HK IPO is a new trend. What about returns?

An attractive investment strategy

Welcome to Know more about HK IPO Subscriptions, a tailor-made course for investors interested in IPO investment. 

The goal of investors is to get higher returns with lower risk. Guess what, HK IPO Subscriptions may be a good choice.

As we all know, the stock market is very volatile. In a bull market, you may benefit from the rising prices and make some money. However, suffering huge losses is very common in a bear market. In 2018, for example, when the market was bearish, the HSI index was down 13% and Tencent, the largest HK stock, fell 22%. 

In contrast, the HK IPO market performed well during the same period of decline. During the year, 205 companies went public, with an average first-day return of 15.9%.

Thanks to the considerable historical returns and relatively low risks in the bear market, HK IPO Subscriptions have become a very popular investment option.

So how to participate in HK IPO Subscriptions? This course will explain to you through the following four chapters:

1. What about the returns of HK IPO?

2. How to apply for an HK IPO 

3. How to choose a right HK IPO

4. How to increase HK IPO allotment chance

Before you start, the first and necessary step is to know what, how, and why.

Systematic learning of this course, combined with practices, may substantially help you increase your chances of successful HK IPO investment.

Let's start with the first chapter. What is the return on an HK IPO Subscription?

What are HK IPO Subscriptions?

Let's start with the basic concept.

What is an IPO? An IPO (Initial Public Offering) is a process by which companies issue their shares to the public for the first time on a stock exchange.

When a company sells its shares to the public through the Hong Kong Exchange, investors can subscribe to shares through the broker, such as Futu Inc. This practice is called HK IPO Subscriptions. 

The HK IPO market is one of the largest in the world. In 2020, 398 billion HKD was raised through HKEX, ranking second among the world's major exchanges. The capital raised in the HK IPO market has topped the list several times in the past decade.

How do you benefit from arbitrage?

You may wonder why HK IPO Subscriptions can obtain substantial returns with relatively low risks. The reason lies in the arbitrage opportunities of HK IPO Subscriptions.

Going public is of great benefit to the company. Firstly, the company can raise a lot of funds for development and expansion. Secondly, going public is conducive to improving brand awareness, thereby attracting more customers.

If a company cannot sell out its new shares, the stock issuing would fail. Therefore, most companies will offer discounts on the pricing of new shares to attract more investors.

In the past few years, if you sell the allotted new shares on the first day, you would earn an average return of more than 15%. This is the arbitrage principle of HK IPO Subscriptions.

How was the performance of HK's IPO market in the past two years?

How did the HK IPO market perform in the last two years? Let's dive into the details.

In 2020, there were 144 newly listed companies in the HK stock market, with an average first-day increase of 18.2%. Among them, 11 IPOs more than doubled and 25 increased by more than 50% in their trading debut.

In 2019, 73 companies were newly listed in the HK stock market, with an average increase of 15.3% on the first day, of which 5 IPOs more than doubled and 9 increased by more than 50%. 

It would be fair to say that past performances speak for the great possibility of earning money in Hong Kong's IPO market. For example, Angelalign Technology (Ticker: 06699), a leading Chinese clear aligner maker, went public in June 2021 with a one-lot profit of HK$46,000 on the first day, making it the most profitable new stock in the history of HK IPO Subscriptions.

Hold on, don't be overwhelmed with excitement. Keep one thing in mind: there is no guarantee of IPO performance. Some new stocks performed below average on the first day of listing and even fell below the issue price on the first day. In recent years, the probability of falling below the issue price on the first day was around 1/3.

Therefore, learning how to pick a suitable IPO to subscribe to is essential to increase the probability of making money and lowering risks of loss, which will be the focus of the following chapters.

Why IPOs are profitable?

Investment is to make money, and so is an IPO subscription. In addition to the arbitrage opportunity mentioned above, there are two other important reasons.

First of all, many good companies choose to go public on the HK stock market. Good companies are the foundation of successful investments. These outstanding companies have not only refreshed the Hong Kong stock market but also provided investors with great opportunities to make money.

For example, Smoore (Ticker:06969), the leader of Chinese e-cigarette maker, and Pop Mart (Ticker:09992), the leader of trendy Chinese toymaker and retailer, both are high-growth companies in industries. Before going public, their financial performance demonstrated rapid growth potential and strong profitability, which won the support of many long-term investors. As a result, their debut performance was strong. As shown in the first table, both their first-day increases were more than 50%, which was driven by the high oversubscription rate.

The second reason is the friendly allotment mechanism for retail investors. In 2020, the average one-lot allotment rate of HK-listed new shares is about 34%. The more shares you subscribe to, the greater possibility you will be allotted.

Why is the one-lot allotment rate so high in the HK IPO market?  For one thing, as we mentioned above, no one can guarantee the return of an IPO. Some will even fall below their issue prices. Therefore, there are far fewer IPO subscribers than stock traders. The number of participants in HK IPO Subscriptions ranges from a few thousand to millions. 

For another, HK IPO Subscriptions' allotment mechanism is prioritized over the one-lot subscription, rather than allocated in proportion to the subscription funds, which means a higher rate of one-lot allotment.

A higher one-lot allotment rate allows more investors to share the benefits of high-quality companies.

Summary

Arbitrage pricing opportunities in the HK IPO market leave room for investment returns. The average first-day increase over the past few years was very significant. Some newly-listed companies even sustained their strong performance, making them good long-term investments.

There are two main reasons why HK IPO Subscriptions make money: many excellent companies choose to list on the HK market, which increases the probability of rising on the first trading day; the high allotment rate in the Hong Kong IPO market is beneficial to retail investors.

However, all markets have risks, and the Hong Kong IPO market is no exception. We will share skills of stock selection with you in Chapter 3. In the next chapter, you'll learn about the HK IPO Subscription Process.

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