Two apparel makers debut in Hong Kong, Shanghai with returns as stark as night and day
The first day trading outcomes of two garment makers in Shanghai and Hong Kong are like night and day, due to the different mechanism and investment attitude in the two markets.
On their debut trading day, Ribo Fashion shot up a staggering 44 per cent on the Shanghai Exchange, while rival Speed Apparel tumbled below its listing price in Hong Kong. The opposing fates of the two similar companies and IPOs stemmed from what analysts described as the difference in the mechanism and investment fashion of the two markets.
Ribo Fashion soared immediately after the market opened and touched the daily increase limit of 44 per cent just 30 minutes into trading. It closed at 10.2 yuan, up from its IPO price of 7.08 yuan. The Shanghai-based maker of women’s apparels raised 424.8 million yuan, selling 60 million shares.
In contrast, Speed Apparel, which debuted on the Growth Enterprise Board in Hong Kong, fluctuated between gains and losses throughout the trading day. It ended at 49 Hong Kong cents, below its listing price of 50 Hong Kong cents. The Hong Kong-based knitwear supplier raised a net HK$37.1 million through its IPO.
“First-day returns on mainland China’s IPOs are unusually high, which has become an interesting phenomenon,” said Kenny Tang Sing-hing, chief executive of Jun Yang Securities.
“Basically, it’s because the IPOs are underpriced and there is a limited supply of deals on the market,” he said.
Mainland IPO shares are priced at no more than 23 times earnings to ensure that there will be take up and the stocks will rise on their debut, according to unwritten regulatory rules.
“Mainland’s IPO mechanism isn’t purely driven by market-based demand and there’s a sort of administrative intervention,” said Wu Kan, a Shanghai-based fund manager at Shanshan Finance.
Coupled with the first-day trading limit of 44 per cent, retail investors who dominate the mainland stock market, often blindly chase a limited supply of newly-listed stocks.
In the lottery-like IPO market, returns are almost guaranteed for those who are lucky enough to be alloted shares in the offering.
From the start of the year to May 24, all 207 IPO stocks in the mainland had risen to the 44 per cent limit on the first day of trading.
“A share investors have a different investment style compared to Hong Kong [investors]. They usually do little research on the fundamentals of newly listed companies. After obtaining the allotment, they sit back and wait to sell the stocks at a profit, ” Tang said.
In addition, the new regulatory rules restricting stock disposal by pre-IPO shareholders were fuelling the enthusiasm towards new shares, analysts said.
All pre-IPO investors are restricted to sell no more than 1 per cent of their stakes in listed companies every three months, as opposed to previously, when only major shareholders were subject to a lock-up period, according to the rules released by the China Securities Regulatory Commission over the weekend.
Hong Kong presents a mixed picture in IPO stock performance.
For the year to May 26, about one-fourth of the 59 IPO stocks had fallen below their listing prices on trading debuts. The worst performer was Sanroc International, a construction machinery supplier that dropped 23 per cent on its first day of trading.
“Hong Kong investors are more mature,” Tang said.
“They look more at the fundamentals and tend to shun the companies that they are unfamiliar with. It’s also quite easy for them to obtain the allotment under the share allocation rules, as the more you subscribe, the more you can win.”
In a hot deal, the issuer can even increase the number of shares offered to retail investors under the “claw-back mechanism”.
Investors are wary of IPO stocks on the GEM, where the quality of companies varies widely, he added.
For Speed Apparel and Ribo Fashion, both have posted positive growths.
Speed Apparel reported an 18.5 per cent on-year increase in revenues for the eight month ending November 2016, according to the prospectus. Ribo Fashion also posted a 3.8 per cent increase in revenues for the first quarter of this year, and expected its first-half earnings to rise as much as 5 per cent.