Foxconn Industrial Internet’s chances of success as it prepares its blockbuster initial public offering in Shanghai have narrowed considerably now that Baidu, Alibaba and Tencent have been revealed as strategic investors.
But then, with retail investor demand already at fever pitch and the shares priced reasonably, the omens are already looking pretty positive for China's biggest domestic IPO in three years.
In a stock market filing, Hon Hai Precision Industry’s smart factory unit said the Chinese technology triumvirate will each purchase shares worth about 3.86% of the Taiwanese company. They are among 20 strategic investors to have been collectively allotted 590.8 million shares, or about 30% of the total on offer.
More commonly seen in Hong Kong or Singapore, the use of cornerstone investors has become more commonplace since the Asian financial crisis in 1997 -- not that the use of cornerstone investors necessarily guarantees a successful outcome for investors.
Sometimes, based on Hong Kong's own mixed recent experience, cornerstone investors can mask underlying valuation issues or be used to artificially prop up demand when markets are weak. Take Postal Savings Bank of China, which sold over $7 billion-worth of shares in 2016 at a premium to book value when peers were trading at lower valuations.
Another pitfall is the lock-in period that strategic investors are obliged to commit to, which can adversely affect the way shares trade in the secondary market and can result in an illiquid stock or worries about a supply overhang.
In the Foxconn Industrial Internet deal, the strategic investors are locked in for a period of one to three years.
Foxconn has priced the 1.8 billion shares it is offering at Rmb13.77 per share, translating into a price-to-earnings ratio of just over 17.
It is also well below the 23 times earnings that the Chinese regulators have preferred historically when approving listings in Shanghai.
The strategic investors will be taking a 30% share of the offer, and institutional and corporate investors an additional 10%.
Retail investors will receive the remaining allocation of 1.06 billion shares, which has already caused a feeding frenzy in China. The Shanghai Stock Exchange has yet to set the date of the listing.
According to a Foxconn statement on Thursday May 24, the retail allocation has been oversubscribed nearly three hundred times.
The presence of the strategic investors, the fair valuation and good price-to-earnings ratio have all combined to reassure the market that this will not be another case where a company uses cornerstone investors just to get the deal across the line.