The Initial Public Offering (IPO) scene in Hong Kong is amongst the most active in the world, due to the city’s position as one of the world’s top financial hubs and its proximity with mainland China. It has been growing rapidly over the years, and businesses going public here have managed to raise over 35 billion US dollars (over 275 billion Hong Kong dollars) on average, annually. This is a substantial figure, and technology companies have always dominated the local IPO landscape.
If you are keen on investing in IPOs in the city, you can do so easily through established brokers and banks. But before you begin your investment journey, you should know a bit about the Hong Kong IPO landscape. You should also understand how you can invest in IPOs, such as what factors to look out for, what makes IPO investments appealing, and concrete steps you can take to get started.
A bit about the Hong Kong IPO scene
To begin with, we should look at the local IPO scene, and how you can get involved as an investor. This includes reviewing the main listing boards for local IPOs and a brief introduction to the Hong Kong Stock Exchange (HKEX).
There are two listing boards for Hong Kong IPOs. They are the Main Board and the Growth Enterprise Market (GEM). The Main Board is the larger of the two, and it is the primary board for established companies with a track record of profitability and a market capitalisation of at least HK$200 million.
The GEM is designed for smaller, high-growth companies that may not yet have a track record of profitability but have the potential. It has lower entry requirements than the Main Board, with a minimum market capitalisation of HK$100 million. The GEM is therefore the target of up-and-coming companies looking to list.
The Hong Kong Stock Exchange (HKEX) is the main exchange in the city and has been a popular destination for Chinese and international companies seeking to go public. The exchange has implemented various measures to attract more companies, including allowing dual class shares and pre-revenue biotech companies to list. These measures have helped to position the city as one of the most attractive destinations for high-growth companies seeking to go public.
How to invest in IPOs
If you are keen to invest in IPOs, there are a few ways you can do so. They include through public offerings, through brokers, and through the secondary market. Below, we examine each of these avenues.
Public offering
The most common way investors take part in investing in an IPO is through public offering. This involves buying shares directly from the company as part of the IPO process, when the company first goes public or even before that. Investors typically buy shares through their brokerage accounts or through online platforms with IPO offerings.
Broker-assisted
Investors can also invest in an IPO through a broker-assisted process. This involves working with a broker to purchase shares of the company as part of the IPO process. Many brokers provide IPO offerings for both local and international investors.
Secondary market
Finally, investors can also invest in an IPO a little while after the company goes public when the exchange lists its shares. This is called buying and selling on the secondary market, and investors can trade them like any other stock through a broker or an online trading platform.
Elements to consider when investing in IPOs
Despite the excitement and appeal of investing in new stocks, you should take precautions and do your research when participating in IPO investments. This is because the companies are new and may not have proven track records. Below are a few elements you should consider before investing in IPOs.
IPO valuation
The demand of IPOs can drive its share prices, making it difficult for investors to obtain shares at a reasonable price. You should always evaluate the supply and demand of an IPO, and you should make sure they are not over- or undervalued right from the start.
Company fundamentals
Apart from the response the public has to an IPO, you should also understand a company’s fundamentals, market share, and the competitive landscape. This means researching the company’s growth potential and the industry’s potential for growth too.
Underwriters and brokers
The underwriters and brokers involved in the IPO may give an indication of the quality of the IPO itself. You should make sure these underwriters and brokers have a good reputation and they have obtained the correct regional licenses required.
Lock-up period
All IPOs undergo a lock-up period. These are restrictions placed on insiders and early investors that prevent them from selling their shares for a set period after the IPO. This is an attempt to provide some stability to the company’s share price after it goes public. You must understand the lock-up period for the IPO you want to invest in and know how it can afford share prices.
IPO prospectus
Any company who wants to go public must draft a detailed IPO prospectus to be submitted to the stock exchange. This prospectus is public if the stock exchange approves the application, and investors who are interested in the IPO should read it carefully. This can help you understand the risks and opportunities associated with the company and your investment.
Investment goals and risk tolerance
Finally, you should think about your own investment goals and risk appetite, and how that aligns with the company. You may also want to determine if the company’s values align with yours. You can find information on their mission and values in their IPO prospectus, which, again, you should be sure to read thoroughly.
Steps you can take to get started
Getting started investing in IPOs has become easier and more accessible over the years. If you are keen on taking this first step, you can do so by following these steps:
- Research the IPO market
The first thing you must do is understand the market, including its latest trends and upcoming IPOs you can choose from in the various industries.
- Select an IPO
Then you must select an IPO that aligns with your investment goals and risk tolerance. You should also make sure the company you want to invest in has values in line with your own, if this matters to you.
- Read the IPO prospectus
Afterwards, you should find the company’s IPO prospectus on the stock market site, which will give you all the information you need about a company’s management team, current financial status, and potential for growth. You will also become familiar with the business’s operations, risks, and other important details you will need to make an informed investment decision.
- Determine the IPO price
Next, you must determine the IPO price, which can be found in the prospectus. You will use this information to determine whether the stock is undervalued, fairly valued, or overvalued.
- Open a brokerage account
To invest in an IPO, you must have an account with a licensed broker or an account with a trading platform. Make sure the broker you choose offers investment opportunities for the IPO you have your eye on.
- Place an order
When the IPO is available for trading, you can then place an order through your brokerage account. Different brokers will have different instructions, so you should pay close attention to their procedures.
- Monitor your investment
When you have placed your order, you must monitor your investment and adjust your portfolio as needed. Keep an eye on market trends and the news on the industry and the general economy, as this may impact your stock’s performance.
The bottom line
Overall, the IPO scene in Hong Kong is robust and exciting. The city is one of the most attractive destinations for business owners to go public, and its dynamic IPO scene also appeals to investors in various industries. However, it is important to note that investing in IPOs can be risky, as the company is new and may not have a proven track record. Therefore, you should do sufficient research before investing, and you should also be prepared for any losses.
