Hong Kong’s tiny floats are filled with big risks

MicroPort NeuroScientific

19/08/2022 04:02

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Yawen Chen
    HONG KONG, Aug 19 (Reuters Breakingviews) - How do companies
go public in falling markets and keep buoyant valuations afloat?
Those in Hong Kong may have an answer. A Chinese biotech firm in
July sold just 2% of shares in its initial public offering,
underscoring a trend of relatively illiquid stocks coming to
market. 
    MicroPort NeuroTech  2172.HK , which specialises in
neurovascular treatments, raised $43 million at a valuation of
$1.8 billion, in line with its November private funding round,
according to research firm ITJuzi. That’s an eyebrow-raising 514
times its 2021 earnings, a formidable feat given the local
benchmark Hang Seng Index, which is down 18% year-to-date,
trades at less than 9 times. Selling as few shares as possible
probably helped, as did allocating 65% of the deal to
cornerstone investors, subject to a six month lock-up. As a
result, just 0.7% of MicroPort’s enlarged capital is considered
freely tradable. 
    That’s possible because the Hong Kong bourse operator only
requires a minimum 25% of stock be held by the public, which
could also include stakes held by pre-IPO and cornerstone
investors. To compare, companies that go public in Shanghai or
Shenzhen have to sell at least 10% of their shares.
    MicroPort is not the only one to take advantage of Hong
Kong’s rules. Recently-listed biotech peers Rainmed Medical
 2297.HK  and Mega Genomics  6667.HK  sold similar portions of
their equity; on Friday, Biocytogen Pharmaceuticals (Beijing)
opened books for its $70 million offering, representing just
5.5% of shares, with most of that going to cornerstone investors
 urn:newsml:reuters.com:*:nIfpbxlq2M. Overall, companies in Hong Kong sold an average of
13% of their enlarged share capital in this year’s offerings,
according to Dealogic data, down from 19% last year.
    Hong Kong regulators have spent years tackling wild price
swings in the market. Shares of SenseTime  0020.HK , which sold
just 5% in its listing last year, more than doubled within the
first week of their debut; six months later, they plunged nearly
50% in a day after the IPO lock-up expired. For issuers, the
volatility makes follow-on fundraising challenging - a headache
for cash-burning biotechnology groups.
    The trend exacerbates Hong Kong’s dismal secondary market
performance.  urn:newsml:reuters.com:*:nL1N2ZT07J Over 80% of new listings since 2021
are trading under water, per Dealogic. A crowded, illiquid
market is partly to blame: just 20 companies on the main board
accounted for 48% of total turnover last quarter. More tiny
floats risk sinking the rest of the market.
    Follow @ywchen1 https://twitter.com/ywchen1 on Twitter
    
    CONTEXT NEWS
    Biocytogen Pharmaceuticals (Beijing) has opened the books
for a Hong Kong initial public offering of HK$550 million ($70
million), financial publication IFR reported on Aug. 19. 
    The company is selling 21.8 million shares, or 5.5% of the
enlarged share capital. That includes $49.8 million worth of new
shares sold to five cornerstone investors, IFR reported.
    The Hong Kong Exchanges and Clearing reported on Aug. 17
that attributable profit fell 27% to HK$4.8 billion ($612
million) in the first six months of 2022 from the same period a
year earlier, due to a plunge in the number of new listings and
lower trading activity.

   
      

 (Editing by Robyn Mak and Thomas Shum)
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