First-day frenzy looks a lot like temporary insanity
Anyone who thought stock-market lunacy was confined to the mainland will have to think again.
Hong Kong investors have proved they are just as susceptible to bouts of insanity as their Shanghai cousins. Yesterday, they bid up shares of Alibaba.com to almost three times the price at which they were issued last week.
The stock opened at HK$30, more than double its HK$13.50 issue price and just kept on rising. The buying was so frenzied and the weight of orders so heavy they clogged up the stock exchange's trading system, causing delays in execution. By the close of trading, the shares had reached an astonishing HK$39.50 (see chart).
Now Alibaba may be a good company; possibly even a great one. It has a clever business model, a commanding market share and a track record of rapid growth. But it is hard to believe that the company can suddenly be worth HK$200 billion. To put that amount into perspective, it is roughly the value of electricity generators CLP Holdings and Hongkong Electric Holdings combined.
And those companies make big profits. In the first half of this year, between them CLP and HK Electric made profits of HK$8.8 billion. In contrast, Alibaba made a profit of just 295 million yuan, or HK$298 million.
Of course, enthusiasts would complain it is outrageous to compare stodgy old utilities to a go-ahead internet company. Even so, Alibaba's issue price looked pretty expensive. The offering valued the company at 110 times this year's expected earnings. That was steep. Rival company Global Sources, which is listed in the United States, trades at 47 times earnings for this year.
Now Alibaba's market valuation looks astronomical. At current levels it would take the company more than three hundred years of profits to justify its share price.
True, profits are expected to rise. Last year, they tripled and Alibaba chairman Jack Ma expects them to triple again this year. But that sort of growth rate is impossible to sustain for long. Whichever way you look at it, after yesterday's run-up, the company is crazily overvalued.
Hong Kong investors seem to have caught their mania from the mainland. At one point on Monday first-day buyers drove newly listed A shares in PetroChina to 48.62 yuan, almost three times their 16.70 yuan issue price (see chart). At that price, the oil giant became the world's biggest company by market capitalisation and, briefly, its first US$1 trillion company, worth more than double the next biggest, Exxon Mobil.
Just think about that for a moment. US$1 trillion is more than the entire gross domestic product of Russia or India. It is five times the annual economic output of Hong Kong.
Of course, that valuation was complete nonsense. PetroChina's Shanghai offering was for just 2 per cent of its outstanding shares, which immediately created an enormous scarcity premium as scrip-starved mainland investors mobbed the stock.
The pricing was further distorted by mainland rules which forbid first-day buyers from selling again in the same session, making huge price gains inevitable for stocks on their stock market debut.
Naturally enough, many of those buyers flipped their shares at the first opportunity they had, and PetroChina shares slumped back 9 per cent in yesterday's trading.
The company is still overvalued, but the shortage of stock and lack of credible alternative investments mean that at least mainland investors have some excuse for driving PetroChina shares to such excessive heights.
Hong Kong investors have the whole world to choose from, which makes it hard to explain their behaviour in bidding up Alibaba.com to such crazy levels as anything else but temporary insanity.
Jake van der Kamp is on holiday
