Take this guide, understand hundreds of pages of prospectus in seconds.

At the beginning of the new year in 2025, the Hong Kong stock market may usher in a new IPO feast!

As of December 31, 2024, there are currently 8 new listings in progress, all of which will be listed between January 8 and 15, 2025. Which one will be the next stock to surge on its first day of trading?

Before subscribing to a new listing, the first thing we need to do is to understand the fundamentals and valuation of the new stock. Only by understanding its fundamentals can we have a clear idea and thereby increase the chances of success and profitability when subscribing to new listings.

The most detailed information for researching company fundamentals is undoubtedly the prospectus. The prospectus can be downloaded from the Futubull app's IPO subscription page. Here's a download link.

However, faced with hundreds of pages of prospectus, many novice investors may not know where to start. In this article, we will provide a prospectus guide to help you easily locate key information in the prospectus. We will first post the 'navigation map' at the beginning, and then pinpoint the key sections for accurate navigation.

Prospectus Overview: Summary

The first section we should look at is the 'Summary' of the prospectus, which serves as an outline introducing basic company information, competitive advantages, development strategies, financial highlights, and IPO market valuation. After reviewing the 'Summary,' we will have a preliminary understanding of the company's fundamentals and valuation levels.

In Hong Kong's new listings, possibly over 80% of new listings have relatively average fundamentals. For these companies, after reviewing the 'summary' section, you can screen them out without needing to spend further time delving deep into details.

For the remaining few IPOs with acceptable fundamentals, it is worth delving deeper. Following the table of contents from top to bottom, we can focus on three main parts: 'Industry Overview,' 'Business,' and 'Financial Information.'

The first part: Industry Overview

In this module, we can see the large industry and sub-industries where the company operates, focusing on specific sub-industries including industry space, industry growth rate, and industry competitive landscape.

It is best to be in a growth industry with a relatively large industry space, low industry penetration rate, and fast industry growth rate. At the same time, the industry competitive landscape should be relatively concentrated, with the company ranking relatively high within the industry. Specific industry development data will be provided in the IPO prospectus.

The second part: Business

In this module, the focus is primarily on the company's business model, competitive advantages, and key business data.

Business model, which is what the company does, how it attracts customers, and what the monetization method is, this can be seen in conjunction with our common sense of life.

Sometimes companies may over-hype themselves, exaggerating their technological content and business prospects. At these times, we also need to keep our eyes open and see through the facade.

Competitive advantage refers to where the company's competitive barriers are relative to other companies in the same industry. For example:

Brand barrier. Strong brands often enjoy product premiums, thus improving profit margins. For example, various consumer goods industries.

Economies of scale. In the manufacturing industry, the larger the scale, the lower the cost, and the higher the profit margin, for example, the autos industry.

Technological barrier. Mastering core technologies that other companies do not have, thus bringing about a monopoly advantage, for example, ai chip.

Network effect. After capturing a large number of users, the users are interconnected and it's difficult to migrate to other products, thus forming a network barrier. For example, the internet plus-related industry.

Business data, which is the data related to company operation disclosure. For example:

Those in the dining and other service industries can look at table turnover rate, individual store sales, store expansion, and more.

Product developers can view product prices, sales trends, etc.

Those in the internet industry can track the number of users, individual customer revenue, and more.

Part Three: Financial Information

There are three financial statements: income statement (profit and loss statement), balance sheet, and cash flow statement. For beginner investors with no knowledge of how to read financial statements, you can first learn the basics of financial statements in the Tuniu classroom through video courses:Understanding the key points of financial statements to uncover the secrets of wealth.

First, the income statement, this is the statement that will be highlighted in the financial data section. Mainly look at revenue scale, revenue and net profit growth rate, gross margin, and net profit margin.

It is best not to have a too small scale of revenue. Companies with low income are either startups or small companies. Unless startups are highly sought after during the IPO, the risk is extremely high. Small companies have little value in fundamental research, and speculation is the main driver.

Revenue and profit growth should not be too slow, the higher the better. Companies with very slow growth have limited potential, and it is difficult to have explosive performance after listing. At the same time, the net profit growth rate should ideally be higher than the revenue growth rate, such companies have economies of scale, continuously improving profitability, and greater development potential.

The level of gross margin and net profit margin should not be too low, otherwise the status in the industry chain may not be strong, lacking competitive advantages, and it will be difficult to gain capital recognition.

Next, the balance sheet. Mainly look at the level of debt ratio, inventory level, accounts receivable level, and cash reserves.

It is best not to have a too high debt ratio. Excessive borrowing leads to high interest costs affecting profit margins and high operational risks with limited expansion potential.

Don't keep inventory levels too high, and ideally, inventory growth should not exceed revenue growth. If inventory is too high or growing too quickly, it may indicate potential sales pressure on the company's products, with worrisome growth prospects.

