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No first-day IPO pop? No problem

Hong Kong_adobe_12May_575
By Jonathan Breen
23 Mar 2021

New Hong Kong-listed companies are increasingly seeing muted aftermarket trading, rather than sweeping gains on their debuts. However, this shouldn’t be mistaken for a dip in investor sentiment in the stock market. It's instead a sign of strength for the bourse.

The Hong Kong Stock Exchange is seeing a shift in investor behaviour.

Of the 13 companies that have listed for more than $100m year-to-date on the bourse, the majority booked gains on the first day of trading. But five of them traded down on debut; three of those listed just in the past month.

Cheerwin Group, Joinn Laboratories and SciClone Pharmaceuticals were all heavily bid by retail investors, on each occasion triggering Hong Kong’s clawback mechanism in full, which reallocated half the stock to the local public investors. They all fell on their debuts and were below their IPO prices as of Tuesday afternoon.

Chinese internet company Baidu’s secondary listing on the HKEX saw a comparatively low turnout from retail accounts. Although they still covered their portion of the deal many times over, final allocations were skewed towards a group of long-only funds and existing shareholders.

That move has paid off. Baidu’s stock began trading on Tuesday and through the day changed hands around 0.1% to 1% above its IPO price of HK$252.00 ($32.45) per share. At the same time, Hong Kong’s benchmark Hang Seng Index was down 1.5%.

It may be tempting for market watchers to label Baidu’s debut as a flop or disappointing, given high hopes for a first-day pop. After all, fellow tech firm Kuaishou Technology’s stock doubled on its debut in February, as did New Horizon Health on its maiden trading day. Numerous other tech and healthcare companies — two of the hottest sectors in the past year — also soared on their debut at the end of 2020.

But many of these early surges were driven by investors looking to capitalise on large gains on the first day of trading and ultimately resulted in volatility.

Kuaishou, for example, was trading at HK$295.40 on Tuesday afternoon, down 6.16% on the day but still up a hefty 157% from its IPO price of HK$115.00. But its stock has whipsawed since its debut last month, to a high of as much as HK$417.80 and a low of HK$250.00. New Horizon Health priced its IPO at HK$26.66 and was up about 125% as of Tuesday afternoon to HK$59.90. While it has not dipped below its listing price, New Horizon Health has gone as low as HK$48.00, and as high as HK$86.55 a share since its debut.

It does make sense that some of the recent aftermarket trading flat to pricing in some cases, under the IPO price in others has caused some worries that investor demand may be petering out for Hong Kong IPOs. But that is unlikely to be the case.

The reality is that the relatively stable debuts show that the listing sponsors’ price discovery during bookbuilding accurately reflected demand and provided a realistic company valuation.

That is attractive for more prudent long-only institutions looking to invest in the medium to long-term growth of an issuer, as opposed to retail investors that typically tend to follow the crowd.

Baidu, for one, is also listed on the Nasdaq, where its American depository shares (ADS) have been trading since 2005. Its ADS gained 3.36% on Monday, closing at $266.13. There is little reason to expect its Hong Kong stock to trade at a big premium to the ADS.

The fact that Baidu’s ADS climbed on Monday, and its Hong Kong shares stayed in the green for most of the day before closing flat, despite a dip in the Hang Seng, is a positive sign for other US-listed Chinese firms considering so-called homecoming listings on the HKEX. Baidu’s stability amid rising US-China tensions following a high-stakes meeting among senior government officials last week, and announcements of sanctions this week, is also significant.

The Hong Kong IPO market is still liquid, but if investors are taking a more cautious, selective approach to firms, that is only to be lauded.

It’s less a sign of them taking a step back from ECM, but more a signal of them paying increasing attention to valuations and the quality of companies getting listed. That can only be a good thing for the stock market in the long run.

By Jonathan Breen
23 Mar 2021