Hong Kong IPOs plagued by bottom pricing as risk appetite wanes

[HONG KONG] Most companies that sold shares for the first time in Hong Kong this year have had to accept pricing at the low end of their expected range.

Tough conditions for first-time issuers globally - ranging from the prospect of higher interest rates to heightened geopolitical tensions - have added to local concerns in the Asian financial hub since mid-2021, as China tightened its grip for issuers abroad.

The increased risks are becoming evident deal after deal. Just 6 companies priced shares in Hong Kong this year, with 5 of them settling at the bottom of their marketed range, according to data compiled by Bloomberg.

The initial weeks of last year and this show starkly different conditions, with investors becoming more selective. Pricing of fewer than a third of the 19 IPOs (initial public offerings) that Hong Kong hosted during the same period in 2021 fell at the lower end of the range.

The erosion in sentiment has extended to trading, with 3 of those shares that have already debuted changing hands at prices lower than their listing. That contrasts with a 3 per cent year-to-date gain for the Hang Seng Index, which is recovering from a 14 per cent annual slump.

The trend will continue as long as there is a mismatch between valuations issuers expect and what investors consider the assets deserve, according to Brian Freitas, an analyst on independent research platform Smartkarma. Some IPOs had large cornerstone investor allocations, he added, indicating "the broader market did not participate".

"To get past this trend, issuers will need to lower their valuation expectations and their IPO prices, and then the IPOs will need to trade higher post listing to build confidence that the issuers are leaving something on the table for investors," Freitas said.

Shanghai-based Lepu Biopharma is the next to debut in Hong Kong, with its listing slated for Feb 23. The company raised US$116 million after pricing shares at the midpoint of the marketed range, IFR reported on Feb 16. BLOOMBERG