Tu Bug Creative/Contributed by Wu Shaolong/Table Data source: Wind
Securities Times reporter Wu Shaolong Zhuo Yong
Pocket IPOs are quietly popular in Hong Kong stocks.
Recently, Wicresoft Brain Sciences successfully landed on the Hong Kong stock market, as the leading company in the territory's neurointerventional segmentation track, this enterprise only issued about 2% of the new shares, and the net amount of IPO fundraising is only 278 million Hong Kong dollars. In addition, the vascular intervention surgery robot Runmaid previously listed in Hong Kong, also issued only about 2% of the new shares.
Wind statistics show that since the beginning of this year, as of the end of July, there have been 15 Hong Kong-listed companies listed in the initial public offering of shares accounted for less than 10 percent of the total shares, of which six companies less than 5 percent; and the whole of last year, the two data were 18 and 2, respectively.
Industry analysis, in the IPO enterprise, pocket issue may be in a certain period of time to amplify the effect of the liquidity premium, but when the release of the peak of the flood, by the not fully gaming the stock price supported by the market value can withstand the test of the release of the test, need to put a question mark.
The Hong Kong stock market is a mature market, dominated by institutional investors, and if the proportion of the relevant companies issued is very low, it will attract the attention of institutions and research. Baxter securities strategy analyst Cen Zhiyong said in an interview with the Securities Times reporter, regardless of whether the pocket IPO, these companies listed on the stock price performance, but also have to look at their own fundamentals and performance, the market and then to judge its value.
Hong Kong IPO cooling
Fiery Hong Kong IPOs cooled down in 2022.
Wind statistics show that as of the end of July this year, the Hong Kong IPO market *** there are 42 companies listed, of which 35 companies for the initial listing, 2 for the Hong Kong SPAC listing, 5 for the introduction of the way not to issue new shares of the company listed. 42 Hong Kong IPOs to raise a total of about 37.7 billion Hong Kong dollars.
Market statistics for 2021 released by the HKEx show that there will be 98 IPOs in the Hong Kong stock market in 2021***, raising HK$328.8 billion, which is a higher level than in previous years.
Compared to last year's IPO year, the first seven months of this year, the number of IPOs in Hong Kong and the amount of money raised accounted for only 43% of last year's annual and 11%, both figures are not more than half.
Deloitte China Capital Markets Services recently released a research report on the cold IPOs in Hong Kong. The report pointed out that, affected by the Fed's drastic interest rate hike and downsizing, and the ongoing conflict between Russia and Ukraine, Hong Kong's IPO market has followed the trend of the global IPO market so far this year, with the total amount of financing and the number of IPOs dropping sharply. On a half-yearly basis, the number of Hong Kong IPOs in the first half of this year is at a low level for the same period since 2013, while the amount of funds raised is at a low level for the same period since 2012.
The report further pointed out that the slowdown in the overall Hong Kong IPO market and declining valuations, coupled with the lack of mega and large-scale new economy IPOs on the market, led to a significant slippage in total fundraising.
The big slide in IPO performance is a major factor behind the cold IPOs in Hong Kong.
Securities Times reporter statistics found that, excluding five introduction of new shares listed, the remaining 37 Hong Kong IPOs since the listing, the average share price decline of 9.7%. In comparison, 66 new stocks in Hong Kong realized IPOs in the first seven months of 2021, and the average gain after listing was 18.41 percent as of the end of July that year; in 2020, it was 13.59 percent.
Deloitte statistics also show that, analyzed in terms of the overall average first-day return of IPOs, the average first-day return of IPOs in the first half of this year fell to -3.7 percent, much lower than the 31.1 percent in the same period last year.
Declining returns have also caused many proposed Hong Kong IPO companies to back off. According to HKEx data, in the first five months of this year, a total of 97 listing applications were received, down 30% year-on-year; 141 listing applications were under processing, down 13% year-on-year. There are even a number of proposed IPOs that chose to withdraw at the doorstep from January to May, 16 proposed Hong Kong IPOs have received in-principle IPO approval but did not go public during the validity period of their applications, an increase of seven compared with nine in the same period last year.
Pocket IPOs are quietly becoming popular
We are more confident in the companies we are investing in, so even if there is an expectation of a break-up, it won't change our offering plan. The head of investment banking at a medium-sized Chinese brokerage firm told reporters.
In the face of a cooling Hong Kong IPO market, a few companies have chosen to press the pause button, but more proposed IPOs are still on track and preparing to land on the Hong Kong stock market.
The phenomenon of pocket-sized IPOs has emerged.
The so-called pocket IPO refers to the compression of the number and percentage of new shares to be issued into a smaller range when they go public.
Wind data show that, excluding SPAC listed and introduced listed companies, this year, as of the end of July, there have been 15 Hong Kong-listed companies debut number of shares of the total share ratio of less than 10%, of which six companies less than 5%, the two accounted for 43% and 17%, respectively.
