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Wednesday, October 21, 2020 – 12:37 pm
Here’s how savvy retail investors in Hong Kong play with the new listings. They borrow as much as they can from their brokers in order to request as many IPO shares as possible.
For hot quotes, a good rule of thumb is that 90 percent of an investment can be covered by margin loans, so for every $ 10,000 you deposit, you can request $ 100,000 worth of shares.
But for Ant, the local brokers are so confident that things will go well that they offer up to 20x leverage. The interest on these seven-day spread loans typically ranges from 2% to 3% annual rate. The advantage, of course, is an IPO.
As long as the world is sane, buying quality IPOs is a no-brainer. Let’s assume 90 percent margin financing at 2.5 percent annual rate and a 1 percent IPO commission rate for brokers. If our savvy investor can get one out of every 100 shares he applied for, he only needs the new shares to debut at a 5 percent profit to break even, backward calculations show.
But the Hong Kong IPO market has heated up and no one knows how many Ant shares it could get. Let’s say the allocation rate was only 0.1 percent, or one in every 1,000 shares applied. Our savvy investor would need more than 40 percent profit from the IPO price to break even.
Intuitively, if your chance of getting shares is that low, the IPO lottery is a sure losing game, because all you are doing is paying broker fees, to no advantage.
We’re already seeing some of that frenzy. In early September, Nongfu Spring, which bottles mineral water, launched the city’s most popular initial public offering in a decade, with the retail side more than 1,100 underwritten at its $ 1.1 billion listing.
For many, the odds of winning Nongfu shares weren’t great. There were 8,377 investors each applying for HK $ 4.3 million (S $ 752,000) in Nongfu shares; they ended up with just HK $ 12,900, or an allocation rate of 0.3%. As for those who put in even more money, the odds could be as low as 0.14%.
Fortunately, Nongfu’s stock is 68 percent above its IPO price and most investors went home happy. Otherwise, the sizzling Hong Kong IPO market would have already appeared.
Selling stocks in this kind of environment is a blessing, but Ma has to thread the needle. The valuation can’t be too low or you’re leaving money on the table. However, it also needs to adapt to the city’s enthusiastic retail investors, who have been pushing their Alibaba Group Holding shares to record highs. Ant could go public the moment Americans elect their next president, which could lead to volatility in the market. Aside from where to get cheap Shanghai hairy crabs (ask me!), Or when the travel bubbles will set, this IPO is the talk of the town.
The next time your aunt tries to convince you that buying from Ant is a disaster, tell her, diplomatically, that she is trying something silly.
BLOOMBERG
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