Investors cautious on HKEX plans for early-stage tech listings

A plan by the Hong Kong Exchange to allow early-stage technology companies to list will expand the investment universe for institutional investors, although these opportunties will be accompanied by a fair share of risks.

The consultation period for the new proposals by the exchange closed on 18 December.

The changes, which are likely to be introduced in the first half of 2023, relax revenue requirements for companies in five “specialist technology” industries, from manufacturers of electric vehicles and nanomaterials to makers of fake meat, following a similar easing of listing rules in 2018 for biotech companies.

Irene Chu, KPMG China’s partner and head of new economy, life sciences and technology in Hong Kong, told AsianInvestor the move would expand opportunities for investors in industries that will be instrumental to Asia’s efforts to address climate change, food security and environment. “Despite the current slowdown in the global IPO markets, I expect the new regime will bring a new generation of high-quality, innovative companies to the Hong Kong market,” she said.

Around 10 to 15 specialist technology companies will list in Hong Kong under the new rule in 2023, raising about HK$50 billion to HK$60 billion, PwC estimates.

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RISKS

But Bonnie Yung, corporate and securities partner at Mayer Brown in Hong Kong pointed to the risks to investors, given the challenges of evaluating the commercial prospects for such early-stage companies.

“It will definitely be harder to accurately value those proposed new companies as there is limited research expertise and experience in this regard in Hong Kong,” she said.

Yung added that investors would have to look hard at additional disclosures on pre-IPO investments, cash-flow, products and their prospects for commercialisation, as well as R&D investment, the identity and background of the pre-IPO shareholders, and the background and experience of the key persons of the listing company.

“The 172-page consultation paper, released on 19 October, adeptly sets out the hazards ahead, and it is a long list,” Jane Moir, head of research at the Asian Corporate Governance Association (ACGA) in Hong Kong, told AsianInvestor.

In a ACGA blog titled Hong Kong: desperate times, published on 31 October, Moir itemised the risks, which include: how to value the companies, the risk of speculation or manipulation, the danger they will pivot to new business models after listing, high post-listing volatility or illiquidity, and the lack of an authority to evaluated a company’s progress towards developing its products. 

COMPETING WITH THE MAINLAND

HKEX is hoping to wrestle business back from exchanges on mainland China and turn around a bad year for new IPOs. HKD19.7bn was raised in the first half of this year on HKEX, down from HKD214.3 billion in the same period last year. 

A series of listing relaxations in recent years by the Star Market (officially named Science and Technology Innovation Board) in Shanghai, and the ChiNext board in Shenzhen have seen the mainland lure tech listings away from Hong Kong.

“Mainland exchanges have attracted many more Chinese tech unicorns and “little giants” in the past few years, and the Hong Kong exchange wants to play a catch up,” said Chris Liu, senior portfolio manager, China-A investments, at Invesco Asset Management in Hong Kong. While Hong Kong provided investors with strong exposure to internet companies, technology hardware and upstream components were poorly covered by HKEX.

Asset owners' investment opportunity set will be broadened if Hong Kong is successful in attracting a meaningful amount of specialist technology companies, experts told AsianInvestor previously.

ALSO READ: Hong Kong proposed listing rules to draw mainland Chinese tech firms

BIOTECH PRECEDENT

The move follows a similar easing of listing requirements for biotech stocks on HKEX in 2018. Last year the Hong Kong exchange was Asia’s largest location for biotech fundraising and the second largest in the world, listing 34 biotech and healthcare companies.

“Most of the top China biotech firms purely focusing on innovative drugs are listed in Hong Kong instead of on the mainland,” said Liu.

But he noted that early stage biotech firms listing under the relaxed regime on HKEX had seen high volatility in recent years, especially in the recent market downturn. “Biotech firms with no profit have been derated significantly; it’s quite difficult for investors to value them. It might take a long time for a new drug to turn profitable,” he said.

On the ACGA blogpost, Moir wrote the 2018 move made room for “issuers with a lower tolerance for governance, a higher appetite for waivers and the increased necessity of ‘case by case’ decisions and patchwork guidance.”

CONDITIONS

Under the proposed new listing regime for technology companies on HKEX, companies must have at least three years of operating history.

Those showing “meaningful” revenue must be expected to generate at least HK$8 billion in market capitalization at IPO with revenue of at least HK$250m for their most recent financial year.

Pre-commercial companies, which present a higher risk, will need a higher expected market cap of HK$15 billion, and R&D investment of 50% of operating expenditure.

In addition, the exchange will impose post IPO lock-up periods for shareholders, and threshold investment requirements by “sophisticated Investors.’’