DLK Advisory Limited
Investment institutions are cautious over high value speculation risk from the incoming specialist technology company listing regime

Investment institutions are cautious over high value speculation risk from the incoming specialist technology company listing regime

Last week, the Hong Kong Stock Exchange (HKEx) launched a special listing regime for specialist technology companies, offering the “pre-revenue or pre-profit” technology companies the opportunity to apply for IPO from 31 March. The hotly debated new policy provoked concerns about whether this will be a shot in the arm for the sluggish Hong Kong stock market in recent years, or whether this will trigger an influx of mainland technology companies to list in Hong Kong.

Speaking in an interview, Zheng Xianrong, a senior investment consultant at Bojiang Capital with years of exposure to the high-tech sector, said that Hong Kong, as an international financial centre, is caught in a dilemma. The move is aimed at driving up the IPOs of more small and medium-sized technology companies from the mainland into Hong Kong to cement the link between both sides of the border, as well as bringing international investors across the board into the Hong Kong market for greater stock liquidity. “Over the past few years, amidst the once-in-a-century unprecedented changes in global inflation, sluggish growth, monetary tightening and a complex geopolitical situation, Hong Kong’s equity capital market has not performed its best, with a massive decline in liquidity, profitability and fundraising ability. Hong Kong’s position as a global financial centre is at risk of being overtaken by Singapore. Economic endeavours and position protection will be the key priorities for Hong Kong in the future,” said Zheng.

In retrospect, it is evident that the HKEx has steered the transformation and upgrading of Hong Kong’s capital market very precisely. 2018 brought a bustle of IPOs in Hong Kong after the amendments of the HKEx’s Main Board listing rules to allow startups with multiple voting rights and pre-profit biopharmaceutical companies to list in Hong Kong. This has tremendously attracted many high-tech, biopharmaceutical and other new economy businesses into Hong Kong, putting the city in the limelight as a global hub for new economy companies. This time around, the HKEx has defined specialist technology companies as mainly businesses in the sectors of next-generation information technology, advanced hardware, advanced materials, new energy and environmental protection, and new food and agricultural technologies. The slashed threshold for listing is widely seen as the HKEx’s support for the relevant technology companies.

The head of the Investment and Financing Centre of Raysdata, a cloud computing company in the mainland, said in an interview that the introduction of the revised listing rules will open up more options for masses of hard-tech companies domestically at the product development stage, which previously may only have had access to fundraising from the primary market. The ability to access equity financing in the secondary market will propel an accelerated growth of such companies, which presents a rather appealing incentive for mainland technology companies.

Ren Bin, founder and CEO of Tikin Media, also views the new rules as a boon to mainland technology companies: “Technology companies possess the advantages of high output value, high added value and low energy consumption, in addition to their ability to engage a pool of highly skilled talents, which will be conducive to promoting the development of core technologies in various industries in the long run. Nonetheless, technology companies can also be challenged by the difficulties of large initial investment and long capital return cycles. The introduction of such a policy is instrumental in expediting the IPO process and securing more funding support to better serve the research and development and product innovation processes, fuelling the digitisation of both the companies and the below-the-line media industry.”

Looking at the other side of the coin, the lowering of the revenue and profitability threshold for technology companies will significantly heighten the demand for investor professionalism. It is reported that the introduction of the specialist technology company IPOs is proposed to allow access to retail investors, while retail participation will come with the introduction of a number of investor protection designs, including the difference in pricing from general IPOs, a lock-up period restriction and additional disclosure requirements. Still, the investment in specialist technology companies is set to put investors’ tolerance for market risks and their ability to screen stocks to a great test.

According to Steven Tam, co-director of Fulbright Securities Limited and a leading stock commentator in Hong Kong, “the policy relaxation is certainly positive for the HKEx in terms of increasing fundraising revenue, but it is still doubtful how specialist technology companies will manage to convince the market, as biotechnology companies have only been cleared for listing since 2018. While shareholders are still able to acquire the fundamentals from the biotechnology companies’ clinical data and other sources, specialist technology companies are far more difficult for shareholders to navigate than biotechnology companies. In times of bearish market sentiment, the specialist technology sector will see the biggest sell-off in the market.”

Investment consultant of Bojiang Capital Zheng Xianrong also shares this concern: “The risk of speculation and manipulation in valuations is higher for specialist technology companies whose products have not been commercialised, as the market may speculate on their commercialisation progress, and specialist technology companies may change their business model significantly in order to find a commercially successful business model, which may lead to post-IPO share price volatility and/or illiquidity in the trading of such companies.” He believes that a successful commercialisation of the core technology is as important as the novelty of the technology itself for the success of a specialist technology company.

Foreseeably, the new HKEx policy will accelerate primary market financing and secondary market exits for specialist technology projects. For Bojiang Capital, a leading investment institution focused on empowering China’s high-tech industry, the new policy is especially a tailwind for it to capitalise on its well established presence over a decade to garner a foothold in the future capital market.