1 Economics Forum Topic: A Study on Initial Public Offerings in Hong Kong Speaker: Joe Wong 14th April 2009 Organized by Society of Economics & Finance Department

2  Listing of Industrial and Commercial Bank of China in October 2006  the world’s largest recorded IPO  Hong Kong Exchanges and Clearing Ltd. (HKEx) became the world’s second largest market for IPO fund-raising after London Stock Exchange, surpassing the New York Stock Exchange in (World Federal Exchanges,2006)  2006: 26%  2007: 23%  IPO market fever is spreading to the general public Introduction

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6  Alibaba.com : 566,216 applications; 10% of the population (over 19 years of age) an oversubscription of about 257 times freezing about US$57.4 billion from HK$13.5 to HK$39.5 per share (192.6% )  Hong Kong is an ideal place to study the IPO process. Introduction

7  The Hong Kong IPO market has surged significantly and has been ranked the top 5 exchanges in the world since  First research question:  “What are the recent developments of the IPO market in Hong Kong?” Objectives of the Study

8  To answer the first question:  a brief history of the stock market and its trend of growth are explored, followed by a comprehensive analysis of the recent developments of IPO market. Objectives of the Study

9  Retail participation in the HKEx reached its historical high in 2007:  2 million individuals  the percentage of adult population (36%)  Second research question:  “What is the individual investor behaviour in IPO investment?” Objectives of the Study

10  To answer the second question:  a survey research method is used to study the general public’s opinion on IPO investment.  a literature review about the behaviour of IPO investors is needed for designing the questionnaire and formulating the hypotheses.  after collecting and analysing the data, we can examine the behaviour of individual investors in IPO investment. Objectives of the Study

11  Tianjin Port Development Holdings Ltd.: oversubscription rate was 1,703 times the highest oversubscription rate between 2002 and  Finally, the third research question is:  “What are the factors affecting the individual investor demand for IPO shares?” Objectives of the Study

12  To answer the third question:  an ordered probit model is adopted to test the hypotheses in order to find out the factors affecting the individual investor demand for IPO shares. Objectives of the Study

13 Recent Developments of the IPO Market in Hong Kong  Growth of the Number of IPOs  Growth of the New Capital Raised  Growth of the New Capital Raised by IPOs  Listing Rules and Procedures

14 Recent Developments of the IPO Market in Hong Kong  Methods of Listing  Subscription for IPO Shares and Methods of Allotment  Price Performance of IPOs

Figure 2.1: Number of Listed Companies from 1980 to 2007

Figure 2.2 Total Market Capitalization of Listed Companies in Hong Kong from 1980 to 2007

Figure 2.4: Number of IPOs from 1980 to 2007

Table 2.7 The Rank of Stock Exchanges in the World by New Capital Raised by IPOs from 2002 to 2007 Stock Exchanges New Capital Raised by IPOs in 2007 (USD million) Rank NYSE Group 60, Shanghai SE 57, N/A London SE 50, Hong Kong SE 37, Sao Paulo SE 27, N/A BME Spanish Exchanges 21, Australian SE 16, Nasdaq 16, Euronext 13, Bombay SE 9, N/A

Figure 2.9 The Rank of Shanghai SE, Sao Paulo and Bombay SE by New Capital Raised by IPOs from 2002 to 2007

Table 2.8 Capital Raised by IPOs as percentage of GDP of the Top 20 Stock Exchanges in 2007 RankStock Exchanges Capital raised by IPOs (USD million) Country GDP (USD million) Capital raised by IPOs as percentage of GDP 1NYSE Group60,385.80United States13,811, Shanghai SE57,770.00China3,280, London SE50, United Kingdom 2,727, Hong Kong Exchanges37,485.90Hong Kong206, Sao Paulo SE27,834.20Brazil1,314, BME Spanish Exchanges21,726.20Spain1,429, Australian SE16,725.50Australia821, Nasdaq16,192.60United States13,811, Euronext13,329.90N/A3,985, Bombay SE9,642.80India1,170,

Table 2.8 Capital Raised by IPOs as percentage of GDP of the Top 20 Stock Exchanges in 2007 (Con’t) 11 National Stock Exchange India 7,874.10India1,170, TSX Group7,369.50Canada1,326, OMX Nordic Exchange6,057.40N/A23,715, Borsa Italiana5,930.80Italy2,107, Shenzhen SE5,670.70China3,280, Warsaw SE5,486.40Ploand420, Singapore Exchange5,159.80Singapore161, Colombia SE4,597.10Mexico893, Istanbul SE3,372.80Turkey657, Korea Exchange3,170.00Korea, Rep.969,

Table 2.17 Summary Review of the Levels of Underpricing in Hong Kong No. of IssuesStudy PeriodLevels of Underpricing (%) Dawson and Hiraki (1985) Dawson (1987) McGuinness (1993) Aggarwal, Liu and Rhee (2003) SFC (2007) SFC (2008) HKEx 1 (2007) N/A

Figure 2.12 Absolute and Relative IPO Underpricing and Long Run Price Performance in 2006

