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Market Spotlight

IPO fatigue hits Hong Kong despite debut boost for JD spinoff

Most of 2021's torrent of listings are trading below their issue price

NARAYANAN SOMASUNDARAM, Nikkei Asia chief banking and financial correspondent | Hong Kong

HONG KONG -- The best start to a year for new equity listings in Hong Kong is being tarnished by the rising number of offers that are slumping on debut, raising questions over the continued strength of the listing boom.

While JD Logistics rose by as much as 18% on Friday when it made its debut after a $3.1 billion initial public offering, it is proving the exception. Two-thirds of the new listings this year are in the red and on average have tumbled by a fifth, the worst among major global exchanges. These listings combined account for almost half the funds raised in Hong Kong this year.

The slump has become more pronounced over the past three months, with 12 of the 18 listings during that period trading below the issue price.

Analysts say companies have to recalibrate their valuation expectations or risk slowing the market.

One cause of the poor performance has been investor caution toward riskier assets because of fears that a surge in inflation would force global central banks to unwind their pandemic-induced stimulus measures earlier than expected. That would be bad for stocks.

But investors and analysts also cite investor fatigue and lofty valuations. Volumes of listings in Hong Kong have set new annual records since 2018.

"The poor performance is a signal that the initial public offering cycle is coming to an end and investors, instead of betting blindly on any deal like last year, need to pick based on fundamentals and valuations," said Ke Yan, an IPO analyst at DZT Research in Singapore. "Companies are still trying to price high, and something has to give."

Previously conditions were more benign. Ultraloose monetary policy, flush liquidity and the hunt for yield propelled equity markets and made it attractive for companies to sell shares. And investors large and small benefited. For fund managers, new listings in Hong Kong gave them access to growth stocks that they were keen to hold. Meanwhile mom and pop investors could anticipate making money from a post-listing share price surge. Even if they had borrowed money to buy into an offering, they could expect to more than cover the cost of this margin financing.

Recent poor performance has left investors out of pocket and is threatening to break this cycle, which in effect underwrote the listing surge. While previous years have also seen a clutch of companies that have dropped below the issue price, this time the larger ones are faring no better, denting the confidence of investors who flocked to them.

Among well-known names that are trading below the offer price are online search giant Baidu, which has lost a quarter of its value since listing in March. Video platform Bilibili, which fell on debut, inched above its issue price on Friday. Other big names that have so far burned investors include Chinese online car platform Autohome and SF Real Estate Investment Trust, a unit of China's largest delivery company, SF Holdings.

That JD Logistics, the logistics arm of Chinese e-commerce giant, bucked the trend on its debut on Friday was partly because the company took a more "sanguine view" of its valuation compared to other recent issuers, according to a person involved in the deal.

Despite the IPO attracting strong bids -- equivalent to 716 times the amount of retail shares on offer and 10.8 times the institutional portion -- JD Logistics priced close to the bottom of the marketed range.

That was also after the company had dropped the valuation by over 10% from initial expectations.

"JD Logistics is a good example of the way forward to keep the market going," said the person who worked in the transaction. "Bring a fundamentally strong, growing company and leave some on the table for investors. Then you will certainly be rewarded."

In terms of the total value of retail bids, demand for JD Logistics' IPO was the second-best for a large offering this year. It was only behind short video app Kuaishou, which shattered all subscription records in Hong Kong, surged 160% on debut and is still up 80%.

Some 35 companies have raised $23.7 billion in Hong Kong so far in 2021, up from $3.5 billion in the same period last year, according to data compiled by Dealogic. Of those companies, 21 -- which between them raised $10.2 billion -- are quoting below the issue price, the data shows.

Globally, among 1,065 companies, which have raised $280 billion, there are 423 companies -- which raised $115 billion -- that are trading below issue price.

Hong Kong's falls have also been steeper. Companies whose shares have declined below offer price are down by an average of 23% in Hong Kong, compared with 8% or lower for major markets including the Nasdaq and the New York Stock Exchange, Dealogic data shows.

Hong Kong's new issuance is almost entirely made up of mainland Chinese companies, and the negative sentiment from tensions between Beijing and Washington, monetary tightening in China, a regulatory crackdown on the country's technology sector and rising corporate defaults have also weighed on sentiment.

The MSCI China Index, which tracks the nation's stocks listed in mainland markets, Hong Kong and other foreign exchanges such as the Nasdaq and NYSE, has dropped 0.6% this month and is flat for the year.

Some investors such as Ronald Chan, chief investment officer of Hong Kong-based asset manager Chartwell Capital, expect some of the headwinds for IPOs to dissipate. Record levels of liquidity in the city along with likely listings for big names could keep the cycle churning, he said.

Among expected IPO candidates are Tencent-backed WeDoctor, one of China’s biggest online health-care startups, and game developer NetEase’s music streaming platform Cloud Village. Meanwhile U.S.-listed companies including VIP Shop and Tencent Music are thought to want secondary listings in Hong Kong.

However, Chan acknowledged that uncertainty in the tech sector from Beijing's anti-monopoly laws and data management crackdown, along with a change in the macroeconomic backdrop, is impacting primary share issuance.

"Inflation and interest rates are back on investors' minds, and that impacts growth companies that are not yet turning over a profit," said Chan, who is also a member of the Hong Kong Stock Exchange's listing committee. "The rotation from growth to traditional-economy stocks with the expectation of a post-COVID 19 recovery is also an attractive proposition, rather than betting on red-hot IPOs."

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