Initial Public Offerings (IPOs) are crucial for companies to raise capital through the financial markets. In the Hong Kong market, the ways and rules for investors to participate in new stock subscriptions (or "IPO allotments") are unique. Understanding the allocation mechanisms, reallocation rules, and market changes is essential for investors to formulate strategies and mitigate risks. This article provides a detailed analysis of these aspects.

1. Allocation Mechanism of New Stocks

In the Hong Kong market, the allocation of new stocks primarily involves the ratio between public offerings and international placements. Public offerings target individual retail investors, while international placements are aimed at institutional investors.

Ratio of Public Offerings to International Placements

Typically, 90% of new stocks are allocated to international placements, with the remaining 10% reserved for retail investors. For instance, if a company issues a total of HKD 1 billion, HKD 900 million would go to international placements, and HKD 100 million would be for public offerings. The retail subscription portion is further divided into two groups: Group A (subscriptions under HKD 5 million) and Group B (subscriptions over HKD 5 million), with each group generally accounting for 50% of the allocation. If there is insufficient subscription, the unallocated shares will be reallocated to the international placement portion. This allocation method ensures that institutional investors receive the majority of the shares, while retail participation remains relatively limited. Nevertheless, retail investors can still engage in new stock subscriptions with smaller investment amounts, providing potential investment opportunities.

2. Reallocation Mechanism and Its Impact

During the IPO process, the reallocation mechanism is a crucial factor that determines the distribution of shares between public offerings and international placements. When the subscription multiple for public offerings reaches a certain level, a portion of the shares will be reallocated from international placements to public offerings.

Changes in Reallocation Ratios

When the public subscription multiple is between 15-50 times, public offerings account for 30% of the shares. When the subscription multiple is between 50-100 times, public offerings account for 40%. When the subscription multiple exceeds 100 times, both allocations are equal at 50%.

（Source: uSMART HK）

This mechanism reflects market fairness, and generally speaking, the more fervent the public offering, the better the performance of the new stock post-listing. Historical data shows that when the subscription multiple exceeds 500 times, the average increase in stock price can reach 47%. Such high levels of attention and liquidity mean that new stocks receive more buying support on their first trading day.

3. Factors Influencing the Performance of New Stocks

The performance of new stocks after listing is influenced by various factors, including subscription enthusiasm and allocation ratios. A high subscription multiple typically indicates strong market interest in the new stock, which can drive the stock price significantly higher on the first day of trading. In the issuance of new stocks, there are two special types of reallocations: tactical and active reallocation.

Tactical Reallocation refers to situations where, under certain conditions, institutions choose to reallocate fewer shares to retail investors, thereby enhancing the performance of the new stock post-listing. In these cases, although the fundamentals of the new stock may not be outstanding, the reluctance of institutions to allocate shares to retail investors can lead to better listing performance. Data shows that tactically allocated new stocks usually have higher price increases and winning rates on their first trading day, attracting considerable investor attention.

Active Reallocation, on the other hand, involves forcibly reallocating shares back to retail investors under certain conditions. This scenario typically increases market pressure, which can negatively affect the listing performance of the new stock. The occurrence of active reallocation often coincides with investors' pessimistic expectations regarding the new stock's outlook, leading to significant price declines.

4. New Rules for IPO Subscriptions in Hong Kong

Since 2024, the Hong Kong IPO market has shown significant recovery, accompanied by some changes in rules that investors need to pay special attention to.

The End of Multi-Account Subscriptions

With the Hong Kong Stock Exchange launching the Electronic IPO Settlement System (FINI), behaviors involving multiple account subscriptions will be subject to strict checks, and any duplicate subscription orders will be deemed invalid. This change effectively eliminates multi-account subscriptions. Investors must subscribe through a single brokerage to avoid losing their chance of winning a share.

Shortened Settlement Period

The FINI system has also shortened the settlement period for new stocks to two trading days, significantly reducing the costs and market risks associated with IPO subscriptions. Previously, the waiting time from the end of the subscription period to listing was five trading days, during which investors' funds were tied up while facing market volatility risks. By shortening this period, investors not only save on financing interest but also can access liquid funds more quickly. For example, if an investor needed to pay interest for six days when financing an IPO, the cost would be considerable. Now, with the interest period shortened to one day, financing costs are reduced, allowing investors to be more relaxed when participating in IPOs.

Delayed Announcement of Allocation Results

Following the launch of the FINI system, the timing for announcing allocation results has changed. Results will now be disclosed only after the dark trading period ends, requiring investors to be more cautious in their decision-making due to a lack of prior information. Critical allocation information, such as public subscription multiples and excessive allocation distribution, can directly impact investors' trading decisions. For instance, in some cases, investors might buy new stocks during dark trading, hoping that the greenshoe mechanism will provide support upon listing. However, if the allocation results indicate poor institutional subscription, it may lead to a significant decline in stock prices post-listing, resulting in potential losses for investors.

5. Investment Strategies and Risk Management

After understanding the rules of new stock issuance, investors should formulate reasonable investment strategies. Controlling position sizes, monitoring subscription multiples, and predicting reallocation situations are essential risk mitigation tactics. Particularly when participating in new stocks that may involve active reallocation, caution is paramount. Investors can refer to historical data and consider the listing performance of different subscription multiples, opting for those stocks with moderate multiples for subscription. It is advisable to avoid stocks with excessively low subscription multiples, as these often lack liquidity and purchasing support post-listing, leading to poor performance.

Additionally, investors should maintain a flexible mindset when participating in IPOs, staying attuned to market dynamics and changes in the fundamentals of new stocks. Timely adjustments to investment portfolios can help avoid losses due to market fluctuations.

You can subscribe to the new Hong Kong IPO through uSMART HK

The uSMART HK app features a dedicated IPO center, offering exclusive promotions for customers to subscribe to public offerings in real time. After logging in the uSMART HK APP, select the transaction at the bottom right, click "IPO Subscription", select the IPO you want to subscribe, click "Public Subscription", fill in the subscription number and send the order.

（Source: uSMART HK）