(Yicai Global) June 28 -- Several Chinese Hong Kong-listed unicorns, such as online car retailer Yixin Group and online insurer ZhongAn Online P&C Insurance, have seen their stocks drop below issue prices shortly after their much-hyped initial public offerings, which has caused speculation about the increasingly overheated subscriptions.

Two more examples: Shenzhen-based healthcare platform Ping An Healthcare and Technology and Tencent's e-book publisher China Literature both went public in Hong Kong last year. The former plunged on the second day, while the latter has slid 36 percentage points below its issue price HKD110 as of yesterday's close.

When these unicorns became listed, they attracted lots of market attention, yet their stock prices soon began to drop significantly. What is the reason for this phenomenon?

A common view in the market is that the issue price was too high and the actual valuation of the firm could not spur higher growth.

The liquidity in the primary market is much inferior to that of the secondary market, which helps companies better package themselves and easily obtain a higher valuation, an investment banker told Yicai Global. After IPOs, firms have to publish their financial statements, which exposes the functionality of their business models, the competitiveness of their products, and the stability of their cash flows, the banker added. 

Financial professionals offered two reasons for the high valuations. One of them was about the valuation adjustment mechanism, under which private equity investors may stipulate conditions for their investment. This forces unicorns to choose to raise the issue price to relieve the pressure on financing cost.  

Another one was that the overvaluation is mainly attributable to the lack of quality projects, said Wang Danwei, a partner of Rui Meng Venture Capital Management. "Pushing up the valuation is also a strategy to build up fund barriers, which create difficulties for other enterprises' financing," added Wang.

The failures are mainly attributable to problems in these companies' innovativeness, operations, development strategies, and finance, consultancy firm Essence Securities concluded.

This is why regulators need to vet these unicorns moving from primary to secondary market with stricter procedures, particularly if the country wants more foreign-listed Chinese firms to repatriate back to the mainland bourses with positive prolonged effects to stock prices. The firms themselves should also pay more careful attention to cash flow and talent resources, the two vital factors supporting companies' development and operation. 

Editor: Emmi Laine