Hong Kong's mom-and-pop investors squeeze funds as IPOs sizzle (updated)

Ocumension Therapeutics

02/08/2020 06:51

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    By Scott Murdoch
    HONG KONG, July 31 (Reuters) - As Hong Kong's stock market
prepares for billions of dollars in sales of new shares, global
fund managers have a big challenge - competing with the city's
army of mom-and-pop investors for a slice of the pie.
    Record participation by retail investors in a recent Hong
Kong initial public offering and sky-high demand in some other
IPOs has forced big investors to hold onto newly listed shares.
    Under IPO rules in Hong Kong - which competes fiercely with
New York and London to attract global listings - a deluge of
orders from retail investors reduces the portion that fund
managers can buy.
    This recent competition from individual investors has forced
a growing number of funds to become "cornerstone" investors:
they get priority before a deal launches but most hold the
shares for at least six months.
    Chinese biotech company Ocumension Therapeutics  1477.HK 
set a record this month for an IPO over HK$500 million ($65
million) when the retail portion was nearly 1,900 times
oversubscribed, according to stock exchange data.
    Retail investors were initially to be allotted 10% of the
$184 million offering, but Hong Kong's "clawback" rule, which
kicks in when the retail portion of an IPO is heavily
oversubscribed, bumped that up to 50%.
    "Strong retail demand is the key reason we see more and more
institutional investors willing to consider becoming a
cornerstone investor," said Morgan Stanley managing director
Cathy Zhang, who worked on the Ocumension deal.
    Ocumension shares popped to $HK37 in early trading from an
initial $HK14.66. It closed on Friday at $HK29.45.
    Hong Kong has among the highest retail trading levels in the
world, and an OECD study last year estimated that individual
investors owned 30% of the market - far above 11% in the United
States and 16% in Britain.
    Bankers say while Asian IPOs have seen strong retail
interest, the levels do not eclipse Hong Kong - in Seoul, SK
Biopharmaceuticals' $791 million share sale in June saw 323
times retail oversubscription rate, according to local media.
    In Europe, bankers saw an uptick in individual interest in
IPOs recently, but most of the retail activity has been in
secondary trading and through exchange-traded funds and index
trackers.
    Hong Kong's high retail demand risks over-valuing companies,
such as biotech startups, when they come to market, bankers say.
    "It is a consensus among institutional investors that
valuation for the majority of the biotech companies listing in
Hong Kong are stretched," according to Aequitas Research
co-founder Ke Yan, who publishes on the SmartKarma platform.
    Strong recent listing performances by biotech firms is also
helping to lure Hong Kong retail shareholders.
    Ocumension rose 154% on its first day and Peijia Medical,
which was 1,184 times oversubscribed, gained 68% on its market
debut, Refinitiv data show.
     Hong Kong Institute of Investors chairman Ricky Tam said
the city's retail investors are being enticed by jumps in stock
prices on the first day of trading.
    "A lot of investors don't know the details of the companies,
they only want to know if an IPO is going to perform well or
not," he said.
    Massive retail demand for Hong Kong IPOs has been driven by
"very, very low" interest rates and should continue, said
brokerage UOB Kay Hian executive director Steven Leung.
    "Whenever there is a hot deal with a good story, lots of
investors, retails, institutions, hedge funds rush to
participate," Leung said.

 (Reporting by Scott Murdoch in Hong Kong; Additional reporting
by Abhinav Ramnarayan; Editing by Sumeet Chatterjee and William
Mallard)
 ((Scott.Murdoch@thomsonreuters.com;))