Securities Times reporter Wu Shaolong Zhuo Yong
"Pocket" IPOs are quietly popular in Hong Kong stocks.
Recently, MicroPort Brain Science has successfully landed on the Hong Kong stock market. As a leading company in the domestic neurointerventional sub-segment, this company only issued about 2% of new shares, and the net amount of IPO funds raised was only HK$278 million.
In addition, Runmed, which makes vascular interventional surgery robots, only issued about 2% of new shares when it went public in Hong Kong.
Wind statistics show that since the beginning of this year, as of the end of July, there have been 15 Hong Kong-listed companies whose IPO shares accounted for less than 10% of the total shares, of which 6 companies were less than 5%; while last year, the two figures were 18 home and 2.
Industry analysis shows that for IPO companies, "pocket" issuance may amplify the effect of the liquidity premium for a certain period of time, but when the "peak" of lifting the ban comes, can the market value supported by the stock price that has not been fully gamed withstand it? The lifting of the ban test requires a question mark.
"The Hong Kong stock market is a mature market, dominated by institutional investors. If the proportion of related companies' issuance is very low, it will attract the attention and research of institutions." Baihui Securities Strategy Analyst Cen Zhiyong was interviewed by a reporter from Securities Times Said that, whether or not a "pocket" IPO, the stock price performance of these companies after listing depends on their own fundamentals and performance, and the market will judge its value.
Hong Kong IPOs cool down
Hot Hong Kong IPOs cool off in 2022.
According to Wind statistics, as of the end of July this year, a total of 42 companies were listed in the Hong Kong IPO market, of which 35 were IPOs, 2 were Hong Kong SPACs, and 5 were companies that did not issue new shares by way of introduction.
42 Hong Kong stock IPOs raised a total of about HK$37.7 billion.
According to the 2021 market statistics released by the Hong Kong Stock Exchange, there will be 98 IPOs in the Hong Kong stock market in 2021, raising funds of HK$328.8 billion, which is a high level over the years.
Compared with last year's IPO year, in the first seven months of this year, the number of Hong Kong stock IPOs and the amount of funds raised only accounted for 43% and 11% of last year's full year, neither of which was more than half.
Deloitte China Capital Market Services Department recently released a relevant research report on the cold IPO of Hong Kong stocks.
The report pointed out that the Hong Kong IPO market has followed the trend of the global IPO market since the beginning of this year, and the total amount and quantity of financing have fallen sharply due to the substantial interest rate hike and balance sheet reduction by the Federal Reserve and the ongoing conflict between Russia and Ukraine.
Calculated on a semi-annual basis, the number of new shares in Hong Kong stocks in the first half of this year was the lowest since the same period in 2013; the amount of funds raised was the lowest since the same period in 2012.
The report further pointed out that the overall slowdown of the Hong Kong IPO market and the decline in valuations, coupled with the lack of super-large and large-scale new economy IPOs, led to a significant decline in total financing.
Behind the cold IPO of Hong Kong stocks, the decline in the performance of new stock listings is an important factor.
According to statistics from Securities Times reporters, after excluding the 5 new stocks introduced to the market, the remaining 37 new Hong Kong stocks have experienced an average price drop of 9.7% since their listing.
In contrast, in the first seven months of 2021, 66 new stocks in Hong Kong stocks achieved IPOs. As of the end of July of that year, the average increase was 18.41%; in 2020, it was 13.59%.
Deloitte statistics also show that, based on the analysis of the average return on the first day of the overall IPO, the average return on the first day of listing in the first half of this year dropped to -3.7%, far lower than the 31.1% in the same period last year.
The decline in returns has also caused many companies planning to IPO in Hong Kong stocks to "retreat".
According to data from the Hong Kong Stock Exchange, in the first five months of this year, a total of 97 listing applications were received, a year-on-year decrease of 30%; 141 listing applications were being processed, a year-on-year decrease of 13%.
