Asia Tea Time - Cup 53 ☕
This week I talk about a Chinese bubble tea company’s IPO, understanding fund fees and the surge in investment-linked scams.
Macro in Asia
Chinese bubble tea maker sees shares fall 27% in Hong Kong IPO
Chinese bubble tea company Chabaidao saw its shares close their first day of Hong Kong trading down 27%.
The firm is China’s third-largest maker of fresh tea drinks and its IPO was the biggest on the Hong Kong Stock Exchange so far this year.
Why it’s happening
- Weak Chinese consumer data doesn’t help the investment case and even the much-adored bubble tea segment isn’t immune.
- Analysts are concerned that increased competition for Chaibaidao given the proliferation of bubble tea companies.
Why it matters
- Hong Kong was consistently one of the biggest IPO markets worldwide, in terms of money raised, before the Covid-19 pandemic. The latest IPO’s performance is a sign of the times
- Poor performance of new listings impacts investor sentiment. If a new IPO sucks after it goes public, there’ll be less interest in future listings.
- Chabaidao raised HK$2.59 billion (US$330 million) and the IPO was seen as a harbinger of how investors are viewing the Hong Kong market.
What’s next?
- Watch out for any new listings in Hong Kong. The city’s stock exchange has been talking about attracting companies – that aren’t from China – to list in the city.
Tim’s Take
It’s no secret that Hong Kong’s stock market has been one of the worst-performing ones in the world in recent years.
However, that poor performance is actually something that has afflicted the city for long-term investors.
Indeed in 2023, Hong Kong’s IPO market – measured by total funds raised – fell to its lowest level in nearly two decades.
That’s due to a confluence of factors, from a weak Chinese economy, a crackdown on the private sector by the Chinese government, and the ratcheting up of geopolitical tensions between the world’s two largest economies.
The disillusionment with Hong Kong’s new listings was evident in Chabaidao’s listing. It was the worst performance for any Hong Kong IPO – of at least US$300 million – since September 2022.
The listing was only 0.5 times subscribed (meaning only half the shares on offer were actually subscribed to prior to listing) and the remainder was offloaded to global investors.
The ironic thing is that Chabaidao’s business seems to be doing well, with its net profit expanding at a compound annual growth rate (CAGR) of 21.6% between 2021 and 2023.
Yet with sentiment of global and local investors in the doldrums, the turnaround in Hong Kong markets is going to require a lot more optimism from both the geopolitical and economic fronts.
Tim’s money tip of the week
There’s always going to be an element of FOMO, or “Fear Of Missing Out”, in markets. In the financial advisory world, that normally entails getting investors to buy into the latest craze or thematic via a fund.
But remember that mutual funds are among the most expensive vehicles out there in the investment universe.
They typically charge a total expense ratio (TER) of 1.5% to 2%. So, that’s 1.5-2% of the money you invested that they deduct every year.
Remember that’s an annual, recurring fee. With low-cost market exchange-traded funds (ETFs), the TER is typically around 0.2% to 0.5%. So, you’re talking one-tenth to one-fifth of the price, every year!
In addition, mutual funds have a juicy “trailer fee” that firms can earn for distributing it to clients on behalf of fund managers.
Because the trailer fee is the incentive, they generally don’t care about the performance or whether the client actually makes money.
What’s worse, most of these funds fail to perform their low-cost benchmarks over the long term.
In the end, understanding the fees and performance involved in any investment are key to growing your wealth over the long term.
Story of the week
The Hong Kong police commissioner said that investment scams in the Chinese city surged by 55% in the first quarter of 2024.
While deception cases only crept up 0.9% during the same period, it was investment-linked scams that surged and resulted in losses of more than HK$900 million for victims.
The lesson? Any time any investment proposition sounds too good to be true, it probably is.