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Hong Kong's IPO Mania Goes White Hot, Drives Up Interbank Rates

IPO mania is gripping Hong Kong and if you’ve been looking for a warning sign that equity markets are close to a peak, just maybe this is it. It was a feature of the Hong Kong market in 2006-07, before the Great Financial Crisis, and in 2000, prior to the bursting of the Dot.com bubble. No surprises, the current mania is also focused on the technology sector. The focal point today is the China Literature Ltd IPO which began trading this morning. The stock price rose as high as HK$110 per share compared with the HK$55 IPO price. No wonder the company’s executives were looking smug.

China Literature is an Amazon Kindle “look-alike”, being the Chinese mainland’s largest publisher of e-books. However, it is also growing its own network of contract writers and owns the rights to well-known Chinese online novels, such as the Grave Robbers’ Chronicles and Ghost Blows Out the Light series. The HK$8.3 billion IPO was more than 600 times oversubscribed with 5% of the city’s population applying for shares. According to Bloomberg.

Hong Kong demand for new share sales has hit fever pitch, with 417,000 people applying for lots in Tencent Holdings Ltd.’s online bookstore unit -- more than 5 percent of the city’s population. China Literature Ltd.’s retail offering was 625 times oversubscribed, according to the company. That locked up at least HK$520 billion ($67 billion), or a third of the city’s monetary base, the South China Morning Post reported. It’s easy to see why the clamor: China Literature’s shares surged as much as 100 percent on their Wednesday debut…"You can tell Hong Kong investors like tech stocks," said Daniel So, Hong Kong-based strategist with CMB International Securities Ltd. "If you’d managed to get the stock, you’d have made a lot of money.”

One signal of the scale of the current IPO mania is that the China Literature had a 200-basis point impact on Hong Kong’s interbank rate, as Bloomberg explains.

Interest in initial public offerings is so intense it’s affecting the city’s interbank rates. The overnight Hibor fixing jumped 2.1 percentage points on Oct. 31, the most in a decade, as investors placed orders for China Literature.

In contrast to some of the Dot.com era’s IPOs, at least China Literature is profitable and has a coherent strategy. It uses “big data” to drive revenues and aims to cross-sell content into other media.  As Bloomberg reports.

China Literature had profit of 213.5 million yuan ($32 million) in the first half of this year, compared with a 2.4 million yuan loss for the same period in 2016, according to its prospectus. The company -- created through the merger of Tencent’s online literature business with Carlyle Group LP-backed Cloudary Corp -- had 9.6 million works and 6.4 million writers as of June 30. Customers can pay for an entire book or buy a few chapters at a time to see if they want to keep reading.

 

“We can study our users’ social network and understand their preference and recommend to them what their friends like to read,” Co-Chief Executive Officer Wu Wenhui said in an interview. “We already have compiled a great amount of user data, which will enable us to study what they like.” The company also wants to leverage its content into other forms of entertainment, such as movies, TV series and anime, as Tencent aspires to create a Marvel-like empire. Shenzhen-based Tencent became China’s second-biggest technology company on the strength of its WeChat messaging app, which since has morphed into a portal for shopping, banking, gaming and consuming entertainment.

China Literature will select some content, and co-invest or co-produce movies or anime series, co-CEO Liang Xiaodong said. He added that his company is closely working with Tencent’s film and video units. “User demand for content is getting very strong, especially original material,” Liang said in an interview with Bloomberg Television. “Our content can easily be converted into movies and games to maximize coverage.”

The China Literature IPO came on the heels of HK’s largest ever fintech IPO, ZhongAn Online Property & Casualty Insurance. ZhongAn raised $1.5 billion and priced at the top end of its valuation range. As Bloomberg notes, there are more tech IPO’s in the pipeline with the focus now shifting to the gaming accessories sub-sector.

China Literature’s IPO follows ZhongAn Online P&C Insurance Co., which went public in September. The first major fintech listing in Hong Kong, and backed by Ant Financial, the owner of Alipay, the retail portion was almost 400 times oversubscribed. Focus will now shift to Razer Inc., a manufacturer of high-spec gaming accessories, which will begin trading in Hong Kong on Monday after raising $529 million.

The Razer Inc. IPO will make co-founder and CEO, Tan Min-Liang, a dollar billionaire. The global gaming market is “hot”, with growth expected to increase by 52% to $160 billion by 2021. Buyers of Razer shares will include Singapore’s sovereign wealth fund, GIC.

If we were to be strictly precise, the ZhongAn IPO was 391 times over-subscribed, while China Literature was 625 times over-subscribed. Consequently, the latter beat out ZhongAn to hold the record for a Hong Kong IPO. We look forward to seeing the metrics for Razer, but Hong Kong IPOs are obviously white hot.

Shouting on deaf ears no doubt, the FT reports that one analyst urged caution.

In recent years, a doubling in the share price on the first day of trading for a Hong Kong listing has been rare. The strong appetite for China Literature stock on Wednesday was driven by retail investors trying to get a piece of what many perceived could be the next Tencent, said Kevin Tam, an analyst at Core Pacific-Yamaichi in Hong Kong.“ They expect this to be Tencent number two,” he added. “Many retail investors missed out on the first Tencent IPO and the 10-times growth.” But Mr Tam cautioned that such expectations for China Literature were misguided. Much of Tencent’s value is locked in its userbase but China Literature has “just a very small slice of that”, he said.

Wu Wenhui. co-chief executive of China Literature, stated that he wants to bring original Chinese literature to a global audience. He might eventually be successful in this but, right now, he's bringing the melt-up stage in the Chinese bubble to a global audience.