It’s never been a better time to be in the red in Hong Kong. The financial hub plans to ease its listing rules to allow more firms that have never turned a profit to go public as part of a plan to attract at least 100 innovative tech firms to list on the local bourse in the next five years.
Unprofitable biotech and information technology (IT) firms have been allowed to list in Hong Kong since 2018.
Now, the Hong Kong Stock Exchange (HKEx) wants to widen the category to include loss-making firms involved in next-generation technologies including artificial intelligence, semiconductors, driverless cars and smart-manufacturing equipment makers, among others, to raise capital on the bourse.
The proposed change comes in apparent response to America’s latest punitive export ban on Chinese semiconductor companies and ongoing accounting-standard disputes concerning Chinese IT firms listed on US markets.
Some analysts anticipate the move will help to boost Hong Kong’s beleaguered initial public offering (IPO) market, which is down 76% in value year-on-year in the first nine months of 2022 due to a medley of factors including the Russia-Ukraine war, soaring inflation and US interest rate hikes.
Since the last loosening reforms in 2018, the HKEx has seen a surge in healthcare and IT firm listings. HKEx said the IT sector is now the largest industry on the bourse while the healthcare and IT industries combined account for more than one-third of total market capitalization.
The HKEx started a two-month consultation on October 19 after seeking opinions from various market stakeholders. The consultation proposed to amend the bourse’s listing requirements to offer more opportunities for capital-intensive businesses with long-term development potential.
“Some stakeholders commented that pre-commercial companies present high growth potential and, with additional requirements, should be allowed to list to provide investors with good investment opportunities,” said the HKEx in a statement. “However, a minority of stakeholders commented that the additional risks associated with pre-commercial companies meant that they were unsuitable for investment by retail investors.”
The bourse has proposed to cancel the current requirement of HK$250 million (US$32 million) in revenues for the most recent audited financial year for prospective listing companies.
Instead, it said pre-commercial firms that aim to go public should have a higher R&D investment ratio and expected market capitalization than commercial companies. The HKEx said it believed such listing applicants could attract sufficient market support and investor interest to justify their listing status.
The consultation was released on the same day new Hong Kong chief executive John Lee delivered his maiden policy address.
Lee said the HKEx would revise the main board listing rules next year to facilitate fundraising of advanced technology enterprises that have yet to meet the current profit and trading record requirements.
He also said the stock exchange was also planning to revitalize GEM, formally known as the Growth Enterprise Market, to provide small and medium enterprises and start‑ups with a more effective fundraising platform.
“Our goal is to attract by 2027 at least 100 innovation and technology (I&T) enterprises of high potential and representativeness to set up operations or expand their presence in Hong Kong, including at least 20 top‑notch I&T enterprises,” Lee said.
“We will build more accommodation facilities for I&T talents, including to explore the development of a new InnoCell near Science Park and accommodation facilities for talents at the Hong Kong-Shenzhen Innovation and Technology Park,” he added.
He predicted these moves would bring in HK$10 billion of new investment while creating new jobs for Hong Kong.
Sam Sam, a strategist at the Hong Kong-based Patrons Securities, said in an interview that the proposal to allow more non-profitable companies to go public in Hong Kong would boost the bourse’s competitiveness.
Sam said as more startups chose to list in the United States or other markets, Hong Kong risked losing opportunities if it did not amend its listing rules. He added that such a move would help attract more institutional investors to Hong Kong as retail investors might not be interested in non-profitable startups.
Futu Holdings Ltd, a Hong Kong-based brokerage, said the proposed listing amendment would support the growth of “new economy” sectors in Hong Kong as well as mainland China.
However, other commentators said Hong Kong’s proposed changes might not significantly boost IPO activity in the short run due to rising US interest rates, which they said had significantly reduced technology firms’ valuations so far this year.
Total IPO fundraising in Hong Kong fell 76% to about HK$70 billion in the first nine months of this year compared to the same period in 2021, according to a KPMG report published on September 30.
Although fundraising activities significantly increased in the third quarter over this year’s first half, many IPO candidates have opted to postpone their listing plans due to market volatility, the KPMG report said.
In the US, total IPO volumes fell 90.4% year-on-year in the first nine months of this year, media reported. Technology firms have raised only US$507 million in the US so far this year, the lowest amount since 2000, the reports said.
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