In the previous class, we talked about how to pick promising IPO stocks. Now comes the question of how to increase our chance in the allotment? This is the topic for today, which can be broken down into three dimensions: how to calculate the allotment rate, what affects the rate, and two ways to increase our chance in IPO allotment.
1. How to calculate the allotment rate?
Let's begin by looking at how the allotment rate is calculated. Take the allocation table of $POP MART(09992.HK)$, the trendy toymaker, as an example.
As we can see from the following table, to subscribe to 200 shares or one lot, the allotment rate is 15%. For two lots, the success rate for each lot is 9.5%, making the cumulative allotment rate for two lots 19%. Likewise, if you apply for ten lots, the allotment rate for each lot is 3.19%, with a cumulative allotment rate of 31.9%.
Data source: HKEX news
We may have noticed that the growth of the cumulative allotment rate is not linear as the number of lots increases. In fact, the allotment rate grows slower as the number of lots increases. For example, the allotment rate for subscribing to ten lots is 31.9%, which only doubles that of one lot subscription, not ten times. This is called the decreasing principle of allotment rate growth.
This shows that HK IPO subscriptions are not distributed according to the funds contributed. Instead, the mechanism tilts towards investors who subscribe to a relatively small number of new shares. Therefore, it is very friendly to retail investors.
2. Factors that can impact the allotment rate.
Secondly, let's look at the influencing factors of HK IPO subscriptions allotment rate.
The first one is the number of subscribers for IPOs. In general, the more investors participate in an IPO, the lower the allotment rate.
The second factor that may affect the rate is the subscription multiple of an IPO. The subscription multiple refers to the ratio of the actual subscription amount to the capital from the primary public offering. For example, if the company raises 100 million through the public offering but the subscription capital reaches 10 billion, the subscription multiple will be 100 times. The higher the subscription multiple, the lower the allotment rate.
The third factor is the clawback mechanism. HK IPOs include public offerings to public investors and international placements to institutional investors.
According to the demand for public offering (the more times an IPO is subscribed, the more the demand for it), issuing companies / underwriters will adjust the proportions of shares issued in the public offering and international offering in accordance with specific provisions of the HKEX. This is known as the clawback mechanism.
The following chart shows how the clawback mechanism works.
Controlling other factors, the higher the proportion of public offerings, the higher the allotment rate.
3. How to increase your chance in the allotment.
After understanding how the allotment rate is calculated and the factors that can affect the allotment rate, let's now move to something practical: how to increase the chance of getting IPO shares. There are two main methods.
The first method is to diversify funds. If there are two or more potential IPOs that you are optimistic about at the same time, you can diversify your cash available and subscribe to all of them so that you can make full use of the advantages of retail investors and increase the overall allotment rate.
The second method is to use an IPO financing service. In addition to cash available, you can also subscribe to IPOs by borrowing money from a brokerage or a bank. In this way, you can apply for more new shares, thereby increasing the chance of a successful subscription. But this approach will incur interests and handling fees.
Okay, this marks the end of the four courses on HK IPO subscriptions, where we have discussed money-making effects, participating procedures, approaches to pick stocks, and methods to maximize the chance of getting IPO shares. Hope you can apply what you have learned and share the benefits of HK IPO subscriptions.