23 October 2018
Top officials of China Literature hold a press conference on the company's initial public offering in Hong Kong on Wednesday last week. Photo: Bloomberg
Top officials of China Literature hold a press conference on the company's initial public offering in Hong Kong on Wednesday last week. Photo: Bloomberg

Why China Literature is going to disappoint

Never would I have thought that there are so many literature lovers in Hong Kong.

But, as it turns out, they’re not actually bookworms who would pore over “many a quaint and curious volume of forgotten lore” of ancient China. More likely they wouldn’t even bother to read the hefty prospectus of a company launching an initial public offering before committing their millions of dollars to the stock.

Still, it’s quite a surprise that more than 400,000 people pledged their money for a piece of China Literature (00772.HK), a spin-off of China’s internet giant Tencent Holdings (00700.HK).

China’s biggest online book publishing company on Wednesday attracted over HK$520 billion capital from retail investors subscribing to its IPO, only a few heartbeats away from the record HK$535 billion notched by China Railway Construction Corporation (01186.HK, 601186.CN) in 2008 and dwarfing the HK$450 billion of (01688.HK) in 2007.

So these retail investors are not exactly stumbling over each other because they care much about literature, or even attracted by the fundamentals of the firm, but only for one reason: they are hoping for a reprise of the Tencent phenomenon.

Since its humble debut in 2004, Tencent has grown to become the biggest listed company in Hong Kong by market cap, dwarfing HSBC (00005.HK), China Mobile (00941.HK) and all the property giants. It has also made it to the league of the world’s 10 largest companies along with tech greats Apple, Microsoft and Google.

Regularly beating analyst forecasts with an over 40 percent profit growth, Tencent rose almost 500 times from its IPO price of HK$3.7 to HK$360 (Wednesday’s close) even after the company split its shares one for five in 2014.

In the case of China Literature, Tencent shareholders are entitled to one share for every integral multiple of 1,256 shares. In other words, you have to own HK$445,629 worth of shares of Tencent to qualify for one China Literature share at HK$55 apiece.

Given the huge number of interested retail investors, it is quite unlikely that China Literature will give a minimum lot of 200 shares to subscribers.

It was reported that 277 investors went for the maximum allotment by putting in a cheque of HK$420 million. These investors are not likely to get what they want because the allotment ratio in similar hot offerings in the past was less than 0.5 percent.

As such, it is easy to conclude that not many investors can profit a lot from the IPO, even if it soars and dazzles on its first day of trading on November 8th.

To make matters worse, many people have actually suffered. A couple of friends told me their HIBOR mortgage-linked payment jerked up between HK$500 and HK$1,000 because of the sudden demand for Hong Kong dollars, thanks to China Literature’s IPO.

So even if they’re not able to get the hot IPO shares, they will actually be worse off because of China Literature.

All this gnashing of the teeth aside, one person will be laughing his way to the bank. Who else but Tencent’s head honcho, Pony Ma, who has profited again from investors’ optimism over his company?

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EJ Insight writer

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