How Are the Shares Allocated Between the Public Offering and International Placing in Hong Kong IPOs?

In an initial public offering (IPO) in Hong Kong, new shares are typically issued in two parts: the Public Offering and the International Placing. The allocation between these two parts is determined based on market conventions and the specific needs of the issuance. Below is an overview of the basic allocation method and the adjustment mechanism between the two.

1. Basic Allocation Ratio

2. Public Offering Portion: Generally, the number of shares allocated to the public offering accounts for about 10% of the total new shares issued. This portion is targeted at local Hong Kong public investors, allowing individual investors and small institutions to subscribe.

3. International Placing Portion: The international placing usually accounts for about 90% of the total new shares issued. It is aimed at international investors, including large institutional investors, hedge funds, high-net-worth individuals, and other overseas investors.

This allocation structure helps ensure that the IPO can attract substantial capital while also giving local Hong Kong investors the opportunity to participate.

1. Clawback Mechanism

To balance market demand in Hong Kong IPOs, a clawback mechanism, also known as the "clawback arrangement," is typically in place. This mechanism allows for adjusting the share allocation ratio between the public offering and international placing based on subscription levels.

• If the Public Offering is Undersubscribed:
• Below 1x Subscription: If the public offering is subscribed less than 1x (i.e., undersubscribed), the public offering portion remains at 10%, and the unsubscribed shares are reallocated to the international placing.
• Between 1x and 15x Subscription: If the public offering subscription ratio is between 1x and 15x, the public offering portion usually remains at 10%, with no clawback adjustment.
• Between 15x and 50x Subscription: If the public offering subscription ratio is between 15x and 50x, the clawback mechanism may increase the public offering portion from 10% up to 20%.
• Above 50x Subscription: If the public offering subscription ratio exceeds 50x, the public offering portion may further increase to 30%.
• Above 100x Subscription: In extreme cases, if the public offering subscription ratio exceeds 100x, the public offering portion may increase even further, potentially reaching up to 50% of the total new shares issued.

• Adjustment of International Placing: When the public offering portion increases through the clawback mechanism, the international placing portion correspondingly decreases. This adjustment aims to provide more subscription opportunities to local Hong Kong investors when market demand is strong.

• Flexibility of the Allocation Method

• Market Demand Driven: The allocation mechanism in Hong Kong IPOs is flexible and can adjust the ratio between the public offering and international placing according to market demand. The clawback mechanism ensures that when demand in the public offering is strong, more shares can be allocated to local investors.

• Role of Institutional Investors: The international placing portion is usually managed by underwriters, who allocate shares to institutional investors worldwide based on their subscription interest and market conditions. This portion plays a crucial role in determining the IPO pricing.

• Successful Examples and Market Response

• Successful IPO Cases: Some well-known companies listing in Hong Kong, such as Alibaba, JD.com, and Xiaomi, have used a combination of public offering and international placing. When market demand was strong, they increased the public offering portion through the clawback mechanism to ensure broad investor participation.

• Market Response: The success of the public offering and international placing often influences the stock’s performance after listing. If the public offering is oversubscribed and the clawback mechanism is triggered, it is generally seen as a strong market endorsement of the new shares, which may indicate good performance in the secondary market.

In summary, Hong Kong IPOs typically divide new share issuance into public offering and international placing portions, with a basic ratio of 10% and 90%, respectively. To balance market demand, a clawback mechanism is implemented during the IPO process to flexibly adjust the allocation based on subscription levels in the public offering. This mechanism ensures that local investors can obtain more subscription opportunities when demand is strong, while also enabling companies to attract international capital, thereby enhancing the IPO’s success rate and market performance.