(Bloomberg) — Securing a piece of a new listing in China has always been challenging, but this year it’s turned nearly impossible. An investor who managed to snag 500 shares in the recent IPO of AI chip manufacturer Moore Threads Technology could have enjoyed a remarkable profit—around 500%, or roughly 287,000 yuan ($40,600)—on the very first trading day if they sold at the peak price.
However, such gains are mostly just a dream for many investors. According to the company’s stock exchange documentation, the success rate for retail subscriptions is only 1 in 2,750.
Chinese regulators are directing IPOs toward strategic sectors like semiconductors and AI, making these new listings highly desirable for retail investors. Data from Bloomberg shows that the average oversubscription rate has skyrocketed to 4,086 this year, the highest since 2021. This translates to a mere 0.02% chance of an individual investor succeeding with a bid.
Guo Zixuan, a private investor from Henan province, has come to realize his chances of participating in an IPO are slim. “It’s really about luck—nothing to lose sleep over,” he admitted, noting that he failed to get a stake in Moore Threads. “If I win some, that’s fantastic. If not, I’ll just apply for the next one. It doesn’t cost anything, and I almost always get something back,” he reflected, having applied for nearly every IPO over the last four years without landing any shares.
For individual investors, there are hardly any downsides in applying. Stock exchanges in Shanghai and Shenzhen allow participants to bid for IPOs without requiring upfront payments, while Beijing’s exchange holds members’ funds during the bidding period. Additionally, many trading apps send alerts about the latest listings, making it easier for investors to stay informed about new opportunities.
Investors have valid reasons to apply for IPOs without diving deep into the financials. This year, listed stocks across China’s exchanges surged, averaging a staggering 251% gain on their first day, with even the worst performers rising by at least 6%. This stands in sharp contrast to 2022 when about one-third of newly listed stocks dropped below their issue price by the end of their first trading day.
Moore Threads’ IPO price is on the higher side at 114.28 yuan per share, which places it in what’s informally labeled as the “high ticket” category in China. This designation suggests that successful bids can lead to substantial profits, as a rise in stock price multiplied by the higher entry cost makes it even pricier for investors.
The explosion in initial-day gains for IPOs is partly due to tighter listing regulations instituted by Chinese authorities last year. These rules raise the bar for companies seeking to go public, thereby restricting the volume of new stocks entering the market. They were implemented after a surge in IPOs was believed to deplete liquidity from existing stocks, negatively impacting the market.
“The IPO market in China resembles a planned economy,” notes Li Minghong, a fund manager at Beijing Yikun Asset Management LP. “This applies not only to the amount raised but also to the preferred sectors and prestige, with a focus on hard technology and innovations.”
Expected returns for IPO subscriptions are likely around 1% to 2% annually, despite significant first-day profits, as the probability of securing shares remains incredibly low, according to Lee.
Zhu Zhenxin, from Assympto Investment Research in Beijing, highlighted that one reason for the extensive oversubscription is Chinese firms’ cautious approach to pricing their IPOs. Historically, there’s been an unwritten guideline limiting price-to-earnings ratios to a maximum of 23 times.
On opening day, demand typically significantly surpasses supply. “Only those who hit the jackpot can offload shares,” Zhu explained. “Meanwhile, new retail investors irrationally believe that buying large amounts guarantees profits.”
This year, nearly half of the IPO activity on the Shanghai and Shenzhen exchanges has been in the IT and industrial sectors, such as robotics and renewable energy. Chinese investors are attracted to these spaces due to global tech trends and the perception that the government will support these industries amid ongoing competition with the U.S.
For instance, MetaX Integrated Circuits Shanghai Co.’s retail segment was oversubscribed by 2,986 times, while communications chip maker Xiamen UX IC Co. saw an oversubscription rate of 4,446 times.
