Dec 21, 2018 07:29 PM

Opinion: Why Mainland Firms Have Fallen Below Their IPO Prices in Hong Kong

Charles Li, chief executive of Hong Kong Exchanges and Clearing Ltd. Photo: IC
Charles Li, chief executive of Hong Kong Exchanges and Clearing Ltd. Photo: IC

Editor’s note: On April 30, Hong Kong instituted new rules that allowed biotech firms to list on the city’s stock exchange even if they had yet to make a profit. The exchange also rolled back a rule that barred companies with a dual-class share structure from listing in an attempt to attract highflying tech firms.

However, many of these newly listed mainland companies have struggled this year, with roughly 72% falling below their Hong Kong initial public offering (IPO) prices, Caixin reported. This slump has raised questions about whether investors bought into the bullish hype surrounding these Chinese companies without fully understanding what could derail their growth prospects.

On Thursday, Charles Li, chief executive of Hong Kong Exchanges and Clearing Ltd. (HKEx), which runs the Hong Kong Stock Exchange, published a blog post that responded to questions from the press about the share slump. The following is a translated excerpt of Li’s post.

It has been eight months since we put the new listing rules into practice. It has been a very busy year, so I wanted to take a moment to reflect on our progress and to answer some questions the press has raised.

Given that these are new-economy companies that are considered leaders of future development, why did most of their new shares drop below their issue prices?

The quality of a listed company doesn’t necessarily have much to do with its shares falling below its issue price. The share slump is mostly due to investors’ natural response to a company’s valuation, as well as general market sentiment.

Just as in other international markets, Hong Kong’s IPOs have always been market-oriented, and issue prices and trading prices are generated by buyers and sellers.

Why did the prices of some new stocks appear to be set at a higher range when they went public?

This probably resulted from a higher market sentiment or a higher valuation given by investors in the early fundraising rounds. This could also be due to the lower supplies of new shares of new-economy companies at the time, or inaccurate judgments from investment banks or issuers. No matter the reason, the market always makes automatic adjustments in terms of prices.

Would you consider manually controlling the issuance pace or pricing to prevent more incidents of shares dropping below their issue prices?

It is a natural phenomenon in the market for shares to drop below issue prices, and no market can avoid it. If people manually controlled or intervened on the pricing, I fear that it would only delay the drop in prices. It couldn’t fully stop it from happening. This may lead to distortions in market information, which does no good to the long-term development of the market. However, we also hope that investors and issuers should see the fluctuations of stock prices in a rational manner. Issuers and intermediaries should adopt a more-responsible and a more-rational pricing strategy when issuing shares.

We haven’t finished tweaking things to make (the exchange) more competitive. The Hong Kong market still has a few idiosyncrasies, like the subscription mechanism for retail investors and the cornerstone investor arrangement, which may give issuers a stronger voice than they would have in other markets. …

The impact of the new listing rules, which opened the door a bit wider to new-economy companies with nonstandard share structures and prerevenue biotech companies, has already been felt in the Hong Kong market. So far this year, 28 new-economy companies have gone public in Hong Kong, including big names like smartphone-maker Xiaomi Corp. and online delivery and group buying website Meituan Dianping. New-economy firms have raised HK$136 billion ($17.37 billion) so far, accounting for nearly half of the total IPO fundraising in Hong Kong in 2018. On the biotech side, we’ve already seen four prerevenue companies list under the new rules.

The changes helped power another strong year for Hong Kong’s IPO market overall. The 209 companies that listed this year raised HK$280 billion, enough for the Hong Kong Exchanges and Clearing Ltd. to finish first in the global IPO fundraising table this year.

Charles Li is the chief executive of Hong Kong Exchanges and Clearing Ltd.

Translated by Timmy Shen (

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