Many years engaged in overseas listing business Hu lawyer said in an interview with the Securities Times reporter, the Hong Kong Stock Exchange listing rules and related guidelines do not provide for a mandatory minimum issuance ratio or minimum fund-raising scale, which mainly sets the threshold of the ratio of shares held by the public, the focus is more focused on ensuring the circulation. Therefore, a situation where less than 5% of Hong Kong shares are issued is also in line with the HKEx Listing Rules.
According to the rules of the Hong Kong Stock Exchange, the public shareholders of a listed company are required to hold 25 percent of the total share capital at the time of listing, which can be reduced to 15 percent if the market capitalization at the time of listing exceeds HK$10 billion.
What is a public shareholder? The HKEx stipulates that three categories of persons cannot be categorized as public shareholders: core associates of the listed company, any person whose purchase of shares in the listed company is directly or indirectly financed by core associates, and persons who habitually take instructions from core associates to dispose of their shares. Old shares issued prior to the listing are also public shareholders as long as they do not fall within the above scope. Conversely, an insufficient percentage of public shareholding will need to be cobbled together by new shareholders from the IPO.
This also means that the IPO new shares issued as a proportion of the total share capital, limited by the proportion of public shareholders in the old shares. The ratio of new shares issued, under the condition of meeting the public shareholders' share, there is room for adjustment. The higher the proportion of public shareholders in the old shares, the proportion of new shares issued can be reduced accordingly.
Taking a look at the historical data of IPOs in Hong Kong, the pocket IPO situation is actually not rare.
Data show that since 2000, the Hong Kong stock IPO issuance ratio of less than 10% of the cumulative **** there are 59 stocks. Among them, the first seven months of 2021 to 2022 combined **** 33, accounting for 55.9%. In addition, since 2000, Hong Kong IPO issuance ratio of less than 5% of the 15, the first seven months of this year appeared in the number of 40%.
New economy companies compromise
Carefully combing the Hong Kong stock market in the first seven months of this year, 15 IPO issuance ratio of less than 10% of the listed companies, the reporter found that most of these companies for the new economy companies.
Four of them are in the software services industry; four in the healthcare equipment and services industry; and three in the pharmaceuticals and biotechnology industry. Together, these three industries ****11 companies, or 73 percent.
As the meat and potatoes of the capital markets, why are new economy companies piling up and choosing pocket IPOs?
Industry insiders interviewed by the reporter generally believe that the new economy enterprises piled up pocket IPO, in addition to the impact of changes in investment sentiment in the secondary market, but also affected by two factors: one is closely related to the enterprise's own business development planning, and the second is based on market value management considerations.
Lawyer Hu said, many enterprises may not be listed for the purpose of large amount of financing, and their own needs for listing and financing may not be so urgent.
Some companies are issuing for the sake of issuing. The aforementioned Chinese brokerage investment banking business to the reporter, this part of the enterprise to Hong Kong listing is not in order to lsquo; financing rsquo; maximize, they are more from the enhancement of the corporate brand as well as to promote the internationalization of the business needs to consider. Over the past year, we have seen a number of companies that chose to list on exchanges as far away as Singapore, Switzerland and London, and their financing amounts are also relatively low.
In terms of fund-raising, many Hong Kong pocket IPOs have raised even less than what they raised before going public.
Taking Wicresoft Brain Sciences as an example, the company's IPO only issued about 2 percent new shares, corresponding to a net fundraising of only HK$278 million. In contrast, Wicresoft's Pre-IPO round last year raised as much as US$150 million (about HK$1.2 billion). The size of the open-market fundraising was only a fraction of the amount raised in the primary market.
Similarly, there is also Runmead-B. The prospectus shows that the company's Hong Kong IPO is a global offering of 23,348,000 shares at an offer price of HK$6.24 per share, and that its issue of new shares accounts for 2.04 percent of its total share capital, *** raising HK$149 million. Compared with the pre-IPO Series D financing of US$72 million (about HK$565 million), the Rummed-B HK IPO raised only 26% of the Series D financing.
It should be noted that the lower the percentage of new shares issued, the greater the constraints on stock trading liquidity. In this case, a relatively small amount of capital can keep a company's share price stable or even drive it up, thus amplifying the effect of the liquidity premium and stabilizing the company's market value and valuation in a downturn.
Ji Wenhe, partner in charge of Deloitte China's listing practice in its capital market services group, said in an interview that the valuations of listed companies may also be affected and adjusted downward against the backdrop of a less-than-ideal market atmosphere. Deloitte China has noticed that some companies have chosen to compress their issuance ratios when they go public, where permitted, to make the company's share price a bit less volatile.
Because most of the company's shares still fall into the hands of major shareholders or institutional investors, they won't speculate excessively in the market, which is helpful in stabilizing the share price and the company's market value. Ji Wenhe explained.
From the situation of a small number of companies, the stable valuation of the back points to the high valuation of the primary market.
The primary market was very hot in the first two years, resulting in the valuation of many companies was raised to a high level, the institutions behind the demand for exit, in order to continue to retain the valuation after the listing, can only compress the scale of IPO financing. The former Chinese brokerage investment banking business said, in any case, the enterprise listed on the primary market investors is a kind of appeasement, now the primary market investment amount has been far greater than the amount of withdrawal, LP (funders) more assessment of the fund's DPI (capital dividend rate) rather than IRR (internal rate of return), so as soon as possible to exit is conducive to locking up the fund's DPI. and to create the premise of the DPI is the enterprise The premise of creating DPI is the listing of enterprises, so they show more urgency in listing enterprises.