Receivables should not be too high, and the growth rate should not exceed the revenue growth rate. Otherwise, if the accounts receivable are too long overdue and cannot be recovered, they will turn into bad debts, affecting profits. Additionally, having too many overdue accounts not only impacts cash flow but also indicates a weak position in the industry chain and a poor competitive landscape for the company.

Cash reserves should not be too low, as it would indicate the company's weak self-financing capability. Depending solely on post-IPO funding would also pose significant operational risks post-listing.

Finally, the cash flow statement. It is essential to focus on the net cash inflow from operating activities, capital expenditures, and dividend payments, among others.

Within the operating cash flow, pay close attention to the net cash inflow situation. Cash flow is the lifeblood of an enterprise. If the net cash inflow from operating activities exceeds the net income, it indicates a high quality of net income for the company. Conversely, if it is significantly lower than net income, a cautious approach may be necessary.

For investing cash flow, one can monitor capital expenditures on fixed assets, among others. Companies with high capital expenditures, coupled with fast revenue growth, are in a better position. However, if revenue growth is slow, there may be significant operational risks, and the overall cash flow situation could be weaker.

Regarding financing cash flow, attention can be paid to dividend payments. Post-IPO dividend distribution is welcomed by investors. However, if there is a rushed dividend payout before the IPO, even emptying out a substantial portion of the cash reserves, it would undoubtedly be a significant negative.

In addition to the core sections of industry overview, business, and financial information, there are valuable insights hidden in other modules of the prospectus. Similarly, following the order of the table of contents, it is beneficial to review these sections from top to bottom.

Other Module: Important Tips

Here, you can focus on two key pieces of information. The first piece of information is whether there are any old shares being sold. If so, it will be indicated as "Shares Sold" or "Shares for Sale." Most companies do not sell old shares, but if they do, it means a major shareholder or other shareholders are reducing their holdings, which is definitely a negative indicator.

The second piece of information is the list of sponsors and underwriters, the historical performance of these institutions will also have a certain impact on the performance of new stocks. The company may have several sponsors, and we can further find "Stabilizing Price Manager" in the "Interpretation" module, usually taken on by the lead sponsor.

Other Module: History, Development, and Company Structure

There is still quite a bit of important information here. The first point is to look at the composition of the company's shareholders. If it is a state-owned enterprise, it is usually difficult to have short-term performance. Having star institutional shareholders or industry giants as shareholders is definitely a positive factor.

The second point is to look at the shareholding ratio. If there are too many shareholders and the equity is too widely distributed, it may increase selling pressure after listing.

The third point is to look at the pre-IPO share lock-up situation. If there are unsold shares, it will increase short-term selling pressure on the first day of listing.

The fourth point is to look at the most recent financing time. If the company has not had any new financing in recent years, it indicates that the company's competitive position is likely declining, and the room for imagination has also decreased.

The fifth point is to look at the discount/premium situation of pre-IPO financing. This is a vertical comparison of the company's historical valuation, which has a certain reference significance for the company's IPO valuation assessment.

Other modules: Directors, supervisors, and senior management

Here, the key point is to look at the background of the company's senior management. If the founder is a successful serial entrepreneur, such individuals will pursue long-termism, which is a major plus. If the industry experience and professional background of the management align with the company's business itself, it also benefits the company's development. Conversely, if there are certain dark histories among the company's top management, then caution may be necessary.

Other modules: Cornerstone Investors

In a bear market environment, if a company can find star institutions or major upstream clients as cornerstone investors, and the proportion of cornerstone investors is large, it will be a significant bullish sign. In a bull market environment, if the cornerstone investors are unremarkable, or if the proportion of cornerstone investors is minimal, then the quality of the company may be questionable.

Other modules: Global Sale Structure and Terms

Here you can also consider two points. The first point is to look at the proportion of public callback. Generally, the public offering portion can be called back up to 50%, but some companies with larger issue sizes may have different rules. For example, the more extreme case of Kuaishou in the past had a maximum recall proportion of only 6% for the public portion. The smaller the callback proportion, the less selling pressure there will be on retail investors after listing, which is beneficial for the first day of listing performance.

The second point is to see if there is an overallotment option, also known as the 'greenshoe', the funds obtained from selling additional newly issued shares can be used to support the stock price in case of a break in the IPO. In large-cap stocks, if there is no greenshoe option, there won't be additional funds coming in to support the stock price in case of a break after listing.

The third point is to see if there is an adjustment right to the issuance volume. A small number of companies may set an additional 15% proportion of the issuance volume adjustment right, in addition to normal financing, which increases the potential financing proportion by 15% and increases the selling pressure after listing. This, of course, is also a negative factor.

The above is about how to view the "navigation map" of IPO prospectuses. After reading this article, everyone should have a better understanding of the key points to read about the industry, business, finance, and other modules in the prospectus. The full text has exceeded 3000 words, due to space limitations, this "navigation" cannot cover everything, if there are any omissions or any other questions, everyone can leave us a message in the comments section.

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