Source: Hong Kong Stock Decoded
Author: Mao Ting
Original title: Caihua Insights|Are there any profitable opportunities for IPOs?
Note: The rise and fall rate in this article is as of 2023-05-31

Investors around the world have experienced it very well recently: capital is becoming more and more rare.

This is because the costs are higher and the need to avoid risks has increased, so capital requires higher returns to cover the cost of taking risks.

For experienced investors, the IPO market is an unverified market, and it is also a market they usually avoid.

From the perspective of trading transactions alone, IPO sellers mainly include initial investors, pre-listing financiers, corporate management, and business founders. Overall, they are all stakeholders with information advantages. In particular, the founders and majority shareholders also serve as management. They have control over the enterprise, and the insider information they know is far beyond the reach of financiers and investors.

A very simple truth: if the company they own is very profitable, and rational economists seeking to maximize profits will not give up their shares unless they can sell for a much higher price than their own psychological price, or the company is not as profitable as everyone sees.

This is the reason why experienced investors, including “stock god” Buffett, have shied away from IPOs.

However, for the general public who do not treat investment as their main business or specialty, IPOs are also attractive: unverified trading usually brings about more volatile games, and there are always “successors” in the market, and everyone is confident that that person is not necessarily me.

From 2020 to early 2022, when capital costs were low, the global IPO market was booming. Flooding of capital, combined with low costs, the stock market is thriving under the impetus of sufficient capital, and the profits earned by integrating capital transactions at almost zero cost are very impressive.

Similarly, capital costs rose in 2022, capital's consideration of investment targets also became stricter, relatively risky new stocks were frowned upon, and the global IPO market was quickly thrown back to its original form. This is the reason why after the European and American interest rate hike cycles began, the IPO market became less active, and its performance was poor.

The global IPO market slumped in 2023

In the first five months of 2023, the amount of IPO financing for US stocks was only 9.3 billion US dollars, or about 65.3 billion yuan, equivalent to only 41.7% of the full year of 2022 and 2.95% of the scale of IPO financing peaked in 2021.

Since the mainland adopted a realistic monetary policy and did not follow interest rate hikes in Europe and the US, the amount of IPO financing in the A-share market in the first five months of this year has more than doubled that of US stocks, reaching 167.2 billion yuan.

In the Hong Kong stock market, which underperformed the stock market, the amount of IPO financing in the first five months of this year was only HK$12.8 billion, or about RMB 11.5 billion, far lower than A-shares and US stocks. The main reason was that the Hong Kong dollar was linked to the US dollar. Therefore, the performance of the Hong Kong stock market was also negatively affected by rising capital costs. In addition, the Hong Kong stock market's performance continued to be poor, and companies interested in listing did not obtain proper valuations, and the listing process had to be suspended.

Global IPO performance in 2023

With the implementation of a registration system that is closer to the market, the fairy tale of signing a steady profit in the A-share market has been rewritten.

Judging from Wind's data, in the first five months of 2023, there were 135 companies that completed their IPOs in the A-share market. There were 21 stocks whose stock prices fell on the first day of listing, or 15.6%, while 41 IPOs fell cumulatively since listing, with a ratio of 30.4%. It can be seen that the A-share IPO market has left the myth of steady profit and has become more effective.

Despite this, A-share IPOs also performed better than US stocks.

According to Wind's data and calculations collected by Caihua News, 103 US stock IPOs were completed in the first five months of 2023 (including 7 IPOs that issued depository receipts), while 50 IPOs have declined cumulatively since listing. The ratio was 48.5%, far higher than the A-share market.

The best performer since listing on the A-share market was the one listed in March of this year$Sichuan Rongda Gold (001337.SZ)$The cumulative increase since listing has reached 402.15%.$Skyverse Technology (688361.SH)$,$Sichuan Biokin Pharmaceutical (688506.SH)$,$Sanbo Hospital Management (301293.SZ)$,$Jiangsu United Water Technology (603291.SH)$The cumulative stock price increases of the like have all more than doubled.

The worst performer was the one listed on the Beijing Stock Exchange$ANDA TE (830809.BJ)$It has dropped 34.77% since listing. Next is the one listed on the GEM$Hubei Hongyuan Pharmaceutical Technology (301246.SZ)$with$Zhejiang Taotao Vehicles (301345.SZ)$The cumulative declines were 33.68% and 33.52%, respectively. However, the worst performing Main Board IPO was listed at the end of March$Fujian Highton Development (603162.SH)$, the cumulative decline was 28.57%.

The industry with the largest amount of IPO funding in US stocks is healthcare, followed by IT. See the chart below.

Among US IPOs, the largest amount of financing was spin-off from Johnson & Johnson's healthcare equipment and services company$Kenvue (KVUE.US)$, see image below.

