Hopes that Sichuan Baicha Baidao’s [HKG: 2555] USD 330m Hong Kong listing would point to a comeback in the exchange’s vibes have turned out to be more wishful thinking.

A complete absence of cornerstone commitments to the largest initial public offering in the city since November 2023 has made it a no-go for many investors, not to mention that the deal, in which shares were offered at HKD 17.50 each, was fairly valued at best in the eyes of many market watchers.

“While enthusiasm has improved from last year, it remains challenging for issuers to get investors traction, without cornerstone commitments for 50%-60% of the offerings,” an equity capital market (ECM) banker said. “It is relatively easy for companies with a valuation between HKD 100m and HKD 200m to go public, but it is more difficult for valuations exceeding HKD 1bn.”

Sichuan Baicha Baidao’s IPO was 0.32x covered in terms of margin subscriptions, according to a local media report today (22 April). The demand pales compared with 96.55x with a USD 40m-USD 44m IPO of Chinese AI devices maker Mobvoi, according to the same report. Mobvoi closed its books on 19 April.

An investor following Sichuan Baicha Baidao’s listing said the books, which closed on 18 April, were less than 2x covered. Phone calls made to the company went unanswered.

Performance of Hong Kong IPOs year to date 

(Data: Dealogic)

As foreign funds continue to shun Chinese issuance by and large, the mainland’s local government-backed funds have naturally constituted the majority of cornerstone investors in Hong Kong IPOs these days, the ECM banker said.

Other than state funds, it’s mostly strategic investors along the supply chain of the share issuers, as few if any financial investors would be keen on participating in any deal, a second ECM banker said.

Generally speaking, investors tend to look at profitable targets, a third ECM banker said. “They are keen on looking at price-to-earnings instead of price-to-sales,” he said.

Two government-linked fund managers said while they continue to hunt investment targets, they are very selective.

Back to basics

To be fair, Hong Kong sits on a decent pipeline of IPOs that include quite a few A-class issuers. (Table below)

And as flagged by this news service earlier, a reasonable number of the 300-plus Chinese companies that withdrew or terminated their A-share IPOs last year may turn to Hong Kong eventually.

Many companies plan to file listing applications in the second or the third quarter this year, as they are under pressure from shareholders looking to exit, a fourth ECM banker said.

But a senior ECM lawyer in mainland China acknowledged nonetheless that securing sufficient investor interest has been a challenge confronting almost every single Hong Kong IPO he works on.

The Hong Kong IPO market, the lawyer said, “has gone back to the basics…we expect more traditional value stocks with good balance sheets and healthy bottom lines to list, rather than those with expectations of high growth in the future.”

Many bankers said a lack of investors has prolonged the wait for the market to reopen.

Despite a pipeline that looks exciting at first glance, it’s worth noting that, unlike the old days, IPO filings today are considered at best as a letter of intent – non-binding.

The IPO pipeline, in the words of a second investor, is very “flaky.”

For the much-anticipated A-suite issuers, they would rather wait until a return of overseas long-funds before they pull the trigger. That said, how the smaller listings fare in the secondary will be closely watched.

All eyes will be on how Sichuan Baicha Baidao trades as it debuts tomorrow (23 April) on the Hong Kong exchange.