Are Hong Kong IPO Bankers Gatekeepers, or Glorified Porters?

Shuli Ren, Bloomberg

As Hong Kong’s public listings boom heats up, investors and regulators are asking whether the city’s investment bankers know what they are doing — or even worse, bother with gatekeeping at all. Some might be no more than well-paid concierge services that wave every passersby through.

Companies are rushing in to capture Hong Kong’s stock rally. Nearly 100 firms filed for public listings in January, more than triple the number recorded a year earlier. Currently, more than 400 firms are waiting in the pipeline for approval.

This velocity is alarming regulators. In an unusual move, the Securities and Futures Commission has asked 13 banks to “promptly” review their procedures, having discovered “serious deficiencies” in their preparation of new listing documents.

The SFC is right to step in: Banks’ incentives are misaligned.

It’s no secret that after three years of IPO drought, bankers are eager to do deals and get fat bonuses again. What’s less talked about is that while every brokerage wants to participate in the biggest listings — just so that they are ranked on the league tables — it’s the smaller companies that bring in the real money.

Underwriting fees averaged an estimated 2.2% last year. But there’s a lot of variation. Zijin Gold International Co., the second-largest deal last year with $3.7 billion capital raised, paid only 1.2%. On the other side of the scale, the rate for, say, BenQ BM Holding Cayman Corp.’s $80 million deal, was 3%. The health-facility operator’s stock tumbled 49% on its trading debut.

In other words, an IPO sponsor can make more money doing many smaller deals than fighting over a few blockbusters. And the worry is that swamped by company requests to go public, banks are not doing enough due diligence.

We are starting to see some evidence that quality is slipping. For instance, among the 64 deals over the last two years that are sponsored by China International Capital Corp., the largest underwriter by IPO counts, 20 fell on trading debut. This ratio is a lot higher than peers such as Goldman Sachs Group Inc. or Morgan Stanley, which have worked on far fewer listings. Whether a stock can create a first-day pop, or significant price increase, is often used to measure an IPO’s success.

The SFC has raised multiple red flags, including senior bankers simultaneously working on too many deals; brokerages being overly-reliant on third-party professionals, such as lawyers and accountants; and that junior staff may not be well trained or qualified.

Meanwhile, retail frenzy is common in this corner of the market. For many years, Hong Kong residents have treated new IPOs as nothing more than a lottery at the Jockey Club. Often, they take out margin loans to subscribe to new shares and sell soon after listing, hoping for a first-day pop. The city’s brokers have been happy to facilitate, with some offering zero-interest lending and collecting only a 10% deposit upfront.

But the roulette wheel has to stop at some point. Shanghai Longcheer Technology Co., which went public in January, is trading below its IPO price even though its retail tranche was oversubscribed more than 1,000 times. Shenzhen-based Eastroc Beverage Group Co. had the city’s largest listing this year with $1.3 billion raised. The much-anticipated debut did not pan out either: The drinks maker ended the day only 1% higher. Both are signs of strain in the IPO space.

Before 2025, a prolonged IPO drought forced top management to shrink their ranks dramatically, and even as they rush to beef up their capital markets desks again, new hires may not be as experienced or qualified. Nonetheless, banks would still do well to step back and slow down the deal flow. It’s not wise to kill this golden goose.

[Abridged]

Courtesy Bloomberg/Shuli Ren