November 30, 2022

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What are the formalities when participating in an IPO in Hong Kong?

Hong Kong exchange probes multiple orders for hot IPO | The Straits Times

An IPO is an acronym for an initial public offering that is used widely to describe how a company goes from being privately owned to being publicly traded on a stock exchange.

In Hong Kong, this term applies as well, but there are slight differences in how it works compared to other countries. For example, a private company can only enter the market after their stocks have been approved by the Securities and Futures Commission (SFC) and have also issued a prospectus for investors. 

When going through with an IPO, companies will need to send their applications, financial statements and reports to get more information on whether or not they’ll be approved for listing.

This article goes into the formalities when participating in an IPO in Hong Kong, not just during the application process, but all aspects, including what to expect after applying.

Before you apply 

Before you apply (and for between 5-6 months), pay attention to investment banks’ roadshows, which will detail how their strategies differ from others’, their recent deals and successes, their underwriters (more on these later), and research analysts’ reports about companies they believe will flourish after going public. It is not uncommon for analysts to upgrade their ratings on companies they gave a “hold” initially or even “sell” right before the roadshow starts.

After you apply

After you apply, you should see your bank contact you within two weeks to let you know if your application was successful or not. Note that different banks maintain different allocations, ranging from 5-10% of the IPO size (in which case it may be wise to get in touch with multiple banks), while others may allocate all available shares under them – there are also cases where companies leave part of the allocation up to the investors themselves.

What are underwriters?

When participating in an IPO, it is essential to learn how underwriters work. Underwriters are groups of banks that take care of everything from the IPO price to obtaining authorization, arranging meetings with potential investors, and most importantly, determining who gets how many shares based on what is known as their “book” or allocation.

Underwriters are provided with a 5-6% commission for helping to arrange the IPO, which they try to recoup by favouring their biggest customers. It is also not uncommon for underwriters to allocate more shares towards their favourite clients, but they have less to allocate across the board. Note that if there are banks where you have accounts, it is in your best interest to let them manage your participation in an upcoming IPO. Asking individual representatives of different banks may prove fruitless as they will often not know about their bank’s overall strategy nor be able to influence it.

Once the IPO price has been decided upon, you will receive a confirmation from your bank that they were able to allocate shares for your participation and an allocation letter which provides details about the number of shares under them as well as their proposed price (which can be lower than the final offering price). 

It is up to you whether you want to participate in this deal or not, but if you do decide to do so, usually between 20-25% of your portfolio, depending on your risk tolerance, should be enough for Hong Kong stocks and ETFs through trading accounts on margin – despite volatility during IPOs, these are some of the safest investments within Hong Kong’s stock market.

Bottom Line

Make sure you research before deciding to participate in an IPO. It is recommended that you read up on the company itself and their motivation for doing this public listing, as well as how they compare to similar companies within Hong Kong’s stock market. New investors are advised to use an experienced and reputable online Saxo forex broker and trade on a demo account before investing real money.