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Hong Kong’s IPO market needs a reset

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By Jonathan Breen
02 Jun 2021

The Hong Kong IPO market saw a scorching start to the year, with a record amount raised on the exchange. But as signs of pressure begin to show, a breather is much needed.

Hong Kong’s bourse has had its best start to the year when it comes to IPOs. By the end of May, companies had raised nearly $15bn from listings, easily surpassing volumes clocked during the same periods over the last few years, shows Dealogic.

However, there are signs that the market may be running out of steam.

The post-listing performance of JD Logistics last week is evidence of a shift in investor sentiment.

The subsidiary of Chinese e-commerce company JD.com floated on May 27 after a HK$24.6bn ($3.2bn) IPO. The stock debuted at HK$46.05, a 14.1% premium to its IPO price, and continued to trade up for a few hours. But it tumbled later to end the day just 3.3% higher.

The IPO, while popular, had been ultimately priced at the bottom of the marketed range at HK$40.36 per share — despite the trade being one of the most hotly anticipated deals of the year.

Its performance is just one example of the volatility some of the newly listed stocks are seeing. Of the four listings in the two months before JD’s deal, only fintech firm Linklogis is up about 7%. One other company is up a paltry 0.5% while two others are trading underwater.

US-listed Chinese firms Autohome, Baidu and Bilibili took close to $6.8bn out of the market in March with secondary listings on the Hong Kong Stock Exchange. But Autohome and Baidu have slipped 13.7% and 22.4% below their offering prices, respectively.

More than half of the listings that raised over $100m so far this year are trading below their issue prices.

This is despite Hong Kong’s benchmark Hang Seng Index gaining 3.92% over the past month to Tuesday’s close, and rising 7.26% year-to-date.

Issuers waiting in the wings should tread carefully. At least six companies are ready to launch IPOs; they have passed the HKEX’s final listing hearing committee and filed updated paperwork, and plan to raise hundreds of millions of dollars each.

Ten more have filed their draft prospectuses and are waiting for the final go-ahead from the bourse.

But they would be better off to wait before hitting the market.

Following the overwhelming number and volume of IPOs this year, investors have become more discerning of issuers and valuations.

While liquidity is still robust, and investor appetite in the primary market has been strong, the absence of a follow-through in the secondary market suggests investors are still digesting the wall of supply.

A small lull in deal flow could help reset expectations among both investors and issuers.

It helps that blackout periods are looming as Hong Kong-listed firms start reporting their quarterly earnings. Investment banks and investors should use this opportunity to take stock of market conditions — see how firms are being valued and if a pricing correction is needed to remove some of the froth in the market.

Taking a step back now will only prove beneficial for IPOs in the longer run.

By Jonathan Breen
02 Jun 2021