Companies may not like them, but Hong Kong needs retail investors. Without their short-term focus, it's hard for IPOs to be hot.
The importance of mom-and-pop punters in the former British colony can't be underestimated. China Literature Ltd., which debuted Wednesday after raising HK$8.3 billion ($1.1 billion), was more than 600 times oversubscribed. Its success, on the heels of ZhongAn Online P&C Insurance Co., is altering Hong Kong's reputation as a piggy bank of Chinese state-owned enterprises.
Unlike the U.S., all initial share sales in Hong Kong have a tranche that's allotted to retail, or individual, investors who then get a larger portion of the float if their subscription levels are high enough. Theories abound on why such investors have so much heft, including the notion that a lack of democratic representation spurs residents toward equities in the city.
In China Literature's case, retail investors, first allotted 10 percent of the float, ended up being given the maximum 33 percent because they subscribed for more than 50 times the amount on offer. While the online publishing house and e-book seller is profitable, fundamentals sometimes have less to do with IPO performance than a company's pedigree: China Literature was spun out from Tencent Holdings Ltd. while ZhongAn is part owned by Jack Ma's Ant Financial, an affiliate of Alibaba Group Holding Ltd.
By their nature, retail investors are fair-weather friends. Milan Station Holdings Ltd., which sells second-hand luxury bags, was inundated at the time of its IPO but its shares have struggled since.
With interest rates so low, borrowing to finance stock purchases has been an easy way for individual investors to make money.
Next up is is gaming gear maker Razer Inc., followed by Tencent Music Entertainment Group. Both are sure to be a magnet for retail investors, and if recent history is any guide, they should be welcomed.
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