Get 'em While They're Hot?

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May Wong sat transfixed before a computer monitor, watching stock prices and anxiously awaiting her big payoff. Shares of vegetable grower China Green Holdings began trading for the first time on Jan. 13, and Wong, a 50-year-old garment importer-exporter, was one of the lucky few who had obtained shares of the hot China stock at its initial public offering (IPO) price of 16¢. That was no easy task, since retail investors ordered 1,604 times more shares than China Green had undertaken to sell, making it the most popular IPO in Hong Kong history. On the opening day of trading, Wong and about a dozen other investors gathered at a branch of brokerage KGI Asia in the city's North Point district shortly before 10 a.m., expecting the stock to surge after the market opened. It did. Within minutes of the starting bell, China Green shares had climbed 56%. "I'm selling," Wong proclaimed. She liquidated her holdings (3,000 shares) for a gain of about $250—small change, sure, but not a bad return in less than 30 minutes. "It's like a gift," she said gleefully.

These days, Chinese IPOs are gifts that keep on giving. After three years of indifference to stocks during one of the worst bear markets on record, ordinary Hong Kongers like Wong are now giddy over just about any new offering with the word China attached to it, hoping to cash in by flipping their shares within hours or days of buying them. The bet is not a bad one: shares of China Life Insurance, the country's largest insurer, are up 64% since their Dec. 18 debut. Gold-mining company Fujian Zijin Mining Industry saw its stock price surge 73% in its first day of trading on Dec. 23. "The market is getting hot on IPOs," says Yang Liu, managing director of Atlantis Investment Management in Hong Kong. But she quickly adds a cautionary note: "We have to be extremely selective."

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Indeed, to some the Hong Kong market's current China mania is eerily reminiscent of the territory's short-lived dotcom boom of 2000, when investors queued for hours to snatch up order forms for shares of Internet ventures, only to see their acquisitions turn to dross when the bubble popped. These days, the object of desire has changed, with investors equally convinced that the China boom is a sure thing. The index for "H shares," as the Hong Kong-listed stocks of mainland companies are called, spiked 152% in 2003. Now that investors are back, Chinese companies are rushing to raise cash. This year will bring a bevy of highly anticipated IPOs, including Ping An Insurance, China's second largest insurer, telecom company China Netcom Corp., and possibly China Construction Bank, one of the mainland's four largest banks. Accounting firm PricewaterhouseCoopers estimates that Chinese companies will raise $10 billion in IPOs in Hong Kong this year, about 50% more than in 2003.

With so many new companies coming to market, cynics wonder if this mania will—like other investment manias—end in misery. Already, there are ominous signs of irrational exuberance. For example, China Green earned just $31 million in revenues and $14 million in profits in its last fiscal year from its distinctly unsexy business of growing cabbages and other produce and selling packaged vegetables such as boiled corn. Yet Hong Kong retail investors put in orders for nearly $4 billion of its stock, acting as if this tiny firm with about 150 employees is destined to become a global titan. In the short term, such suspension of disbelief can be highly profitable, but it can also prove to be an excellent way of losing money fast. "I warn investors to be cautious," says Joseph Lau, a director at Tai Fook Asset Management. "Some of the investors will ultimately be burned."

Still, optimists point out that most of the companies going public are solid operations with proven track records, state backing, and large market shares in well-understood industries—unlike shaky Internet start-ups. The dotcoms "were selling a concept, but most of the companies listing in Hong Kong have a profit," says Kenny Tang, associate director of Tung Tai Securities. What's more, the bullish argument goes, the Chinese economy is growing exponentially, and that should continue to drive mainland stocks higher.

With so many more Chinese companies poised to sell stock in Hong Kong, investors will have plenty of new opportunities to play IPO roulette. One risk, though, is that this additional supply could put a damper on share prices. Liu of Atlantis warns that investors should stick to IPOs of big, stable companies that have solid earnings growth. "You have to be sure you know about the company and have done your homework," she says. Otherwise, you're likely to end up with a painful case of dotcom déjà vu.