There are even many companies that plan to go public and choose to "exit" at the door. From January to May, 16 companies that plan to IPO in Hong Kong have obtained IPO approval in principle, but they have not listed within the validity period of the application, compared with 9 companies in the same period last year. 7 more.
'Pocket' IPOs are quietly popular
"We have more confidence in the companies we invest in, so even if there is an expectation of a breakout, we will not change our issuance plan." The person in charge of the investment banking business of a medium-sized Chinese-funded securities firm told reporters.
In the face of the cooling Hong Kong stock IPO market, a few companies chose to press the pause button, but more IPO companies are still preparing to enter the Hong Kong stock market step by step.
The phenomenon of "pocket" IPOs followed.
The so-called "pocket" IPO refers to compressing the number of new shares and the ratio of issuance to a smaller range when new shares are listed and issued.
Wind data shows that after excluding SPAC listing and introduction of listed companies, this year, as of the end of July, there have been 15 Hong Kong-listed companies whose IPOs accounted for less than 10% of the total shares, of which 6 companies were less than 5%, and the two accounted for than 43% and 17%.
Lawyer Hu, who has been engaged in overseas listing business for many years, said in an interview with a Securities Times reporter that the listing rules and relevant guidelines of the Hong Kong Stock Exchange do not stipulate a mandatory minimum issuance ratio or minimum fundraising scale. They mainly set the shares held by the public. Compared with the threshold, the focus is more on "guaranteing circulation".
Therefore, it is also in line with the Hong Kong stock listing rules that the proportion of Hong Kong stock issuance is less than 5%.
According to the rules of the Hong Kong Stock Exchange, when a listed company is listed, its public shareholders must hold 25% of the total share capital. If the market value at the time of listing exceeds HK$10 billion, the shareholding ratio can be reduced to 15%.
What is a public shareholder?
The Hong Kong Stock Exchange stipulates that three types of persons cannot be classified as public shareholders: the core related persons of the listed company, any person who is directly or indirectly funded by the core related persons to purchase the shares of the listed company, and those who routinely follow the instructions of the core related persons to dispose of the shares.
As long as the old shares that have been issued before listing do not fall within the above scope, they also belong to public shareholders.
Conversely, the insufficient public shareholding ratio needs to be met by new IPO shareholders.
This also means that the proportion of IPO new shares to the total share capital is limited by the proportion of public shareholders in the old shares.
There is room for adjustment in the proportion of new shares issued under the condition that the proportion of public shareholders is satisfied.
The higher the proportion of public shareholders in the old shares, the lower the proportion of new shares issued.
Looking at the historical data of Hong Kong stock IPOs, "pocket" IPOs are actually rare.
Data show that since 2000, there have been a total of 59 individual stocks with an IPO ratio of less than 10% in Hong Kong stocks.
Among them, there are 33 companies in the first seven months from 2021 to 2022, accounting for 55.9%.
In addition, since 2000, there have been 15 IPOs with a proportion of less than 5% of Hong Kong stock IPOs, and 40% of them have appeared in the first seven months of this year.
The Compromise Choice of New Economy Enterprises
After carefully sorting out the 15 listed companies in Hong Kong stocks with an IPO ratio of less than 10% in the first seven months of this year, the reporter found that most of these companies are new economy companies.
Among them, there are 4 companies in the software service industry; 4 companies in the healthcare equipment and service industry; and 3 companies in the pharmaceutical and biotechnology industry.
These three industries have a total of 11 companies, accounting for 73%.
As the "sweet pastry" of the capital market, why do new economy companies get together and choose "pocket" IPOs?
Industry insiders who were interviewed by reporters generally believed that the new economy enterprises getting together in "pocket" IPOs was not only affected by changes in investment sentiment in the secondary market, but also affected by two factors: first, it was closely related to the company's own business development plan; second, it was affected by two factors. Based on market value management considerations.
Lawyer Hu said that the purpose of listing many companies may not be entirely for large-scale financing, and their own needs for listing financing may not be so urgent.
