A guide to launching and investing in IPOs in Hong Kong

IPO stands for Initial Public Offering, and it is the first time a company goes public and allows institutional and retail investor to publicly traded its shares. These new shares are typically listed on one or more stock exchanges.

In this article, we’ll explain why companies go public, the IPO registration process in Hong Kong, and some pros and cons of investing in IPOs for investors who are eager to participate in the market but do not know much about it.

Why do companies go public?

Companies typically go public because they are in need of cash for expansion and development. When investors purchase stocks, the cash is funnelled back into the company for the development of products and services.

Largest IPOs launched in Hong Kong

Hong Kong is home to many fast-growing and rapidly developing start-ups and small businesses, and the Hong Kong Stock Exchange (HKEX) has seen some large IPOs from 1986 to present day.

For example, the AIA Group managed to raise over 159.08 billion HKD during its IPO on the Hong Kong Stock Exchange, while the Industrial and Commercial Bank of China’s H Shares managed to raise over 124.95 billion HKD.

How to launch an IPO in Hong Kong: requirements

Launching an IPO in Hong Kong does not take place on a whim. In fact, the average preparation process for a listing on the HKEX is about two to three years. This may sound like a long time, but it makes sense, considering how much information a company has to collect and collate beforehand just to make an application. Successful IPO launches requires the following from the company:

  • A sponsor to represent the company in front of the Hong Kong Stock Exchange. Usually, this is an investment bank.
  • A reporting accountant, who will prepare the company’s financial prospectus and issue all relevant letters related to the company’s financial status.
  • Two groups of legal advisers, one that acts on behalf of your company and the other that acts on behalf of your sponsor and any underwriters.
How to launch an IPO in Hong Kong: stages
Firstly, a company has to meet the listing criteria on the HKEX.

The HKEX has two listing boards – the main board and the GEM (Growth Enterprise Market). Larger companies tend to list on the main board, as they require a revenue of at least 500 million HKD and a market capitalisation of at least 4 billion HKD. For rapidly developing businesses, they can turn to the more relaxed GEM, which requires a cash flow of at least 30 million HKD and a market capitalisation of at least 150 million HKD.

Next, a company completes an application for the listing.

To do so, you have to prepare a prospectus of your company’s financial status, management structure, and background. You should also state your company’s reason for going public and identify all current shareholders. It is expected a full transparency in this prospectus, and it required legally the accuracy of all information presented.

If HKEX approves the prospectus, the company will be vetted over the course of three days, and there will be a hearing scheduled. The hearing will be between the applicant and representatives of the Hong Kong Stock Exchange, and they will usually take place about 20 days before the listing.

If HKEX approves the application, the stock exchange will hold a board meeting to approve the listing. Then the company is usually expected to start promoting their IPO before its launch to gain as much interest and support from the public as possible. This is especially true for companies that have had no public presence prior to their IPO.

During this marketing and offering phase, companies may host events and roadshows to increase brand exposure and awareness. It is also at this stage that the company’s prospectus go published for public access and the share price is determined.

Finally, the company goes public and is on the stock exchange. The public offering lasts about three and a half days. It usually ends with a book-building process.

Advantages of investing in IPOs

There are some clear advantages of investing in IPOs:

  • Ability to get in on the action early

Investors who are interested in a certain company can use the opportunity of an IPO to get in on the action early and own a part of a company they like. As an IPO, share prices have the potential to be lower in its beginnings as well. (Though, of course, that depends on the company itself.)

  • Complete price transparency

Investors who buy a company’s first publicly traded shares also gain complete price transparency, and they can get to examine a company’s financial status thoroughly through the published prospectus. This is a huge advantage for investors, who normally can only gain in-depth information to the financial performance and development direction of a company through annual reports. Investors can also find peace of mind knowing that all the information in the prospectus is accurate.

  • Potential of great returns

Investing in a new company that is in the midst of expansion can be very exciting and offer great potential returns in the long term.

Disadvantages of investing in IPOs

However, not all investments are perfect and that includes IPOs. Below are some common cons of IPO investments:

  • Not knowing whether a share will do well

One of the pitfalls of investing in IPOs is that traders will not know how a company will do in the long term or even in the short term in the future. This is because these newly listed companies are often not very well-known nor are they very established. Investors who take a chance on investing in up-and-coming IPOs may be rewarded, but they may also lose all their money.

  • Not being able to sell the shares immediately

There usually is a holding period when investing in new stocks. In this short period of time,  they forbids investors from selling their freshly bought stocks. This is so that the share price of a company can have time to stabilise. This may not be too appealing to investors who prefer buying and selling in the short-term.

  • Time consuming

Finally, investing in a new company may be tiring because of its lack of proven track record. Investors have to read the company’s IPO prospectus and do research on their own, which may prove to be rather time consuming. For many with some capital to spare, investing in shares of large and established companies requires much less effort.

Start investing in IPOs

If you are interested in investing in IPOs, you can check out local offerings via Saxo Bank.


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