(Yicai) Oct. 16 -- ChaPanda, a popular Chinese new-style tea chain, said it is fully cooperating with an investigation by Hong Kong’s securities regulator into whether its initial public offering two and a half years ago may have been rigged to create a false impression of investor demand.

Production and operations remain normal, ChaPanda also announced late on Oct. 14. Regulators have yet to disclose details of the investigation's progress or findings yet, nor have they clarified whether anyone inside the business was involved.

Hong Kong’s Securities and Futures Commission halted shares trading in Baicha Baidao Industrial [HKG: 2555], which operates ChaPanda, on Oct. 13, just five days after the Chengdu-based company announced a share incentive plan.

The watchdog cited concerns that the public offering may have been manipulated to create a false sense of investor demand because part of the proceeds may have been diverted away from the company through undisclosed agreements with a suspicious third-party group.

In simpler terms, this involves certain subscribers paying for shares to create the illusion of "strong IPO demand.” Then once a company is listed, the funds raised are surreptitiously funneled back to these key subscribers.

Rigging an IPO to create fake subscriber interest would mislead ordinary investors into buying shares or participating in trades at unreasonable valuations, Shen Meng, executive director of Chanson Capital, told Yicai. If the probe confirms fraud, ChaPanda could face not only fines and delisting but also criminal prosecution and lawsuits brought by investors, Shen added.

Baicha Baidao's trading halt likely has little to do with ChaPanda’s business operations and more to do with regulators looking into whether its IPO was rigged, according to industry insiders. In the first half of this year, the firm's net profit rose 3.5 percent to CNY345 million (USD51.6 million) from a year ago, while revenue gained 6.2 percent to CNY2.7 billion (USD403.5 million).

Looking back at its listing, Baicha Baidao's IPO was not particularly sought-after. It initially planned to issue about 148 million shares, with no cornerstone investors, allocating 10 percent to retail investors in Hong Kong and the rest to international institutions. But the public offering was ultimately subscribed just 0.5 times, far below the 195 times recorded by comparable tea drinks brand Guming Holdings and the 3,617 times recorded by Auntea Jenny. ChaPanda raised HKD2.6 billion (USD331.3 million) in its global offering.

Baicha Baidao had compelling reasons for going public. It completed two rounds of pre-IPO equity financing in 2023, raising a total of CNY970 million from institutional investors. The funds were intended for day-to-day operations and supply-chain development, with about 64 percent used before publication of its IPO prospectus.

The investors held share-redemption rights. If Baicha Baidao failed to list, they would have been entitled to demand that the company buy back the shares, potentially putting it under substantial financial strain.

Editor: Martin Kadiev