Hong Kong market faces pressure as HK$255 billion in locked shares expire in July

[HONG KONG] Hong Kong’s underperforming stock market may come under renewed pressure as a large amount of shares frozen under restrictions tied to equities offerings become tradable next month.

At least HK$255 billion (S$41.8 billion) worth of stocks, either from initial public offerings or secondary share sales, will see their temporary lockups expire in July, the most for any month through the rest of this year, according to exchange data calculated by Bloomberg.

Separately, Goldman Sachs Group estimates that IPO-induced lockup expiries in the city will total US$274 billion in the coming year, marking a record for any 12-month period. Shares held by cornerstone investors of a Hong Kong IPO and existing shareholders won’t be available for public trading for a period of time, typically for six months or a year after the stock’s listing.

The looming expiries result from an IPO boom in the financial hub late last year and early this year, when technology firms rushed to capture the artificial intelligence investment frenzy. The potential selling pressure would be an extra headwind for Hong Kong stocks, which have lagged Asian peers such as South Korea and Taiwan that have led the global AI trade.

Pressured by China’s struggling economy and doubts on Chinese firms’ heavy AI spending, the city’s Hang Seng Index has fallen 3 per cent this year, versus an over 100 per cent surge for Korea’s Kospi gauge and the 57 per cent gain for Taiwan’s Taiex benchmark.

“Historical precedents suggest that equities typically experience moderate downward price pressure following lock-up expiration,” Goldman analysts including Si Fu wrote in a note dated on Jun 14. Such stocks tend to see a median decline of 4 per cent in three months and 7 per cent in six months after they become tradable, they added.

Companies faced with substantial lockup expiries in July include those that have seen their shares surge following listings, such as AI model developer MiniMax Group and Knowledge Atlas Technology JSC, also known as Zhipu. Insilico Medicine Cayman TopCo and chip designer Shanghai Biren Technology are among those in the same situation later this year.

The list also contains dual-listed companies such as GigaDevice Semiconductor and Sany Heavy Industry.

First-time share sales in Hong Kong fetched about US$5 billion in January, the highest tally for the month on record. Listings have raised nearly US$14 billion in the first three months of this year, notching their best quarter since 2021, data compiled by Bloomberg show.

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The more than 60 new listings in Hong Kong this year have delivered strong post-IPO performance, rising 67 per cent on average in the first three months after making debut, according to Goldman’s note.

“For tech and healthcare companies, multiple funding rounds prior to IPO typically result in greater lockup expiry pressure due to the large share amounts and low holding costs,” said Willer Chen, analyst at Mizuho Securities, referring to the cheaper prices that pre-IPO investors enjoy. “We believe stocks with low holding costs for lockup shareholders and large unlocked shares relative to freefloat will experience the most pronounced impact.”

To some, the potential selling pressure may offer a chance to buy on dips for investors who remain bullish about the stocks’ long-term prospects.

“We see this as an opportunity, as higher free float should improve liquidity and enable better price discovery in quality Hong Kong listings coming out of lock ups,” said Gary Tan, a portfolio manager at Allspring Global Investments. BLOOMBERG