I’ve written before about how Hong Kong IPOs (and China stocks in general) consistently disappoint investors so I don’t want to revisit, at length, that theme here. [Shovel Vendors versus Prospectors Oct. 2018, Doggy China Stocks Dec. 2018]
Instead, before the press write the inevitable gush about how 2019 has been a record year for volume of new issuance in Hong Kong though (it has been, BTW) I wanted to get a quick two pennyworth in on how investors have done this year.
First, A Word On IPO Performance Calculation. Performance According To Whom?
There’s infinite ways to analyze IPO performance and any analysis will be flawed. Do we take day-1 performance, 1-week, or 1-year? Should we weight by issue size? Should we consider under-allocation and factor in transaction and financing costs? There’s no simple answer.
Performance Then; According to Me
The bottom line is there’s no ‘science’ to this so here’s my own commonsense analysis. To Friday, December 13th I counted a total of 136-companies that’d raised money via a Main-Board HK IPO in 2019 (official numbers will include GEM transfers and ‘introductions’ so will be higher in terms of ‘total IPOs’).
Taking the IPO price versus the market price on December 13th for the above cohort and then reducing those gain/loss numbers to a simple arithmetic average I get to a number which represents aggregate performance.
Assuming an investor was able to buy all the stock they wanted in every deal with no financing or transaction costs and had bought each IPO as it appeared in equal amounts what would their aggregate return have been to Friday, December 13th?
Surprising, to me at least to say, it’s a positive 3%. That it’s an up number at all is explained (in part) by the fact that overall market sentiment picked up in H2 and listings from that period seemed to do better than H1 introduced peers.
2019, Another Year, Another Waste of Time?
I’ve taken more-than-fair unrealistic assumptions into my calculation above and come out with a piffling theoretical return. The reality, for any investor who chose to regularly tangle with Hong Kong IPOs last year, most likely, is they’re now out of pocket; and this isn’t the first time they’ve been left with the sticky end of the stick. It’s a regular-as-clockwork process.
Why should this be? Surely markets learn from past mistakes and if IPOs are consistently over-priced (that’s the problem, BTW, in a nutshell), over time, the balance of power should shift away from arrangers who facilitate this process to the takers of this paper whose capital is being serially destroyed?
What Makes Hong Kong Different From More Developed Stock Markets
For many years developed stock markets such as the U.K. and the U.S. have been majority-owned by institutional shareholders; but in Hong Kong (and China’s A-share markets) stocks, in the main, are owned by an army of Mom and Pop investors, hereafter ‘Punters’.
Punters play by different rules from institutional investors and are prone to behavioral errors institutional investors seek to distance themselves from. Punters are emotional, they anchor on past prices, they assign importance to round numbers, they follow trends, they don’t read/do research and, most important of all, they’re resigned, as a group, to regularly losing money.
Who Wants To Lose Money? Fools Perhaps?
Losing money is the biggest mistake an investor can make and I’ve spent a lifetime trying to perfect techniques that avoid this outcome; but I’m not a Punter.
Punters are the kind of people who go into a casino saying ‘It’s just a bit of fun. Besides, I’ll only go in with $100 so I can’t lose any more’. These people are otherwise knows as fools and these same people appear to be stepping up, again and again, for IPO allocations in Hong Kong.
Classical economics suggests there shouldn’t be fools in markets. People should be punished and withdraw; but in the real world this is not so. The proof that we’re surrounded by fools is everywhere; cigarettes, tattoos, casinos, carbonated drinks and processed foods are all thriving businesses but they can only do well if large numbers of people are making day-in-day-out foolish economic decisions.
So The Process Continues?
For as long as China stock’s IPOs remain bought in the majority by fools overpricing will be the norm and, yes, this process will continue.
Fool-yourself if you like and only participate in Hong Kong IPOs when you ‘feel’ the price is right; but this is to go into a casino unaware that odds are stacked against you. Have a go, by all means, but don’t imagine you’re doing anything other than playing with your capital; investing you are not.
In Conclusion
The deck is stacked against rational investors in the Hong Kong IPO process because arrangers know an army of Punters can be serially bilked by over-pricing new issues. 2019 has been another example of this process at work with though, for a change, limited damage to collective wealth.
Fools have then enjoyed a paradise in 2019 in which their behavior hasn’t been (too) badly punished.That this process has been, relatively speaking, painless in the past year suggests it’ll continue on into 2020 with fresh vim. We wish good fortune to all but remind any/all gains from IPO participation in the year ahead will be more the product of luck than perspicacity.
With regard to IPOs we’ll concentrate, as we do every year, sifting through the chaff at the back-end of these high-jinks. That’s a process.