Hong Kong Eyes Capital-Hungry Tech IPOs
The Hong Kong Stock Exchange has announced its latest move to attract Chinese companies, focusing on small technology startups that need capital. However, this move could be a gamble as some companies might not make any profit, resulting in low-quality stocks. The US has allowed Chinese tech startups to list for years, but many fail to take off and delist, leaving investors with huge losses. This move, though, could be a win for investors hoping to buy into promising companies early as the Hong Kong Exchanges and Clearing Ltd. has implemented relaxed rules for “specialist technology companies,” enabling them to be listed on its main board using the new Chapter 18C of its regulations.
Creating a new chapter specifically for tech companies is the exchange’s latest effort to tempt listings from sectors that often lack revenue or profits but have considerable growth potential. This move comes as tensions between Washington and Beijing may make new, vulnerable Chinese tech startups think twice about listing in the US.
The new chapter permits “pre-commercial” companies to apply for IPOs even if they have zero revenue as long as their market cap is above HK$10 billion ($1.3 billion). Companies with “high growth potential” can provide next-generation information technologies and advanced hardware, software, materials, or ventures in new energy, the environment, or food and farming technologies. Companies with revenue under HK$150 million in their previous financial year should invest at least half of their operating expenses in Research and Development, while the ratio is less for companies with annual revenues of between HK$150 million and HK$250 million.
The new rules include some criteria to ensure a certain amount of quality control. For example, a company designated as commercial must have a history of annual revenue growth and set aside allowances for future sales declines because of reasons not in its control. Also, a company wanting to list under Chapter 18C must receive significant funding from sophisticated independent investors at least a year before applying.
Investors must be diligent when considering companies from China, as many startups will try to sell them on their prospects. Investors must decide whether to believe in a company’s growth story, requiring extra diligence to separate the good from the bad among the steady stream of tech startups.