Figure 2.13 IPO underpricing and Long Run Price Performance for Mainland Enterprises and non- Mainland Enterprises in 2006

Offer: 13.5; Highest: 41.8; Lowest: 3.46 (2007/11/06) (2007/12/03) (2008/10/28)

26 Conceptual Framework M ost IPO research focuses on three main phenomena M ost IPO research focuses on three main phenomena 1 Initial Underpricing 2 Long-run underperformance 3 ‘hot issue’ market

Literature Review  Initial Underpricing:  Tinic (1988); Ritter and Welch (2002);  Loughran and Ritter (2003); Brau and Fawett (2006)  Long-run Underperformance:  Ljungqvist, Nanda and Singh (2006); Dorn (2007);  Agarwal, Liu and Rhee (2003)  “Hot Market” Issue:  Alti (2004); Ljungqvist and Wilhem, Jr. (2005)

Figure 3.1 Relationship of the IPO Process to the Three IPO Phenomena Three IPO Phenomena Lon-run Underperformance“Hot Issue” MarketInitial Underpricing Issuers Investors (Individual / Institutiona l) Underwriters Investors (Individual / Institutiona l)

29 Conceptual Framework  relatively little literature on using questionnaire survey to study the behaviour of individual investors in the IPO investment.  In the hope of contributing to fill in the gap of this area of research, this study was carried out:  to investigate the individual investor behavior in IPO investment and  to find out the factors affecting the individual investor demand for IPO shares.

30 Research Method Oct.2006 Preliminary Study (Oct. 2006): Questionnaire of 18 questionsQuestionnaire of 18 questions 3,120 respondents3,120 respondents Revised the questionnaire and add 8 questionsRevised the questionnaire and add 8 questions Sept.2007 Questionnaire of 26 Questions Pilot Study (Sept. 2007): Revised the questionnaire again

31 Survey : Questionnaire Design Three main parts Q21 - Q26 demographic characteristics: gender, age, education level, personal monthly income, occupation and place of residence focuses on general public’s opinion on IPO investment Q1 – Q3; Q15 –Q20 the investor behaviour in IPO investment Q4 – Q14

32 Survey : Sources of Data Questionnaire Design 1,640 respondents (58.3%) applied for IPO shares in the period Oct to Sept ,815 respondents the first two weeks of October 2007

33 Results of the Survey The frequency with which a retail investor applies for IPO shares No 41.7 % Yes 58.3 % If yes, 6 times or more 43.5 % Mean and Maximum 6.75 times and 60 times and 60 times

Figure 4.9 Frequency Distribution by Number of Times of Subscription for IPO Shares in the Last Year 43.5%

Question 15: Have any of your family members or friends subscribed for IPO shares in the last year? FrequencyPercent No Yes Total

Figure 4.11 Frequency Distribution by Perception of the Risk of Investing in IPOs 51.4% 14%

Figure 4.16 Frequency Distribution by Source of Information

Question 6: Have you studied the prospectus before investing in IPOs? FrequencyPercent No Yes Total

Figure 4.18 Frequency Distribution by Number of Minutes Spent on Studying the Prospectus before Investing in IPOs 46.6%

Figure 4.24 Frequency Distribution by Number of Lots of Applying for IPO Shares %

Figure 4.26 Frequency Distribution by the Time to Sell the Allocated Shares %

Figure 4.27 Frequency Distribution by Satisfaction of the Return from Investing in IPOs %

43 Conclusions and Recommendations  First, one of the key empirical findings:  If an investor’s family member or friend has applied for IPO shares, the investor is more likely to apply more often for IPO shares.

Figure 4.17 Distribution Chart by Most Important Factor Influencing Investors’ Decision to Apply for IPO Shares

45 Conclusions and Recommendations  Therefore, if one of an investor’s family members or friends has experience and had earned some money in IPO investment, other family members and friends are likely to take part as well due to the ‘close’ relationships with family members and friends, especially in Chinese culture.  Investors’ investing decisions are influenced by the so-called ‘herd movement’.

46 Conclusions and Recommendations  Moreover, there were high multiples of oversubscription during 2006 and  If a family member wants to apply for IPO shares and have a good chance of getting at least one lot, he/she may encourage all family members to apply.

47 Conclusions and Recommendations  Last but not least, only 15.7% of the general public thought that the HKSAR Government has provided enough investment education for them.

Figure 4.13 Frequency Distribution by Investment Education Provided by the Government 15.7%

49 Conclusions and Recommendations  As mentioned before, 58.3% of respondents had subscribed for IPO shares in the last year. 43.5% of the total 1,640 respondents had subscribed for IPO shares 6 times or more  However, there were 27.3% of them claiming to be a novice (with level of experience equals 3 or less than 3 out of 10).

50 Conclusions and Recommendations  In consideration of the sustained and rapid economic growth in China, there will be more Mainland companies raising funds in Hong Kong.  Therefore, I suggest that the government should devote more resources towards investment education for the general public in order to strengthen Hong Kong’s IPO market.

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