"Some companies are issued for the purpose of issuance." The person in charge of the investment banking business of the aforementioned Chinese securities firm introduced to the reporter, "These companies are not listed in Hong Kong for the purpose of maximizing the 'financing amount', they are more about enhancing the corporate brand and promoting the international business. This year, we have seen many companies that choose to go to Singapore, Switzerland, London and other exchanges for listing, and their financing amount is relatively low.”
Judging from the amount of funds raised, many Hong Kong stock "pocket" IPO funds raised are even less than the amount of financing before listing.
Taking MicroPort Brain Science as an example, the company only issued about 2% of new shares in this IPO, corresponding to a net fundraising amount of only HK$278 million.
In contrast, MicroPort Brain Science’s Pre-IPO round financing amounted to US$150 million (about HK$1.2 billion) last year.
The scale of fundraising in the public market is only a fraction of the amount raised in the primary market.
A similar situation exists with Runmed-B.
According to the prospectus, the company offered 23.348 million shares globally in the Hong Kong IPO at a price of HK$6.24 per share, and its new shares accounted for 2.04% of the total share capital, raising a total of HK$149 million.
Compared with the US$72 million (about HK$565 million) in the D round of financing before the listing, the funds raised in the Hong Kong stock IPO of Runmed-B are only 26% of the D round of financing.
It should be noted that the lower the proportion of new shares issued, the greater the restriction on the liquidity of stock trading.
In this case, a relatively small amount of capital can maintain the stability of the company's stock price and even drive the stock price to rise, thus amplifying the effect of the liquidity premium and stabilizing the company's market value and valuation level when the market atmosphere is relatively sluggish.
In an interview with reporters, Ji Wenhe, a partner in charge of the listing business of Deloitte China Capital Markets Service Department, said that in the context of a less-than-ideal market atmosphere, the valuation of listed companies may also be affected and lowered.
Deloitte China has noticed that when some companies go public, they choose to compress the issuance ratio when allowed, so as to reduce the volatility of the company's stock price.
"Because most of the company's shares are still in the hands of major shareholders or institutional investors, they will not speculate excessively in the market, which is helpful for stabilizing the stock price and the company's market value." Ji Wenhe explained.
Judging from the situation of a small number of companies, the backside of the stable valuation points to the high valuation of the primary market.
"The primary market was very hot in the first two years, which led to the valuation of many companies being raised to a higher level. The institutions behind them have requests to withdraw. In order to continue to maintain the valuation after listing, the scale of IPO financing can only be reduced." The person in charge of the investment banking business of the securities company said, "In any case, the listing of enterprises is a kind of comfort to investors in the primary market. Now the investment in the primary market is far greater than the withdrawal amount, and the LP (investor) will further evaluate the DPI of the fund. (capital dividend rate) rather than IRR (internal rate of return), so exiting as soon as possible is conducive to locking in the DPI of the fund. The premise of creating DPI is that companies go public, so they are more urgent for companies to go public.”
The reporter learned that in the Pre-IPO stage, many companies will sign IPO gambling agreements with venture capital institutions.
Generally speaking, if the relevant company cannot complete the listing within the specified time, according to the agreement, the company needs to pay a higher price to repurchase the shares held by the venture capital institution, or compensate them for more equity.
Multiple factors are intertwined, and "pocket" IPO has also become a helpless choice for these companies.
"A small-scale issuance may be a compromise choice under the current situation." Lawyer Hu also said that because some companies have high financing valuations before going public, existing institutional shareholders also have threshold requirements for issuance valuations, which are generally unacceptable. Issue at a discount.
"For investors in the primary market, the IPO of the invested company is a strategy and opportunity for them to withdraw their funds." Cen Zhiyong said, "As for how much money can be raised by the listing, it may not be their first concern."
'Pocket' IPO struggles to support stock prices
Can the "pocket" IPO play a stable and supportive role in the stock price of new listed stocks?
