Hong Kong IPO Flop a Warning for Punters in Xiaomi Mega Deal

(Bloomberg) -- One of Hong Kong’s most popular investment strategies -- borrow big and plow the money into a red-hot IPO -- is starting to fail, just as the city prepares to host Xiaomi Corp.’s $10 billion listing.

Ping An Healthcare & Technology Co.’s initial public offering flopped after the retail tranche was more than 600 times oversubscribed. That dealt a blow to anyone hoping to flip the stock -- a move that proved profitable last November when China Literature Ltd. surged as much as 100 percent on its first day. The stock, known as Good Doctor, fell as much as 2 percent on Tuesday before erasing losses to close higher for the first time.

Buying and holding the shares isn’t a palatable prospect, partly because scorching retail demand helped bump up the offer price. About three-quarters of the companies that raised funds in the city this year have dropped below their listing price, compared with average returns of 18 percent in the U.S. All of which adds to the dilemma facing investors in the run up to one of the biggest and most anticipated IPOs in years.

"There’s no doubt that people will continue to chase these deals, and Xiaomi can pull off a successful IPO," said Peter Garnry, head of equity strategy at Saxo Bank A/S in Hellerup, Denmark. "But what we’re seeing in Hong Kong is classic late cycle, where shareholders want to lock in gains quickly because there’s a certain lack of confidence in the broader market. Post-IPO performance has been disappointing."

Chinese smartphone maker Xiaomi filed its IPO in the city last week under new rules allowing dual class shares. While the filing didn’t say how much Xiaomi is looking to raise, it’s expected to be at least $10 billion. That would be the biggest IPO globally since Alibaba’s $25 billion debut in 2014. The company, controlled by billionaire Lei Jun, had revenue of $18 billion last year.

Read a Bloomberg Opinion column on Xiaomi’s IPO filing

After the Hang Seng Index’s best start to a year in more than three decades, Hong Kong’s benchmark gauge has stalled around the 30,000 level. Among recent popular IPOs, China Literature, Razer Inc., Yixin Group Ltd. and ZhongAn Online P&C Insurance Co. are all down more than 35 percent from their peaks.

China Literature’s lockup period ended Tuesday, after certain shareholders were restricted from selling the stock for six months following the IPO. It rallied 8.7 percent after a broker initiated coverage of the company with a buy recommendation.

“Retail investors tend to want to escape IPOs quickly, because they don’t know how much upside there can be,” said Kevin Leung, executive director for investment strategy at Haitong International Securities Group Ltd. in Hong Kong. “The market doesn’t know where the fair valuation is and that hurts confidence.”

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