The reporter learned that in the Pre-IPO stage, many enterprises will sign IPO betting agreements with VC organizations. Generally speaking, if the enterprise concerned can not complete the listing within the specified time, according to the agreement, the enterprise needs to pay a higher price to buy back the shares held in the hands of the VC institutions, or to compensate them for more equity. With multiple factors intertwined, pocket IPOs have also become a hopeless choice for these companies.
The small percentage offering may be a compromise in the current situation. Mr. Hu also said that because of the high valuation of some of the companies' pre-listing financing, the existing institutional shareholders also have a threshold requirement for the valuation of the issue, which generally makes it difficult to accept a discounted issue.
For primary market investors, the IPO of a portfolio company is a strategy and opportunity for them to exit their capital. As for how much money can be raised in an IPO, it may not be their first concern, Cen Zhiyong said.
Pocket IPOs hard to support share prices
Can pocket IPOs play a stabilizing and supporting role for the share prices of listed IPOs or not? From the overall actual situation, its role is limited.
Statistics show that since this year, the Hong Kong stock 15 debut ratio of less than 10% of the stocks listed on the first day of the average decline of 6.67%. Among them, only four of the day's share price closed up, while the same four fell by more than 15 percent. If you extend the observation period, the average share price of these 15 Hong Kong stocks fell 16.73 percent since their listing through the end of July, with the average decline widening over time.
Comparing the 20 Hong Kong stocks that have debuted at more than 10% so far this year, the average gains on the first day and since listing through the end of July were 6% and -4.87%, respectively. Both figures outperformed the aforementioned 15 pocket IPO Hong Kong stocks.
Signs that the individual pocket IPOs have not performed as well as expected are already being seen in the subscription phase of the IPOs' public offerings.
Data shows that the average IPO subscription multiple for the 15 Hong Kong stocks with less than 10 percent initial public offerings so far this year is 11 times, with the highest being Wicresoft Brain Science at 45 times and Xuanwu Cloud ranking second at 42 times. In addition, two companies, Innovative Qi Zhi and Ruike Bio-B, also had subscription multiples of more than 10 times. And for the whole of last year, the average public offering subscription multiple for Hong Kong IPOs was 238 times.
It's important to note that, from a long-term perspective, a compromise like a pocket IPO implies a number of problems.
The price discovery function of the capital market is based on the background of a full game. If the proportion of new shares issued is low, the trading activity of the stock will be affected, which may lead to the deviation of the trading price of the enterprise. Especially when the release of the peak of the flood, the listed company's stock liquidity due to the inability to carry a large number of cuts, the stock price will fluctuate dramatically.
Shangtang, which saw its share price plummet, is a notable example.
On December 30, 2021, as a leading domestic artificial intelligence company, Shangtang officially landed on the Hong Kong Stock Exchange. The company's IPO saw the issuance of only 5% of new shares, raising net proceeds of HK$5.552 billion. In this 5% of new shares, about 3% of new shares are attributed to cornerstone investors, 0.7% of new shares are attributed to the old shareholders Shanghai International, all with lock-up time; and those that can be bought in the secondary market account for only about 1%.
With such an issuance model, Shangtang's stock price has soared continuously since its listing, and the company's highest market value has exceeded the HK$320 billion mark. As of June 29 this year, the company's market value basically can be stabilized above 200 billion Hong Kong dollars. However, 200 billion Hong Kong dollars market capitalization, corresponding to only a daily average of 219 million Hong Kong dollars in turnover, if you exclude the company's performance in the first month of listing, the company's average daily turnover of less than 100 million Hong Kong dollars in the latter five months.
The pocket-sized IPO brought a nearly 1,000-fold difference in market capitalization and average daily turnover, but also sowed hidden dangers.
On June 30 this year, Shangtang ushered in the release of shareholders. Although the business soup in advance to foresee the market sentiment, the company's chairman and CEO Xu Li, chief scientist Wang Xiaogang, executive director Xu Bing and other co-founders opened to announce additional holdings of shares of the restricted period, but these initiatives have little effect. On that day, superimposed on some changes in the company's fundamentals, Shangtang shares plummeted 46.77%, and the market value evaporated HK$92.125 billion in a single day. As of now, the market value of business soup has fallen below the 80 billion Hong Kong dollar mark.
Lawyer Hu summarized some of the potential drawbacks of the pocket IPO model to reporters. According to her, there are three major potential problems with this issuance model: first, the issuance scale is limited, and the amount of corporate financing is restricted; second, it affects market expectations, which may cause some volatility in future share prices; and third, such companies may become shorting targets in the future.
Large public funds and hedge funds will take into account the size of the liquidity disk when selecting stocks, and it will be difficult for companies with too few shares outstanding to enter their underlying pool, and this may also form a vicious circle. The former Chinese brokerage investment banking business head told reporters.
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