From the overall actual situation, its role is limited.
Statistics show that since the beginning of this year, the 15 Hong Kong stocks with an initial listing ratio of less than 10% have an average decline of 6.67% on the first day of listing.
Among them, only 4 stocks closed up on the day, and 4 stocks fell by more than 15%.
If the observation period is extended, the average share price of these 15 Hong Kong stocks has fallen by 16.73% since their listing as of the end of July, and the average decline has expanded with the extension of time.
Comparing the 20 Hong Kong stocks with a IPO ratio of more than 10% since the beginning of this year, the average increase on the first day and since the end of July was 6% and -4.87% respectively.
Both data outperformed the aforementioned 15 "pocket" IPO Hong Kong stocks.
The listing performance of individual stocks in the "pocket" IPO failed to meet expectations, and there were "signs" in the subscription stage of the public offering of new shares.
The data shows that the average subscription ratio of the 15 Hong Kong stocks with a IPO ratio of less than 10% since the beginning of this year is 11 times.
In addition, the subscription multiples of Chuangxinqizhi and Ruike Bio-B are also more than 10 times.
In the whole of last year, the average subscription ratio of Hong Kong stock IPOs was 238 times.
It's important to note that compromises like "pocket" IPOs have implications in the long run.
The price discovery function of capital market is based on the background of full game.
If the proportion of new shares issued is low, the trading activity of the stock will be affected, which may lead to deviations in the trading price of the company.
Especially when the "peak" of lifting the ban comes, the stock price of listed companies will fluctuate violently because the stock liquidity of listed companies cannot bear a large reduction in holdings.
SenseTime, whose stock price has fallen sharply before, is one notable example.
On December 30, 2021, as a leading enterprise in artificial intelligence in China, SenseTime officially landed on the Hong Kong Stock Exchange.
The company issued only 5% of its new shares at the time of its IPO, raising a net amount of HK$5.552 billion.
Among the 5% of the new shares, about 3% of the new shares belong to cornerstone investors, and 0.7% of the new shares belong to the old shareholder Shanghai International, all of which have a lock-up time; and only about 1% can be bought in the secondary market.
Under such an issuance model, the stock price of SenseTime has skyrocketed since its listing, and the company's highest market value has also exceeded the HK$320 billion mark.
As of June 29 this year, the company's market value has basically stabilized above HK$200 billion.
However, under the market value of 200 billion Hong Kong dollars, the corresponding daily average turnover is only 219 million Hong Kong dollars. If the performance of the company in the first month of listing is excluded, the company's average daily turnover in the next five months is less than 100 million Hong Kong dollars.
The "pocket" IPO brought SenseTime a difference of nearly 1,000 times in market value and average daily transaction value, and also buried hidden dangers.
On June 30 this year, SenseTime ushered in the lifting of the ban by shareholders.
Although Shang Tang anticipated the market sentiment in advance, the company's chairman and CEO Xu Li, chief scientist Wang Xiaogang, executive director Xu Bing and other co-founders announced additional restrictions on the sale of their shares at the opening of the market, but these measures had little effect.
On the same day, with some changes in the company's fundamentals, Shangtang's stock price fell 46.77%, and its market value evaporated by 92.125 billion Hong Kong dollars in a single day.
Up to now, the market value of SenseTime has fallen below the HK$80 billion mark.
Lawyer Hu summarized some potential drawbacks of the "pocket" IPO model to reporters.
She believes that there are three potential problems with this issuance model: first, the issuance scale is limited, and the amount of corporate financing is limited; second, it affects market expectations, which may cause certain fluctuations in future stock prices; third, these companies may become short-selling targets in the future.
"When selecting stocks for large public funds and hedge funds, they will consider the size of the circulating market. If the number of circulating shares of companies is too small, it is difficult for companies to enter their target pool, and this may also form a vicious circle." The person in charge of the investment banking business of the securities firm told reporters.