detail.

Investors won’t be able to find too much hidden value.

The exceptions are sales of shares from the government, like those of MTR Corp. (00066.HK) and Link REIT (00823.HK).

The government usually offers attractive prices, as they want all the investors to be happy.

Investors should consider if there are other reasons that may force big shareholders in other companies to sell shares.

Regina Miracle International (Holdings) Ltd., an underwear brand, is also seeking 2 billion yuan in an IPO.

Two other big mainland companies — China Reinsurance (Group) Corp. and China International Capital Corp. — plan to raise US$2 billion and US$1 billion, respectively, through listings in Hong Kong later this year.

We’re seeing a stream of IPO deals despite turmoil in the equity market.

Is the market cheap enough, and is the correction already done?

The Hong Kong market has always been considered an “ATM machine” for companies.

In fact, free inflows and outflows of capital constitute the city’s fundamental advantage as a financial hub.

Companies favor Hong Kong as a listing destination, and institutional investors like H shares, because of clear regulations and few restrictions.

That has generated many jobs in accounting, securities, taxation, asset management and so on.

Through IPOs, investors are able to understand the real thinking of entrepreneurs and the true market sentiment.

The Hong Kong market has been sluggish in recent months.

However, there are still many new share offerings despite the market downturn.

That shows Hong Kong is recognized by investors as a real financial centre.

And Hong Kong is set to benefit the most when the mainland economy bottoms out.

Excellent investors, just like world-class talent, are able to find opportunities whatever the market conditions may be.

This article appeared in the Hong Kong Economic Journal on Oct. 2.

Translation by Julie Zhu

[Chinese version中文版]

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Columnist at the Hong Kong Economic Journal

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