The Hong Kong Stock Exchange is once again the world's largest single stock market when it comes to new stock offerings. But the biggest company to debut so far this year has been a damp squib.
China's oldest stock brokerage, the Shenwan Hongyuan Group HK:6806, raised HK$9.1 billion (US$1.2 billion) with its listing on Friday. That makes it the largest listing in Asia so far in 2019. But the stock slumped as much as 15% intraday and ended Hong Kong trade down 11.9% on Friday.
That's not the greatest advertisement for listings in Hong Kong, which last year was the exchange with the greatest dollar volume globally of initial public offerings (IPOs).
Hong Kong in 2018 saw 125 companies go public, raising US$36.5 billion in stock. That wrested the title of the world's IPO capital from the New York Stock Exchange. The NYSE had 64 companies go public valued at a total of US$28.9 billion.
Nasdaq saw another 186 initial public offerings, raising US$27.7 billion. So the combined U.S. total is considerably higher than that for the individual Hong Kong stock market. Nevertheless, for a single market Hong Kong reclaimed the crown of IPO king, which it last held in 2015 and 2016.
Investors will hope for better from other 2019 offerings in Hong Kong, where the listings traditionally revolved around the Asian manufacturing sector but are increasingly service-oriented. Last year saw the greatest number of tech and telecom listings in my home city.
Smartphone maker Xiaomi HK:1810, the world's fourth-largest, raised US$5.4 billion last July in Hong Kong, while the mainland app-based food-delivery company Meituan Dianping HK:3690 cornered US$4.9 billion in cash with its September IPO.
Neither company impressed on its debut, with Xiaomi down 1% for the day and Meituan up 5%. Both are well below their listing prices, with Xiaomi now off 29.3% and Meituan Dianping down 17.7%.
Both companies have dual-class shares. Hong Kong only began allowing them this year, and I don't think it ever should have allowed them, because tech bosses use them to take in public money without giving up any control over their companies.
Whatever, it's happening. Hong Kong had attracted tech heavyweights such as Tencent Holdings (TCEHY) under its old format, but saw dot.com darlings such as Alibaba Group Holding Ltd. (BABA) , Baidu Inc. (BIDU) and JD.com Inc. (JD) all list in the United States.
The brokerage Shenwan Hongyuan clearly holds little attraction so far for Hong Kong's international investors. Frankly, I don't blame them. There are a lot of stock shenanigans that go on inside mainland China, where the source of investor funds and their destination are often murky. And the capital markets on the mainland are not free, unlike in Hong Kong.
What's more, Shenwan Hongyuan already has a listing inside the "bamboo curtain" of capital, in Shenzhen. Those shares fell 0.6% on Friday. It priced the Hong Kong listing at HK$3.63, at the very lowest of its indicative range.
Chinese companies trade at far higher prices inside that bamboo curtain, in Shanghai or Shenzhen, than in international markets. That's because the bulk of Chinese investors cannot get their capital outside of China. There is also a dearth of decent listings and other alternative investments in China away from the stock and property markets.
Shenwan Hongyuan shares are trading at a price-to-earnings (P/E) ratio of 15.5 in Hong Kong, but at 28.8 in Shenzhen. Company executives will choose to have the lower-priced Hong Kong listing to attract international investors and give themselves greater access to a larger pool of capital.
The state-owned brokerage was formed by the merger of Shenyin Wanguo and Hongyuan Securities. Its key cornerstone investors are all Chinese: ICBC Asset Management, Huaxia Life Insurance, China Life Insurance, China Reinsurance and New Life China Insurance.
The brokerage, owned by the government company Central Huijin Investment, says it plans to use the Hong Kong proceeds to build out its enterprise-finance business with an aim of serving merger-and-acquisition clients. It will also devote greater attention to wealth management.
Goldman Sachs Group Inc. (GS) helped underwrite the offering (bonus points with Beijing!) alongside ICBC, ABC International and Shenwan Hongyuan itself.
Although this first-day performance has been poor, it's worth watching the earnings of Shenwan Hongyuan. Profits fell 9.6% last year as China's stock markets proved the world's worst performers. The CSI 300 of the largest listings in Shanghai and Shenzhen was down 25.7% in 2018.
This year has been a total about-face, with the CSI 300 index up 30.9% to make it the world's top-performing major index in 2019. Expect a turnabout in the brokerage's financial performance to match the turnaround in stock performance.
China's stock markets are notoriously sentiment-driven, with two-thirds of the trading coming from retail investors. So they leap into the market when the going is good, as it is now. That's inevitably good for Chinese brokerages.
The average first-day bump in the United States last year was 15.7%. But thanks to the fourth-quarter selloff, the U.S. IPOs ended the year with an average loss of 1.9%, a little better than the S&P 500's 4.4% decline.
Hong Kong will hope its dual-listing structure lures back "home" Chinese companies that are looking to list overseas. There were 32 Chinese companies that went public in the United States last year, with proceeds of a combined US$8.9 billion, around one-fifth of the U.S. total.