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Retail investors shy away from Ganfeng Lithium's Hong Kong IPO

Jiangxi Ganfeng Lithium Co. Ltd., which is set to list its shares in Hong Kong on Oct. 11, saw its retail offering in Hong Kong receive a weak market response as investors take a cautious approach amid the current dip in the local equity market in recent months.

The company, one of China's largest lithium producers, said in a filing Oct. 10 that it raised HK$3.17 billion from the initial public offering, which was originally intended to raise up to HK$5.13 billion. Retail investors only snapped up 58% of the retail component of the offer. The IPO was priced at HK$16.50 apiece, the lower limit of a marketed range of up to HK$26.50. The company said shares not subscribed for have been reallocated to the international placement tranche.

Kenny Wen, a wealth management strategist at Hong Kong-based Everbright Sun Hung Kai, said many investors are now taking a cautious approach to new IPOs as the market has seen much downward pressure in recent months.

"The company is a major player in the industry, which is backed by strong cornerstone investors, so its offer price is attractive. But typically, the market response is dominated by the overall sentiment, especially when investors are not familiar with the company," Wen said. "I think many are holding off their decisions until the first several trading days."

Wen also expects shares to be flat on the company's debut. "Since its IPO price was at the lower limit of the range and there is a big gap between the offer price and its A-share price, I don't expect a sharp drop when it is first traded. Its share price on the first trading days should be flat." Wen added the relatively low offer price had earlier led to a selloff in Ganfeng's A-shares on the Shenzhen Stock Exchange.

The poor market response may also be attributed to a number of recent high-profile IPOs, which diluted retail interest and capital, Wen said.

Ganfeng's Hong Kong IPO will be followed by its domestic rival Tianqi Lithium Corp. later this year, but Wen said the latter company's performance is unlikely to mirror Ganfeng's. Tianqi's IPO performance will depend on the market and the price of lithium at that time.

Steven Tse, a research analyst at SBI China Capital, said that although some investors are interested in investing in lithium due to its importance in manufacturing batteries to supply electric vehicles, there are still fears of oversupply in the industry led by rapid growth of electric vehicle production in China in previous years.

Tse said Ganfeng had shown significant earnings growth in 2016 due to the rapid expansion of its production capacity, and its net profit saw a yearly increase of 431%, but the company's earnings growth is expected to moderate as the price of the commodity and, subsequently, the company's products stabilize.

Tse sees the company's partnership with Tesla as the major driver for its future growth. "Ganfeng will supply 20% of its lithium hydroxide production to Tesla. This will also boost investor confidence." In September, Ganfeng Lithium said it signed a three-year supply deal with Tesla.