IT’S enough money to buy Alibaba Group Holding, or pay every resident of Hong Kong nearly US$50,000.
The figure – more than US$353 billion – represents the amount of margin loans sought by the city’s retail investors to bet on red-hot initial public offerings (IPOs) this year.
The frenzy is causing first-day pops, creating headaches for investment banks and attracting scrutiny from regulators who worry that mom-and-pop speculators will end up getting burned.
Behind it all is an intense competition among local brokers to offer what looks to some like an irresistible deal – margin loans with interest rates as low as 0 per cent.
“I am a millionaire for seven days – I know it’s just on paper, but it’s cool,” said Gareth Chan, who is in his 30s and has been buying into IPOs since 2019.
The way Chan, who works in a back-office function for a conglomerate, sees it, there’s virtually no risk to the wagers if he sells within the first few minutes of trading.
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That cannot-lose mentality is starting to worry Hong Kong authorities. The city’s financial regulator is reviewing eight brokers with the highest IPO oversubscription volumes, Securities and Futures Commission (SFC) chief executive officer Julia Leung said in February, without naming the firms.
The review is looking into clients’ ability to repay loans and IPOs that were oversubscribed thousands of times following a new settlement system known as Fini, Leung said.
Before Fini, the norm for margin-loan offerings tended to be around 10 to 20 times leverage. After the system went into effect, the ratio could go to around 100 times leverage or more.
One broker, Phillip Securities, offered 200 times leverage, meaning investors could fund their bids with 99.5 per cent margin financing, according to a spokesperson for the firm.
For now, there’s little sign the frenzy is fading. Last week, retail traders sought more than HK$1.8 trillion (S$312 billion) in margin loans to get a slice of tea-and-ice-cream chain Mixue Group’s IPO. That represented more than 5,300 times the shares reserved for them and a record bid for a listing in the city.
It brings this year’s margin-loan applications for Hong Kong listings to HK$2.8 trillion, the highest since as far back as 2016, according to broker data compiled by TradeGo FinTech for IPOs that were successfully completed.
The margin loans applied for the Mixue listing also surpassed the HK$1.3 trillion reportedly sought through retail orders for the Hong Kong portion of fintech giant Ant Group’s botched IPO in 2020.
Clawing back
Market participants say retail investors tend to hold the IPO shares only briefly once trading starts, before flipping them for a profit. They can also sell the shares before the listing itself on the grey market the day before. They then pay back the margin loan for the amount they get allotted while booking the gains.
Chan made about HK$16,000 profit from the grey market ahead of the Mixue listing, falling short of his expectation of HK$40,000 as the market turned sour last Friday (Feb 28).
He said he is still keeping one board lot, or minimum trading unit, according to trading record reviewed by Bloomberg.
The fervent demand from mom-and-pop investors has been problematic for investment banks looking to market the IPOs to institutions.
Oversubscriptions by retail traders require the underwriters to increase allocations to as much as 50 per cent of the IPO to that pool of investors, in an arrangement known as the clawback mechanism. That would chip away shares initially reserved for institutions, which include funds that hold shares over a long-term horizon.
The Hong Kong Stock Exchange is now seeking market feedback to allocate a maximum of 20 per cent to retail investors in hot IPOs.
If the stock exchange’s proposals were to materialise, the competition for shares among mom-and-pop investors would be even fiercer for hot deals, said Billy Au, a partner who has worked on IPOs at the law firm Johnson Stokes & Master.
“If everyone dumps the shares on the first day, then the share price cannot be sustained, and at the end of the day the retail investors will suffer,” Au said.
For now, Hong Kong’s regulator will be keeping a close eye on demand for IPOs.
“Even if some IPOs are thousands of times oversubscribed, they can still fall” after debut, the SFC’s Leung said. “Investors should exercise caution.” BLOOMBERG
