Hong Kong’s IPO Takeoff Is Running Out of Runway

(Bloomberg Opinion) -- Brace, brace. Hong Kong’s IPO takeoff is going to come to a screeching halt.

There’s a flood of deals still in the pipeline, it’s true, from food delivery giant Meituan Dianping to biotech unicorn Innovent Biologics Inc. But investor fatigue is setting in, with many of the hot sales that helped to reignite the market in the past year trading below their offer prices or showing lackluster gains.

China Tower Corp. closed unchanged on its debut Wednesday after completing the world’s biggest initial public offering in two years. That mirrors the performance of smartphone maker Xiaomi Corp., another keenly anticipated listing that’s little changed a month after it started trading. Ascletis Pharma Inc., a Hangzhou-based maker of HIV drugs, has slumped 20 percent since making its entrance at the end of July.

Even the online insurer that sparked a revival of Hong Kong’s IPO frenzy is in the red. 

Hong Kong’s IPO Takeoff Is Running Out of Runway

ZhongAn Online P&C Insurance Co., a company backed by internet behemoths Tencent Holdings Ltd. and Alibaba Group Holding Ltd., surged on its debut in September, but now stands 42 percent below its price on listing. Two-thirds of IPOs that raised more than $1 billion in the two years ended July 2017 were below their offer prices after six months; three-quarters had dropped after a year, data compiled by Bloomberg show.

Ironically, the cause of the pain can be traced partly to measures Hong Kong Exchanges & Clearing Ltd. has taken to fight back against a U.S. market that was luring away China’s new-economy stars. Under Chief Executive Officer Charles Li, the exchange operator opened the gates to both dual-class stocks such as Xiaomi and “pre-revenue” biotech firms such as Ascletis. 

The promise to IPO hopefuls was simple: List in Hong Kong and get access to the trading pipes that allow investors in mainland China’s partially closed capital markets to buy into the city’s stocks (another Li initiative). Often unable to list at home, this offered a way for Chinese pharma and tech companies to tap the wall of mainland investment money. It also helped Hong Kong to regain its crown as the world’s biggest biggest IPO fundraising venue.

Hong Kong’s IPO Takeoff Is Running Out of Runway

Hong Kong’s pitch also held out the prospect of a more direct route back into the mainland stock market, via China depositary receipts, though this didn’t pan out as hoped. China decided that CDRs were a concept whose time hadn’t yet come, forcing Xiaomi to postpone a sale that it had planned to conduct simultaneously with its Hong Kong IPO. That’s not all: China’s stock exchanges subsequently said they wouldn’t let mainland investors buy shares with weighted-voting rights, closing Xiaomi off from the Shanghai and Shenzhen stock connects.

The takeaway? Hong Kong probably isn’t ready for companies that have yet to turn a profit. The two big gainers among listings since mid-2017 are Chinese new-economy firms that are making money: Tencent-backed online bookstore China Literature Ltd.  and biotech WuXi Biologics (Cayman) Inc. 

A biotech firm that’s further along than Ascletis in clinical trials, such as Innovent, may win more fans, but even that’s no guarantee. Cancer drug developer BeiGene Ltd. dropped on its debut Wednesday.

Hong Kong’s IPO Takeoff Is Running Out of Runway

Chinese IPOs tend to be smaller in the U.S. but their performance has been better, with lack of profitability no bar in a market that prizes growth. Conversely, earnings are no shield when growth prospects dim: Qudian Inc., a Beijing-based online lender that is profitable, plunged by more than half since March amid a regulatory crackdown on the industry.

The lesson for China’s budding new-economy stars is that Hong Kong may not be worth the hassle. And for the city’s IPO investors: Stick to firms that are already in the black.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

©2018 Bloomberg L.P.