Milk tea shops are lining up to take advantage of naive investors.

The Hong Kong stock market has been strong for two consecutive days, with the Hang Seng TECH Index performing the strongest, surging 3.4% today to close at 3,449 points.

There are two positive factors for Hong Kong stocks recently. First, last Friday, the China Securities Regulatory Commission (CSRC) announced five measures to enhance cooperation with Hong Kong, including expanding the scope of ETF products, incorporating REITs, supporting RMB trading counters, optimizing mutual recognition of funds, and facilitating listing and financing channels. The new regulations will help improve the connectivity mechanism, injecting liquidity into Hong Kong's capital market.

Currently, there are eight ETFs under the Stock Connect program, with a total fund size of HKD 191.5 billion. According to the new rules, Hong Kong-listed ETFs with an average daily asset size of at least HKD 550 million over the past six months and investment focus on Hong Kong can be included in the Stock Connect. There are currently 14 ETFs in the Hong Kong market that meet this requirement, and they are expected to be included this year.

Second, UBS today upgraded its rating on the MSCI China Index to overweight, citing strong earnings despite concerns about China's real estate and macroeconomic conditions.

The largest constituents of the MSCI China Index have generally performed well in terms of earnings and fundamentals, with poor stock performance purely due to valuation collapse.

Additionally, there are recent market rumors that the 20% dividend tax under the Stock Connect program may be reduced. I think this is plausible, as lower taxes would make undervalued Hong Kong stocks with high dividends more attractive to A-share investors.

While these reasons explain the recent rally, the fundamental driver is that Hong Kong stocks have become undervalued, with many Hang Seng TECH stocks offering dividends and buybacks yielding 5%. The current rebound is technical, as oversold markets eventually recover—just like the recent pullback in U.S. stocks after a prolonged rally, which follows basic market principles.

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Today, CHABAIDAO (2555.HK) debuted on the market and, unsurprisingly, plunged 27%. Thankfully, I didn’t participate in the IPO. To celebrate avoiding this loss, I ordered a cup of CHABAIDAO this afternoon.

During the IPO, I mentioned that the fundraising size was too large, there were no cornerstone investors, and the post-listing float would be too big for anyone to support. It’s no surprise that the public offering was undersubscribed at only 0.5x. To ensure a successful listing, the issuer arranged for institutional orders to cover the shortfall, reallocating the unsold public shares to the international placement.

Even so, the stock opened below its IPO price and fell as much as 38% intraday. This situation will likely heighten the crisis awareness of other bubble tea chains waiting to list in Hong Kong, such as Mixue Bingcheng, Guming, Shanghai Auntie, Chayan Yuese, and Bawang Chaji.

However, these F&B chains don’t have many alternatives. A-shares are off-limits, U.S. markets are unwelcoming, and Hong Kong at least offers a window—though they’ll need to reassess their brand value and set reasonable valuations instead of aiming to exploit naive investors. Over-exploiting consumers harms brand reputation, as seen with Nayuki (2150.HK), whose image has suffered.

The three most recent IPOs have performed poorly. The strong IPO performance in Q1 was due to small fundraising sizes and guaranteed listings. Without a rising secondary market, IPO activity won’t recover. Once subscriptions pick up, market makers dump shares on retail investors—why bother propping up prices?

$CHABAIDAO(02555.HK) $NAYUKI(02150.HK)