They’re going crazy for AI IPOs in China, where the frenzied optics around new semiconductor listings are magnified by a lottery-like, state-controlled process for retail participation.
A brief primer’s in order. The government in Beijing determines who can go public and in some sense, at what price. Following three consecutive annual losses for the mainland benchmark from 2021 to 2023, regulators imposed stricter rules for new listings in an effort to, among other things, prevent a Daniel Plainview “I drink your milkshake” dynamic wherein IPOs contributed to a lack of market depth for established companies.
Stricter IPO rules necessarily made it harder for companies to go public, setting up a potential supply-demand mismatch with China’s famously excitable investor base.
The retail portion of IPOs is allocated based on a kind of national sweepstakes. Here’s how it works (stylized):
- You open a brokerage account,
- You monitor the schedule for new listings,
- You throw your name in a giant hat with no requirement to put any money down,
- You cross your fingers, rub a rabbit’s foot, do a rain dance, sacrifice a goat and hope you get a piece of the deal
If you don’t (get a piece of the deal), it’s no biggie. As one retail investor put it, in remarks to Bloomberg, “If you win some [shares], it’s a blessing, if not, you just make sure to subscribe for the next one. It costs you nothing.”
Even if the tickets weren’t costless, this would be a lottery worth playing depending, of course, on the hypothetical ticket price if entry wasn’t free. Hold that thought.
As the figure below shows, the average listing was more than 4,000 times oversubscribed this year, the most since 2021 when Xi Jinping embarked on a multi-faceted regulatory crackdown.
The same linked Bloomberg article helpfully translated the oversubscription rate into a 0.02% chance of any one individual investor being awarded an allocation. By comparison, the odds of winning the Powerball jackpot in the US are 0.00000034223%, according to Gemini. Tickets for that, while not expensive, aren’t free.
(Note: The chances aren’t much better for any major multi-state game in the $1 million prize tier in the US. As ChatCPT puts it, “if you look across major US draw lotteries, the single-play odds of winning $1 million or more almost always land in a range between 1 in 10 million and 1 in 20 million. A clean, reasonable average is 1 in 15 million, 0.0000067%.)
The chart above also shows the average first-day gain for a given year’s IPOs in China. This year, that average is more than 250%. Not a single new listing fell on the first day. So while you of course have to come up with the money to buy the shares if you luck out and get an allocation, there’s virtually no chance your shares won’t rise on the first day of trading.
Given all that, of course you’re going to sign up for an allocation. Tickets are free (again with the obvious caveat that you need to put aside enough cash to purchase the shares should you get some), the odds are actually quite good in the context of infinitesimal odds and if you win, the worst you would’ve done this year on the first day was a 6% gain.
The best you would’ve done was (past tense) around 500% on Moore Threads, a would-be Nvidia rival in China.
There’s that chart. At one point, the stock closed 723% above its issue price which, in the world of Chinese IPOs, was high.
The chart header refers to a fun name for relatively high-priced new listings. As a mathematical consequence of their higher price, such listings have the potential to deliver to lottery winners larger absolute gains in a first-session rally.
On Wednesday, Moore lost its spot as the best-performing Chinese IPO to GPU-maker MetaX, whose management team’s staffed by AMD veterans. Its shares rose nearly 700% during their first day. Talk about a “big fat ticket.”
Expect more of this. As Beijing continues to insist on AI self-sufficiency, regulators will naturally favor semi-related IPOs, which’ll invariably result in similarly ridiculous first-day rallies as those who didn’t win the lottery compete for scarce shares.
I have not been back recently, but you used to see retail “investment” stores sporting rows and rows of price monitors. All under a fragrant cloud of smoke from Double Happiness cigarettes.
They reminded me of an OTB parlor in Troy, NY when legal gambling opportunities were much more scarce. And before the Nanny State deprived us of the right to chain smoke in public venues.