A month after Hong Kong's initial public offering reforms took effect on August 4, the odds of winning new shares have plummeted, with the lowest rate for one board lot at just 0.06 percent.
Among the five IPOs debuted under the new rules, their stocks have performed well, with the first-day gains ranging from 6 percent to 206 percent.
But the chances of securing a board lot have significantly decreased, frustrating retail investors. Nonetheless, as the new system is here to stay, investors must adapt. An analysis of the allocation results reveals three key characteristics and suggests optimal strategies.
First, the adoption of "Scheme B" has made winning allocations much harder.
IPOs now use either Scheme A or B. Scheme A initially allocates 5 percent of shares to the public offering, with the percentage potentially increasing to a maximum of 35 percent if the offering is heavily oversubscribed.
Scheme B fixes the public allocation ratio between 10 percent and 60 percent from the start, with no clawback mechanism.
Data shows that IPOs using Scheme A, like Sicc (2631) and Aux Electric (2580), were easier to win. Conversely, those using Scheme B—Guangzhou Innogen Pharmaceutical (2591), Shuangdeng Group (6960), and Jiaxin International Resources (3858)—all fixed their public allocation at the minimum 10 percent, resulting in one-lot win rates of just 0.06 percent to 1 percent.
Even subscribing with the maximum allowable amount for Innogen and Shuangdeng did not guarantee a single lot.
Second, Group A sometimes outperformed Group B. The public offering is split into Group A (subscriptions under HK$5 million) and Group B (subscriptions over HK$5 million), each generally allocated 50 percent of the retail shares. A application for the maximum allowable amount subscribes for half of the entire public offering, representing the largest possible order in Group B.
Third, the increased difficulty in winning allocations is accompanied by larger share price gains. Taking the three IPOs that adopted Scheme B as an example, their first-day gains ranged from 31 percent to 206 percent. Even Shuangdeng, which had a relatively weaker first-day performance, saw its gray market price surge over 300 percent. Similarly, Jiaxin International Resources and Imogen witnessed gray market increases of over 100 and 500 percent, respectively.
Typically, larger subscriptions increase the odds of winning. However, for the three hard-to-win Scheme B IPOs, the win rate for the tail-end of Group A was 35 percent for Shuangdeng and 70 percent for Jiaxin International, outperforming the head of Group B (13 percent and 63 percent, respectively). This suggests investors, aware of the low odds in Scheme B IPOs, significantly increased their order sizes, making Group B even more competitive.
For small retail investors, it is advisable to use fee-free cash subscriptions to reduce costs. Notably, some brokers even offer interest-free margin financing for IPOs, allowing investors to wage a "zero-cost" protracted war for new shares.
