Right here’s how savvy retail buyers in Hong Kong play new listings. They borrow as a lot as they will from their brokers, in an effort to apply for as many IPO shares as doable. For warm listings, a great rule of thumb is that 90% of an funding may be lined by margin loans — so for each $10,000 you place down, you get to use for $100,000 price of shares. However for Ant, native brokers are so sure issues will go easily that they’re providing leverage at as much as 20 instances. Curiosity on these seven-day margin loans is normally someplace between a 2% and three% annual charge. The upside, in fact, is an IPO pop.
So long as the world is sane, shopping for high quality IPOs is a no brainer. Let’s assume 90% margin financing at a 2.5% annual charge, and a 1% IPO fee charge to the brokers. If our savvy investor can get one out of each 100 shares she utilized for, she simply wants the brand new inventory to debut with a 5% achieve to interrupt even, back-of-the-envelope calculations present.
However Hong Kong’s IPO market has change into heated, and it’s anybody’s guess as to what number of Ant shares you might truly get. Say the allotment charge was solely zero.1%, or one out of each 1,000 shares utilized. Our savvy investor would want greater than a 40% achieve from the IPO worth to interrupt even. Intuitively, in case your probability of getting any shares in any respect is that low, the IPO lottery is a positive shedding sport, as a result of all you’re doing is paying brokers’ charges, with no upside in anyway.
We’re already seeing a few of that frenzy. In early September, Nongfu Spring Co., which bottles mineral water, launched the town’s hottest IPO in a decade, with the retail portion over 1,100 instances subscribed in its $1.1 billion itemizing. For a lot of, the chances of profitable Nongfu shares weren’t nice. There have been eight,377 buyers who every utilized for HK$four.three million ($555,000) price of Nongfu shares; they ended up with solely HK$12,900, or a zero.three% allotment charge. As for individuals who put in much more cash, the chances might be as little as zero.14%. Luckily, Nongfu’s shares are 68% above its IPO worth and most buyers went house joyful. In any other case, Hong Kong’s scorching IPO market would have popped already.
Promoting shares in this type of atmosphere is a blessing, however Jack Ma has to string the needle. The valuation can’t be too low, or he’s leaving cash on the desk. But he additionally must accommodate the town’s enthusiastic retail buyers, who’ve been pushing his Alibaba Group Holding Ltd. inventory to document highs. Ant would possibly begin buying and selling across the time People decide their subsequent president, which may spell market volatility.
Aside from the place to get low-cost Shanghai furry crabs (ask me!), or when journey bubbles will likely be established, this IPO is the discuss of city. Subsequent time your auntie tries to persuade you that purchasing into Ant is a slam dunk, inform her, diplomatically, that she’s making an attempt dumb luck as an alternative.
This column doesn’t essentially mirror the opinion of the editorial board or Bloomberg LP and its house owners.
Shuli Ren is a Bloomberg Opinion columnist protecting Asian markets. She beforehand wrote on markets for Barron’s, following a profession as an funding banker, and is a CFA charterholder.