A money-making tool that crosses bull and bear markets! Do you know these advantages of listing in Hong Kong?

In recent years, the Hong Kong stock IPO market has experienced a complete bull and bear cycle, from the booming market in the first half of 2020-2021, the period of widespread bullishness, to the consolidation and pullback in 2022-2023, but still with periods of structural opportunities.

By 2024, the Hong Kong Stock Exchange's electronic settlement system (FINI system) was launched, and the Hong Kong IPO market began another bull run. In the first half of 2024, 30 new stocks were listed, most of which rose, with an average increase of up to 20.7%, surpassing the bull market period in 2020 in terms of price increase. From the perspective of oversubscription multiples of IPOs, the market continues to heat up, from more than ten times during the market adjustment period to over 200 times oversubscription in the first half of 2024.

So why is the Hong Kong IPO market attracting so much attention? What are the reasons for such obvious money-making effects? Let's understand the advantages of Hong Kong IPOs.

1. Historical performance through bull and bear markets

The first advantage of Hong Kong IPOs is that the overall first-day performance of new stock listings is very good. From historical data, the overall first-day performance of Hong Kong IPOs can be considered a moneymaking tool that can withstand bull and bear markets.

For example, from the chart above, we can see that from 2016 to the first half of 2024, the average first-day increase of Hong Kong IPOs for each year has been positive. In 2018, after the global financial crisis, Hong Kong IPOs still had an average increase of 16.2%, becoming a rare safe haven under the background of the global bear market. Even in the lowest point of the Hong Kong stock market in 2023, out of the 75 newly listed stocks, the average increase was 2.9%, and there was no overall decline.

So why does the overall performance of Hong Kong IPOs on the first day of listing look so impressive? There are two main reasons.

The first reason is that listing has many benefits for companies, and in order to have a successful listing, most companies will make pricing concessions.

These benefits mainly include the ability to expand the business through raising capital from the listing, and at the same time, the company's shareholders are more easily able to realize gains after the listing. In addition, the listing can also expand its brand influence and exposure, attracting more attention from the public to purchase their products.

On the first day of listing, the new stock price of the company may return to normal valuation from the discounted basis, thereby providing some room for upward movement in the first day's performance.

The second reason is that on the first day of most new stock listings, it is often the day with the highest attention and the most active trading. Therefore, from a trading perspective, there is a certain liquidity premium on the first day of new stock listings, further boosting its stock price performance.

This liquidity premium is also related to the new stock market environment. When the sentiment for new stocks is good, investors are enthusiastic and the new stock premium is high. On the contrary, if the sentiment for new stocks is weak and there are few investors participating, the new stock premium is low.

Looking at the new stock market in the first half of 2024, the sentiment for new stocks is gradually heating up, and the liquidity premium is becoming stronger, which is a significant bullish factor for the subsequent performance of new stock listings.

So, how should we view the post-investment outlook for Hong Kong stocks? Will it return to the peak of a bull market?

In the first half of 2024, the average increase was about 20.7%, which has set a record in recent years based solely on market performance. However, in terms of the number of subscribers and the amount of funds raised, there is still a long way to go compared to the peak period of 2020-2021.

In terms of the number of subscribers, the average number of subscribers for all new stocks in the first half of 2024 was approximately 0.0124 million, which is twice the number in 2023, but still relatively low overall.

From the perspective of average financing amount, in the first half of the year, it was only about 0.44 billion, still continuing to decline, only about 1/10 of the peak period of new stocks in 2020-2021. The most important reason here is that there is a lag period from the initial recovery of the new stock market to the listing of large high-quality companies.

In other words, whether from the perspective of investor subscription sentiment or the enthusiasm of companies for listing, the recovery of the Hong Kong new stock market is still in its early stage and has not entered a frenzied phase. It is still in a relatively benign state. If this round of new stock bull market is confirmed, perhaps it can continue to rise for a long time.

2. Low threshold and high allocation rate

The second biggest advantage of Hong Kong new stock investing is the low threshold and relatively high allocation rate.

After all, even if the current profit-making effect of Hong Kong new stocks is good, if the participation threshold is high, most people can only hesitate. Moreover, if the subscription allocation rate is as low as less than one-thousandth as in A-shares, no matter how much it rises, it's still like a pie in the sky.

