An IPO, or initial public offering, is the first sale of shares by a company to the public. IPOs are highly anticipated events that can generate a lot of excitement and hype. They also tend to be very lucrative for investors, who often see significant gains in the value of their shares after an IPO. There are several reasons why IPOs in Hong Kong tend to outperform those in the US.
Timing is one of the main reasons IPOs in Hong Kong tend to outperform those in the US. Companies on the Hong Kong Stock Exchange often do so much closer to their actual launch date than companies listing on US exchanges. Therefore, investors in Hong Kong are getting a much better deal, as they can buy shares at a much lower price.
Another reason IPOs in Hong Kong outperform those in the US is regulation. The US Securities and Exchange Commission (SEC) boasts several rules and regulations that companies must comply with before listing on a US exchange. These requirements can be very costly and time-consuming, which deters many companies from listing in the US.
In contrast, the Hong Kong Stock Exchange has much less onerous listing requirements. As a result, more companies can list on the exchange, which provides investors with a broader choice of investment opportunities.
Investor protection is another crucial factor contributing to the superior performance of IPOs in Hong Kong. The US SEC requires companies to disclose much information about their business before listing it on a US exchange. Investors can get a great deal of information about the company and its business prospects from this disclosure.
However, it also means that companies have to reveal their secrets to their competitors, which gives them a significant advantage, as they can copy or imitate the successful business models of their listed peers.
In contrast, the disclosure requirements in Hong Kong are much less demanding. Companies only need to disclose information necessary for investors to make an informed decision. It provides listed companies with a significant competitive advantage, as they can keep their secrets from their competitors.
Price discovery is another important factor contributing to the superior performance of IPOs in Hong Kong. US exchanges use a system known as ‘book-building’ to determine the price of shares offered in an IPO. Under this system, investment banks act as middlemen between companies and investors. They solicit bids from institutional investors and then allocate shares based on those bids.
This system has many drawbacks. First, it is susceptible to manipulation by investment banks, which can inflate the prices of shares. Second, it often results in a ‘winner’s curse’, where investors who bid the highest prices overpay for their shares.
In contrast, the Hong Kong Stock Exchange uses a price discovery auction system to determine the price of shares offered in an IPO. Under this system, all bids are made public, and an auction determines the final price.
This system has several advantages over book-building. First, it is much less susceptible to manipulation by investment banks. Second, it ensures that all investors pay a fair price for their shares. As a result, IPOs in Hong Kong tend to be priced more accurately than those in the US, which leads to better long-term performance.
Allocation is another critical factor contributing to the superior performance of IPOs in Hong Kong. Under the US system, investment banks allocate many shares to their most valued clients.
It often results in a small number of investors owning a large proportion of the shares on offer, leading to problems when they want to sell their shares, as there may not be enough buyers to absorb all the shares being sold. It can drive down the price of shares and lead to poor performance.
In contrast, the Hong Kong Stock Exchange has a fairer allocation system. Shares are allocated pro-rata to all investors who apply for them. It ensures that many investors own a small number of shares, reducing the likelihood of them being sold at a discount.
Click here to see a list of the expected IPO in 2022.