Are Chinese IPO Bonanzas Over?

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Imagine you bought Amazon or Google at IPO their stages.

Any amount of money you had put down would be worth a small fortune today. It would be as if you had won the lottery.

But like lottery tickets, the chances of picking a winning IPO is very slim.

Over in China, however, there are IPO winners all over the place.

Late last year, it was China Literature that made investors’ dreams come true. The eBook spin-off received bids for 9.48 billion shares, more than 625-times what the company was offering.

Fewer than 8,000 investors got their hands on some stock. The rest had to duke it out in the market.

On its first day of trading, China Literature doubled.

Investors’ enthusiasm broke the record previously held by ZhongAn Online Property & Casualty Insurance. Investors bought 391-times more stock than ZhongAn had to offer in 2017.

The stock also rose as much as 57% on its first day of trading.

Then there’s the Bank of Shanghai. Listed in 2016, investors demanded 763-times more shares than the bank was offering.

But if Chinese IPOs are so hot, why did smartphone maker Xiaomi fall on their first day of trading?

Is the lottery over?

Most investors wouldn’t think of buying a stock fresh off an IPO.

Leading up to a listing is when enthusiasm for the stock is at its highest.

This could be the next big thing. If you don’t get on it now, you’ll miss out on an ever-climbing share price, promoters say.

But of course, they’re just trying to move stock. An investment bank or broker might agree to purchase a minimum amount of shares within an IPO. But it’s only so they can sell the stock for a quick profit to a sea of return-hungry investors.

It’s why most stocks usually decline soon after listing.

And it’s no different for Chinese IPOs. Had you bought Chinese Literature, ZhongAn and the Bank of Shanghai all on the first day of trading, you’d be down 25%, 26% and 50% respectively.

But that doesn’t mean you can’t make money. Take a look at the average gain of Chinese IPOs days after listing in 2015.

MoneyMorning 11-07-18

Source: Bloomberg
[Click to open new window]

No, that’s not a misprint. Each month the average IPO returned greater than 100% after just 20 days of trade. Amazing numbers, akin to winning the lottery for those lucky enough to obtain an allocation,Business Insider writes.

Chinese investors have the chance to double their money after just 20 days. Who wouldn’t want to jump onto such quick profits?

But why then didn’t Xiaomi rocket up on its first day?

Have too many investors lost money buying tech IPOs? Was the company’s price too high? Did promoters fail to sell the potential of Xiaomi, the Apple of China?

From The Australian:

The stock that was made available to retail investors drew orders represented 9.5 times the shares offered, the company said last Friday. That is far short of the oversubscription rates for other tech IPOs in Hong Kong. Orders for a separate block for foreign investors only slightly exceeded the amount offered.

Xiaomi’s debut comes at a challenging time for Chinese stocks as investor sentiment has been hurt by an escalating trade conflict with the US. Last month, Shanghai’s key index entered bear-market territory — meaning a 20 per cent drop from its recent high — and Hong Kong’s benchmark is down more than 10 per cent from a January peak.

Whatever the reason, it’s now put a damper on upcoming Chinese tech IPOs.

Didi Chuxing (China’s Uber), Meituan-Dianping (a coupon e-commerce business), ByteDance (content platform) and Ant Financial are all potential IPOs in the near future.

But whether they’ll be hit successes is anyone’s guess.

Remember moderation

There’s nothing wrong with a bit of a speculative punt. And by speculative I don’t mean buying penny stocks. In fact, there are times when a stock trading for 20 cents is far safer than a stocks trading for $20.

To me, a speculative bet is when the outcome is highly uncertain. It might be that the company has a very brief history against competition. Or it could be that you don’t fully understand the business model or how it could look 10 years from now.

But with uncertainty comes potential.

Investors don’t like buying investments when the outcome is uncertain. But if you do happen to pick a winner, then it’s as if you bought into a Chinese IPO.

It’s not the worst thing in the world to do. But you shouldn’t use the majority of your wealth to buy lottery tickets.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: He predicted Japan’s 1989 economic collapse, the dotcom AND subprime busts, as well as the populist wave that brought Brexit and Donald Trump…all well before the mainstream media.

Now controversial economist and bestselling author Harry Dent returns with a chilling warning for Australia…In Dent’s new must read book Zero Hour, he lays it all out. You can pick up your copy here.

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