147 For 147: Chinese IPOs “Guarantee” Big Profits

There are very few sure things when it comes to investing in stocks, but investing in a Chinese IPO over the last 12 months is about as close as you can get to “guaranteed profits”. Every single one of the 147 mainland Chinese IPOs over the last year has gone up by the maximum allowed 44% in its first day of trading.

It’s all about Chinese IPOs

Inflows into the red hot Hong Kong stock markets have slowed the last couple of days, and were down 57% compared to the five-day average on Tuesday. According to Hengsheng Asset Management, the main reason for the big decrease in Hong Kong volume is that investors are focusing on the 30 mainland Chinese IPOs that are taking orders this week.

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These 30 offerings are likely to pull in a staggering 2.73 trillion yuan ($439 billion) in bids, equal to Malaysia’s entire stock-market capitalization, based on estimates from six brokerages. This works out to an oversubscription rate of about 150 times, meaning the odds of getting into an IPO are well under 1%. That said who cares about valuation?,The potential rewards are “too big to ignore” as every single one of the 147 mainland IPOs that began trading since last April has soared the max 44% permitted by regulation on on their first day of trading.

Of note, Jiangsu Broadcasting Cable Information Network, a digital television and broadband services provider, is hoping to raise 3.25 billion yuan in the largest of the 30 initial public offerings.

Statement from Hengsheng Asset Management money manager

“The fund flow from the mainland to Hong Kong could slow down a bit now,” Dai Ming, a money manager at Hengsheng Asset Management in Shanghai, noted. “Some investors are being diverted away because of the appeal of the IPOs, which will guarantee very lucrative and hefty gains.”

Pressure from Chinese regulators for low IPO prices

Analysts note that IPOs have been surging in China after government regulators began pressuring firms more than a year ago to keep offering prices low in order to protect individual investors. There has been no official statement of a valuation ceiling, but Bloomberg data show that no Chinese firms are going public at offering prices greater than 23 times EPS.

While no one can predict the future, a certain Seth Klarman quote seems apt here.