The best performing US IPOs were real estate investment trusts (REITs)$Peakstone Realty Trust (PKST.US)$Since it was listed at the end of April, the cumulative increase has reached 201.13%. China Securities$Structure Therapeutics (GPCR.US)$The performance was also good. The cumulative increase has more than doubled, as shown in the chart below.

As for the Hong Kong stock market, Wind's data shows that 27 IPOs have been listed since this year, including 2 introduced listed companies, namely China Securities, which has returned,$PING AN (02318.HK)$Affiliated financial services companies$LUFAX (06623.HK)$, and a spin-off from$KARRIE INT'L (01050.HK)$A boutique property developer$KRP DEVELOPMENT (02421.HK)$.

According to Wind statistics, according to statistics from Wind, 15 of the listed IPOs listed after deducting introduction from 2023 have fallen below the issue price, accounting for 60% of the total. The performance is inferior to US stocks and A shares.

Among the IPOs listed this year, those that have performed the best so far are those engaged in cross-border digital marketing services$POWERWIN TECH (02405.HK)$, a cumulative increase of 337.14%; The worst performer was the cloud-based human capital management (HCM) solution platform$BEISEN HOLDING (09669.HK)$, a cumulative decline of 70.74%.

Does the poor performance of Hong Kong stocks mean there's no drama? no! Caihua believes that this is instead an opportunity.

Maybe it's an opportunity for Hong Kong stocks

Whether it was 2020, a “big drain”, or 2023, the “big contraction”, the Hong Kong stock market seriously outperformed US stocks, as shown in the table below.

Since this year, US technology stocks have seen a sharp rebound. The Nasdaq index, which reflects the performance of technology stocks, has risen 23.59%, while the Hang Seng Technology Index, which reflects the performance of Hong Kong technology stocks, has fallen 12.16%.

Looking at the general market, the Dow Jones Industrial Average has dropped 0.72% since this year, while the Hang Seng Index has plummeted 7.82%.

Looking at the valuation, Wind's data shows that the current price-earnings ratio of the NASDAQ index has reached 36 times, while the Hang Seng Technology Index is only 24 times; the price-earnings ratio of the Dow Jones Industrial Average has reached 25 times, while the Hang Seng Index is only 8.6 times. The valuation of Hong Kong stocks is significantly lower than that of US stocks.

As far as rational economists pursue the logic of maximizing benefits, the lower-valued Hong Kong stock market has greater potential opportunities and a wider safety cushion.If the Fed's interest rate hike cycle ends, interest rates stabilize, and the US Treasury's debt ceiling issue is resolved, the performance of Hong Kong stocks may stabilize.

On the other hand, favorable policies are expected to support the recovery of the Hong Kong stock market. Recently, the Chief Executive of the Special Administrative Region has actively led business teams to go abroad and visit various cities in the mainland to attract investment and find businesses, which is conducive to boosting capital inflows.

Furthermore, the SAR government's various initiatives since this year are also conducive to attracting international investment into the Hong Kong market. For example, the policy declaration for developing family office business is expected to use various favorable measures to attract family offices to settle in Hong Kong.Family offices have been active at the forefront of investment in the new economy, unicorns, etc. for the past ten years. Channeling these funds to Hong Kong will make Hong Kong an investment capital for science and innovation projects and will also bring more vitality to the secondary market.

In fact, Hong Kong's IPO market has been quietly active recently. Two companies have already decided to list in June——Jay Chou's concept stock$STARPLUS LEGEND (06683.HK)$An R&D biopharmaceutical company focusing on dermatology that will go public on June 13$CUTIA-B (02487.HK)$It will be available on June 12.

In addition, two companies have passed listing hearings, namely Adicon, which is engaged in medical testing services, and Growatt, the world's third largest photovoltaic inverter supplier.

According to Wind's statistics, Caihua found that there are currently 85 applications “being processed” for Hong Kong stock IPOs, which indicates that there are more companies willing to go public. The distribution of industries is as follows.

As can be seen from the chart, consumer retail, pharmaceuticals and healthcare, and software and services are the industries with the most applications, showing market expectations for a recovery in consumer sentiment after the pandemic, as well as the continuing driving effect brought about by the new listing regulations of the Hong Kong Stock Exchange.

In addition to this, a number of influential companies are rumored to be interested in listing on the Hong Kong stock market, such as recently$BABA-SW (09988.HK)$Structural restructuring will be carried out, and Alibaba Cloud, Cainiao, and Hema will be separately listed.$HKEX (00388.HK)$Or one of the selected locations.

Just now, it was rumored that Nacha Auto's parent company, Hezhong, will be listed on the Hong Kong Stock Exchange, or add another listed new energy vehicle brand to the Hong Kong Stock Exchange.

All in all, good food is about to come, and the good news in the Hong Kong stock market is yet to come.

Editor/Hoten