Are Hong Kong IPOs lemons?
Not all Hong Kong IPOs with huge retail demand will fly.
Take Acotec, a medical device maker which debuted with an eye-popping 26 per cent drop in share price. Share price closed at HK$17.6, which translates into a loss of HK$6,200 for a minimum investment of HK$23,800.
That was the largest loss on the first day of trading this year for Hong Kong IPOs, known to produce juicy returns, well, if you pick the right one.
Only about three per cent of the over 310,000 investors managed to get Acotec, which secured a 654 times subscription in its retail book.
In other words, over 300,000 investors were relieved as they had a narrow escape.
Still there were reportedly 56 investors who went all-in with a HK$81 million bet in total. In addition to deep losses, they have to pay for borrowing costs too if margin financing has been arranged.
Acotec is not the only medical stock that brought damage to investors. Last week, Shanghai Heartcare Medical Tech Group, which was over-subscribed by more than 300 times, was down nearly 25 per cent on its first day of trading.
Concrete maker Zhixin Group and financial analytics firm Bairong are also among the worst performers on the first day.
IPO is, after all, more a market sentiment play than a fundamental play. The economic rule of demand and supply generally applies to hot IPOs. Therefore some hot IPOs would go up multiple times – in one particular case, 45 times if my memory is correct - because of the limited stock supply. Clearly, there are exceptions, only that it is hard to tell beforehand.
This year, the market peaked soon after Chinese Lunar New Year and the hot new economy sector went sour on concerns about Beijing’s tightening grip of tech firms. As such, Hong Kong stock market turned bearish.
That would not help the bio-technology IPOs, most of which were loss-making but priced at high valuations attractive enough for owners to sell some of their stakes to the public.
Once bitten, twice shy. Would investors come back for more if they keep suffering from bad returns? Good luck to Hong Kong Exchanges and Clearing, the cradle of the IPOs.
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