Is there enough funding in Hong Kong for multiple unicorn IPOs at the same time?
Brokers believe Hong Kong can support one blockbuster IPO from a unicorn such as Xiaomi at a time, but two or more to together may force them to decide how they allocate their lending
As Hong Kong gears up for an IPO bonanza, including the offering from smartphone maker Xiaomi next month that could raise up to US$10 billion, which could temporarily freeze record amount of funds in the city, bankers and brokers believe the city’s financial system will be tested if more than one company tries to raise funds at the same time.
Gary Cheung, chairman of the Hong Kong Securities Association, said one unicorn listing will not be a problem for the city, but two or more to coming together could.
“Hong Kong is a free market so no regulator will restrict when the issuers want to list their companies, so it is possible two to three unicorns could launch their IPOs simultaneously,” Cheung said.
“The investment banks which act as sponsors will usually prevent two blockbuster IPOs from overlapping. But if they do choose to list at the same time, brokers and bankers may need to choose between them as they have a ceiling as to how much IPO financing they can offer,” he said, adding that they may only give margin loans to one IPO which they believe has the best potential to rise and not for the weaker ones.
More unicorns are expected to list here after Hong Kong Exchanges and Clearing carried out the largest listing reform in more than two decades in April to accept giant tech firms with dual-class shareholding structure and biotech firms without revenue to list.
Investors generally borrow money from brokers and banks to subscribe to the new shares, causing huge sums of money to be locked up for a few days from the closure of the IPO until investors receive their refunds after the listing.
The HK$8.77 billion (US$1.2 billion) IPO of Ping An Healthcare and Technology, also known as Ping An Good Doctor, led to a 17 per cent year on year increase in Hong Kong’s loans growth in April to HK$9.96 trillion, while money supply M2 was up 13.6 per cent annually to HK$14.34 trillion, according to data from the Hong Kong Monetary Authority.
But in terms of funds temporarily frozen by an IPO, Good Doctor ranked 11th as it locked up only HK$376.8 billion. The record is held by China Railway Construction, which had frozen HK$540.9 billion during its IPO in March 2008.
While Good Doctor was oversubscribed 653 times compared to China Railway Construction’s 291 times, it raised only a quarter of the railway company’s US$5.4 billion IPO.
The Xiaomi IPO is expected to break the record for the amount of money frozen in the city as its IPO may reach US$10 billion, which is double that of China Railway Construction. Brokers also believe the issue would be oversubscribed heavily because of retail investors’ preference for tech stocks.
“Xiaomi and other upcoming unicorn IPOs are set to lock up much more money than in the past,” said Joseph Tong Tang, chairman of Morton Securities. “We have never faced such challenges before as not many tech giants listed here in the past,” adding that Tencent Holdings only became big much after its listing.
Tong also believed that Hong Kong could cope with multiple listings simultaneously because as a free market there is no limit to capital flowing into the city.
“International investors could freely bring in money to buy Xiaomi’s or any other unicorn’s IPO. Banks and brokers could also extend margin to customers, money supply could increase any time during the IPO period and banks have already started to prepare for that by increasing the deposit rates for large sums,” he said.
Such signs are already visible. HSBC on Friday increased the six-month time deposit rates for amounts over HK$10,000 to 1.8 per cent from 1.6 per cent. Other banks are offering even more aggressive interest rates ranging from 2 to 2.3 per cent for one-year time deposits of more than HK$100,000.
Meanwhile, local banks have started accumulating liquidity ahead of the Xiaomi’s roadshow on June 23. The one-month Hong Kong interbank offered rate (Hibor) rose to 1.60 per cent last week, the highest in 10 years while three-month Hibor climbed to 2.01 per cent, which shows that banks are fighting for money in the interbank market.