A wave of listings broke out, and the nightmare of Hong Kong IPOs, Xie (02507), as a leading global private jet manufacturer, fell below the issue price without exception.

The Zhitong Finance App learned that recently, the Hong Kong stock market is unfriendly to IPOs. The breakout ratio is high, and there are not a few that have fallen below 50% of the issue price. For example, go out and ask (02438), and the market value has shrunk by more than 60% in the 3 months since listing. XiRui landed on the Hong Kong Stock Exchange on July 12. The issue price was HK$27.5. However, it fell below the issue price in 6 trading days. Currently, the price is HK$24.85, a decrease of more than 10%.

In fact, most IPOs in Hong Kong stocks have similar characteristics. On the first day of listing, the volume was generally very high. On the one hand, there was a demand from financial investors to exit the listing. On the other hand, the money-making effect of the market was poor, and investors who subscribed did not receive a premium. In addition, the fundamentals were unable to form effective support, and the market did not buy accounts, thus creating a situation where the decline continued. In comparison, XiRui Aircraft is more resistant to falling compared to other IPOs.

Brokers are reluctant to sell

Xirui's current listing introduced 5 cornerstone investors, including China Transfer Fund Phase II, Taicang Hi-Tech, Changshu Dongnan, and Wuxi C&D New Investment. The subscription price was HK$27.5, totaling about HK$0.85 billion, and a six-month sales ban period was set. Prior to listing, the controlling shareholder was state-owned. However, the market value of the shares offered was HK$1.509 billion, and after deducting the cornerstone investors, there is still more than HK$0.6 billion in public stock circulation.

On the first day of listing, it had a turnover of HK$0.173 billion. Regardless of the T situation, the vast majority of investors participating in the subscription still did not trade. On the one hand, this group of investors may be optimistic about the company's development; on the other hand, the benefits are visible to the naked eye. The main reason is that the price is high when it is listed, and there is no premium at all.

The Zhitong Finance App revealed doubts through changes in brokers' chips. According to relevant trading software, the shareholding ratios of the two major brokers, Industrial Bank and Standard Chartered Bank, have not changed since listing, at 5.88% and 2.33%, respectively. Meanwhile, CICC showed signs of increasing its positions. From 4.72% of its holdings on July 12 to 5.88% on July 19, it bought a net 4.2263 million shares in the past 5 days. The main sales were Futu Securities, which sold 1.2403 million shares during the period.

The company's trading volume plummeted the day after listing, but on the third and fourth trading days, there was a clear rebound in trading volume. Mainly, the two brokers, CICC and FTU, were active, and shrank rapidly after the fifth day. The sharp contraction in trading volume also represents the reluctance of the vast majority of latecomer investors to sell. As the sluggish sentiment spread, with reference to other new stocks, investors in this part of the unsold part, especially from the two major brokers, Industrial Bank and Standard Chartered Bank, have instead become a hidden danger for the company to continue to decline.

Stable performance

The Zhitong Finance App learned that XiRui Aircraft mainly designs, produces and sells single-engine pistons and jets. It is a leading private jet manufacturer, with a market share of 32% in the global private aviation market in 2023. The company's performance was steady, with revenue of $1.068 billion in 2023 and net profit of $0.091 billion. In 2021-2023, the compound growth rates of revenue and net profit were 20.24% and 12.42%, respectively.

The company provides two aircraft product lines, the SR2X series, which are mainly single-engine piston aircraft for retail customers, including the SR20, SR22 and SR22T models; and Vision Jets, which are mainly used by retail customers and single-engine jet aircraft for use by small-scale charter customers. The price of the SR2X series is $0.6269-1.4938 million, and the price of the Vision jet is $3.24-3.6347 million.

Image source: Company prospectus

In terms of revenue composition, the SR2X series accounted for 57.4% of revenue in 2023, while Vision Jets had a revenue share of 28.4%. The remaining 14.2% was for after-sales and training projects. Revenue from the SR2X series and Vision jets continued to grow. In 2021-2023, the compound revenue growth rate was 21.55% and 13.42%, respectively, and the number of aircraft delivered also increased steadily. The former increased from 442 to 612, and the latter increased from 86 to 96.

Xirui's SR2X series was the first product to be released. It has now reached the 7th generation. More than 9,700 units have been delivered, and single-engine piston models have been certified and verified in more than 60 countries. Among them, the SR20, SR22, and SR22T models were first delivered in 1999, 2001, and 2010, respectively. A total of 1,862, 4,527, and 3,349 aircraft were delivered, respectively. In addition, the first Vision Jet was delivered in 2016, with a total of 548.

The company's aircraft sales structure changed little. The mid-priced SR2X series dominated, and the proportion of high-priced Vision jets was stable, making gross margins relatively stable, at 34-35% in previous years and 34.3% in 2023. Although various expenses increased due to increased revenue, the changes were not very obvious. The return on equity in 2023 and the adjusted EBITDA margin were 21.1% and 15.2%, respectively, and the net interest rate was 8.52%. The company has a healthy debt ratio of 56.2% in 2023, 6.75% interest-bearing debt, and $0.247 billion in cash on account, accounting for 24.5% of total assets.

Growth is limited

Xirui's performance is stable, but the company is trying to accelerate performance growth through global market and production capacity expansion. According to reports, the company sells its products to customers in 44 countries and regions around the world, has authorized service centers in 33 countries, and is seeking to replicate the success of the consumer-facing model domestically and expand this model to regions other than the United States by increasing the number of sales agents.

In terms of production capacity, the weekly production of SR2X series aircraft can reach 14. The vision jets are 2.2, and the capacity utilization rate is over 90%. The company says it will expand production lines that can be adapted to future new models based on existing production capacity. The company raised 30% of the capital to expand production, including expanding the plant to new regions. Up to now, it has a reserve of 1,320 aircraft, including 260 pre-orders.

It is worth mentioning that Xirui's aircraft delivery growth rate has far surpassed the industry. Under pressure from demand, the expansion of production capacity will lead to a decrease in utilization. According to the prospectus, global and regional general aviation aircraft deliveries grew compounded by low unit numbers. By region, the North American market accounted for 66% of the share, while the European market ranked second, accounting for 8.5%, but demand was declining. The global private jet market is a niche market. The market size in 2023 was only 3.7 billion US dollars, 2,215 aircraft were delivered in 2023, and the compound growth rate in the past five years was only 4%.

Image source: Company prospectus

Moreover, there is a high concentration of industry participants. In terms of global private jet deliveries, the top three players have a market share of more than 50%, with Xirui ranking first with 32%. To gain a higher market share in the niche market, competition will be more intense. At the same time, there will be little room for growth, and it will be greatly affected by local policies. Furthermore, in terms of shareholder returns, Xirui currently has no formal dividend policy or fixed dividend payment ratio.

Xirui is not in the spotlight, and its performance is average. Although it is a leader in the industry, the industry's niche market has little prospects for slow growth, making it difficult to attract price investors to take over. The investment environment for Hong Kong IPOs is poor. Judging from multiple factors such as the market capitalization performance of the vast majority of IPOs that have already been listed, combined with Xirui's lack of hot spots, uncertain dividend policies, and limited future growth, the company may still decline further.