In terms of threshold, the first threshold for investing in Hong Kong new stocks is to open a Hong Kong stock brokerage account, such as Futu, the largest retail brokerage in Hong Kong.

The second threshold is the need to prepare funds for participation. The minimum subscription amount for Hong Kong new stocks generally ranges from thousands to tens of thousands of dollars. However, Futu provides financing for most new stocks, so with just a few thousand dollars, you can participate in almost all new stocks, with almost no fund threshold.

From the perspective of allotment rate, the allotment rate for Hong Kong new stocks is relatively high, with an average initial allotment rate of about 55%. In the current hot market conditions this year, the initial allotment rate is also about 40%. In addition to the 10x leverage financing subscription provided by Futu, as long as the capital is not too small, most new stocks can be allotted.

The main reasons why the Hong Kong IPO subscription success rate is so high are mainly two-fold. Firstly, although the Hong Kong IPO subscription is generally profitable, it is not a guaranteed profit, with a certain rate of listing price drop. The average listing price drop rate over the years is about 1/3, but after the market picked up in the first half of 2024, the listing price drop rate decreased to around 30%, the lowest in over 6 years. Therefore, investors will not rush in crowds to participate in IPO subscriptions, and the number of participants is controlled within tens of thousands to hundreds of thousands, resulting in a high success rate.

Secondly, the distribution of Hong Kong IPO subscriptions generally follows the principle of decreasing, overall favoring individual investors. For example, if the success rate of one lot of a certain IPO subscription is 100%, you can successfully subscribe for one lot, but the number of successful subscriptions for 100 lots may only be 20 lots, resulting in a success rate of only 20% per lot.

In other words, the overall success rate of Hong Kong IPO subscriptions is already not low, and the success rate for small investments in the distribution is relatively higher.

3. Stock selection and selling decisions are simple and clear

The third major advantage of participating in Hong Kong IPO subscriptions is that stock selection is relatively simple, and the logic for selling decisions is clear.

When it is said that stock selection for Hong Kong IPO subscriptions is simple, it is in comparison to stock trading.

For stock trading, you need to choose a market, such as the mainstream US stocks, Hong Kong stocks, A-shares, etc. After choosing the market, each market has thousands of stocks, and you also need to select industries or sectors, and finally pick specific stocks. It's like searching for a needle in a haystack.

On the other hand, selecting stocks for Hong Kong IPO subscriptions is very simple most of the time, as new stocks usually come one by one. Therefore, the decision-making on stock selection is not about which one to choose most of the time, but whether to participate and how much to participate, rarely experiencing decision-making difficulties.

Of course, it is not entirely correct to say that it is easy because for each new stock, the decision on subscription and position control is directly related to the subscription income and risk, and we will discuss this issue in detail in subsequent courses.

Similarly, compared to stock trading, the logic of selling decisions for IPO subscription in Hong Kong is also very simple and clear.

For stock trading, there is a saying: those who can buy are just disciples, but those who can sell are the masters. There are too many things to consider when selling stocks: should you make a quick profit or hold for the long term? What if you sell too early? And so on.

Selling new stocks in the Hong Kong stock market is relatively simple, usually either in the pre-market or on the first day of listing. Why? As we mentioned before, on the first day of a new stock's listing, there is usually a certain premium due to its liquidity. After the first day, the liquidity premium may decrease. Based on historical performance of new stocks, the average cumulative return one year after listing is significantly lower than the first day's return. Therefore, selling before or on the first day of listing is consistent with the statistical trend. Of course, if an individual really has high expectations for a particular new stock, they can continue to hold it, but that is beyond the scope of buying new stocks for trading purposes.

In conclusion, the IPO subscription market in Hong Kong has been showing signs of recovery recently and is worth paying attention to.

There are three major advantages to the IPO subscription market in Hong Kong.

First, its historical performance during bull and bear markets. In recent years, the overall first-day performance of new IPOs has been positive, and the average increase for most years exceeds 10%.

Second, it has low entry barriers and high allotment rates. The capital requirement for IPO subscription in Hong Kong is very low, and the rate of allotment is high. Using margin financing in Futu can further increase the allotment rate.

Thirdly, there is a simple and clear logic for stock selection and selling decisions. When it comes to stock selection in Hong Kong IPO subscriptions, usually only the decision of whether to participate in a particular new stock and how much to subscribe needs to be considered, while for selling decisions, usually only selling in the grey market or on the first day needs to be considered.