The Hong Kong IPO landscape has been consistently active in the past years, and the city has always been a popular destination for companies looking to go public. This is due to its vibrant, entrepreneurial atmosphere, with encouraging local laws and low business taxation. This has made IPO investing a popular activity for the city’s many traders.
If you are planning on buying ‘fresh shares’ from a company that is about to undergo an IPO and go public for the first time, check out this guide to IPOs in Hong Kong. You will learn what an IPO is, why companies go public, the IPO landscape in the city, and how you can get involved in investing.
What is an IPO?
An Initial Public Offering (IPO) is a process by which a private company raises capital by selling shares of their stock to the public for the first time. The process of going public can be complex and costly, taking up to two years or more, with numerous steps, which generally are:
- Securing the services of an investment bank or a group of banks to act as underwriters for the company.
- Preparing a registration document, statement, and a prospectus. These will include all the financial and operational information about a company, and it is extremely important that the company is meticulous at this step. If there is missing or inaccurate information, it will reflect badly on the company and authorities may reject the application.
- Attending meetings with potential investors. This step is the ‘roadshow’ as it usually requires travelling on the management team’s part. It is essential as it is the avenue through which a company can secure capital and drive demand before it goes public and starts selling stocks.
- Allocating the price of a share. This is the stage when the underwriters have an idea of how much demand and interest there are in the company that is about to go public, and thus, what the final offering price will be and how many shares ought to be sold.
- Listing the company on the stock exchange. This happens at the closing of every IPO process, and it is when the company is finally public, and trading commences.
Why would a company go public?
Companies go public for different reasons, as listed below. One thing to note is that it is never a decision to be taken lightly, as going public is a complex and time-consuming process. Not to mention, there are often stringent requirements companies will need to fulfil before they can go public.
To raise capital
One of the primary reasons companies go public is to raise large amounts of capital. They may use this money to facilitate further growth and expansion, such as hiring new staff, creating new branches of their company around the world, or developing new services and products. They may also go public to raise capital to pay off debts accrued.
Additionally, once a company is public, they can issue additional shares in the future through secondary offerings. This can provide a new and consistent source of capital, which can be funnelled back into the system for even more growth.
To increase liquidity
The second reason companies go public is to increase their liquidity. When they start selling shares, the money invested in the company in the first place by early investors and employees can turn their shares into cash. Cashing out is a good option for those who no longer want to be involved in the company and want to simply take their earnings and go.
To establish a public market value
Thirdly, companies may go public to establish a public market value. Public companies on the stock market are fully transparent in terms of how much their market capitalisation is, and this is important for companies that are looking to build trust in the industry. It will also be helpful for companies that are considering mergers and acquisitions.
The stock market has stringent rules and high barriers for entry. When a company manages to go public, they establish themselves as a dependable partner and player, which can lead to smoother business deals in the future.
To build brand and increase visibility
Finally, companies rarely go public just to build brand and increase visibility. Usually, creating buzz is a side effect of going public that companies welcome. Once a company is public, it becomes more visible and attracts more customers and employees.
The IPO landscape in Hong Kong
In recent years, Hong Kong has seen a substantial increase in the number of companies launching IPOs. This is particularly true of the biotech and tech sectors, thanks to the growing demand for healthcare and financial technological services in Hong Kong and in Asia at large.
The city saw a slight decrease in the number of IPOs in 2020 when the Covid pandemic began. However, the companies that did go public still managed to raise an aggregate $24 billion. Two years after the pandemic began, the city is seeing a strong rebound with many large companies from the mainland going public, including major mainland Chinese companies.
The abundance of high net-worth and ultra-high net-worth individuals in Hong Kong also make it an opportune place for companies to go public. Finally, due to its proximity with mainland China, Hong Kong is also a popular destination for companies to go public if they are planning to break into the Chinese market.
What to consider before investing in an IPO
If you are a trader, investing in new shares may be an exciting endeavour and just the right one for you. However, there are a few things to consider before you commit to a company’s shares:
The company’s fundamentals
Even though there is no historical price chart available on the stock exchange for the company yet, you can look at the company’s past financial statements and other disclosures. This can help you get a sense of how it is performing, its financial health, and growth prospects.
Indeed, past performance is no guarantor of future company valuations. However, it is good to have an idea of the company’s revenue and earnings growth, as well as its competitive position in its industry. This way, you can gauge how much capital you want to invest.
The company’s management team
You should also consider who runs the company and their track record. A strong management team with a proven track record is an essential factor when going public and supporting a company.
Of course, you should never forget to consider the broader industry trends and the effects these trends will have on your company’s valuation. For example, during the height of the pandemic, the healthcare industry saw great growth, as well as the biomed and biotech ones.
Risk and return
Very often, people become too over-excited about IPOs and forget to calculate their risk and return ratio. They may also forget to think about how much risk they can realistically take. Setting a risk management strategy that also details what your end goals when investing in an IPO is, is crucial.
The bottom line
When considering investing in an IPO, it is important to consider several key factors such as company fundamentals, industry trends, management team, and risk and return. It’s also worth noting that investing in an IPO can be a high-risk investment. Therefore, it’s vital that you do your own research and consult with a financial advisor before making any investment decisions.