Hesai Group, a leader in laser radar technology, made its debut on the Hong Kong Stock Exchange on September 16, achieving a dual primary listing in both the US and Hong Kong. This milestone marks the official reopening of the long-dormant channel for Chinese companies returning to Hong Kong. However, contrary to the 「high subscription enthusiasm」 observed during the issuance phase, the stock faced a downturn after an initial spike on its first trading day, dropping nearly 20% from its issue price as of October 23, resulting in substantial paper losses for cornerstone investors. A deeper look into its pricing strategy, allocation structure, and market stabilization efforts reveals several hidden risks behind what appeared to be a successful IPO.
The offering recorded a historical second-high issuance ratio of 14.4%, with fundraising exceeding market expectations. The IPO generated high demand, with international offerings closing a day earlier at a subscription rate of 14.09 times, and the Hong Kong public offer seeing a staggering 168.65 times subscription. The company ultimately exercised its full 15% issuance adjustment, raising HKD 4.16 billion (approximately USD 530 million), which exceeded the pre-market expectation of USD 300 million. On October 12, the company publicly announced that it had fully exercised the overallotment option, increasing the total proceeds to HKD 4.78 billion, corresponding to an issuance ratio of 14.4%. This issuance ratio is exceptionally rare among recent Chinese firms returning to Hong Kong, with a historical average of just 3.6% since 2022, positioning Hesai just behind Baidu with 17.8%.
Among cornerstone investors, funds like Hillhouse Capital, Taikang Life, WT Asset Management, Grab, Hongda Group, and Commando Global Fund collectively invested USD 148 million, accounting for 24.1% of the final issuance scale. This arrangement broke with a historical precedent whereby only two previous Chinese companies going public in Hong Kong had cornerstone investors. It is noteworthy that this 24.1% cornerstone share is relatively low compared to recent large IPO projects in Hong Kong, typically above 40%. Furthermore, from the allocation results, some cornerstone investors and other related parties also participated in the international offering, totaling an investment scale of HKD 1.58 billion, representing 33.1% of the issuance scale. Notably, Hillhouse invested an additional HKD 160 million through international distribution beyond its cornerstone commitment of HKD 550 million, while Citic Securities also entered the international placement with investment of HKD 70 million.
The high issuance ratio and minimal discount created a lack of safety cushion. The main controversy regarding Hesai's issuance centered on its pricing strategy—offering only a 1.6% discount against a backdrop of a 14.4% issuance ratio, which deviated significantly from industry norms and set the stage for potential price challenges post-IPO. The aggressive pricing strategy is closely linked to the underwriting team's inexperience with cross-market pricing, favoring the issuer's equity value while neglecting the market’s reasonable demand for a safety margin.
The issuance price was set at HKD 212.80 per share, which was just 1.6% lower than the closing price of USD 27.74 in the US market on September 11 (equivalent to about HKD 216.37). In comparison, from 2022 to now, the average discount for Chinese stocks returning to Hong Kong has been 3.1%. If we exclude the greatest discount example of Noah Holdings (10%), the average remains significant at 2.8%. Only three pharmaceutical companies—CK Hutchison, Zai Lab, and BeiGene—recorded lower or similar discount levels, all during times of high market interest in the pharmaceutical sector as industry leaders.
Moreover, high issuance ratios typically necessitate higher discounts to attract investors and distribute shares more broadly, yet Hesai chose the opposite route. Historical data shows that Global Data's 12.3% issuance ratio came with a 3.0% discount; Baozun at 17.8% with a 2.3% discount; and Yum China at 10.0% even offered a staggering 4.9% discount. These projects successfully balanced dilution and market pressure through this proper discount strategy, which Hesai did not follow by opting for a nearly 「at par」 issuance despite significantly exceeding the industry's average issuance ratio.
When analyzing the stock price context during pricing, Hesai’s approach appears increasingly risky. During the issuance period, its US stock was experiencing a robust uptrend—hitting an all-time high of USD 30.44 per ADR on the day the issuance began (September 5), although it pulled back slightly before pricing; nevertheless, it remained near historic highs. Typically, launching an IPO at a record high price necessitates a greater discount to mitigate potential pullback risks; for instance, BYD and Xiaomi offered discounts of 7.8% and 6.6% respectively during their periods of price surges earlier this year. However, Hesai and its underwriting team opted for a lower discount, improving financing efficiency and maintaining the issuer's equity value in the short term, but leaving Hong Kong investors with insufficient safety cushions.
The subsequent market performance saw a nearly 20% decline, causing Hillhouse, as a cornerstone anchor, to face a paper loss of HKD 110 million. In total, Hillhouse invested HKD 710 million, translating to significant valuations losses given the closing price on October 23; other investors, such as WT Asset Management and Taikang Life, also encountered losses nearing HKD 50 million.
Furthermore, the ineffectiveness of the greenshoe mechanism prompted discussions in the market. According to an announcement made on October 12, CICC as the stabilization agent 「did not acquire or sell any Class B common shares in the market for the purpose of stabilizing prices.」 This suggests that during critical periods following the stock's price drop below its issuance price, no protective actions were taken by the stabilizing agent, rendering the greenshoe mechanism largely ineffective.
Per the rules of the Hong Kong Stock Exchange, the stabilization period lasts 30 days post-listing, where the stabilizing agents' main role is to buy shares using proceeds from any overallotment to stabilize the price if it drops below its issuance price. However, CICC's lack of purchasing actions may have stemmed from instructions from the issuer—to allow full greenshoe release in favor of increasing fundraising by an additional 15% without stabilizing price efforts.
This approach, while seemingly augmenting fundraising scale, severely undermined market confidence. Analyzing the offering structure, Hesai's initial issuance already reached 11.3%. Given the combination of overallotment options and greenshoe mechanism, there was ample room for expanding the fundraising scope, all while maintaining a stabilization mechanism, avoiding excessive issues during a low discount issuance.