Photographer: Scott Eells/Bloomberg

Hong Kong Link Is No Match for 44% One-Day Score in Chinese IPOs

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Even the world-beating rally in Hong Kong’s stock market can’t compete with Chinese investors’ favorite way to make a quick profit: initial public offerings.

While mainland traders purchased the maximum amount of Hong Kong shares allowed through the city’s exchange link with Shanghai on Wednesday and Thursday last week, inflows have since slowed and were 57 percent below the five-day average on Tuesday. A key reason for the drop-off is that investors are turning their attention to the 30 Chinese IPOs taking orders this week, according to Hengsheng Asset Management Co.

The offerings may attract 2.73 trillion yuan ($439 billion) of bids, almost the equivalent of Malaysia’s entire stock-market capitalization, based on the median estimate of six brokerages. While a projected oversubscription rate of about 150 times means the odds of getting into an IPO are slim, the reward is too big for investors to ignore: every one of the 147 mainland IPOs that began trading over the past year jumped the maximum 44 percent allowed on their first day.

“The fund flow from the mainland to Hong Kong could slow down a bit now,” said Dai Ming, a money manager at Hengsheng Asset Management in Shanghai. “Some investors are being diverted away because of the appeal of the IPOs, which will guarantee very lucrative and hefty gains.”

Buy Orders

IPOs have been surging after regulators put pressure on companies to keep offering prices low to protect individual investors. While policy makers made no official announcement about a valuation ceiling, data compiled by Bloomberg show that virtually no companies in China are going public at prices of more than 23 times their earnings per share.

Mainland investors placed 2.66 billion yuan of net buy orders for Hong Kong shares through the link on Tuesday, versus the five-day average of 6.3 billion yuan. They used up the entire 10.5 billion yuan daily quota twice last week after Chinese policy makers expanded the number of local funds eligible to use the link and investors bet valuation discounts in Hong Kong will narrow relative to China.

Hong Kong’s Hang Seng Index surged 11 percent in the four days through Monday, the most among national benchmark equity gauges worldwide. The Hang Seng China AH Premium Index, which measures the valuation premium for mainland shares over dual-listed Hong Kong counterparts, dropped 7.5 percent in the same period.

The Hang Seng index slipped 1.6 percent Tuesday, while China’s Shanghai Composite Index rose 0.3 percent.

Subscriptions for mainland IPOs will probably peak on Wednesday, Yuliang Chang, a strategist at Deutsche Bank AG in Hong Kong, wrote in an April 13 report. Jiangsu Broadcasting Cable Information Network Corp., a provider of digital television and broadband services, may raise about 3.27 billion yuan for the biggest of the 30 deals, according to Minsheng Securities Co.

— With assistance by Shidong Zhang

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