WeChat, millennials and Hong Kong’s IPO boom

The Chinese government’s decision to ban the Australian government’s WeChat social media posting to counter the Chinese government’s posting will only be a minor distraction to WeChat’s owner Tencent Holdings Limited.

Tencent, with a market capitalisation of some $US480 billion is the world’s biggest video game company and its empire includes Riot Games and Epic games. Right now attention on Tencent is far more focused on its most exciting new venture – its stake in the online broking platform “Futubull”.

Futu is right in the thick of the world’s first mobile phone driven share market boom as middle class Chinese millennials scramble to gain shares in the multitude of IPOs that are hitting the Hong Kong market.

It is fascinating that at a time when China is starting to put clamps on the financing of small enterprises by smaller nonbank groups and is restricting freedoms in Hong Kong, a debt fuelled IPO boom is taking place.

It’s really important for groups like Tencent to stay on the right side of the Chinese administration because, if they don’t, facilitating the current IPO boom will be impossible.

Accordingly, when the word came down from the Chinese authorities to WeChat operators that the post from Australia’s Prime Minister was to be deleted but the Chinese government posting was to remain, it was not a decision that took long for Tencent and WeChat to make.

Futu’s main rival in the IPO boom is Tiger brokers, which is backed by the Chinese mobile phone maker Xiaomi which received a huge boost when the US banned Huawei.

Xiaomi this week announced a major capital raising.

In my decades in journalism I have watched a succession of booms and busts that created fortunes but also resulted in major financial loss for those who didn’t get out quickly enough. Australia now has much stricter rules ---perhaps too strict ---over new IPO floats.

But in Hong Kong, while there are clearly rules, so far this year 125 IPOs have been launched, raising around $US40 billion.

The rash of new listings are dominated by technology, biotechnology and property management companies, although they include a bottled water producer.

The way Futu and others operate generates enormous momentum in the IPO market. The Chinese millennials have been successful in their careers and business activities are looking for some action.

IPOs usually offer the prospect of instant profit although, of course, longer term their value depends on later trading discoveries.

But later results are not the name of the game in today’s market. Not only can the Chinese clients of Futu buy into IPOs via their mobile phone but they can also borrow money to make the subscription. This makes for a supercharged boom. You become a client of Futu to take advantage of the IPO “opportunities” and loans by paying a subscription.

Futu’s total number of paying clients jumped 38 per cent to 419,000 at the end of September. Futu is developing its platform into a series of asset classes including retirement products.

It wants to be the primary “wallet” for its users.

The company says that it is pursuing a “massive opportunity to facilitate a once in a generation shift in the wealth management industry and build a digital gateway into broader financial services by serving the emerging affluent Chinese population”.

The company is closely linked into the social media networks and creates a network around its users providing them with material from companies, analysts, media and key opinion leaders. Such a network has the potential to create market frenzies much more effectively that the old word of mouth rumour networks of past Australian booms.

Groups like Futu and Tiger pose a big threat to the traditional Hong Kong brokers who are caught with the wrong technology for this sort of boom. Many are going out of business.

Meanwhile the IPO boom is providing much larger prices for major floats. The biggest looming float is Airbnb which was valued at $US18 billion earlier this year after it raised $US2 billion in the early months of the coronavirus pandemic. It will float at a value of around $US35 billion --- a level that simply could not have been achieved without the IPO boom.

The key to achieving Futu’s aims will be to make sure that its client base does not get caught in the inevitable post boom crashes that will take place next year or the year after.

In Australia at the end of our share market booms there was always a reaction against the government for not protecting investors. My guess is that the same thing will happen eventually in China and it will be fascinating to see how the Chinese government handles the problem.