Hong Kong's initial public offering market is experiencing a boom, with new listings showing an average first-day gain of almost 30% this year, and over 100 listings delivering a weighted average first-day jump of about 28%. This intense demand has prompted companies to take a more active role in allocating shares, often reserving them for strategic investors, business partners, suppliers, customers, and other close allies, a practice sometimes referred to as "friends and family" allocations. This shift is squeezing out traditional investment funds, which now face more limited pools of shares, especially after cornerstone investors often absorb up to half of a deal.
Examples of this trend include Victory Giant Technology Huizhou Co., a printed circuit board maker, which saw its shares jump 50% on its first day after a $3 billion deal. Its management directly selected investors, placing over 20% of the sale with some of Nvidia Corp.'s largest shareholders to mirror its customer base. Similarly, for Lingyi iTech Guangdong Co.'s June listing, more than a third of nearly 300 institutional orders received no shares, with management closely shaping the allocations. Zhongji Innolight Co., an Nvidia supplier, also actively shaped its investor book despite strong institutional appetite for its $7.8 billion IPO, allocating only a small portion to "friends and family."
While this selective approach isn't new, it raises concerns about market fairness and transparency, particularly in today's hot market. Tom Chau, president of the Hong Kong Chartered Governance Institute, warned that micromanaging allocations, especially in smaller offerings, could lead to mispricing and make IPOs vulnerable to "pump-and-dump" activities. He highlighted that undisclosed placements could unfairly treat investors, falsify demand, prop up prices, and damage market confidence and minority shareholder interests. The Securities and Futures Commission (SFC) has broadened its oversight of bookbuilding and allocation practices, even freezing assets connected to allegedly fabricated demand in one case.
Despite the significant first-day pops, the longer-term performance of some of these IPOs has been mixed. More than half of Hong Kong's 10 largest listings this year are now trading below their offer prices. Victory Giant, for instance, is trading about 4% below its Hong Kong offer price, while Lingyi has closed above its offer price on only two trading days since its June debut. This reversal underscores the risks of relying solely on strong initial demand as an indicator of sustained performance and intensifies questions about pricing and liquidity when issuers exert more control over share distribution.
