Euromoney, April 6 2017
The Chinese brokerage’s fixed-price IPO in Hong Kong is being hailed as a step forward for a mainland-distorted market. But is it?
Let’s be clear: Guotai Junan Securities Co’s fixed-price Hong Kong IPO, which begins trading Tuesday (April 11), is not a solution to the exchange’s price-discovery problems. It is a symptom of them. But it might, at least, be pointing us in a better direction.
The mainland brokerage’s HK$16.5 billion ($2.1 billion) float is unusual for having dispensed with the standard price range bookbuilding process and gone out with a single offer price.
To understand the reasoning for this, one has to look back over the past two years of Hong Kong IPOs, which have been characterized by high issuance volume and dreadful performance. Hong Kong had more listings than any other exchange last year – $24.5 billion. But, according to local online broker Boom.com, out of 110 listings since January 2016, 50 are still below their listing price as of April 6, despite the Hang Seng having risen 15% over that time and almost 25% since lows in February 2016.
Performance has been so bad because many deals – chiefly from mainland enterprises and particularly state-owned ones – have simply priced at the wrong level. This is due to the distortion effect of Chinese onshore money, which manifests itself in two ways.
One is the so-called friends-and-family effect, wherein a mainland issuers decides what price they want and enlists friendly and chiefly domestic enterprises to commit to that price, even though that’s not what the international institutional market would pay based on an analysis of the issuer’s merits.