10 Things to Check Before Subscribing to a HK IPO

Start with the most basic question: what does this company do?

If you can’t explain the business in one or two normal sentences, that’s already a warning sign. Not because complicated businesses are always bad, but because you’re more likely to miss the real risks. Read the business overview in the prospectus. Check what the company sells, who pays it, where revenue comes from, and whether growth depends on a few big customers, a single product, or one market.

In my experience, the best IPOs to study are not always the most glamorous ones. They’re the ones where you can quickly understand how the company makes money and what could stop it from making more.

Next, go to the financial information. Don’t just look at revenue growth. Revenue is nice, but profit and cash flow tell you much more.

Check revenue, gross margin, net profit, operating cash flow and debt. A company can grow revenue quickly and still burn cash. That may be acceptable for biotech, specialist technology or some high-growth companies, but you need to understand why it is losing money and what has to happen before it can become profitable.

Also watch for one-off profit. If the latest year looks amazing because of a temporary gain or accounting item, don’t treat it like normal operating strength. Frankly, the IPO market loves a good growth story, but cash flow has a way of telling the truth.

A good company can still be a bad IPO if the price is too high. This is where many small players get caught.

Look at the offer price range, expected market capitalisation and valuation against listed peers. If similar companies are trading at lower price-to-earnings, price-to-sales or other relevant multiples, ask why this IPO deserves a premium. Maybe it does. Maybe it has stronger margins, faster growth, better brand power or a cleaner balance sheet. But you should be able to explain it.

The thing is, IPO pricing is not charity. The seller wants a good price too. Don’t confuse a famous name with a cheap entry point.

Most people skip the risk factors section because it’s long and depressing. That’s a mistake.

Common IPO risks include customer concentration, supplier concentration, regulatory changes, lawsuits, high debt, falling margins, dependence on founders or key people, weak cash flow and intense competition. Some risk disclosures are generic, but some are very specific and useful.

My habit is to pick the three risks that could hurt the company most. Then I ask: if one of these actually happens, would I still want to own the stock? If the answer is no, I reduce the application size or skip it completely.

The use of proceeds section tells you what management says it will do with the IPO money. This matters more than many beginners realise.

Expansion, R&D, production capacity, technology upgrades and market development can all make sense if they match the company’s strategy. Debt repayment is not always bad either, especially if the company needs a stronger balance sheet. But if most of the proceeds are going to vague working capital, general corporate purposes, or cleaning up old problems, I’d want to know why.

Look for a plan that is specific enough to judge. If the company itself sounds unsure about how to use the money, why should you rush to provide it?

Cornerstone investors can improve market confidence. They agree to subscribe before listing and usually accept a lock-up period. When respected strategic investors or long-term funds appear, it can be a positive signal.

But don’t overdo it. A famous cornerstone investor does not guarantee a first-day gain. Cornerstones can be strategic, financial, relationship-driven, or simply part of the deal structure. Check who they are, how much they subscribed, how long they are locked up, and whether their participation actually tells you something about the company’s future.

Cornerstones are useful information. They’re not a replacement for reading the prospectus.

This is where many retail investors only half-read the prospectus, but it matters.

Most Hong Kong IPOs have a Hong Kong Public Offer and an International Placing. The public offer is the channel regular investors like us normally use. The international placing is mainly for institutional and professional investors. You should check the public offer size, international placing size, lot size, offer price range, timetable and application method.

Also check the clawback mechanism. Under the current HKEX framework, some IPOs may use Mechanism A, where the public tranche starts at 5% and can increase to 15%, 25% or 35% if public demand reaches certain levels. Others may use Mechanism B, where the public tranche has at least 10% initial allocation but no clawback. Some IPOs may set a higher initial public allocation, depending on the structure disclosed in the prospectus.

The practical point is simple: don’t assume every IPO gives retail applicants the same share of the deal. Read the structure.

A hot IPO may be heavily oversubscribed. That sounds exciting, but it often means small applicants get very little or nothing.

Before results are out, you can only estimate from the public offer size, market sentiment and financing demand. After results are released, read the allotment result properly. Look at the subscription multiple, one-lot success rate, basis of allocation and whether clawback was triggered.

Don’t just say, ‘This IPO was 200 times subscribed, so it must be good.’ Strong demand tells you the stock is popular. It does not tell you the stock is cheap, or that it will rise after listing.

IPO margin financing is tempting because it lets you apply for more shares with borrowed money. In a strong market, everyone suddenly feels brave. I’ve seen this movie many times.

Margin can increase your application size, but it also adds interest cost and risk. If the IPO is too hot, you may receive only a tiny allocation and still pay financing cost. If the IPO is weak, you may receive more shares than expected, and then you’re holding a bigger position when the stock starts falling.

Before using margin, calculate the interest, handling fee and breakeven price. If the stock needs to rise several percent just for you to cover costs, the margin trade may not be as attractive as it looks.

This is the part many people ignore. They think only about getting shares, not what to do after they get them.

Are you selling on day one if there is a gain? Are you holding because you actually like the business? What if the stock opens below the offer price? What if you get more shares than expected? What if the grey market is weak before listing?

You don’t need a perfect plan, but you need a plan. Otherwise, the market will make the decision for you, usually when you’re emotional.

• Do I understand what the company does?
• Is the company profitable, or do I understand why it is loss-making?
• Is the IPO valuation reasonable compared with peers?
• What are the three risks that can really hurt the company?
• Is the use of proceeds clear and sensible?
• Who are the cornerstone investors, and do they actually matter?
• How are the Public Offer and International Placing structured?
• What is the likely allotment chance and one-lot success rate?
• Am I applying with cash or margin, and have I counted the cost?
• What will I do after listing if the stock rises, falls, or goes nowhere?

A Hong Kong IPO should not be judged only by hype, subscription multiple or grey market movement. Those things matter, but they’re only part of the picture.

A better IPO decision starts with the prospectus, the company’s fundamentals, the offer structure, the valuation and your own risk tolerance. Missing one IPO is not a tragedy. Applying blindly and losing money is worse.

A good IPO investor doesn’t only ask, ‘Will this stock rise on listing day?’ A better question is: ‘Do I understand this IPO well enough to risk my money?’