How to Lose $20,000 in Hong Kong's IPO Slot Machine

(Bloomberg) -- Any stock market is a dead pool without IPOs. But too many share sales can give investors indigestion.

Take Ping An Healthcare & Technology Co., or Good Doctor. It struggled on its first day on Friday, despite being 653 times oversubscribed. Its performance is in sharp contrast to Tencent Holdings Ltd. spinoff China Literature Ltd., which soared 86 percent when it debuted in November.

Hong Kong's private bankers must have been making frantic calls to try and explain the result. Whereas some wealthy individuals netted $90,000 from China Literature, those hoping for a similar windfall with Good Doctor were sorely disappointed.

In Good Doctor's retail tranche, 299 investors applied for 5.2 million shares each, the maximum allowed. At HK$54.80 apiece, that's HK$285 million ($36 million) upfront.

Up to 90 percent of that amount could be financed on margin but — factoring in rising interest rates and IPO commission fees — investors would have needed a day-one pop of at least 18 percent just to break even. Those borrowing at a 3 percent annualized rate would have lost more than HK$156,000, or $20,000.

Driving the divergence is a flood of listings. In what's become a race to the bottom, Hong Kong has allowed dual-class shares and removed profitability requirements for innovative companies in areas such as biotech. Goldman Sachs Group Inc. estimates that firms going public in the city could raise $38 billion this year, the most since 2010.

For some retail investors, that means they can afford to wait for the next hot thing. Don't like Good Doctor? Then hang about for Xiaomi Corp. If the Chinese smartphone maker doesn't appeal, no problem. What about Lufax, China's popular peer-to-peer lender, or Tencent Pictures? The possibilities are endless.

It doesn't help that China Literature's performance post-listing hasn't been that great, giving some investors cold feet. Its stock has slumped 28 percent since January. Two other stellar debuts of 2017 – ZhongAn Online Property & Casualty Insurance Co. and Yixin Group Ltd. — haven't fared too well either.

Part of that is because Chinese startups are demanding sky-high valuations. But who can blame them? Xiaomi has already gone through nine rounds of venture capital funding; Chairman Lei Jun has no choice but to sell his “ecosystem” to pay back early supporters.

There are two ways to look at IPOs. Either they can ignite animal spirits or drown an exhausted investor base. Hong Kong is edging precariously close to the latter.

To contact the author of this story: Shuli Ren at sren38@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.

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