FII, a subsidiary of Taiwan-based Hon Hai Precision Industry (known as Foxconn), took a gamble with its Rmb27.1bn ($4.2bn) IPO last week, the largest A-share listing in the mainland since 2015. The issuer was counting on interest from big, high quality names to fill an unusually large strategic investor tranche equal to 30% of the transaction.
It wasn’t disappointed. China’s technology titans Alibaba Group Holdings, Baidu and Tencent Holdings — collectively referred to as BAT — were among the names that turned up for the IPO. In total, the tranche comprised 20 strategic investors.
Many market participants have been quick to criticise FII’s decision to allocate and lock-up so much stock with strategic buyers. The float comprised 1.97bn A-shares, with 590.8m set aside for strategic investors and the remaining split between institutional and retail buyers. They compared it to large Hong Kong IPOs from Chinese issuers in recent years, where more than half the offerings were regularly placed with cornerstone investors without any qualms, affecting the stocks’ aftermarket performance.
But they are missing the point with FII. Sure, the similarities between FII’s listing and Hong Kong floats that relied on cornerstones are evident. But in most cases in Hong Kong, huge amounts of stock were placed with so-called ‘friends and family’ investors. For instance, in a HK$57.6bn ($7.3bn) flotation in September 2016 for Postal Savings Bank of China, 76% of the deal was placed with cornerstones, including to state-owned firms with little similarities in business to the issuer.
This is materially different to the sophisticated global technology companies that bought FII’s shares. Each of the BAT companies signed up for 21.8m shares, while Chinese internet service provider Shanghai Oriental Pearl Group also took the same number of stock.
The investor line-up on FII also clearly reflected the Chinese government’s increasing focus on new economy companies. A handful of state-owned enterprises were among the strategic investors, inevitable for a high profile deal from a subsidiary of the largest electronics contract manufacturing company in the world.
Among the buyers were Central Huijin Investment, a government-owned investment firm, China Railway Corp and China Life Insurance Co, which were in for 58.1m, 43.6m and 34.1m shares, respectively. The lock-up periods for each account range from one to three years.
For a listing in the A-share market, locking up some shares is a smart move. Stocks in the retail-dominated market are renowned for popping on their first day of trading, largely thanks to mom and pop investors typically getting the bulk of an IPO and the China Securities Regulatory Commission’s forced price ceiling. Ultimately, retail accounts take advantage of an artificially low listing price and flip the stock for quick gains, causing volatility.
That’s unlikely to be the case with FII. Its shares were sold at Rmb13.77 each, which translates to a price-to-earnings multiple of 17.1 times, well below the regulatory cap of 23 times. The price was determined through consultation with institutional investors — similar to a bookbuild — rather than setting a pre-agreed figure with the regulator as is usually the case with A-share listings.
FII broke the mould with its IPO, going to the market to find fair value for its stock and lining up a group of sophisticated investors to play a big part in the deal. The fact that the retail tranche was covered by more than 150 times — the level at which full retail clawback is activated — shows how things could be different had the strategic investor tranche not been placed. Clawback was limited to 56.7% of the float. The remaining stock was allocated to institutional investors.
The company ticked all the right boxes with its IPO offering, and has set a template for others to follow. Now all it needs is for its stock to trade strongly in the secondary market when it debuts in Shanghai next month. That will be the real test of its success.