Here’s how savvy retail investors in Hong Kong play new listings. They borrow as much as they can from their brokers, in order to apply for as many IPO shares as possible. For hot listings, a good rule of thumb is that 90% of an investment can be covered by margin loans — so for every $10,000 you put down, you get to apply for $100,000 worth of shares. But for Ant, local brokers are so certain things will go smoothly that they’re offering leverage at up to 20 times. Interest on these seven-day margin loans is usually somewhere between a 2% and 3% annual rate. The upside, of course, is an IPO pop.
As long as the world is sane, buying quality IPOs is a no-brainer. Let’s assume 90% margin financing at a 2.5% annual rate, and a 1% IPO commission fee to the brokers. If our savvy investor can get one out of every 100 shares she applied for, she just needs the new stock to debut with a 5% gain to break even, back-of-the-envelope calculations show.
But Hong Kong’s IPO market has become heated, and it’s anyone’s guess as to how many Ant shares you could actually get. Say the allotment rate was only 0.1%, or one out of every 1,000 shares applied. Our savvy investor would need more than a 40% gain from the IPO price to break even. Intuitively, if your chance of getting any shares at all is that low, the IPO lottery is a sure losing game, because all you are doing is paying brokers’ fees, with no upside whatsoever.
We are already seeing some of that frenzy. In early September, Nongfu Spring Co., which bottles mineral water, launched the city’s most popular IPO in a decade, with the retail portion over 1,100 times subscribed in its $1.1 billion listing. For many, the odds of winning Nongfu shares weren’t great. There were 8,377 investors who each applied for HK$4.3 million ($555,000) worth of Nongfu shares; they ended up with only HK$12,900, or a 0.3% allotment rate. As for those who put in even more money, the odds could be as low as 0.14%. Fortunately, Nongfu’s shares are 68% above its IPO price and most investors went home happy. Otherwise, Hong Kong’s sizzling IPO market would have popped already.
Selling shares in this kind of environment is a blessing, but Jack Ma has to thread the needle. The valuation can’t be too low, or he’s leaving money on the table. Yet he also needs to accommodate the city’s enthusiastic retail investors, who have been pushing his Alibaba Group Holding Ltd. stock to record highs. Ant might start trading around the time Americans pick their next president, which could spell market volatility.
Apart from where to get cheap Shanghai hairy crabs (ask me!), or when travel bubbles will be established, this IPO is the talk of town. Next time your auntie tries to convince you that buying into Ant is a slam dunk, tell her, diplomatically, that she’s attempting dumb luck instead.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder.
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