IPOs in Hong Kong allow bidders to revise their bids during the book-building process. According to the equity listing rules, a bidder can revise its bids on an IPO until it renders a firm commitment. Around 15% of orders from institutional investors are revised during book-building. The revision is not random but results from changes in information and market conditions, such as market volatility or deteriorating investment property market sentiment.
Analysts also note that revisions provide more chances for bidders to get involved in IPOs with less competition. Some investors may withdraw from competitive bidding during severe stock declines because they do not want to buy at high prices; however, these bidders may not reduce their bids to non-competitive levels. Thus, revisions help bidders become competitive again in the book-building process. Have a look at this site for more information.
The revision mechanism has been introduced to respond to changing circumstances between placing orders and determining final prices. For example, a bidder places a bid for 45% of the offer when he learns that all three final prices in the competitor’s IPO are between HKD5.33 and HKD5.38, a relatively high price range in that IPO (more than 5%). However, when he sees the IPO result, the final price is only HKD5.25, so his bid for 45% of the offer becomes too large, and he reduces it to 42%.
One of the main reasons bidders revise their bids in Hong Kong IPOs is a price increase. If the price goes up significantly, it may be advisable for bidders to reduce their bids to stay competitive. Concerning revisions under changing market conditions, when a bidder thinks he can participate with less competition or has more chances of getting involved in an IPO, they are advised to lower their prices. Also, if there has been volatility and stock declines, you might want to decrease your bids.
The decision of whether or not to revise your offer is also dependent on how much you value what you’re trying to buy (the more you value it, the more likely you are to revise your offer). For example, if there’s a lot of volatility surrounding an IPO, it would be advisable for bidders to adjust their offers.
Once the bidder has decided to revise their offer, they must reduce the bid amount. When an investor determines that he should revise his bid, he will change the number of shares he is willing to buy to continue participating. For example, if you were hoping to buy 20% of the total offering and avoid volatility, your bids would likely be 90% for between HKD5.20-HKD5.30 (a very competitive range). If you determine that there might be more IPOs available with less competition, or not as many investors are interested in buying at high prices due to declines or volatility, lowering your bid would make sense. When revising the bid, for this reason, you will switch your preference to buying at 90% below HKD5.20 (90% less than what you originally wanted).
The book-building process is where revisions are most common. When making changes during this time, bidders can reduce or increase their bids regarding the revised prices they provided. The only adjustments permitted are increases and decreases, with no additions or subtractions of shares. However, price is just one piece of information that bidders will consider when making revisions; changing market conditions could also be another factor. For example, investors may revise their bids down if they think that more IPO opportunities might be available soon.
The book-building process ends when the IPO closes. At this point, revisions are not permitted anymore, and investors who reduced their bids would be at a disadvantage to those who did not. This is also true for those who increase their bids because it will result in fewer shares available for everyone else. However, suppose you end up buying fewer shares than you originally wanted due to modifications by other bidders after you revised your price downward. In that case, it’s worth noting that stock declines can sometimes cancel out that loss.